What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-11-12 compared with 2025-08-12 · 112 added, 94 removed, 205 unchanged (50% of the section changed)

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and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2024 , Part II, Item 1A of this Form 10-Q and that are described from time to time in our other periodic reports filed with the SEC.

These factors are not necessarily all of the important

factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.

Other unknown

or unpredictable factors could also have material adverse effects on future results.

The Company intends these forward-looking statements

to speak only at the date made.

Except as otherwise required to be disclosed in periodic reports required to be filed by public companies

with the SEC pursuant to the SEC’s rules, Lifeway has no duty to update these statements, and it undertakes no obligation to publicly

update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

These factors are not necessarily all of the

important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.

Other unknown or unpredictable factors could also have material adverse effects on future results.

The Company intends these forward-looking

statements to speak only at the date made.

Except as otherwise required to be disclosed in periodic reports required to be filed by public

companies with the SEC pursuant to the SEC’s rules, Lifeway has no duty to update these statements, and it undertakes no obligation

to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Business Overview

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Organic Milk Supply

To increase the supply of organic milk available

to the Company for the manufacture of finished goods, the Company is purchasing mature dairy cows (or the “herd”) which will

be managed by a third-party dairy facility (the “Dairy”), and expects to enter into a supply and purchase agreement (“SPA”)

To increase the supply of organic milk available to

the Company for the manufacture of finished goods, the Company is purchasing mature dairy cows (or the “herd”) which will

be managed by a third-party dairy facility (the “Dairy”), and entered into a supply and purchase agreement (“SPA”)

with a COOP (the “COOP”) to purchase the milk produced by the herd.

The Company purchased 402 mature dairy cows during

July 2025 for $694 and will consider further mature dairy cow purchases in the future.

On July 1, 2025, the Company entered into a thirty-nine

month agreement (the “Herd Agreement”) with a third-party Dairy who will manage care of the herd, milk the herd, and sell

the milk to a COOP, with which Lifeway will have a separate supply and purchase agreement.

The Dairy will make monthly payments to Lifeway

over the agreement period in exchange for its right to sell milk produced by the herd to the COOP and has a right to purchase the herd

at the end of the agreement period for a nominal amount.

The Company is currently assessing the appropriate

accounting treatment for the purchase of the herd and agreement with the Dairy.

the third quarter of 2025 for $1,335 and plans further mature dairy cow purchases in the future.

As amended in September 2025, the Company entered

into a sixty month agreement (the “Herd Agreement”) with a third-party Dairy who will manage care of the herd, milk the herd,

and sell the milk to the COOP under the SPA, with a right to purchase the herd at the end of the agreement period for a nominal amount.

Beginning December 1, 2025, the Dairy will make monthly payments to Lifeway over the five year agreement period in exchange for its right

to possess and control the herd, including the right to sell milk produced by the herd to the COOP.

The herd agreement is treated as a sale of non-financial

assets to a party that is not a customer.

The Company will recognize a sale upon the delivery of each herd to the Dairy, with interest

income recognized over the agreement period.

The Company has recorded $184 in prepaid and other current assets and $1,151 in other assets

as of September 30, 2025 related to the herd agreement with no recorded gain or loss on sale.

The Company records the purchases of dairy

cows as investing outflows, principal payments received as investing inflows and interest income as operating inflows on the statement

of cash flows.

Current Macroeconomic Environment

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Results of Operations

Three Months Ended June 30, 2025 Compared to Three Months Ended

June 30, 2024

Three Months Ended September 30, 2025 Compared to Three Months

Ended September 30, 2024

The following table presents certain information

concerning our financial results, including information presented as a percentage of consolidated net sales:

Three Months Ended June 30,

Three Months Ended September 30,

Cost of goods sold

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Interest expense

Gain on sale of property and equipment

Fair value loss on investments

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Provision for income taxes

Net sales were at $53,901 for the three-month

period ended June 30, 2025, an increase of $4,744 or 9.7% versus prior year.

Net sales were at $57,143 for the three-month period

ended September 30, 2025, an increase of $11,048 or 24.0% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir, partially offset by the planned trade promotion investment to support incremental distribution of farmers

cheese and kefir.

The second quarter 2024 benefited from a customer relationship we strategically exited in the third quarter of 2024,

and a significant distributor shifting from Lifeway delivered to customer pick-up in late 2024, which results in lower net sales and lower

freight out expense.

of our branded drinkable kefir.

The third quarter 2024 benefited from a customer relationship we strategically exited in the third quarter

of 2024, and a significant distributor shifting from Lifeway delivered to customer pick-up in late 2024, which results in lower net sales

and lower freight out expense.

On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately

in the second quarter of 2025 compared to the same period in 2024.

29% in the third quarter of 2025 compared to the same period in 2024.

Gross profit as a percentage of net sales was 28.7%

and 27.0% in the three-month period ended June 30, 2025 and 2024, respectively.

The increase versus the prior year was driven by higher

volumes of our branded products, which provided manufacturing efficiencies and the favorable impact of conventional milk pricing, partially

offset by unfavorable organic milk pricing and planned trade promotion investment.

and 25.7% in the three-month period ended September 30, 2025 and 2024, respectively.

The increase versus the prior year was driven by

higher volumes of our branded products, which provided manufacturing efficiencies and the favorable impact of conventional milk pricing.

Selling Expenses

Selling expenses increased by $1,068 to $5,047 during

the three-month period ended June 30, 2025 from $3,577 during the same period in 2024.

Selling expenses as a percentage of net sales increased

to 8.7% in the three-month period ended June 30, 2025 from 7.3% during the same period in 2024.

The increase is primarily a result of

our continued investments in marketing activities to drive brand awareness and sales volumes.

the three-month period ended September 30, 2025 from $3,979 during the same period in 2024.

Selling expenses as a percentage of net sales

increased to 8.8% in the three-month period ended September 30, 2025 from 8.6% during the same period in 2024.

The increase is primarily

a result of our continued investments in marketing activities to drive brand awareness and sales volumes.

General and Administrative Expenses

General and administrative expenses increased $2,622

$575 to $4,752 during the three-month period ended June 30, 2025 from $4,177 during the same period in 2024.

The increase is primarily

driven by professional fees associated with non-routine stockholder action and the Danone unsolicited purchase proposal.

to $6,186 during the three-month period ended September 30, 2025 from $3,564 during the same period in 2024.

The Company incurred approximately

$2,400 of professional fees associated with the Danone unsolicited purchase proposal and non-routine stockholder action.

Provision for Income Taxes

Income taxes were recognized at effective rates

of 28.1% and 29.4% for the three months ended June 30, 2025 and 2024, respectively.

The change in the Company’s effective tax rate

is primarily driven by changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense.

Income taxes were recognized at effective rates of

30.3% and 31.2% for the three months ended September 30, 2025 and 2024, respectively.

The change in the Company’s effective tax

rate is primarily driven by changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense.

The Company’s effective tax rate may change

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income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur.

Six Months Ended June 30, 2025 Compared to Three Months Ended

June 30, 2025

Nine Months Ended September 30, 2025 Compared to Three Months

Ended September 30, 2025

The following table presents certain information

concerning our financial results, including information presented as a percentage of consolidated net sales:

Six Months Ended June 30,

Nine Months Ended September 30,

Cost of goods sold

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Interest expense

Gain on property and equipment

Fair value loss on investments

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Provision for income taxes

Net sales were at $99,992 for the six-month period

ended June 30, 2025, an increase of $6,201 or 6.6% versus prior year.

The net sales increase was primarily driven by higher volumes of

our branded drinkable kefir, partially offset by the planned trade promotion investment to support incremental distribution of farmers

Net sales were at $157,135 for the nine-month period

ended September 30, 2025, an increase of $17,249 or 12.3% versus prior year.

The net sales increase was primarily driven by higher volumes

of our branded drinkable kefir, partially offset by the planned trade promotion investment to support incremental distribution of farmers

cheese and kefir.

The first six months of 2024 benefited from a customer relationship we strategically exited in the third quarter of

The first nine months of 2024 benefited from a customer relationship we strategically exited in the third quarter of

2024, and a significant distributor shifting from Lifeway delivered to customer pick-up in late 2024, which results in lower net sales

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On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately

14% in the first six months of 2025 compared to the same period in 2024.

19% in the first nine months of 2025 compared to the same period in 2024.

Gross profit as a percentage of net sales was 27.3%

26.5% and 26.4% during the six-month period ended June 30, 2025 and 2024, respectively.

and 26.2% during the nine-month period ended September 30, 2025 and 2024, respectively.

The increase versus the prior year was driven

by higher volumes of our branded products, which provided manufacturing efficiencies, partially offset by organic milk pricing and planned

trade promotion investment.

by higher volumes of our branded products, which provided manufacturing efficiencies and the favorable impact of conventional milk pricing,

partially offset by organic milk pricing and planned trade promotion investment.

Selling Expense

Selling expense increased by $2,139 to $9,416 during

the six-month period ended June 30, 2025 from $7,277 during the same period in 2024.

Selling expenses as a percentage of net sales increased

to 9.4% in the six-month period ended June 30, 2025 from 7.8% during the same period in 2024.

The increase is primarily a result of our

continued investments in marketing activities to drive brand awareness and sales volumes.

Selling expense increased by $3,207 to $14,463

during the nine-month period ended September 30, 2025 from $11,256 during the same period in 2024.

Selling expenses as a percentage of

net sales increased to 9.2% in the nine-month period ended September 30, 2025 from 8.0% during the same period in 2024.

The increase is

primarily a result of our continued investments in marketing activities to drive brand awareness and sales volumes.

General and Administrative Expense

General and administrative expense increased $3,689

to $9,380 during the six-month period ended June 30, 2025 from $8,313 during the same period in 2024.

The increase is primarily driven

by professional fees associated with non-routine stockholder action and the Danone unsolicited purchase proposal.

to $15,566 during the nine-month period ended September 30, 2025 from $11,877 during the same period in 2024.

The Company incurred approximately

$4,300 of professional fees associated with the Danone unsolicited purchase proposal and non-routine stockholder action.

Provision for Income Taxes

The provision for income taxes was $3,088 and

$2,658 during the six months ended June 30, 2025 and 2024, respectively.

The effective income tax rate for the six months

ended June 30, 2025 was 28.4% compared to 30.0% in the same period last year.

Income taxes were recognized at effective tax rates

of 29.1% and 30.4% for the nine months ended September 30, 2025 and 2024, respectively.

The change in the Company’s effective tax

rate is primarily driven by changes in the amount of non-deductible officer compensation and non-deductible stock-based compensation expense.

The Company’s effective tax rate may change

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If additional borrowings are needed,

$25,000 was available under the Revolving Credit Facility as of June 30, 2025 (see Note 7, Debt).

$25,000 was available under the Revolving Credit Facility as of September 30, 2025 (see Note 7, Debt).

We are in compliance with the terms

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Statement of Cash Flows:

Six months Ended

Nine months Ended

September 30,

Net Cash Flows Provided By (Used In):

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Net cash provided in operating activities was

and $8,090 during the six-month period ended June 30, 2025 and 2024, respectively.

The decrease was primarily due lower cash earnings

and the change in working capital.

$10,681 and $15,541 during the nine-month period ended September 30, 2025 and 2024, respectively.

The decrease was primarily due to

lower cash earnings and the change in working capital.

Investing Activities

Net cash provided by investing activities was $795

during the six-month period ended June 30, 2025 compared to net cash used in investing activities of $3,905 in the same period in 2024.

The decrease in cash used reflects cash proceeds of $5,152 received in the first quarter and $54 in the second quarter of 2025 from the

sale of our Simple Mills investment.

Net cash used by investing activities was $4,354

and $5,431 during the nine-month period ended September 30, 2025 and 2024, respectively.

The decrease in cash used reflects cash

proceeds of $5,152 received in the first quarter and $54 in the second quarter of 2025 from the sale of our Simple Mills

The increase in purchases of property and equipment

is primarily driven by the expansion of manufacturing capacity and modernization of our Waukesha, Wisconsin facility.

This project will

enable Lifeway to meet increasing sales demand and will double the facility’s manufacturing capacity and improve packaging efficiency,

as well as other operational improvements.

The Company currently estimates investing approximately $45,000.

As of September 30, 2025,

approximately $9,200 is included on the consolidated balance sheet in property, plant and equipment, with cumulative cash paid of approximately

The project will be funded primarily through cash on-hand and cash flow from operations, with further requirements available under

the Company’s revolving credit facility.

The project is expected to be completed during the fourth fiscal quarter of 2026.

Our capital spending is focused in three core areas:

growth, cost reduction, and facility improvements.

growth, cost reduction,

and facility improvements.

Growth capital spending supports capacity expansion and new product innovation and enhancements.

Cost reduction and facility improvements

support manufacturing efficiency, safety, and productivity.

Cost reduction

and facility improvements support manufacturing efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities was $65

and $2,750 during the six-month period ended June 30, 2025 and 2024, respectively.

The cash used in 2025 represents credit agreement amendment

expenses incurred during the first quarter.

The cash used in 2024 represented the quarterly principal payments under the term loan, which

was paid in full during the second quarter of 2024.

and $2,750 during the nine-month period ended September 30, 2025 and 2024, respectively.

The cash used in 2025 represents credit agreement

amendment expenses incurred during the first quarter.

The cash used in 2024 represented the quarterly principal payments under the term

loan, which was paid in full during the second quarter of 2024.

Debt Obligations

As of June 30, 2025, the Company had $0 outstanding

As of September 30, 2025, the Company had $0 outstanding

under the Revolving Credit Facility.

The Company had $25,000 available for future borrowings under the Revolving Credit Facility as of

June 30, 2025.

September 30, 2025.

The Credit Agreement includes customary representations,

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The Company is in compliance with all applicable

financial debt covenants as of June 30, 2025.

financial debt covenants as of September 30, 2025.

See Note 7 to our Consolidated Financial Statements for additional information regarding

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There were no material

changes to the Company’s critical accounting policies and estimates in the six months ended June 30, 2025.

changes to the Company’s critical accounting policies and estimates in the nine months ended September 30, 2025.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis