Lifeway Foods, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in this Form 10-Q is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2024 (the “Form 10-K”). Unless otherwise specified, any description of “our”, “we”, and “us” in this MD&A refer to Lifeway Foods, Inc. (“Lifeway”) and our wholly-owned subsidiaries. Cautionary Statement Regarding Forward-Looking Statements In addition to historical information, this quarterly report contains “forward-looking” statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as “anticipate,” “from time to time,” “intend,” “plan,” “ongoing,” “realize,” “should,” “may,” “could,” “believe,” “future,” “depend,” “expect,” “will,” “result,” “can,” “remain,” “assurance,” “subject to,” “require,” “limit,” “impose,” “guarantee,” “restrict,” “continue,” “become,” “predict,” “likely,” “opportunities,” “effect,” “change,” “predict,” and “estimate,” and similar terms or terminology, or the negative of such terms or other comparable terminology. Examples of forward-looking statements include, among others, statements we make regarding: · Expectations of the effect on our financial condition of claims, litigation, environmental costs, contingent liabilities and governmental and regulatory investigations and proceedings, if any; · Strategy for acquisitions, customer retention, growth, product development, market position, financial results and reserves; · Estimates of the amounts of sales allowances and discounts to our customers and consumers; · Our belief that we will maintain compliance with our loan agreements and have sufficient liquidity to fund our business operations. Forward looking statements are based on management’s beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties, and assumptions that include: · Changes in the pricing of commodities; · The actions and decisions of our competitors and customers, including those related to price competition; · Our ability to successfully implement our business strategy; · The effects of government regulation; · Disruptions to our supply chain, or our manufacturing and distribution capabilities, including those due to cybersecurity threats; · Adverse economic conditions in the United States, our primary market, or any of the other jurisdictions in which we conduct significant business in the future, and resultant changes in consumer spending; and · Such other factors as discussed throughout Part I, Item 1 “Business”; Part I, Item 1A “Risk Factors”; 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. 19 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 Lifeway was founded in 1986 by Michael Smolyansky, ten years after he and his family emigrated from Eastern Europe to the United States. Lifeway was the first to successfully introduce kefir to the U.S. consumer on a commercial scale, initially catering to ethnic consumers in the Chicago, Illinois metropolitan area. Lifeway has grown to become the largest producer and marketer of kefir in the U.S. and an important player in the broader market spaces of probiotic-based products and natural, “better for you” foods. Our primary product is drinkable kefir, a cultured dairy product. Lifeway Kefir is tart and tangy, high in protein, calcium and vitamin D. The Company manufactures (directly or through a co-manufacturer) and markets products under the Lifeway, Fresh Made, and GlenOaks Farms brand names, as well as under private labels on behalf of certain customers. The Company’s product categories are: · Drinkable Kefir, a cultured dairy product sold in a variety of organic and non-organic sizes, flavors, and types. · European-style soft cheeses, including farmer cheese, white cheese, and Sweet Kiss. · Cream and other, which primarily consists of cream, a byproduct of raw milk processing. · Drinkable Yogurt, sold in a variety of sizes and flavors. · ProBugs, a line of kefir products designed for children. · Other Dairy, which primarily consists of Fresh Made butter and sour cream. Recent Developments and Trends 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 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 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. 20 Current Macroeconomic Environment We continue to monitor macroeconomic conditions and global trade developments, including inflation in key input costs, recently implemented tariffs, and the potential for additional or modified tariffs or export controls. These evolving global trade policies may contribute to increased supply chain complexity, commodity cost volatility, and broader economic uncertainty. We do not currently expect these conditions to have a material adverse impact on our operations or financial results. We are primarily a United States based manufacturer sourcing a vast majority of our inputs domestically. In addition, all our domestically produced products are sold to customers in the United States. We expect the accelerating consumer focus on health and wellness to drive increased demand for our products. Results of Operations 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 September 30, 2025 2024 $ % $ % Net sales 57,143 100.0% 46,095 100.0% Cost of goods sold 39,821 69.7% 33,508 72.7% Depreciation expense 914 1.6% 720 1.6% Total cost of goods sold 40,735 71.3% 34,228 74.3% Gross profit 16,408 28.7% 11,867 25.7% Selling expenses 5,047 8.8% 3,979 8.6% General & administrative expense 6,186 10.8% 3,564 7.7% Amortization expense 135 0.2% 135 0.3% Total operating expenses 11,368 19.8% 7,678 16.6% Income from operations 5,040 8.9% 4,189 9.1% Other income (expense): Interest expense (21 ) 0.0% (4 ) (0.0% ) Gain on sale of property and equipment – 0.0% 3 0.0% Fair value loss on investments – 0.0% – 0.0% Gain on sales of investments – 0.0% – 0.0% Other income (expense), net 73 0.1% 138 0.3% Total other income (expense) 52 0.1% 137 0.3% Income before provision for income taxes 5,092 9.0% 4,326 9.4% Provision for income taxes 1,563 2.7% 1,350 2.9% Net income 3,529 6.3% 2,976 6.5% 21 Net Sales 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. 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 29% in the third quarter of 2025 compared to the same period in 2024. Gross Profit Gross profit as a percentage of net sales was 28.7% 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 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 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 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 from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. 22 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: Nine Months Ended September 30, 2025 2024 $ % $ % Net sales 157,135 100.0% 139,886 100.0% Cost of goods sold 111,744 71.1% 101,127 72.3% Depreciation expense 2,548 1.6% 2,082 1.5% Total cost of goods sold 114,292 72.7% 103,209 73.8% Gross profit 42,843 27.3% 36,677 26.2% Selling expense 14,463 9.2% 11,256 8.0% General & administrative expense 15,566 9.9% 11,877 8.5% Amortization expense 405 0.3% 405 0.3% Total operating expenses 30,434 19.4% 23,538 16.8% Income from operations 12,409 7.9% 13,139 9.4% Other income (expense): Interest expense (56 ) 0.0% (102 ) (0.1% ) Gain on property and equipment – – 3 0.0% Fair value loss on investments (20 ) 0.0% – 0.0% Gain on investments 3,407 2.2% – 0.0% Other income (expense), net 229 0.1% 153 0.1% Total other income (expense) 3,560 2.3% 54 0.0% Income before provision for income taxes 15,969 10.2% 13,193 9.4% Provision for income taxes 4,651 3.0% 4,008 2.9% Net income 11,318 7.2% 9,185 6.5% Net Sales 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 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 and lower freight out expense. On a comparable basis adjusting for these two factors, the Company’s net sales increased approximately 19% in the first nine months of 2025 compared to the same period in 2024. Gross Profit Gross profit as a percentage of net sales was 27.3% 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 and the favorable impact of conventional milk pricing, partially offset by organic milk pricing and planned trade promotion investment. 23 Selling Expense 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 $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 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 from period to period based on recurring and non-recurring factors including the relative mix of pre-tax earnings (or losses), the jurisdictional mix of earnings, enacted tax legislation, state income taxes, the impact of non-deductible items, changes in valuation allowances, settlement of tax audits, and the expiration of the statute of limitations in relation to unrecognized tax benefits. The Company records discrete income tax items such as enacted tax rate changes and completed tax audits in the period in which they occur. Income taxes are discussed in Note 10 in the Notes to the Consolidated Financial Statements. Liquidity and Capital Resources Management assesses the Company’s liquidity in terms of its ability to generate cash to fund its operating, investing, and financing activities. The Company remains in a strong financial position, and believes that its cash flow from operations, revolving credit facility, and cash and cash equivalents will continue to provide sufficient liquidity for its working capital needs, capital resource requirements, and growth initiatives and to ensure the continuation of the Company as a going concern. If additional borrowings are needed, $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 of the Credit Agreement and expect to meet foreseeable financial requirements. The success of our business and financing strategies will continue to provide us with the financial flexibility to take advantage of various opportunities as they arise. To date, we have been successful in generating cash and obtaining financing as needed. However, if a serious economic or credit market crisis ensues, it could have a negative effect on our liquidity, results of operations and financial condition. The Company’s most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for raw materials, labor, manufacturing and distribution, trade and promotions, advertising and marketing, and tax liabilities) as well as expenditures for property, plant and equipment. Long-term cash requirements primarily relate to funding long-term debt repayments (see Note 7, Debt) and deferred income taxes (see Note 10, Income Taxes, in our Annual Report on Form 10-K). 24 Cash Flow The following table is derived from our Consolidated Statement of Cash Flows: Nine months Ended September 30, Net Cash Flows Provided By (Used In): 2025 2024 Operating activities $ 10,681 $ 15,541 Investing activities $ (4,354 ) $ (5,431 ) Financing activities $ (65 ) $ (2,750 ) Operating Activities Net cash provided in operating activities was $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 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 investment. 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 $6,100. 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 capital spending supports capacity expansion and new product innovation and enhancements. 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 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 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 September 30, 2025. The Credit Agreement includes customary representations, warranties, and covenants, including financial covenants requiring the Company to maintain a fixed charge coverage ratio of no less than 1.25 to 1.00, and a maximum cash flow leverage ratio of no greater than 2.00 to 1.00 for each fiscal quarter commencing with the fiscal quarter ending March 31, 2025. The Company is in compliance with all applicable financial debt covenants as of September 30, 2025. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements. 25 Recent Accounting Pronouncements Information regarding recent accounting pronouncements is provided in Note 2 – Summary of Significant Accounting Policies. Critical Accounting Policies and Estimates A description of the Company’s critical accounting policies and estimates is contained in its Annual Report on Form 10-K for the year ended December 31, 2024. There were no material changes to the Company’s critical accounting policies and estimates in the nine months ended September 30, 2025. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable.