What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-05-14 compared with 2025-11-12 · 75 added, 155 removed, 162 unchanged (59% 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, 2025 , 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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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.

Business Trends

Current Macroeconomic Environment

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Results of Operations

Three Months Ended September 30, 2025 Compared to Three Months

Ended September 30, 2024

Three Months Ended March 31, 2026 Compared to Three Months Ended

March 31, 2025

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,

Three Months Ended March 31,

Cost of goods sold

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Interest expense

Gain on sale of property and equipment

Fair value loss on investments

Gain on sales of investments

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Provision for income taxes

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.

Net sales were at $63,012 for the three-month

period ended March 31, 2026, an increase of $16,921 or 36.7% versus prior year.

The net sales increase was primarily driven by higher

volumes of our branded drinkable kefir.

Gross profit as a percentage of net sales was

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

27.5% and 24.0% in the three-month period ended March 31, 2026 and 2025, 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.

the favorable impact of milk pricing and manufacturing efficiencies resulting from increased production volumes.

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 increased by $1,490 to $6,188

during the three-month period ended March 31, 2026 from $4,698 during the same period in 2025.

The increase is primarily a result of our

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

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.

decreased to 9.8% in the three-month period ended March 31, 2026 from 10.2% during the same period in 2025.

General and Administrative Expenses

General and administrative expenses increased

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.

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,

Cost of goods sold

Depreciation expense

Total cost of goods sold

Selling expense

General & administrative expense

Amortization expense

Total operating expenses

Income from operations

Other income (expense):

Interest expense

Gain on property and equipment

Fair value loss on investments

Gain on investments

Other income (expense), net

Total other income (expense)

Income before provision for income taxes

Provision for income taxes

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 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.

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.

$75 to $4,703 during the three-month period ended March 31, 2026 from $4,628 during the same period in 2025.

General and administrative

expenses as a percentage of net sales decreased to 7.5% in the three-month period ended March 31, 2026 from 10.0% during the same period

During the first quarter of 2025, the Company incurred approximately $985 of legal and professional fees associated with Danone’s

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.

Income taxes were recognized at effective rates

of 25.3% and 28.7% for the three months ended March 31, 2026 and 2025, respectively.

The change in the Company’s effective tax rate

is primarily driven by the increase in pre-tax book income and 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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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

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If additional borrowings are needed,

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

$18,000 was available under the Revolving Credit Facility as of March 31, 2026 (see Note 7, Debt ).

We are in compliance with the terms

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Statement of Cash Flows:

Nine months Ended

September 30,

Three months Ended

Net Cash Flows Provided By (Used In):

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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.

Net cash provided by operating activities was

$4,378 during the three-month period ended March 31, 2026 compared to net cash used in operating activities of $150 in the same period

The increase was primarily due increased cash earnings, partially offset by 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

Net cash used in investing activities was $11,041

during the three-month period ended March 31, 2026 compared to net cash provided by investing activities of $2,933 in the same period

The increase in purchases of property and equipment

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The Company currently estimates investing approximately $48,500.

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.

As of March 31, 2026, $31,267

is included on the consolidated balance sheet in property, plant and equipment, with $3,691 in-service and recorded in machinery and equipment

and $27,576 recorded in construction in process.

The cumulative cash paid for this project is $31,267 as of March 31, 2026.

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.

The Company received cash proceeds of $5,152 in

the first quarter of 2025 from the sale of our Simple Mills investment.

Our capital spending is focused on three core

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.

We continue to

make capital expenditures primarily to modernize manufacturing facilities and support productivity initiatives.

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.

Net cash provided by financing activities was

$6,696 and net cash used in financing activities was $65 during the three-month period ended March 31, 2026 and 2025, respectively.

cash provided by during 2026 primarily represents the line of credit borrowing in connection with the Waukesha Wisconsin facility expansion

and modernization project.

During the first quarter of 2026, to comply with the Company’s contractual obligations prohibiting the

Company from issuing equity to the Chief Executive Officer and certain of her affiliates, the Company settled previously vested restricted

stock units held by the Chief Executive Officer in cash.

The cash used in 2025 represented credit agreement amendment expenses incurred

during the first quarter.

Debt Obligations

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

As of March 31, 2026, the Company had $7,000 outstanding

under the Revolving Credit Facility.

The Company had $18,000 available for future borrowings under the Revolving Credit Facility as of

September 30, 2025.

March 31, 2026.

All outstanding amounts under the revolving line

of credit bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 1.75% (5.54% as of March 31, 2026).

is payable monthly in arrears.

Lifeway is also required to pay a quarterly unused line fee of 0.25% on the Revolving Credit Facility,

and in conjunction with the issuance of any letters of credit, a letter of credit fee of 1.00%.

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.

1.25 to 1.00, and a maximum cash flow leverage ratio of no greater than 2.00 to 1.00.

The Company is in compliance with all applicable

financial debt covenants as of September 30, 2025.

financial debt covenants as of March 31, 2026.

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 nine months ended September 30, 2025.

changes to the Company’s critical accounting policies and estimates in the three months ended March 31, 2026.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis