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, 2025 (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, 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. 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. Business Trends 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. 20 Results of Operations 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 March 31, 2026 2025 $ % $ % Net sales 63,012 100.0% 46,091 100.0% Cost of goods sold 44,741 71.0% 34,254 74.3% Depreciation expense 920 1.5% 802 1.7% Total cost of goods sold 45,661 72.5% 35,056 76.0% Gross profit 17,351 27.5% 11,035 24.0% Selling expenses 6,188 9.8% 4,698 10.2% General & administrative expense 4,703 7.5% 4,628 10.0% Amortization expense 135 0.2% 135 0.3% Total operating expenses 11,026 17.5% 9,461 20.5% Income from operations 6,325 10.0% 1,574 3.5% Other income (expense): Interest expense (68 ) (0.1% ) (14 ) 0.0% Gain on sales of investments – 0.0% 3,352 7.3% Other income (expense), net – 0.0% 54 0.1% Total other income (expense) (68 ) (0.1% ) 3,392 7.4% Income before provision for income taxes 6,257 9.9% 4,966 10.9% Provision for income taxes 1,583 2.5% 1,426 3.1% Net income 4,674 7.4% 3,540 7.8% 21 Net Sales 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 Gross profit as a percentage of net sales was 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 the favorable impact of milk pricing and manufacturing efficiencies resulting from increased production volumes. Selling Expenses 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 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 $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 in 2025. 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 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 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. 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, $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 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. 22 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). Cash Flow The following table is derived from our Consolidated Statement of Cash Flows: Three months Ended March 31, Net Cash Flows Provided By (Used In): 2026 2025 Operating activities $ 4,378 $ (150 ) Investing activities $ (11,041 ) $ 2,933 Financing activities $ 6,696 $ (65 ) Operating Activities 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 in 2025. The increase was primarily due increased cash earnings, partially offset by the change in working capital. Investing Activities 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 in 2025. 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 $48,500. 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. 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. 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 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. We continue to make capital expenditures primarily to modernize manufacturing facilities and support productivity initiatives. 23 Financing Activities 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. The 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 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 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). Interest 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. The Company is in compliance with all applicable financial debt covenants as of March 31, 2026. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness and related agreements. 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, 2025. There were no material changes to the Company’s critical accounting policies and estimates in the three months ended March 31, 2026. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. 24