Lifeway Foods(LWAY) - 2025 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents Lifeway Foods, Inc.'s unaudited consolidated financial statements and related notes for the periods ended June 30, 2025, and December 31, 2024 Consolidated Balance Sheets | Metric | June 30, 2025 (Unaudited) (in thousands) | December 31, 2024 (in thousands) | | :----------------------------------- | :------------------------ | :------------------ | | Assets | | | | Total current assets | $49,331 | $43,605 | | Property, plant and equipment, net | $30,731 | $26,862 | | Total assets | $98,267 | $90,547 | | Liabilities | | | | Total current liabilities | $16,289 | $15,504 | | Total liabilities | $19,571 | $18,636 | | Stockholders' Equity | | | | Total stockholders' equity | $78,696 | $71,911 | - Total assets increased by $7,720 thousand (8.5%) from December 31, 2024, to June 30, 2025, primarily driven by increases in cash and cash equivalents, inventories, and property, plant, and equipment[10] - Total stockholders' equity increased by $6,785 thousand (9.4%) from December 31, 2024, to June 30, 2025[10] Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $53,901 | $49,157 | $99,992 | $93,791 | | Gross profit | $15,400 | $13,275 | $26,435 | $24,810 | | Income from operations | $5,795 | $5,386 | $7,369 | $8,950 | | Net income | $4,249 | $3,783 | $7,789 | $6,209 | | Basic EPS | $0.28 | $0.26 | $0.51 | $0.42 | | Diluted EPS | $0.28 | $0.25 | $0.51 | $0.41 | - Net sales increased by 9.7% for the three months ended June 30, 2025, and by 6.6% for the six months ended June 30, 2025, compared to the respective prior-year periods[12] - Net income increased by 12.3% for the three months ended June 30, 2025, and by 25.4% for the six months ended June 30, 2025, compared to the respective prior-year periods[12] Consolidated Statements of Stockholders' Equity - Total stockholders' equity increased from $71,911 thousand at January 1, 2025, to $78,696 thousand at June 30, 2025, primarily due to net income of $7,789 thousand and stock-based compensation[16] - Net income contributed $3,540 thousand in Q1 2025 and $4,249 thousand in Q2 2025 to retained earnings[16] - Stock-based compensation expense recognized was $326 thousand in Q1 2025 and $601 thousand in Q2 2025[16] Consolidated Statements of Cash Flows | Cash Flow Activity | Six months ended June 30, 2025 (in thousands) | Six months ended June 30, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $3,762 | $8,090 | | Net cash provided by (used in) investing activities | $795 | $(3,905) | | Net cash used in financing activities | $(65) | $(2,750) | | Net increase in cash and cash equivalents | $4,492 | $1,435 | | Cash and cash equivalents at end of period | $21,220 | $14,633 | - Net cash provided by operating activities decreased to $3,762 thousand in the first six months of 2025 from $8,090 thousand in the same period of 2024, primarily due to lower cash earnings and changes in working capital[18][107] - Net cash provided by investing activities significantly improved to $795 thousand in the first six months of 2025, compared to net cash used of $3,905 thousand in 2024, driven by $5,206 thousand in proceeds from the sale of investments[18][108] Note 1 – Basis of Presentation - The unaudited consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and include all adjustments necessary for fair presentation[20] - The consolidated financial statements include Lifeway Foods, Inc. and all its wholly-owned subsidiaries, with all significant intercompany accounts and transactions eliminated[21] Note 2 – Summary of Significant Accounting Policies - Significant accounting policies have not materially changed from the Annual Report on Form 10-K for fiscal year ended December 31, 2024[22] - Key estimates include promotional allowances, goodwill and intangible asset valuation, stock-based compensation, and deferred income taxes[23] - Advertising costs are expensed as incurred and reported in Selling expense, with total advertising expense at $4,418 thousand for the six months ended June 30, 2025, up from $2,531 thousand in 2024[26] - The Company operates as a single reportable segment, focusing on cultured dairy products sold in the United States[28] - New accounting standards ASU 2024-03 (Expense Disaggregation Disclosures) and ASU 2023-09 (Income Tax Disclosures) are effective for future periods and will primarily impact financial statement notes, not recognition or measurement[29][30] Note 3 – Inventories, net | Inventory Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------- | :------------ | :---------------- | | Ingredients | $3,053 | $2,519 | | Packaging | $2,872 | $2,855 | | Finished goods | $4,299 | $3,304 | | Total inventories, net | $10,224 | $8,678 | - Total inventories, net, increased by $1,546 thousand (17.8%) from December 31, 2024, to June 30, 2025, primarily due to increases in ingredients and finished goods[31] Note 4 – Property, Plant and Equipment, net | Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :---------------------- | :------------ | :---------------- | | Buildings and improvements | $24,141 | $23,520 | | Machinery and equipment | $38,997 | $38,181 | | Construction in process | $5,459 | $2,163 | | Total property, plant and equipment, net | $30,731 | $26,862 | - Net property, plant and equipment increased by $3,869 thousand (14.4%) from December 31, 2024, to June 30, 2025, largely due to an increase in construction in process[32] Note 5 – Goodwill and Intangible Assets - Goodwill remained constant at $11,704 thousand as of June 30, 2025, with no changes from December 31, 2024[32] Intangible Assets, Net | Intangible Asset | Net Carrying Amount (June 30, 2025) (in thousands) | Net Carrying Amount (December 31, 2024) (in thousands) | | :------------------------------ | :---------------------------------- | :------------------------------------ | | Customer relationships | $1,773 | $1,853 | | Brand names | $4,315 | $4,505 | | Total intangible assets, net | $6,088 | $6,358 | - Total intangible assets, net, decreased by $270 thousand from December 31, 2024, to June 30, 2025, primarily due to amortization[33] - Estimated amortization expense for intangible assets is $270 thousand for the six months ended December 31, 2025, and $540 thousand annually from 2026 to 2029[33] Note 6 – Accrued Expenses | Accrued Expense Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------------- | :------------ | :---------------- | | Payroll and incentive compensation | $3,364 | $4,188 | | Real estate taxes | $507 | $468 | | Utilities | $189 | $193 | | Current portion of operating lease liabilities | $58 | $47 | | Other | $291 | $207 | | Total accrued expenses | $4,409 | $5,103 | - Total accrued expenses decreased by $694 thousand (13.6%) from December 31, 2024, to June 30, 2025, mainly due to a decrease in payroll and incentive compensation[34] Note 7 – Debt - On February 5, 2025, the Company entered into the Fifth Modification to its Revolving Credit Facility, increasing the commitment from $5,000 thousand to $25,000 thousand and extending the termination date to February 5, 2028[35] - The Fifth Modification replaced the quarterly minimum working capital covenant with a maximum cash flow leverage ratio of no greater than 2.00 to 1.00[35] - As of June 30, 2025, the Company had no outstanding borrowings and $25,000 thousand available under the Revolving Credit Facility, and was in compliance with all covenants[36][37] Note 8 – Leases - The Company leases machinery and equipment with remaining lease terms ranging from less than one year to six years[38] - Total lease expense (including short-term leases) was $95 thousand for the six months ended June 30, 2025, compared to $77 thousand for the same period in 2024[41] Operating Leases | Year | Operating Leases (in thousands) | | :--- | :------------------------------ | | Six months ended December 31, 2025 | $45 | | 2026 | $82 | | 2027 | $74 | | 2028 | $67 | | 2029 | $60 | | Thereafter | $41 | | Total lease payments | $369 | | Less: Interest | $(91) | | Present value of lease liabilities | $278 | - The weighted-average remaining lease term for operating leases was 4.8 years, and the weighted average discount rate was 12.27% as of June 30, 2025[42] Note 9 – Commitments and contingencies - Lifeway is involved in various legal proceedings, claims, and disputes in the ordinary course of business[43] - Provisions for legal matters are recorded when a loss is probable and reasonably estimable; currently, no accruals are material individually or in aggregate[44] Note 10 – Income taxes | Period | Effective Tax Rate | | :----- | :----------------- | | Six months ended June 30, 2025 | 28.4% | | Six months ended June 30, 2024 | 30.0% | | Three months ended June 30, 2025 | 28.1% | | Three months ended June 30, 2024 | 29.4% | - The change in the effective tax rate is primarily due to changes in non-deductible officer compensation and stock-based compensation expense[45] - The provision for income taxes during interim periods is calculated by applying an estimate of the annual effective tax rate to income before taxes, excluding discrete items[46] Note 11 – Stock-based and Other Compensation - The Lifeway Foods, Inc. 2022 Omnibus Incentive Plan has 2.57 million shares remaining available for awards as of June 30, 2025[48] - The 2022 Non-Employee Director Equity and Deferred Compensation Plan has 390 thousand shares remaining available for awards as of June 30, 2025[49] Compensation Expense and Tax Benefit | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Compensation expense related to stock-based payments | $601 | $623 | $927 | $1,296 | | Related income tax benefit | $168 | $66 | $259 | $131 | - Unrecognized compensation expense for nonvested restricted stock units was $687 thousand as of June 30, 2025, to be recognized over a weighted average period of 1.2 years[53] - Unrecognized compensation expense for nonvested performance units is estimated at $1,775 thousand as of June 30, 2025, to be recognized over a weighted average period of 1.16 years[58] - Total contribution expense for the defined contribution plan was $413 thousand for the six months ended June 30, 2025, compared to $362 thousand for the same period in 2024[59] Note 12 - Earnings Per Share | Metric | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Weighted average common shares outstanding | 15,206 | 14,727 | 15,170 | 14,709 | | Assumed exercise/vesting of equity awards | 184 | 470 | 189 | 467 | | Weighted average diluted common shares outstanding | 15,390 | 15,197 | 15,359 | 15,176 | Note 13 – Disaggregation of Revenue and Significant Customers - Lifeway operates as one reportable segment, manufacturing and distributing cultured dairy products primarily in North America[61][62] - The primary product is drinkable kefir, sold under Lifeway, Fresh Made, GlenOaks Farms, and private labels[63] Net Sales by Product Category | Product Category | Six Months Ended June 30, 2025 (in thousands) | % of Total (2025) | Six Months Ended June 30, 2024 (in thousands) | % of Total (2024) | | :--------------- | :----------------------------- | :---------------- | :----------------------------- | :---------------- | | Drinkable Kefir other than ProBugs | $84,039 | 84% | $77,543 | 83% | | Cheese | $7,811 | 8% | $6,892 | 7% | | Cream and other | $4,825 | 5% | $3,987 | 4% | | ProBugs Kefir | $1,515 | 1% | $1,750 | 2% | | Drinkable Yogurt | $1,083 | 1% | $2,918 | 3% | | Other dairy | $719 | 1% | $701 | 1% | | Net Sales | $99,992 | 100% | $93,791 | 100% | | Product Category | Three Months Ended June 30, 2025 (in thousands) | % of Total (2025) | Three Months Ended June 30, 2024 (in thousands) | % of Total (2024) | | :--------------- | :------------------------------- | :---------------- | :------------------------------- | :---------------- | | Drinkable Kefir other than ProBugs | $45,989 | 85% | $41,010 | 83% | | Cheese | $3,999 | 8% | $3,377 | 7% | | Cream and other | $2,366 | 4% | $2,171 | 4% | | ProBugs Kefir | $769 | 1% | $884 | 2% | | Drinkable Yogurt | $449 | 1% | $1,382 | 3% | | Other dairy | $329 | 1% | $333 | 1% | | Net Sales | $53,901 | 100% | $49,157 | 100% | - Drinkable Kefir (excluding ProBugs) remains the largest product category, accounting for 84% of net sales for the six months ended June 30, 2025[64] - Two significant customers accounted for approximately 25% of net sales for the six months ended June 30, 2025, and 26% for the same period in 2024[65] Note 14 – Shareholder Rights Plan - The Company adopted a Shareholder Rights Agreement on November 4, 2024, issuing one preferred share purchase right for each outstanding common stock share[68] - Each Right entitles its holder to purchase one one-thousandth of one share of Series A Junior Participating Preferred Stock at an exercise price of $130.00[68] - The Right expires at the end of November 4, 2025, or earlier if exercised[68] Note 15 – Subsequent Events - The One Big Beautiful Bill Act (OBBBA) was enacted on July 4, 2025, but is not expected to have a material impact on the Company's estimated annual effective tax rate or cash flows in the current fiscal year[69] - To increase organic milk supply, Lifeway purchased 224 mature dairy cows for $694 thousand in July 2025 and entered into a 39-month agreement with a third-party dairy facility to manage the herd and sell milk to a COOP[70][71][72] - The Company is currently assessing the appropriate accounting treatment for the herd purchase and related agreement[73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition, operational results, liquidity, and capital resources for the reported periods Business Overview - Lifeway Foods, Inc. was founded in 1986 and is the largest producer and marketer of kefir in the U.S., focusing on probiotic-based and 'better for you' foods[78] - The primary product is drinkable kefir, a cultured dairy product, marketed under Lifeway, Fresh Made, GlenOaks Farms, and private labels[79] - Product categories include: Drinkable Kefir, European-style soft cheeses, Cream and other, Drinkable Yogurt, ProBugs (kefir for children), and Other Dairy (butter and sour cream)[84] - The Company is primarily a United States-based manufacturer, sourcing most inputs domestically and selling all domestically produced products to U.S. customers[83] Recent Developments and Trends - Lifeway is increasing its organic milk supply by purchasing mature dairy cows and entering into agreements with a third-party dairy facility and a COOP[79][81] - The Company purchased 224 mature dairy cows in July 2025 for $694 thousand and is evaluating further purchases[80] - The Company is assessing the accounting treatment for the herd purchase and the 39-month Herd Agreement[82] Current Macroeconomic Environment - The Company monitors macroeconomic conditions, including inflation, tariffs, and trade policies, but does not currently expect a material adverse impact on operations or financial results[83] - An accelerating consumer focus on health and wellness is expected to drive increased demand for Lifeway's products[83] Results of Operations Three Months Ended June 30, 2025 vs. 2024 | Metric | 2025 ($ in thousands) | 2025 (%) | 2024 ($ in thousands) | 2024 (%) | Change ($ in thousands) | Change (%) | | :-------------------------------- | :------- | :------- | :------- | :------- | :--------- | :--------- | | Net sales | 53,901 | 100.0% | 49,157 | 100.0% | 4,744 | 9.7% | | Gross profit | 15,400 | 28.6% | 13,275 | 27.0% | 2,125 | 16.0% | | Selling expenses | 4,718 | 8.8% | 3,577 | 7.3% | 1,141 | 31.9% | | General & administrative expense | 4,752 | 8.8% | 4,177 | 8.5% | 575 | 13.8% | | Income from operations | 5,795 | 10.7% | 5,386 | 10.9% | 409 | 7.6% | | Net income | 4,249 | 7.9% | 3,783 | 7.6% | 466 | 12.3% | Six Months Ended June 30, 2025 vs. 2024 | Metric | 2025 ($ in thousands) | 2025 (%) | 2024 ($ in thousands) | 2024 (%) | Change ($ in thousands) | Change (%) | | :-------------------------------- | :------- | :------- | :------- | :------- | :--------- | :--------- | | Net sales | 99,992 | 100.0% | 93,791 | 100.0% | 6,201 | 6.6% | | Gross profit | 26,435 | 26.5% | 24,810 | 26.4% | 1,625 | 6.5% | | Selling expense | 9,416 | 9.4% | 7,277 | 7.8% | 2,139 | 29.4% | | General & administrative expense | 9,380 | 9.4% | 8,313 | 8.9% | 1,067 | 12.8% | | Income from operations | 7,369 | 7.4% | 8,950 | 9.4% | (1,581) | (17.7%) | | Net income | 7,789 | 7.9% | 6,209 | 6.5% | 1,580 | 25.4% | - Net sales for Q2 2025 increased by 9.7% to $53,901 thousand, primarily due to higher volumes of branded drinkable kefir, with a comparable increase of approximately 18% when adjusting for exited customer relationships and distributor shifts[86] - Gross profit margin for Q2 2025 increased to 28.6% from 27.0% in Q2 2024, driven by higher branded product volumes and favorable conventional milk pricing, partially offset by unfavorable organic milk pricing and trade promotion investments[87] - Selling expenses for Q2 2025 increased by $1,141 thousand (31.9%) to $4,718 thousand, mainly due to increased marketing activities to boost brand awareness and sales volumes[88] - General and administrative expenses for Q2 2025 rose by $575 thousand (13.8%) to $4,752 thousand, primarily due to professional fees related to non-routine stockholder action and the Danone unsolicited purchase proposal[89] - The effective income tax rate for the six months ended June 30, 2025, was 28.4%, down from 30.0% in the prior year, mainly due to changes in non-deductible officer compensation and stock-based compensation[99] Liquidity and Capital Resources - Lifeway maintains a strong financial position, expecting sufficient liquidity from operations, its revolving credit facility, and cash equivalents to fund working capital, capital requirements, and growth initiatives[102] - As of June 30, 2025, $25,000 thousand was available under the Revolving Credit Facility, with no outstanding borrowings[103][110] - The Company is in compliance with all financial covenants of its Credit Agreement, including 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[111][112] - Short-term cash requirements include funding operations (raw materials, labor, marketing, taxes) and capital expenditures; long-term needs relate to debt repayments and deferred income taxes[104] Cash Flow | Cash Flow Activity | Six months Ended June 30, 2025 (in thousands) | Six months Ended June 30, 2024 (in thousands) | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $3,762 | $8,090 | | Investing activities | $795 | $(3,905) | | Financing activities | $(65) | $(2,750) | - Net cash from operating activities decreased to $3,762 thousand in H1 2025 from $8,090 thousand in H1 2024, primarily due to lower cash earnings and changes in working capital[107] - Net cash from investing activities turned positive at $795 thousand in H1 2025, compared to a net use of $3,905 thousand in H1 2024, mainly due to $5,206 thousand in proceeds from the sale of the Simple Mills investment[108][27] - Net cash used in financing activities decreased significantly to $65 thousand in H1 2025 from $2,750 thousand in H1 2024, as the 2024 figure included principal payments on a term loan that was fully repaid[109] Recent Accounting Pronouncements - Information on recent accounting pronouncements is detailed in Note 2 – Summary of Significant Accounting Policies[113] Critical Accounting Policies and Estimates - There were no material changes to the Company's critical accounting policies and estimates during the six months ended June 30, 2025, as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2024[114] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has no applicable quantitative and qualitative disclosures about market risk - The Company has no applicable quantitative and qualitative disclosures about market risk[115] Item 4. Controls and Procedures This section details the evaluation of the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - As of June 30, 2025, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective[116] Changes in Internal Control over Financial Reporting - There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2025, that materially affected or are reasonably likely to materially affect, its internal control over financial reporting[117] PART II – OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 9 for information regarding legal proceedings, indicating no new material information beyond what is already disclosed in the financial notes - Information regarding legal proceedings is available in Note 9, Commitment and Contingencies[119] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - There have been no material changes from the risk factors disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2024[120] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section indicates that there were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities and use of proceeds to report[121] Item 3. Defaults Upon Senior Securities This section reports that there were no defaults upon senior securities - There were no defaults upon senior securities[122] Item 5. Other Information This section confirms that no director or officer adopted or terminated Rule 10b5-1 trading arrangements during the quarter - No director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the quarter ended June 30, 2025[123] Item 6. Exhibits This section lists all exhibits filed or furnished with the Form 10-Q, including certifications, press releases, and XBRL documents - Certifications (Rule 13a-14(a)/15d-14(a) and Section 1350) from Julie Smolyansky (CEO) and Eric Hanson (CFO) are included[125] - A press release dated August 12, 2025, reporting financial results for the three months ended June 30, 2025, is furnished[125] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) and Cover Page Interactive Data File are included[125] Signatures This section contains the required signatures from the Company's Chief Executive Officer, President, and Director, Julie Smolyansky, and Chief Financial & Accounting Officer, Eric Hanson, certifying the filing of the report - The report is signed by Julie Smolyansky, Chief Executive Officer, President, and Director (Principal Executive Officer), and Eric Hanson, Chief Financial & Accounting Officer (Principal Financial and Accounting Officer), both dated August 12, 2025[129]