Lifeway Foods, Inc. (LWAY)

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:

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:

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:

Recent Developments

Danone Offering

On May 14, 2026, the Company entered into an underwriting
agreement (the “Underwriting Agreement”) with BTIG, LLC (the “Underwriter”) and Danone USA Public Benefit Corporation
(the “Selling Stockholder”) in connection with a public offering of an aggregate of 3,454,756 shares (the “Shares”)
of the Company’s common stock, no par value, by the Selling Stockholder at a price to the public of $19.50 per share (the “Offering”).

The Offering was completed on May 19, 2026 and
was made pursuant to a shelf registration statement on Form S-3 (No. 333-291148) that was previously filed with the Securities and Exchange
Commission (“SEC”) and declared effective by the SEC on December 10, 2025 and a prospectus supplement. The Company did not
receive any proceeds from the Offering.

Share Buyback

The Company repurchased 253,153 Shares in the
Offering at the same per share price paid by investors in the Offering.

Rights Redemption

On June 5, 2026, the board of directors authorized
and directed the Company to redeem rights of shareholders outstanding on June 5, 2026 to a dividend of Series A Junior Participating Preferred
Stock (the “Rights”) declared pursuant to that certain Shareholder Rights Agreement with Computershare Trust Company, N.A.,
as rights agent dated November 4, 2024, as amended (as amended from time to time, the “Rights Agreement”). Upon such redemption,
the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the redemption price of $0.001 for
each Right so held and the Rights Agreement will terminate and be of no further force or effect.

Interim Funding Agreement

On June 30, 2026, the Company entered into a Master
Security Agreement (the “MSA”) with its current lender. The MSA provides for loan advances under an Interim Funding Agreement
(the “Interim Funding Agreement”) to finance or refinance the acquisition of equipment, subject to lender’s acceptance
of collateral documentation, up to $22,000,000 in the aggregate, during an interim funding period which expires June 30, 2027. Interest
on the loan advances is payable monthly in arrears at the 1-month Term SOFR plus 1.65%.

Upon the conclusion of loan advances under the
Interim Funding Agreement, and the execution of a Collateral Schedule by lender and Lifeway, all loan advances outstanding on the date
of such Collateral Schedule (the “Conversion Date”), shall be converted into the Equipment Guidance Line Note (the “Note”).
The note is payable in monthly installments of principal and interest and matures five years after the Conversion Date. Interest is payable
monthly in arrears at the 1-month Term SOFR plus 1.65%.

Business Trends

Current Macroeconomic Environment

During the second quarter
of 2026 we experienced significant increases in the price of conventional milk. We anticipate the elevated pricing to continue into the
third quarter and then begin to decrease in the fourth quarter of 2026. Additionally, driven by the rising price of oil, the input cost
of our resin-based packaging components such as bottles and caps increased during the second quarter of 2026. We continue to monitor macroeconomic
conditions and global trade developments, including inflation in key input costs, 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, further
commodity cost volatility, and broader economic uncertainty.

We do not currently expect
tariffs 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 June 30, 2026 Compared to Three Months Ended June
30, 2025

The following table presents certain information concerning
our financial results, including information presented as a percentage of consolidated net sales:

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ITEM 7.      MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of the financial
condition and results of operations as of and for the years ended December 31, 2025 and 2024 should be read in conjunction with the audited
consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. In
addition to historical information, the following discussion contains certain forward-looking statements within the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995. These statements relate to our future plans, objectives, expectations
and intentions. These statements may be identified by the use of words such as “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,” and “estimate,” and similar terms or terminology, or the negative of such terms
or other comparable terminology. Although we believe the expectations expressed in these forward-looking statements are based on reasonable
assumptions within the bounds of our knowledge of our business, our actual results could differ materially from those discussed in these
statements. Factors that could contribute to such differences include, but are not limited to, those discussed in the “Risk Factors”
section in Part I, Item 1A. We undertake no obligation to update publicly any forward-looking statements for any reason even if new information
becomes available or other events occur in the future.

Recent Developments

Cooperation Agreement

On September 30, 2025, the Company and Danone entered into a Cooperation
Agreement (the “Cooperation Agreement”) pursuant to which, among other things:

All of Danone’s obligations (other than
the non-disparagement covenants) cease to apply upon certain “triggering events,” including breaches of the Cooperation Agreement
by the Company or certain statements by the Company, Julie Smolyansky or any of their respective affiliates or representatives challenging
the validity of the Cooperation Agreement or the Stockholders’ Agreement. Additionally, if Julie Smolyansky is deemed to have breached
the Cooperation Agreement while she is Chief Executive Officer of the Company, such breach will be a triggering event under the Cooperation
Agreement unless the Board terminates Julie Smolyansky for cause as a result of such breach within a specified time period.

All of the Company’s obligations under the Stockholders’
Agreement (other than those relating to Danone’s registration rights and rights with respect to inspection of our books and records)
cease to apply after Danone and its affiliates no longer collectively beneficially own at least 761,438 (as adjusted for any reverse stock
split or similar recapitalization). The Company’s obligations under the Cooperation Agreement (other than the non-disparagement
covenants) cease to apply after Danone and its affiliates cease to beneficially own any shares of Common Stock.

Debt Refinancing

On February 5, 2025,
the Company entered into the Fifth Modification to the Amended and Restated Loan and Security Agreement (the “Fifth Modification”)
with its current lender. The Fifth Modification, among other things, (i) increased the commitment for revolving loans under the Credit
Agreement from $5,000 to $25,000, with interest payable at either the lender Base Rate (the Prime Rate minus 1.00%) or the SOFR plus 1.75%,
(ii) extended the termination date of the Credit Agreement to February 5, 2028 and (iii) replaced the quarterly minimum working capital
financial covenant with a financial covenant to maintain 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 remaining material terms and conditions of the Credit Agreement
remain substantially unchanged. The Company had no outstanding borrowings at the time of entry into the Fifth Modification.

On December 29, 2025,
the Company entered into the Sixth Modification to the Amended and Restated Loan and Security Agreement (the “Sixth Modification”)
with its current lender. The Sixth Modification, provides for, among other things, (i) modification of the Fixed Charge Coverage Ratio
only for the period from December 31, 2025 through June 30, 2027 to exclude the Waukesha, WI unfinanced capital expenditures attributable
to plant optimization and manufacturing capacity expansion as approved by Lender, up to $50,000 (ii) modification of the Change of Control
definition to reflect that specified changes to the Company’s board of directors do not constitute a Change of Control and (iii)
extended the termination date of the Credit Agreement to February 5, 2029. The remaining material terms and conditions of the Credit Agreement
remain substantially unchanged. The Company had no outstanding borrowings at the time of entry into the Sixth Modification.

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 799 mature dairy cows during 2025
for $2,870.

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 $635 in prepaid and other current assets and $2,235 in other assets
as of December 31, 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.

Trends and Uncertainties

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 comple

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