What changed in this filing

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Item 2. Management’s Discussion and Analysis

2026-08-13 compared with 2026-05-14 · 225 added, 105 removed, 132 unchanged (71% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS.

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.

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

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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.

Other Dairy, which primarily consists of butter and sour cream.

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.

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

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.

expect the accelerating consumer focus on health and wellness to drive increased demand for our products.

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 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,

Three Months Ended June 30, 2026 Compared to Three Months Ended June

The following table presents certain information concerning

our financial results, including information presented as a percentage of consolidated net sales:

Three Months Ended June 30,

Cost of goods sold

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Provision for income taxes

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.

Net sales were at $66,893 for the three-month period

ended June 30, 2026, an increase of $12,992 or 24.1% 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 19.5%

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.

and 28.6% in the three-month period ended June 30, 2026 and 2025, respectively.

The decrease versus the prior year was driven by the unfavorable

impact of milk pricing and to a lesser extent the unfavorable impact of resin-based packaging inputs and transportation costs.

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.

Selling expenses increased by $2,916 to $7,634 during

the three-month period ended June 30, 2026 from $4,718 during the same period in 2025.

Selling expenses as a percentage of net sales increased

to 11.4% in the three-month period ended June 30, 2026 from 8.8% 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.

General and Administrative Expenses

General and administrative expenses increased $95

$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.

to $4,657 during the three-month period ended June 30, 2026 from $4,752 during the same period in 2025.

General and administrative expenses

as a percentage of net sales decreased to 7.0% in the three-month period ended June 30, 2026 from 8.8% during the same period in 2025.

During the second quarter of 2026, the Company incurred approximately $375 of legal and professional fees associated with the sale of

Danone USA Public Benefit Corporation's holdings of common stock of Lifeway Foods, Inc.

in an underwritten transaction.

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

of 68.7% and 28.1% for the three months ended June 30, 2026 and 2025, respectively.

Statutory Federal and state tax rates remained consistent

from 2025 to 2026.

The Company has items that are nondeductible or are discrete adjustments to tax expense.

The Company consistently reflects

non-deductible officer compensation expense, non-deductible stock-based compensation expense and separate state tax rates from period

Although similar items were reflected in 2026, the percentage effect is different due to the difference in pre-tax income in

2026 compared to 2025.

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.

Six Months Ended June 30, 2026 Compared to Six Months Ended June

The following table presents certain information concerning

our financial results, including information presented as a percentage of consolidated net sales:

Six Months Ended June 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

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 $129,905 for the six-month period

ended June 30, 2026, an increase of $29,913 or 29.9% 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 23.4%

and 26.5% during the six-month period ended June 30, 2026 and 2025, respectively.

The decrease versus the prior year was driven by the

unfavorable impact of milk pricing and to a lesser extent the unfavorable impact of resin-based packaging inputs and transportation costs,

partially offset by higher volumes of our branded products, which provided manufacturing efficiencies.

Selling Expense

Selling expense increased by $4,406 to $13,822 during

the six-month period ended June 30, 2026 from $9,416 during the same period in 2025.

Selling expenses as a percentage of net sales increased

to 10.6% in the six-month period ended June 30, 2026 from 9.4% 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.

General and Administrative Expense

General and administrative expense decreased $20 to

$9,360 during the six-month period ended June 30, 2026 from $9,380 during the same period in 2025.

The Company incurred approximately

$375 of legal and professional fees associated with the sale of Danone USA Public Benefit Corporation's holdings of common stock of Lifeway

in an underwritten transaction during the six-month period ended June 30, 2026.

Provision for Income Taxes

The effective income tax rate for the six months

ended June 30, 2026 was 28.0% compared to 28.4% in the same period last year.

The change in the Company’s effective tax rate is

primarily driven by the decrease in pre-tax book income and changes in the amount of non-deductible officer compensation and non-deductible

stock-based compensation expense.

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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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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.

a strong financial position, and believes that its cash flow from operations, revolving credit facility, interim funding agreement, 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, $3,000

$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.

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

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).

was available under the Revolving Credit Facility and $22,000 was available under the Interim Funding Agreement as of June 30, 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.

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

The following table is derived from our Consolidated

Statement of Cash Flows:

Three months Ended

Six months Ended

Net Cash Flows Provided By (Used In):

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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.

$4,039 and $3,762 during the six-month period ended June 30, 2026 and 2025, respectively.

The increase was primarily due to the increase

in cash earnings offset by the change in working capital.

Investing Activities

Net cash used in investing activities was $19,282

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

during the six-month period ended June 30, 2026 compared to net cash provided by investing activities of $795 in the same period in 2025.

The increase in purchases of property and equipment

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The Company currently estimates investing approximately $50,500.

As of March 31, 2026, $31,267

As of June 30, 2026, $38,917

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.

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

$7,348 in-service and recorded in leasehold improvements, and $27,878 recorded in construction in process.

The cumulative cash paid for

this project is $38,917 as of June 30, 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 and interim funding agreement.

The ability to

manufacture and package at the increased scale is expected to begin in January 2027, and the total project expected to be completed during

the first fiscal quarter of 2027.

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.

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.

We continue to make

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

Financing Activities

Net cash provided by financing activities was $16,759

$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

during the six-month period ended June 30, 2026 compared to net cash used in financing activities of $65 in the same period in 2025.

cash provided 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.

During the second quarter of 2026, the Company repurchased $4,937 of treasury stock in connection with the

sale of Danone USA Public Benefit Corporation's holdings of common stock of Lifeway Foods, Inc.

in an underwritten transaction.

the first quarter of 2026, to comply with the Company’s contractual obligations in place at the time 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

As of June 30, 2026, the Company had $22,000 outstanding

under the Revolving Credit Facility.

The Company had $3,000 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).

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%.

June 30, 2026.

All outstanding amounts under the revolving line of

credit bear interest at the Secured Overnight Financing Rate (“SOFR”), plus 1.75% (5.48% as of June 30, 2026).

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%.

As of June 30, 2026, the Company had $0 outstanding

under the Interim Funding Agreement.

The Company had $22,000 available for future borrowings under the Interim Funding Agreement as of

June 30, 2026, subject to lender’s acceptance of collateral documentation.

All outstanding amounts under the Interim Funding

Agreement bear interest at the 1-month Term Secured Overnight Financing Rate (“SOFR”), plus 1.65%.

Monthly Interest is payable

monthly in arrears.

The Credit Agreement includes customary representations,

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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.

The Company is in compliance with all applicable financial

debt covenants as of June 30, 2026.

See Note 7 to our Consolidated Financial Statements for additional information

regarding our indebtedness and related agreements.

Recent Accounting Pronouncements

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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.

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 six months ended June 30, 2026.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis