Lifeway Foods, Inc. (LWAY)

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, 2024 and 2023 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

Unsolicited Proposal

On November 5, 2024, we announced that our board
of directors (our “Board”) determined, after careful and thorough consideration in consultation with the Company’s independent
financial and legal advisors, that the unsolicited proposal made on September 23, 2024 by Danone North America PBC (“Danone”)
to acquire all of the shares of the Company that it did not already own for $25.00 per share, substantially undervalued the Company and
was not in the best interests of the Company or its stockholders or other stakeholders. In connection with that determination, we entered
into a Shareholder Rights Agreement with Computershare Trust Company, N.A., as rights agent (the “Rights Agreement”). Pursuant
to the Rights Agreement, our Board declared a dividend of one preferred share purchase right (each a “Right”) for each outstanding
share of Company common stock to stockholders of record as of the close of business on November 18, 2024. Each Right entitles its holder,
subject to the terms of the Rights Agreement, to purchase from the Company one one-thousandth of one share of Series A Junior Participating
Preferred Stock, no par value, of the Company at an exercise price of $130.00 per Right, subject to adjustment. Rights also attach to
any shares of Company common stock that become outstanding after November 18, 2024 and prior to the earlier of the Distribution Time (as
defined in the Rights Agreement) and the redemption or expiration of the Rights, and in certain other circumstances described in the Rights
Agreement.

On November 15, 2024, Danone revised its offer
to acquire all of the shares of the Company that it did not already own from $25.00 per share to $27.00 per share. On November 20, 2024,
we announced our Board’s determination that, after careful and thorough consideration in consultation with the Company’s independent
financial and legal advisors, the revised unsolicited proposal substantially undervalued the Company and was not in the best interests
of the Company or its stockholders or other stakeholders. On November 26, we announced additional information regarding the information
the Board used to come to this determination.

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.

Products

In October 2024, we began to roll out our first
products with 100% lactose free labeling. Our products were already up to 99% lactose free, so we are pleased to further attract consumers
with our new Organic Whole Milk Flavor Fusion items that have this added benefit, along with decreased sugar content. In demand flavors
including Hot Honey, Matcha Latte, and Passionfruit Lychee are new additions to our portfolio. The entire lineup is loaded with high-quality
bioavailable nutrients, and plays to our strengths, as our organic products have been incredibly successful to date.

We expect health and wellness trends to continue to
be a tailwind for our entire premium product portfolio. We plan to continue to invest behind our key products to capture more and more
of this growing market,

Distribution Strategy

In September 2024, we announced our first expansion
of Kefir distribution in the South African market. In November 2024, we announced our expansion within Dubai and the UAE. The offering
of 32oz Lifeway Kefir, 8oz Lactose-Free Lifeway Kefir, ProBugs and farmer cheese, exported from the United States, is expected to begin
shipping in the first quarter of 2025 and will become available in supermarkets and hypermarkets in Dubai and across the Emirates. We
are taking a measured, and thoughtful approach to global expansion, as we seek markets that are primed for success and can be accessed
without a major initial investment.

Trends and Uncertainties

Current Macroeconomic Environment

We have not experienced significant supply chain disruptions
or labor supply shortages and have continued to satisfy customer and consumer demand for our products. Management continues to proactively
manage the supply and transportation of materials used to produce and package our products, staffing, and transportation of our products
to customers. This proactive planning has allowed the Company to meet increased demand.

Results of Operations

Comparison of Year Ended December 31, 2024 to Year
Ended December 31, 2023 (in thousands)

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

Net Sales

Net sales were $186,820 for the year ended December
31, 2024, an increase of $26,697 or 16.7% 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 decreased
to 26.0% during the year ended December 31, 2024 from 26.5% during the same period in 2023. The decrease versus the prior year was driven
by the unfavorable impact of milk pricing, and to a lesser extent the increase in other input costs, partially offset by favorable transportation
costs.

Selling Expenses

Selling expenses increased by $2,967 to $14,743
during the year ended December 31, 2024 from $11,776 during the same period in 2023. Selling expenses as a percentage of net sales increased
to 7.9% during the year ended December 31, 2024 from 7.4% during the same period in 2023. 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
$6,309 to $19,439 during the year ended December 31, 2024 from $13,130 during the same period in 2023. Legal and professional fees associated
with non-routine stockholder action and the Danone unsolicited purchase proposal, and the CEO retention bonus awarded in the fourth quarter
of 2024, account for approximately 75% of the increase. General and administrative stock-based compensation expense increased $784 compared
to the same period in 2023.

Provision for Income Taxes

The provision for income taxes includes federal,
state and local income taxes. The provision for income taxes was $4,944 and $5,282 during the year ended December 31, 2024 and 2023, respectively.

The effective income tax rate was 35.4% in 2024
compared to 31.7% in 2023. The statutory Federal and state tax rates remained consistent from 2023 to 2024. The Company consistently reflects
non-deductible items such as non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive
awards and separate state tax rates from year to year. Although similar items were reflected in 2024, the percentage effect is different
primarily due to the increase in certain non-deductible compensation in 2024 compared to 2023. The increase is partially offset by the
difference in pre-tax income in 2024 compared to 2023.

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 underlying
income tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, 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 in the period in which they occur.

Section 162(m) of the Internal Revenue Code (the
“Code”) limits the deductibility of compensation paid to certain of our executives to the extent their total compensation
exceeds $1 million in any taxable year.

Income taxes are discussed
in Note 10 in the Notes to the Consolidated Financial Statements.

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 while it has been impacted by the macroeconomic challenges with commodity inflation
and other input cost increases, the Company 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, $5,000 was available under the Revolving Credit Facility as of December 31, 2024 (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 income 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).

Cash Flow

The following table is derived from our Consolidated
Statement of Cash Flows:

Operating Activities

Net cash provided by operating activities was $12,962
in 2024 compared to $16,941 in 2023. The decrease was primarily due to lower cash earnings driven by non-routine stockholder action, and
the change in working capital.

Investing Activities

Net cash used in investing activities was $6,682 in
2024 compared to $4,410 in 2023. The increase in cash used reflects our planned capital spending increase during 2024 compared to 2023.
Our capital spending is focused in three core areas: growth, cost reduction, and facility improvements. Growth capital spending supports
increased production capacity, 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
$2,750 in 2024 compared to $3,777 in 2023. The cash used represents the quarterly principal payments under the term loan. The Company
paid the outstanding term loan balance of $2,250 in full during the second quarter of 2024.

Debt Obligations

The Company is party to an Amended and Restated
Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and
certain of its subsidiaries. The Credit Agreement provides for, among other things, a $5,000 term loan to be repaid in quarterly installments
of principal and interest over a term of five years, a revolving line of credit up to a maximum of $5,000 (the “Revolving Credit
Facility”) and an incremental facility not to exceed $5,000. The termination date of the term loan is August 18, 2026, unless earlier
terminated. The term loan was terminated during the second quarter of 2024 upon payment of the outstanding loan balance in full. The termination
date of the revolving credit facility is June 30, 2025, unless earlier terminated.

As of December 31, 2024, the Company had $0 outstanding
under the Revolving Credit Facility and note payable. The Company had $5,000 available for future borrowings under the Revolving Credit
Facility as of December 31, 2024.

All outstanding amounts under the loans bear interest
at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. Interest is payable monthly in arrears. Lifeway is also required
to pay a quarterly unused line fee of 0.20% on the Revolving Credit Facility, and in conjunction with the issuance of any letters of credit,
a letter of credit fee of 0.20%.

The Company is in compliance with all applicable
financial debt covenants as of December 31, 2024. See Note 7 to our Consolidated Financial Statements for additional information regarding
our indebtedness and related agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing
arrangements as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Estimates

Critical accounting estimates are defined as those
most important to the portrayal of a company’s financial condition and results, and require the most difficult, subjective, or complex
judgments. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP with no need for
the application of our judgement. In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with
U.S. GAAP requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of net sales and expenses during the reporting period. We believe in the quality and reasonableness of our critical accounting
estimates; however, materially different amounts might be reported under different conditions or using assumptions, estimates or making
judgments different from those that we have applied. Management has discussed the development and selection of these critical accounting
policies, as well as our significant accounting policies (see Note 2 to the Consolidated Financial Statements), with the Audit and Corporate
Governance Committee of our Board of Directors. We have identified the policies described below as our critical accounting policies that
require us to make subjective or complex judgments.

Goodwill impairment

Goodwill totaled $11,704 as of December 31, 2024.
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.
Goodwill is not amortized.

The Company has one reporting unit within its single
reportable segment. We review and evaluate our goodwill for potential impairment at a minimum annually, as of December 31, or more frequently
if circumstances indicate that impairment is possible. We completed our annual goodwill impairment analysis as of December 31, 2024. Our
assessment did not result in an impairment.

In testing goodwill for impairment, the Company has
the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”). Under the
Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of the
reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry
and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific
events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value
of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary.

Step 1 of the quantitative test requires comparison
of the fair value of the Company’s one reporting unit to the carrying value. If the carrying value of the reporting unit is less
than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying
amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.

Under a Step 1 quantitative test, we estimate the
fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.
Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates
and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth
rates, and long-term discount rates, among others. The discount rate used to determine the present value of future cash flows is based
on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty
related to the business’s ability to execute on the projected cash flows. For the market approach, the Company uses the guideline
public company method. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable
publicly traded companies with similar operating and investment characteristics. The Company also reconciles the fair value of its reporting
unit to its current market capitalization, allowing for a reasonable control premium.

Sales discounts & allowance

We offer various trade promotions and sales incentive
programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction
in sales. The measurement and recognition of discounts and allowances involve the use of judgment and our estimates are made based on
historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are
normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion
programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to
original estimates. As of December 31, 2024, we had $1,590 of accrued discounts and allowances.

Share-based compensation

Certain employees and non-employee directors receive
various forms of share-based payment awards, and we recognize compensation expense for these awards based on their grant date fair values.
The grant date fair value of Restricted Stock Units (“RSUs”) and Performance Share Unit (“PSUs”) awards is equal
to the Company’s closing stock price on the grant date. The Company granted RSU and PSU awards during 2024 to employees. The PSU
awards are contingent upon the achievement of strategic milestones during a three-year measurement period. The expense recognition of
PSU awards therefore requires management to make judgements and estimates at the end of each reporting period as to the cumulative three-year
milestone achievements. Changes in managements estimate of the three-year cumulative milestone achievements are recognized as change in
management estimate in a subsequent period. We do not estimate forfeitures in measuring the grant date fair value of RSUs and PSUs, but
rather account for forfeitures as they occur. Forfeitures have historically been immaterial. See Note 11 to our consolidated financial
statements for further detail.

Income taxes

We pay income taxes based on tax statutes, regulations,
and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various
taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. The assumptions about future taxable income require the use of significant
judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

We recognize an income tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based
on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured
based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments
and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations.
If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings.
Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.

Recent Accounting Pronouncements.

See Note 2, Summary of Significant Accounting Policies,
in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information regarding
recent accounting pronouncements.

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, 2023 and 2022 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

Current Macroeconomic Environment and Inflation Impact

During 2022, we experienced inflationary and cost
pressures due to volatility and disruption in the global economy which have increased our production and distribution costs. During 2023,
we experienced some moderation of inflationary pressures and have experienced pricing declines in certain of our input costs, such as
conventional milk. In response to these persistent inflationary and cost pressures, we instituted price increases in 2022 on many of our
products. These inflation-justified price increases mitigated a portion of our increased costs.

We have not experienced significant supply chain
disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products. Management continues
to proactively manage the supply chain of materials used to produce and transport our products to customers. This proactive planning has
allowed the Company to avoid disruption to its manufacturing facilities, transportation, and sales, and to meet the increased demand.
The Company has maintained production at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

Results of Operations

Comparison of Year Ended December 31, 2023
to Year Ended December 31, 2022 (in 000’s)

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

Net Sales

Net sales were $160,123 for the year ended December
31, 2023, an increase of $18,555 or 13.1% versus prior year. The net sales increase was primarily driven by higher volumes of our branded
drinkable kefir, and to a lesser extent the impact of price increases implemented during the fourth quarter of 2022.

Gross Profit

Gross profit as a percentage of net sales increased
to 26.5% during the year ended December 31, 2023 from 18.9% during the same period in 2022. The increase versus the prior year was primarily
due to the higher volumes of our branded products and the favorable impact of milk pricing, and to a lesser extent the price increases
implemented during the fourth quarter of 2022 and decreased transportation costs.

Selling Expenses

Selling expenses increased by $472 to $11,776
during the year ended December 31, 2023 from $11,304 during the same period in 2022. The increase is primarily due to increased compensation
expense, partially offset by the reduction in royalty expense resulting from the termination of the endorsement agreement in September
2022.

General and Administrative Expenses

General and administrative expenses increased
$537 to $13,130 during the year ended December 31, 2023 from $12,593 during the same period in 2022. The increase is primarily a result
of increased incentive compensation expense, partially offset by the termination of the endorsement agreement in September 2022 and reduced
professional fees.

Provision for Income Taxes

The provision for income taxes includes federal,
state and local income taxes. The provision for income taxes was $5,282 and $917 during the year ended December 31, 2023 and 2022, respectively.

The effective income tax rate was 31.7% in 2023
compared to 49.1% in 2022. The statutory Federal and state tax rates remained consistent from 2022 to 2023. The Company consistently reflects
non-deductible items such as non-deductible officer compensation expense, non-deductible compensation expense related to equity incentive
awards and separate state tax rates from year to year. Although similar items were reflected in 2023, the percentage effect is different
due to the difference in pre-tax income in 2023 compared to 2022.

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 underlying
income tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, 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 in the period in which they occur.

Section 162(m) of the Internal Revenue Code (the
“Code”) limits the deductibility of compensation paid to certain of our executives to the extent their total compensation
exceeds $1 million in any taxable year.

Income taxes are discussed
in Note 10 in the Notes to the Consolidated Financial Statements.

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 while it has been impacted by the macroeconomic challenges with commodity inflation
and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan 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, $5,000 was available under the Revolving Credit Facility as of December 31, 2023 (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 income 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).

Cash Flow

The following table is derived from our Consolidated
Statement of Cash Flows:

Operating Activities

Net cash provided by operating activities was
$16,941 in 2023 compared to $3,987 in 2022. The increase was primarily due to higher cash earnings driven by increased product volumes
and declines in certain input costs, and the change in working capital.

Investing Activities

Net cash used in investing activities was $4,410
in 2023 compared to $4,029 in 2022. The increase in cash used reflects our planned capital spending increase during 2023 compared to 2022.
Our capital spending is focused in three core areas: growth, cost reduction, and facility improvements. Growth capital spending supports
new product innovation and enhancements. Cost reduction and facility improvements support manufacturing efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities
was $3,777 in 2023 compared to $4,747 in 2022. The Company paid the outstanding line of credit balance of $2,777 in full on October 6,
2023. There were no amounts outstanding under the line of credit after October 6, 2023, through December 31, 2023.

On November 7, 2022, the Company entered into
a Stock Purchase Agreement with Ludmila Smolyansky (“Ms. Smolyansky”), to purchase 850,340 shares of Lifeway common stock
from Ms. Smolyansky, Board of Director member. The shares were repurchased during the fourth quarter of 2022.

Pursuant to the Stock Purchase Agreement, (i)
Ms. Smolyansky sold the shares at a purchase price of $4.70 per share, which represents a twenty percent (20.0%) discount to the average
closing price of the common stock on Nasdaq over the five (5) trading day period ended on the trading day immediately preceding the date
of the Stock Purchase Agreement and (ii) Ms. Smolyansky used a portion of the proceeds to satisfy in full certain obligations of Ms. Smolyansky,
which are secured by previously disclosed pledges of common stock, causing all such pledges to be released. The purchased shares are held
in treasury by the Company.

Debt Obligations

The Company is party to an Amended and Restated
Loan and Security Agreement (as amended and modified from time to time, the “Credit Agreement”) with its existing lender and
certain of its subsidiaries. The Credit Agreement provides for, among other things, a $5 million term loan to be repaid in quarterly installments
of principal and interest over a term of five years, a revolving line of credit up to a maximum of $5 million (the “Revolving Credit
Facility”) and an incremental facility not to exceed $5 million. The termination date of the term loan is August 18, 2026, unless
earlier terminated. The termination date of the revolving credit facility is June 30, 2025, unless earlier terminated.

As of December 31, 2023, the Company had $0 outstanding
under the Revolving Credit Facility and $2,733 outstanding under the note payable, net of $17 of unamortized deferred financing fees.
The Company had $5,000 available for future borrowings under the Revolving Credit Facility as of December 31, 2023.

All outstanding amounts under the loans bear interest
at the Secured Overnight Financing Rate (“SOFR”), plus 2.07%. The Company’s interest rate on debt outstanding under
the note payable as of December 31, 2023 was 6.29%. Interest is payable monthly in arrears. Lifeway is also required to pay a quarterly
unused line fee of 0.20% on the Revolving Credit Facility, and in conjunction with the issuance of any letters of credit, a letter of
credit fee of 0.20%.

The Company is in compliance with all applicable
financial debt covenants as of December 31, 2023. See Note 7 to our Consolidated Financial Statements for additional information regarding
our indebtedness and related agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing
arrangements as defined in Item 303(a)(4) of Regulation S-K.

Critical Accounting Estimates

Critical accounting estimates are defined as those
most important to the portrayal of a company’s financial condition and results, and require the most difficult, subjective, or complex
judgments. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP with no need for
the application of our judgement. In certain circumstances, the preparation of our Consolidated Financial Statements in conformity with
U.S. GAAP requires us to use our judgment to make certain estimates and assumptions. These estimates affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported
amounts of net sales and expenses during the reporting period. We believe in the quality and reasonableness of our critical accounting
estimates; however, materially different amounts might be reported under different conditions or using assumptions, estimates or making
judgments different from those that we have applied. Management has discussed the development and selection of these critical accounting
policies, as well as our significant accounting policies (see Note 2 to the Consolidated Financial Statements), with the Audit and Corporate
Governance Committee of our Board of Directors. We have identified the policies described below as our critical accounting policies that
require us to make subjective or complex judgments.

Goodwill impairment

Goodwill totaled $11,704 as of December 31, 2023.
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.
Goodwill is not amortized.

The Company has one reporting unit within its
single reportable segment. We review and evaluate our goodwill for potential impairment at a minimum annually, as of December 31, or more
frequently if circumstances indicate that impairment is possible. We completed our annual goodwill impairment analysis as of December
31, 2023. Our assessment did not result in an impairment.

In testing goodwill for impairment, the Company
has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test (“Step 1”). Under
the Step 0 test, the Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of
the reporting unit is less than its carrying value. Qualitative factors may include, but are not limited to, economic conditions, industry
and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific
events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value
of the reporting unit is less than the carrying value, then performing the Step 1 quantitative test is necessary.

Step 1 of the quantitative test requires comparison
of the fair value of the Company’s one reporting unit to the carrying value. If the carrying value of the reporting unit is less
than the fair value, no impairment exists. Otherwise, the Company would recognize an impairment charge for the amount by which the carrying
amount of the reporting unit exceeds its fair value up to the amount of goodwill allocated to the reporting unit.

Under a Step 1 quantitative test, we estimate
the fair value of our one reporting unit using a combination of the fair values derived from both the income approach and the market approach.
Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant estimates
and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth
rates, and long-term discount rates, among others. The discount rate used to determine the present value of future cash flows is based
on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty
related to the business’s ability to execute on the projected cash flows. For the market approach, the Company uses the guideline public
company method. The market approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly
traded companies with similar operating and investment characteristics. The Company also reconciles the fair value of its reporting unit
to its current market capitalization, allowing for a reasonable control premium.

Sales discounts & allowance

We offer various trade promotions and sales incentive
programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction
in sales. The measurement and recognition of discounts and allowances involve the use of judgment and our estimates are made based on
historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are
normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion
programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to
original estimates. As of December 31, 2023, we had $1,270 of accrued discounts and allowances.

Share-based compensation

Certain employees and non-employee directors receive
various forms of share-based payment awards, and we recognize compensation expense for these awards based on their grant date fair values.
The grant date fair value of Restricted Stock Units (“RSUs”) and Performance Share Unit (“PSUs”) awards is equal
to the Company’s closing stock price on the grant date. The Company granted RSU and PSU awards during 2023 to employees. The PSU
awards are contingent upon the achievement of strategic milestones during a three-year measurement period. The expense recognition of
PSU awards therefore requires management to make judgements and estimates at the end of each reporting period as to the cumulative three-year
milestone achievements. Changes in managements estimate of the three-year cumulative milestone achievements are recognized as change in
management estimate in a subsequent period. We do not estimate forfeitures in measuring the grant date fair value of RSUs and PSUs, but
rather account for forfeitures as they occur. Forfeitures have historically been immaterial. See Note 11 to our consolidated financial
statements for further detail.

Income taxes

We pay income taxes based on tax statutes, regulations,
and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various
taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. The assumptions about future taxable income require the use of significant
judgment and are consistent with the plans and estimates we are using to manage our underlying businesses.

We recognize an income tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based
on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured
based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments
and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations.
If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings.
Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.

Recent Accounting Pronouncements.

See Note 2, Summary of Significant Accounting
Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information
regarding recent accounting pronouncements.

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

The following discussion of the financial condition
and results of operations as of and for the years ended December 31, 2022 and 2021 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," "future,"
"predict," 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

COVID-19 Pandemic Impact

We have seen increased customer and consumer demand
for our products during the pandemic as consumers increased their food purchases for in-home consumption. We have not experienced significant
supply chain disruptions or labor supply shortages and have continued to satisfy customer and consumer demand for our products. Management
continues to proactively manage the supply and transportation of materials used to make and package our products, staffing, and transportation
of our products to customers. This proactive planning has allowed the Company to avoid disruption to its manufacturing facilities and
production, transportation, and sales and to meet the increased demand. The Company has maintained full production capacity available
at all locations and does not anticipate manufacturing or staffing disruptions in the near term.

However, the COVID-19
pandemic, or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other
inputs necessary to produce our products, and our operations may be negatively impacted. In 2022, our costs increased primarily due to
inflationary price increases of milk, other ingredients, packaging materials, and transportation to our customers. However, because of
market conditions or for competitive reasons, our pricing actions may sometimes lag input cost changes, or we may not be able to pass
along the full effect of increases in raw materials and other input costs as we incur them.

During 2022, social distancing, shelter-in-place
and work-from-home mandates and recommendations have continued to be reduced or eliminated. The increased customer demand for our products
as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or decrease due to
the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. We are unable to predict the nature
and timing of when such change may occur, if at all.

Results of Operations

Comparison of Year Ended December 31, 2022 to Year
Ended December 31, 2021 (in 000’s)

Net Sales

Net sales were $141,568 for the year ended December
31, 2022, an increase of $22,503 or 18.9% versus prior year. The net sales increase was primarily driven by higher volumes of our branded
drinkable kefir and the impact of price increases implemented during the year, and to a lesser extent, the favorable impact of our acquisition
of Glen Oaks Farms during the third quarter of 2021. Approximately 18% of the net sales increase results from the full year 2022 impact
of our acquisition of Glen Oaks Farms during the third quarter of 2021.

Gross Profit

Gross profit as a percentage of net sales decreased
to 18.9% during the year ended December 31, 2022 from 24.1% during the same period in 2021. The decrease versus the prior year was primarily
due to the unfavorable impact of milk pricing, and the inflationary price increases of other ingredients, packaging materials, and freight,
partially offset by the decrease in depreciation expense and favorable labor efficiency due to increased volumes. We took favorable pricing
actions during 2022 to recover a portion of the input and freight cost inflation. However, for market conditions or competitive reasons,
our pricing actions may also lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials
and other input costs as we incur them.

Selling Expenses

Selling expenses increased by $207 to $11,304
during the year ended December 31, 2022 from $11,097 during the same period in 2021. The increase versus prior year is primarily due to
increased investment in advertising and marketing programs, increased broker expense, partially offset by lower compensation expense.

General and Administrative Expenses

General and administrative expenses
increased $982 to $12,593 during the year ended December 31, 2022 from $11,611 during the same period in 2021. The increase is
primarily a result of increased legal and professional fees, which include expense related to non-routine stockholder action, the
fiscal year 2020 Form 10-K restatement, and incentive compensation, partially offset by lower consulting expense to our former
Chairperson of the Board of Directors.

Provision for Income Taxes

The provision for income taxes includes federal,
state and local income taxes. The provision for income taxes was $917 and $2,305 during the year ended December 31, 2022 and 2021, respectively.

Our effective income tax rate was 49.1% in 2022
compared to 41.0% in 2021. The statutory Federal and state tax rates remained consistent from 2021 to 2022. The Company has a number of
items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation
expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from year to year. Although
similar items were reflected in 2022, the percentage effect is different due to the difference in pre-tax income in 2022 compared to 2021.

Our 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 underlying income
tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, the impact of non-deductible items, changes
in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record discrete
income tax items such as enacted tax rate changes in the period in which they occur.

Section 162(m) of the Internal Revenue Code (the
“Code”) limits the deductibility of compensation paid to certain of our executives to the extent their total compensation
exceeds $1 million in any taxable year.

Income taxes are discussed
in Note 10 in the Notes to the Consolidated Financial Statements.

Net Income (Loss)

We reported net income of $924 or $0.06 per basic
and diluted common share for the year ended December 31, 2022 compared to net income of $3,311 or $0.21 per basic and diluted common share
in the same period in 2021.

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 while it has been impacted by the macroeconomic challenges with commodity inflation
and other input cost increases, the Company believes that its cash flow from operations, revolving credit and term loan 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, $2,223 was available under the Revolving Credit Facility as of December 31, 2022 (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’
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 income 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).

The following table is derived from our Consolidated
Statement of Cash Flows:

Operating Activities

Net cash provided by operating activities was
$3,987 in 2022 compared to $5,564 in 2021. The decrease was primarily due to lower cash earnings, which reflect the impact of input and
freight cost inflation in 2022, and the change in working capital.

Investing Activities

Net cash used in investing activities was $4,029 in
2022 compared to $7,142 in 2021. The decrease in cash used reflects the August 2021 acquisition of GlenOaks Farms, Inc., partially offset
by increased capital spending in 2022. Our capital spending is focused in three core areas: growth, cost reduction, and facility improvements.
Growth capital spending supports new product innovation and enhancements. Cost reduction and facility improvements support manufacturing
efficiency, safety, and productivity.

Financing Activities

Net cash used in financing activities was $4,747
during 2022 compared to net cash provided by financing activities of $2,885 in 2021. The decrease in cash used relates to the term loan
entered into during August 2021 in connection with the acquisition of GlenOaks Farms, Inc., partially offset by the quarterly principal
payments under the term loan.

On June 24, 2021, Lifeway’s Board authorized
a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share. We repurchased
all 250 shares of common stock at a cost of $1,583 during the three-month period ended September 30, 2021. We intend to hold repurchased
shares in treasury for general corporate purposes, including issuances under our 2015 Omnibus Incentive Plan. Treasury shares are accounted
for using the cost method.

On November 7, 2022, the Company entered into
a Stock Purchase Agreement with Ludmila Smolyansky (“Ms. Smolyansky”), to purchase 850,340 shares of Lifeway common stock
from Ms. Smolyansky, Board of Director member. The shares were repurchased during the fourth quarter of 2022.

Pursuant to the Stock Purchase Agreement, the
Company and Ms. Smolyansky have agreed, among other things, that (i) Ms. Smolyansky will sell the shares at a purchase price of $4.70
per share, which represents a twenty percent (20.0%) discount to the average closing price of the common stock on Nasdaq over the five
(5) trading day period ended on the trading day immediately preceding the date of the Stock Purchase Agreement and (ii) Ms. Smolyansky
will use a portion of the proceeds to satisfy in full certain obligations of Ms. Smolyansky, which are secured by previously disclosed
pledges of common stock, causing all such pledges to be released. The purchased shares will be held in treasury by the Company.

Debt Obligations

On August 18, 2021, Lifeway entered into the Fourth
Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified
from time to time, the “Credit Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification
amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be repaid
in quarterly installments of principal and interest over a term of five years (the “Term Loan”).  The termination date
of the Term Loan is August 18, 2026, unless earlier terminated. Except for the addition of the Term Loan, the Credit Agreement remains
substantively unchanged and in full force and effect.

As of December 31, 2022, we had $2,777 outstanding
under the Revolving Credit Facility and $3,727 outstanding under the note payable, net of $23 of unamortized deferred financing fees.
We had $2,223 available for future borrowings under the Revolving Credit Facility as of December 31, 2022. As amended, all outstanding
amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the
LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% on the Revolving Credit
Facility and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%.

The Company’s interest rate on debt outstanding
under the revolving line of credit and note payable as of December 31, 2022 was 6.17% and 6.29%, respectively.

We are in compliance with all applicable financial
debt covenants as of December 31, 2022. See Note 7 to our Consolidated Financial Statements for additional information regarding our indebtedness
and related agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements
as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

Not applicable.

Critical Accounting Estimates

Critical accounting estimates are those estimates
made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to
have a material impact on the financial condition or results of operations of the registrant. In many cases, the accounting treatment
of a particular transaction is specifically dictated by U.S. GAAP with no need for the application of our judgement. In certain circumstances,
the preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires us to use our judgment to make certain
estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting
period. We believe in the quality and reasonableness of our critical accounting estimates; however, materially different amounts might
be reported under different conditions or using assumptions, estimates or making judgments different from those that we have applied.
Management has discussed the development and selection of these critical accounting policies, as well as our significant accounting policies
(see Note 2 to the Consolidated Financial Statements), with the Audit Committee of our Board of Directors. We have identified the policies
described below as our critical accounting policies.

Goodwill impairment

Goodwill totaled $11,704 as of December 31, 2022.
The Company completed its annual goodwill impairment analysis as of December 31, 2022. Our assessment did not result in an impairment.
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.
We estimate the fair value of our one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using
a combination of the fair values derived from both the income approach and the market approach. Under the income approach, we calculate
the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates
of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine
the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with
business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market
approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with
similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared
to the carrying value to determine if impairment is necessary.

Sales discounts & allowance

We offer various trade promotions and sales incentive
programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction
in sales. The measurement and recognition of discounts and allowances involve the use of judgment and our estimates are made based on
historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are
normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion
programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to
original estimates. As of December 31, 2022, we had $1,800 of accrued discounts and allowances.

Share-based compensation

Certain employees and non-employee directors receive
various forms of share-based payment awards, and we recognize compensation expense for these awards based on their grant date fair values.
The grant fair value of Restricted Stock Units (“RSUs”) and Performance Share Unit (“PSUs”) awards is equal to
the Company’s closing stock price on the grant date. The Company granted RSU and PSU awards during 2022 to employees under the 2022
long-term incentive-based plan, and RSU awards to non-employee Directors under the 2022 Non-Employee Director Equity and Deferred Compensation
Plan. We do not estimate forfeitures in measuring the grant date fair value, but rather account for forfeitures as they occur. See Note
11 to our consolidated financial statements for further detail.

Income taxes

We pay income taxes based on tax statutes, regulations,
and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various
taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse. The assumptions about future taxable income require the use of significant judgment and are consistent with the
plans and estimates we are using to manage our underlying businesses.

We recognize an income tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based
on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured
based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments
and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations.
If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings.
Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.

Recent Accounting Pronouncements.

See Note 2, Summary of Significant Accounting Policies,
in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information regarding
recent accounting pronouncements.

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

The following discussion of the financial condition
and results of operations as of and for the years ended December 31, 2021 and 2020 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," "future,"
"predict," 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.

Restatement of Previously Issued Consolidated
Financial Statements

During the preparation of our fiscal 2021 consolidated
financial statements, we identified a material error in the accounting for our deferred income tax liabilities and goodwill. Specifically,
in connection with our 2009 acquisition of Fresh Made, Inc., we did not record a deferred income tax liability and corresponding increase
to goodwill related to the difference in the book and income tax bases for the $3.7 million Fresh Made indefinite-lived brand name intangible
asset acquired. The error resulted in a $1.18 million understatement of both deferred income tax liabilities and goodwill of as of January
1, 2020. The Restatement had no impact on our Consolidated Statements of Operations, Consolidated Statements of Cash Flows, or Consolidated
Statements of Stockholders’ Equity during 2021 and 2020. The impact of the Restatement on periods prior to 2020 had no effect on
opening retained earnings as of January 1, 2020.

The accounting adjustments required to correct
the error in the consolidated financial statements for the year ended December 31, 2020 as a result of completing the restatement
process are described in Note 1 – Basis of presentation - Restatement of Previously Issued Consolidated Financial Statements included
in “Part II – Item 8 – Financial Statements and Supplementary Data.” Note 17 – Restatement of previously
issued unaudited consolidated financial statements presents the accounting adjustments to correct the error in the quarterly consolidated
financial statements for the fiscal quarters in 2020 and 2021.

The accompanying Management’s Discussion
and Analysis of Financial Condition and Results for Operation gives effect to the Restatement adjustments made to the previously reported
Consolidated Financial Statements for the year ended December 31, 2020.

Recent Developments

COVID-19 Pandemic Impact

In December 2019, COVID-19 was first reported
and subsequently characterized by the World Health Organization ("WHO") as a pandemic in March 2020. In an effort to reduce
the global transmission of COVID-19, various policies and initiatives have been implemented by governments around the world, including
orders to close businesses not deemed "essential", shelter-in-place orders enacted by state and local governments, and the practice
of social distancing measures when engaging in essential activities.

During the first quarter of 2020, Management,
anticipating the spread of COVID-19 and its effects, implemented a plan to mitigate effects of COVID-19 on supply and transportation of
materials used to make and package our products, staffing, and transportation of our products to customers. Management’s proactive
planning allowed the Company to avoid disruption to its manufacturing facilities and production, transportation, and sales and to meet
the increased demand without delay. The Company has maintained full production capacity available at all locations and does not anticipate
manufacturing or staffing disruptions in the near term.

To date, we
have seen increased customer and consumer demand for our products. We have not experienced significant supply chain disruptions or labor
supply shortages and we have continued to be able to satisfy customer and consumer demand for our products. However, the COVID-19 pandemic,
or any future pandemic, may limit the availability of, or increase the cost of, employees, ingredients, packaging and other inputs necessary
to produce our products, and our operations may be negatively impacted. In 2021, our costs increased primarily due to inflationary price
increases of milk, other ingredients, packaging materials, and freight. However, because of market conditions or for competitive reasons,
our pricing actions may sometimes lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials
and other input costs as we incur them.

Recently, in 2022, social distancing,
shelter-in-place and work-from-home mandates and recommendations have begun to be reduced or eliminated. The increased customer demand
for our products as consumers increased their at-home consumption and e-commerce purchasing during the COVID-19 pandemic may change or
decrease due to the decrease in social distancing and stay-at-home and work-from-home mandates and recommendations. We are unable to predict
the nature and timing of when such change may occur, if at all.

Results of Operations

Comparison of Year Ended December 31, 2021
to Year Ended December 31, 2020 (in 000’s)

Net Sales

Net sales were $119,065 for the year ended December
31, 2021, an increase of $17,039 or 16.7% versus prior year. The net sales increase was primarily driven by higher volumes of our branded
drinkable kefir and, to a lesser extent, the favorable impact of our acquisition of Glen Oaks Farms during the third quarter of 2021.
Approximately 11% of the net sales increase results from our acquisition of Glen Oaks Farms during the third quarter of 2021. Approximately
20% of the net sales increase results from the Farmers to Families Food Box program with the USDA, which began during the middle of the
first quarter of 2021 and ended during May 2021.

Gross Profit

Gross profit as a percentage of net sales decreased
to 24.1% during the year ended December 31, 2021 from 26.4% during the same period in 2020. The decrease versus the prior year was primarily
due to the unfavorable impact of milk pricing, and the inflationary price increases of other ingredients, packaging materials, and freight,
partially offset by the decrease in depreciation expense and favorable labor efficiency due to increased volumes. We took favorable pricing
actions beginning in December 2021 to recover input and freight cost inflation. However, for market conditions or competitive reasons,
our pricing actions may also lag input cost changes, or we may not be able to pass along the full effect of increases in raw materials
and other input costs as we incur them.

Selling Expenses

Selling expenses increased by $900 to $11,097
during the year ended December 31, 2021 from $10,197 during the same period in 2020. The increase versus prior year is primarily due to
increased investment in advertising and marketing programs, partially offset by lower compensation and broker expense.

General and Administrative Expenses

General and administrative expenses decreased
$50 to $11,611 during the year ended December 31, 2021 from $11,661 during the same period in 2020. The decrease is primarily a result
of lower compensation, related party consulting, and office rent expense, partially offset by higher employee incentive compensation expense.

Provision for Income Taxes

The provision for income taxes includes federal,
state and local income taxes. The provision for income taxes was $2,305 and $1,596 during the year ended December 31, 2021 and 2020, respectively.

Our effective income tax rate was 41.0% in 2021
compared to 33.1% in 2020. The statutory Federal and state tax rates remained consistent from 2020 to 2021. The Company has a number of
items that are nondeductible or are discrete adjustments to tax expense. The Company consistently reflects non-deductible officer compensation
expense, non-deductible compensation expense related to equity incentive awards and separate state tax rates from year to year. Although
similar items were reflected in 2021, the percentage effect is different due to the difference in pre-tax income in 2021 compared to 2020.

Our 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 underlying income
tax rates applicable to various state and local taxing jurisdictions, enacted tax legislation, the impact of non-deductible items, changes
in valuation allowances, and the expiration of the statute of limitations in relation to unrecognized tax benefits. We record discrete
income tax items such as enacted tax rate changes in the period in which they occur.

Section 162(m) of the Internal Revenue Code (the
“Code”) limits the deductibility of compensation paid to certain of our executives. Under Section 162(m), no tax deduction
in taxable years beginning after December 31, 2017 is allowed for compensation paid to any covered employee to the extent that the total
compensation for that covered employee exceeds $1,000,000 in any taxable year.

Income taxes are discussed
in Note 10 in the Notes to the Consolidated Financial Statements.

Net Income (Loss)

We reported net income of $3,311 or $0.21 per
basic and diluted common share for the year ended December 31, 2021 compared to net income of $3,232 or $0.21 per basic and diluted common
share in the same period in 2020.

Liquidity and Capital Resources

Cash Flow

At this time, the COVID-19 pandemic has not materially
impacted our operations. We expect to meet our foreseeable liquidity and capital resource requirements, and to ensure the continuation
of the Company as a going concern, through anticipated cash flows from operations, our revolving credit facility and cash and cash equivalents.
If additional borrowings are needed, approximately $2,223 was available under the Revolving Credit Facility as of December 31, 2021. See
Note 7 to our Consolidated Financial Statements for additional information regarding our Revolving Credit Facility. 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. Given
the dynamic nature of COVID-19, we will continue to assess our liquidity needs while continuing to manage our discretionary spending and
investment strategies.

The ultimate
impact that the COVID-19 pandemic or any future pandemic or disease outbreak will have on our business and our consolidated results of
operations is uncertain.

Sources and Uses of Cash

Lifeway had a net increase in cash and cash equivalents
of $1,307 and $4,090 during the years ended December 31, 2021 and 2020, respectively. The drivers of the year over year change are as
follows:

Net cash provided by operating activities was
$6,144 in 2021 compared to $6,385 in 2020, a decrease in cash provided of $241. The decrease is primarily due to the change in working
capital.

Net cash used in investing activities was $7,722
in 2021 compared to $1,890 in 2020, an increase in cash used of $5,832. The increase reflects the August 2021 acquisition of Glen Oak
Farms, Inc. The $5,800 acquisition purchase price was funded through proceeds from our new $5,000 term loan and existing cash. Capital
spending was $1,922 in 2021 compared to $1,895 in 2020. Our capital spending is focused in three core areas: growth, cost reduction, and
facility improvements. Growth capital spending supports new product innovation and enhancements. Cost reduction and facility improvements
support manufacturing efficiency, safety and productivity.

Net cash provided by financing activities was
$2,885 during the year ended December 31, 2021 compared to net cash used in financing activities of $405 in the same period in 2020.
The increase in net cash provided by financing activities relates to the term loan entered into during August 2021 in connection with
the acquisition of Glen Oaks Farms, Inc. See the Debt Obligations section below for further detail.

On June 24, 2021, Lifeway’s Board authorized
a plan to repurchase up to 250 shares of Common Stock in the open market within 24 months at no more than $10 per share. We repurchased
all 250 shares of common stock at a cost of $1,583 during the three-month period ended September 30, 2021. We intend to hold repurchased
shares in treasury for general corporate purposes, including issuances under our 2015 Omnibus Incentive Plan. Treasury shares are accounted
for using the cost method.

Debt Obligations

On August 18, 2021, Lifeway entered into the
Fourth Modification (the “Fourth Modification”) to the Amended and Restated Loan and Security Agreement (as amended and modified
from time to time, the “Credit Agreement”) with its existing lender and certain of its subsidiaries. The Fourth Modification
amends the Credit Agreement to provide for, among other things, a $5 million term loan by the existing lender to the borrowers to be
repaid in quarterly installments of principal and interest over a term of five years (the “Term Loan”).  The termination
date of the Term Loan is August 18, 2026, unless earlier terminated. Except for the addition of the Term Loan, the Credit Agreement remains
substantively unchanged and in full force and effect.

As of December 31, 2021, we had $2,777 outstanding
under the Revolving Credit Facility and $4,470 outstanding under the note payable, net of $30 of unamortized deferred financing fees.
We had $2,223 available for future borrowings under the Revolving Credit Facility as of December 31, 2021. As amended, all outstanding
amounts under the Loans bear interest, at Lifeway’s election, at either the lender Base Rate (the Prime Rate minus 1.00%) or the
LIBOR plus 1.95%, payable monthly in arrears. Lifeway is also required to pay a quarterly unused line fee of 0.20% on the Revolving Credit
Facility and, in conjunction with the issuance of any letters of credit, a letter of credit fee of 0.20%. The interest rate on debt outstanding
under the Loans as of December 31, 2021 was 2.15%.

We are in compliance with all applicable financial
debt covenants as of December 31, 2021. See Note 7 to our Consolidated Financial Statements for additional information regarding our
indebtedness and related agreements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing
arrangements as defined in Item 303(a)(4) of Regulation S-K.

Contractual Obligations

Not applicable.

Critical Accounting Estimates

Critical accounting estimates are those estimates
made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to
have a material impact on the financial condition or results of operations of the registrant. In many cases, the accounting treatment
of a particular transaction is specifically dictated by U.S. GAAP with no need for the application of our judgement. In certain circumstances,
the preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires us to use our judgment to make certain
estimates and assumptions. These estimates affect the reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the Consolidated Financial Statements and the reported amounts of net sales and expenses during the reporting
period. We believe in the quality and reasonableness of our critical accounting estimates; however, materially different amounts might
be reported under different conditions or using assumptions, estimates or making judgments different from those that we have applied.
Management has discussed the development and selection of these critical accounting policies, as well as our significant accounting policies
(see Note 2 to the Consolidated Financial Statements), with the Audit Committee of our Board of Directors. We have identified the policies
described below as our critical accounting policies.

Goodwill and intangible asset valuation

Goodwill totaled $11,704 as of December 31, 2021.
The Company completed its annual goodwill impairment analysis as of December 31, 2021. Our assessment did not result in an impairment.
Goodwill represents the excess purchase price over the fair value of the net tangible and other identifiable intangible assets acquired.
We estimate the fair value of our one reporting unit annually (as of December 31), or more frequently if certain conditions exist, using
a combination of the fair values derived from both the income approach and the market approach. Under the income approach, we calculate
the fair value of a reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on our estimates
of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used to determine
the present value of future cash flows is based on the weighted-average cost of capital adjusted for the relevant risk associated with
business-specific characteristics and the uncertainty related to the business's ability to execute on the projected cash flows. The market
approach estimates fair value based on market multiples of revenue and earnings derived from comparable publicly-traded companies with
similar operating and investment characteristics. The resulting fair value, based on the income and market approaches, is then compared
to the carrying value to determine if impairment is necessary.

We reviewed our indefinite lived intangible assets,
which consist of brand names totaling $3,700 as of December 31, 2021, using the relief from royalty method. Significant assumptions include
the royalty rate, revenue growth rates, and discount rates. Our assumptions were based on historical performance and management estimates
of future performance. Our assessment did not result in an impairment in 2021.

Sales discounts & allowance.

We offer various trade promotions and sales incentive
programs to customers and consumers. From time to time, we grant certain sales discounts to customers which are classified as a reduction
in sales. The measurement and recognition of discounts and allowances involve the use of judgment and our estimates are made based on
historical experience and specific customer program accruals. Differences between estimated and actual discount and allowance costs are
normally not material and are recognized in earnings in the period such differences are determined. The process for analyzing trade promotion
programs could impact our results of operations and trade spending accruals depending on how actual results of the programs compare to
original estimates. As of December 31, 2021, we had $1,170 of accrued discounts and allowances.

Share-based compensation.

Certain employees and non-employee directors
receive various forms of share-based payment awards and we recognize compensation expense for these awards based on their grant date
fair values. The fair values of stock option awards are estimated on the grant date using the Black-Scholes option pricing model, which
incorporates certain assumptions regarding the expected term of an award and expected stock price volatility. The expected term is determined
under the simplified method, using an average of the contractual term and vesting period of the stock options. The expected volatility
is based on the historic volatility of our common stock. We do not estimate forfeitures in measuring the grant date fair value, but rather
account for forfeitures as they occur. Key assumptions are described in further detail in Note 11 to our consolidated financial statements.
No stock options were issued during 2021 or 2020.

Income taxes.

We pay income taxes based on tax statutes, regulations,
and case law of the various jurisdictions in which we operate. At any given time, multiple tax years are subject to audit by the various
taxing authorities. Income taxes are accounted for under the asset and liability method. Deferred income tax assets and liabilities are
recognized for the future tax effects of temporary differences between financial and income tax reporting using tax rates in effect for
the years in which the differences are expected to reverse.

We recognize an income tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based
on the technical merits of the position. The income tax benefit recognized in our financial statements from such a position is measured
based on the largest estimated benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. These judgments
and estimates made at a point in time may change based on the outcome of tax audits and changes to, or further interpretations of, regulations.
If such changes take place, there is a risk that our tax rate may increase or decrease in any period, which would impact our earnings.
Future business results may affect deferred tax liabilities or the valuation of deferred tax assets over time.

Recent Accounting Pronouncements.

See Note 2, Summary of Significant Accounting
Policies, in the Notes to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for information
regarding recent accounting pronouncements.