REEDS INC

Previous wording

During the six months ended June 30, 2024, the Company continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses. In addition, it continues to build its innovation pipeline with sustained growth in Reed’s Real Ginger Ale, Virgil’s Zero Sugar handcrafted sodas, Reed’s Classic and Stormy Mule, and Reed’s Hard Ginger Ale.

Current wording

During the nine months ended September 30, 2024, the Company continued to focus on strengthening its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses. In addition, it continues to build its innovation pipeline with sustained growth in Reed’s Real Ginger Ale, Virgil’s Zero Sugar handcrafted sodas, Reed’s Classic and Stormy Mule, and Reed’s Hard Ginger Ale.

Previous wording

The Company remains focused on driving sales growth, improving gross margin, and reducing freight costs. The sales growth focus is on channel expansion, increase in store placements, new product introduction and improved sales execution. The margin enhancement initiative is driven by packaging savings, co-packer upgrades, and better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. In addition, the Company continues to augment its co-packer network to drive further efficiencies and build proper levels of inventory at the appropriate location to maximize delivery metrics.

Current wording

The Company remains engaged on driving sales growth, improving gross margin, and reducing freight costs. The sales growth focus is on channel expansion, increase in store placements, new product introduction and improved sales execution. The margin enhancement initiative is driven by packaging savings, co-packer upgrades, and better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. In addition, the Company continues to augment its co-packer network to drive further efficiencies and build proper levels of inventory at the appropriate location to maximize delivery metrics.

Previous wording

During the three months ending June 30, 2024, the Company continued to experience moderation from the elevated freight costs experienced in 2023. The average cost of shipping and handling for the three months ended June 30, 2024, was $2.18 as compared to $3.05 in the three months ended June 30, 2023. During the six months ended June 30, 2024, the average cost of shipping and handling was $2.54 per case, as compared to $3.27 per case for the six months ended June 30, 2023. Although the Company has experienced decreases in freight costs over the last four quarters, in the Company’s opinion there remains a volatile environment and the Company will continue to monitor pricing and availability in transportation. Mitigation plans have been implemented to manage this risk. The Company has been negatively impacted by supply chain challenges affecting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins. The Company has experienced moderation in inflation and anticipates this to continue throughout 2024.

Current wording

During the three months ending September 30, 2024, the Company continued to experience moderation from the elevated freight costs experienced in 2023. The average cost of shipping and handling for the three months ended September 30, 2024, was $2.99 as compared to $2.98 in the three months ended September 30, 2023. During the nine months ended September 30, 2024, the average cost of shipping and handling was $2.66 per case, as compared to $3.17 per case for the nine months ended September 30, 2023. Although the Company has experienced decreases in freight costs over the last four quarters, in the Company’s opinion there remains a volatile environment and the Company will continue to monitor pricing and availability in transportation. Mitigation plans have been implemented to manage this risk. The Company has been negatively impacted by supply chain challenges affecting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins. The Company has experienced moderation in inflation and anticipates this to continue throughout 2024.

Previous wording

The following chart sets forth key statistics for the transition of the Company’s top line activity from the second quarter of 2023 through the second quarter of 2024.

Current wording

The following chart sets forth key statistics for the transition of the Company’s top line activity from the third quarter of 2023 through the third quarter of 2024.

Previous wording

Core beverage volume for the three months ended June 30, 2024, represents 99% of all beverage volume.

Current wording

Core beverage volume for the three months ended September 30, 2024, represents 100% of all beverage volume.

Previous wording

Discounts as a percentage of gross sales was 13% compared to 10% in the same period last year. As a result, net sales revenue increased 19% in the three months ended June 30, 2024, to $11,874, compared to $10,005 in the same period last year.

Current wording

Discounts as a percentage of gross sales was 24% compared to 10% in the same period last year. As a result, net sales revenue decreased 43% in the three months ended September 30, 2024, to $6,752, compared to $11,856 in the same period last year driven by lower sales and elevated trade spend.

Previous wording

Cost of goods sold increased $547 during the three months ended June 30, 2024, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended June 30, 2024, was 68% as compared to 75% for the same period last year.

Current wording

Cost of goods sold decreased $2,286 during the three months ended September 30, 2024, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended September 30, 2024, was 82% as compared to 66% for the same period last year. The decline as a percentage of net sales, was driven by elevated trade spend, partially offset by lower supply chain and input costs.

Previous wording

The total cost of goods per case decreased to $12.34 per case in the three months ended June 30, 2024, from $13.58 per case for the same period last year.

Current wording

The total cost of goods per case increased to $12.91 per case in the three months ended September 30, 2024, from $12.22 per case for the same period last year.

Previous wording

Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $263 in the three months ended June 30, 2024, to $1,423 from $1,686 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended June 30, 2024, were 12% of net sales and $2.18 per case, compared to 17% of net sales and $3.05 per case during the same period last year.

Current wording

Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $629 in the three months ended September 30, 2024, to $1,279 from $1,908 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended September 30, 2024, were 19% of net sales and $2.99 per case, compared to 16% of net sales and $2.98 per case during the same period last year.

Previous wording

Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $1,097 during the three months ended June 30, 2024, compared to $1,259 during the same period last year. As a percentage of net sales, selling and marketing costs was 9% during the three months ended June 30, 2024, as compared to 13% during the same period last year. The decrease was primarily driven by lower marketing costs, service fees and product sampling costs partially offset by higher broker commissions.

Current wording

Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $1,283 during the three months ended September 30, 2024, compared to $861 during the same period last year, an increase of $422. As a percentage of net sales, selling and marketing costs was 19% during the three months ended September 30, 2024, as compared to 7% during the same period last year. The increase was primarily driven by higher employee related costs, marketing spend, and higher service fees related to e-commerce sales.

Previous wording

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the three months ended June 30, 2024, to $1,980 from $1,311, an increase of $669 over the same period last year. As a percentage of net sales, general and administrative expenses were 17% during the three months ended June 30, 2024, as compared to 13% during the same period last year. The increase was driven by higher professional fees, legal settlements and higher stock compensation.

Current wording

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the three months ended September 30, 2024 to $1,791 from $1,407, an increase of $384 over the same period last year. As a percentage of net sales, general and administrative expenses were 27% during the three months ended September 30, 2024, as compared to 12% during the same period last year. The increase was driven by higher professional fees, bad debt expense, investor related costs and employee related costs.

Previous wording

The loss from operations was $669 for the three months ended June 30, 2024, as compared to a loss of $1,747 in the same period last year driven by decreased gross profit offset by decreases in operating expenses discussed above.

Current wording

The loss from operations was $3,138 for the three months ended September 30, 2024, as compared to a loss of $143 in the same period last year driven by decreased gross profit and an increase in operating expenses discussed above.

Previous wording

Interest and other expense for the three months ended June 30, 2024, consisted of $1,150 of interest expense and $1,393 of the change in fair value of our SAFE investments. During the same period last year, interest and other expense consisted solely of $1,387 of interest expense.

Current wording

Interest and other expense for the three months ended September 30, 2024, consisted of $1,012 of interest expense. During the same period last year, interest and other expense consisted of $1,293 of interest expense.

Previous wording

The following table sets forth key statistics for the six months ended June 30, 2024 and 2023, respectively, in thousands.

Current wording

The following table sets forth key statistics for the nine months ended September 30, 2024 and 2023, respectively, in thousands.

Previous wording

Core beverage volume for the six months ended June 30, 2023, represents 99% of all beverage volume.

Current wording

Core beverage volume for the nine months ended September 30, 2024, represents 100% of all beverage volume.

Previous wording

Core brand gross billing increased by 2% to $23,962 compared to $23,429 during the same period last year, driven by Reed’s volume decline of 5% and Virgil’s volume decline of 11%. The result is an increase in total gross billing of 1%, to $23,963 during the six months ended June 30, 2024, from $23,618 in the same period last year. Price on our core brands increased 3% to $20.82 per case. The decrease was a result of volume declines that have impacted the CSD segment as a result of price increases coupled with the Company’s inability to produce sufficient levels of inventory to meet current demand as a result of tighter credit terms from suppliers.

Current wording

Core brand gross billing decreased by 10% to $32,864 compared to $36,626 during the same period last year, driven by Reed’s volume decline of 10% and Virgil’s volume decline of 16%. The result is a decrease in total gross billing of 11%, to $32,864 during the nine months ended September 30, 2024, from $36,837 in the same period last year. Price on our core brands increased 1% to $20.81 per case. The lower gross billings was a result of volume declines that have impacted the carbonated soft drink segment as a result of price increases coupled with the Company’s inability to produce sufficient levels of inventory to meet current demand as a result of tighter credit terms from suppliers.

Previous wording

Discounts as a percentage of gross sales was 10% compared to 10% in the same period last year. As a result, net sales revenue increased 1% in the six months ended June 30, 2024, to $21,469, compared to $21,162 in the same period last year.

Current wording

Discounts as a percentage of gross sales was 14% compared to 10% in the same period last year. As a result, net sales revenue decreased 15% in the nine months ended September 30, 2024, to $28,221, compared to $33,018 in the same period last year driven by lower sales and elevated trade spend.

Previous wording

Cost of goods sold decreased $1,730 during the six months ended June 30, 2024, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the six months ended June 30, 2024, was 66% as compared to 75% for the same period last year.

Current wording

Cost of goods sold decreased $4,016 during the nine months ended September 30, 2024, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the nine months ended September 30, 2024, was 70% as compared to 72% for the same period last year. The decrease was driven by lower supply chain and input costs.

Previous wording

The total cost of goods per case decreased to $12.36 per case in the six months ended June 30, 2024, from $13.70 per case for the same period last year. The cost of goods sold per case on core brands was $12.36 during the six months ended June 30, 2024, compared to $13.59 for the same period last year.

Current wording

The total cost of goods per case decreased to $12.52 per case in the nine months ended September 30, 2024, from $13.17 per case for the same period last year. The cost of goods sold per case on core brands was $12.51 during the nine months ended September 30, 2024, compared to $13.11 for the same period last year.

Previous wording

Gross margin increased to 34% for the six months ended June 30, 2023, compared to 25% for the same period last year.

Current wording

Gross margin increased to 30% for the nine months ended September 30, 2024, compared to 28% for the same period last year.

Previous wording

Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $881 in the six months ended June 30, 2024, to $2,925 from $3,806 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the six months ended June 30, 2024, were 14% of net sales and $2.54 per case, compared to 18% of net sales and $3.27 per case during the same period last year.

Current wording

Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $1,510 in the nine months ended September 30, 2024, to $4,204 from $5,714 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the nine months ended September 30, 2024, were 15% of net sales and $2.66 per case, compared to 17% of net sales and $3.17 per case during the same period last year.

Previous wording

Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $2,190 during the six months ended June 30, 2024, compared to $2,706 during the same period last year. As a percentage of net sales, selling and marketing were 10% of net sales during the six months ended June 30, 2024, as compared to 13% of net sales during the same period last year. The decrease was driven by lower service fees, and reduced sampling, trade show and marketing spend partially offset by higher broker fees.

Current wording

Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $3,473 during the nine months ended September 30, 2024, compared to $3,567 during the same period last year. As a percentage of net sales, selling and marketing expenses were 12% of net sales during the nine months ended September 30, 2024, as compared to 11% of net sales during the same period last year. The decrease was driven by lower co-op advertising fees, employee related costs and marketing spend partially offset by higher broker fees and e-commerce delivery costs.

Previous wording

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the six months ended June 30, 2024, to $3,448 from $3,020, an increase of $428 over the same period last year. The increase was driven by higher legal settlements costs and professional fees spending partially offset by lower public company costs.

Current wording

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the nine months ended September 30, 2024, to $5,239 from $4,427, an increase of $812 over the same period last year. The increase was driven by higher employee related costs, legal settlement related costs, professional fees, and quality assurance costs spending partially offset by lower public company costs.

Previous wording

The loss from operations was $1,319 for the six months ended June 30, 2024, as compared to a loss of $4,325 in the same period last year driven by increased gross profit and decreased operating expenses discussed above.

Current wording

The loss from operations was $4,457 for the nine months ended September 30, 2024, as compared to a loss of $4,468 in the same period last year driven by increased gross profit and decreased operating expenses discussed above.

Previous wording

Interest and other expense for the six months ended June 30, 2024, consisted of $2,173 of interest expense and $1,393 of the change in fair value of our SAFE investments. During the same period last year, interest and other expense consisted solely of $3,166 of interest expense.

Current wording

Interest and other expense for the nine months ended September 30, 2024, consisted of $4,578 of interest expense. During the same period last year, interest and other expense consisted of $4,459 of interest expense.

Previous wording

Set forth below is a reconciliation of net loss to Modified EBITDA for the six months ended June 30, 2022 and 2021 (unaudited; in thousands):

Current wording

Set forth below is a reconciliation of net loss to Modified EBITDA for the nine months ended September 30, 2024 and 2023 (unaudited; in thousands):

Previous wording

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the six months ended June 30, 2024, the Company recorded a net loss of $4,885, and utilized $3,307 of cash in operations and at June 30, 2024, had a working capital deficiency of $19,378 and a stockholders’ deficit of $23,849. As of June 30, 2024, the Company borrowed $9,124 on its line of credit and owed $18,821on its Notes (See Note 5 and Note 6 for further detail). These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Current wording

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine months ended September 30, 2024, the Company recorded a net loss of $9,035, and utilized $2,254 of cash in operations and at September 30, 2024, had a working capital deficiency of $22,923 and a stockholders’ deficit of $21,953. As of September 30, 2024, the Company borrowed $5,390 on its line of credit and owed $21,751 on its Notes (See Note 5 and Note 6 for further detail). These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Previous wording

As of June 30, 2024, we had a cash balance of $326, no availability under our line of credit and $3,876 of additional borrowing capacity from the credit facility assuming there is availability under the terms.

Current wording

As of September 30, 2024, we had a cash balance of $306, no availability under our line of credit and $7,529 of additional borrowing capacity from the credit facility assuming there is availability under the terms.

Previous wording

Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. The Company is continuing to discuss restructuring of debt with existing lenders and is exploring new financing opportunities to address the line of credit which comes due in March 2025 (see Note 5) and the portion of debt under the Notes that is due under on December 15, 2024 (see Note 6). As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.

Current wording

Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. The Company is continuing to discuss the restructuring of debt with existing lenders and is exploring new financing opportunities to address the line of credit which comes due in March 2025 (see Note 5) and the portion of debt under the Notes that is due on December 15, 2024 (see Note 6). As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.