# Reed'S, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Reed'S, Inc.](/companies/reed.md) (CIK 1140215)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 17:16 ET
- Period: 2023-09-30
- Accession: 0001493152-23-040116
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1140215/000149315223040116/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1140215/000149315223040116/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $11.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $33.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $7.8m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $23.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $4.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $9.2m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | −$143.0k | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$4.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $1.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $4.5m | us-gaap:InterestExpense |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$1.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$8.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.34 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.69 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$0.34 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.69 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 4,169,131 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 3,322,959 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | −$4.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $84.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $1.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $1.0m | us-gaap:Cash |
| Current assets | at 2023-09-30 | $23.5m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $24.7m | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $27.7m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $37.4m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | −$12.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 36,938 characters.

### Cautionary Statement Regarding Forward-Looking Statements and Information

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report.*

*In addition to our GAAP results, the following discussion includes Modified EBITDA as a supplemental measure of our performance. We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.*

*The following discussion also includes the use of gross billing, a key performance indicator and metric. Gross billing represents invoiced amounts to distributors and retailers, excluding sales adjustments. Gross billing may include deductions from MSRP or “list price”, where applicable, and excludes promotional costs of generating such sales. Management utilizes gross billing to monitor operating performance of products and salespersons, which performance can be masked by the effect of promotional or other allowances. Management believes that the presentation of gross billing provides a useful measure of Reed’s operating performance.*

### Overview

During the period ended September 30, 2023, 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.

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.

### Recent Trends - Market Conditions

Although the U.S. economy continued to grow during the third quarter of 2023, the higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout 2023.

During the three and nine month period ended September 30, 2023, the Company experienced moderation from the elevated freight costs experienced in 2022. The average cost of shipping and handling for the three month period ended September 30, 2023, was $2.98 per case, as compared to $3.38 per case for the three month period ended September 30, 2022. The average cost of shipping and handling for the nine month period ended September 30, 2023, was $3.17 per case, as compared to $4.13 per case for the nine month period ended September 30, 2022. Although the Company has experienced decreases in freight costs over the last three 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 impacting 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 2023.

Through September 30, 2023, we continued to generate cash flows to meet our short-term liquidity needs, and we expected to maintain access to the capital markets.

### Results of Operations – Three Months Ended September 30, 2023, as compared to Three Months Ended September 30, 2022

The following table sets forth key statistics for the three months ended September 30, 2023 and 2022, respectively, in thousands.

|  | Three Months Ended September 30, 2023 | 2022 | Pct. Change |
| --- | ---: | ---: | ---: |
| Gross billing (A) | $13,219 | $14,101 | -6% |
| Less: Promotional and other allowances (B) | 1,363 | 2,007 | -32% |
| Net sales | $11,856 | $12,094 | -2% |
| Cost of goods sold | 7,823 | 9,659 | -19% |
| % of Gross billing | 59% | 68% |  |
| % of Net sales | 66% | 80% |  |
| Gross profit | $4,033 | $2,435 | 66% |
| % of Net sales | 34% | 20% |  |
| Expenses |  |  |  |
| Delivery and handling | $1,908 | $2,249 | -15% |
| % of Net sales | 16% | 19% |  |
| Dollar per case ($) | $2.98 | $3.38 |  |
| Selling and marketing | 861 | 1,220 | -29% |
| % of Net sales | 7% | 10% |  |
| General and administrative | 1,407 | 1,420 | -1% |
| % of Net sales | 12% | 12% |  |
| Total operating expenses | 4,176 | 4,889 | -15% |
| Loss from operations | $(143) | $(2,454) | -94% |
| Interest expense | $(1,293) | $(777) | 66% |
| **Net loss** | $(1,436) | $(3,231) | -56% |
| **Loss per share – basic and diluted** | $(0.34) | $(1.43) | -76% |
| Weighted average shares outstanding - basic & diluted | 4,169,131 | 2,254,356 | 85% |

*(A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing has been defined by our internal reporting practices.*

*(B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.*

### Sales, Cost of Sales, and Gross Margins

The following chart sets forth key statistics for the transition of the Company’s top line activity from the third quarter of 2022 through the third quarter of 2023.

| Cases: |  | 2023 Q1 | Q2 | Q3 | YTD | Q3 vs PY | YTD vs PY | 2022 Q1 | Q2 | Q3 | YTD | Q3 Per Case 2023 | 2022 | vs PY | Sept YTD Per Case 2023 | 2022 | vs PY |
| --- | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
|  | Reed’s | 370 | 355 | 402 | 1,127 | -13% | -5% | 415 | 410 | 357 | 1,182 |  |  |  |  |  |  |
|  | Virgil’s | 241 | 197 | 238 | 676 | -22% | -29% | 302 | 351 | 304 | 957 |  |  |  |  |  |  |
|  | Total Core | **611** | **552** | **640** | **1,803** | **-3%** | **-16%** | **717** | **761** | **661** | **2,139** |  |  |  |  |  |  |
|  | Non Core | 2 | - | - | 2 | -100% | -85% | 4 | 5 | 4 | 13 |  |  |  |  |  |  |
|  | **Total** | **613** | **552** | **640** | **1,805** | **-4%** | **-16%** | **721** | **766** | **665** | **2,152** |  |  |  |  |  |  |
| **Gross Billing:** |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Core | $12,333 | $11,095 | $13,197 | $36,626 | -5% | -13% | $13,287 | $14,972 | $13,876 | $42,135 | $20.6 | $21.0 | -2% | $20.3 | $19.7 | 3% |
|  | Non Core | 120 | 69 | 22 | 211 | -90% | -72% | 274 | 167 | 178 | 619 | $- | $56.3 | -% | 105.5 | 58.2 | 81% |
|  | **Total** | **$12,453** | **$11,164** | **$13,219** | **$36,837** | **-6%** | **-14%** | **$13,636** | **$15,155** | **$14,101** | **$42,892** | **$20.7** | **$21.2** | **-3%** | **20.4** | **19.9** | **2%** |
| **Discounts:** | **Total** | **$(1,296)** | **$(1,159)** | **$(1,363)** | **$(3,819)** | **-32%** | **-22%** | **$(1,454)** | **$(1,430)** | **$(2,007)** | **$(4,891)** | **$(2.1)** | **$(3.0)** | **-29%** | **$(2.1)** | **$(2.3)** | **-7%** |
| **COGS:** |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  | Core | $(8,422) | $(7,408) | $(7,820) | $(23,650) | -18% | -18% | $(9,150) | $(10,286) | $(9,548) | $(28,984) | $(12.2) | $(14.4) | -15% | $(13.1) | $(13.6) | -3% |
|  | Non Core | (87) | (88) | (3) | (128) | -97% | -64% | (87) | (126) | (106) | (319) | - | (27.8) | -% | (64.0) | (27.0) | -% |
|  | **Total** | **$(8,459)** | **$(7,496)** | **$(7,823)** | **$(23,778)** | **-19%** | **-19%** | **$(9,250)** | **$(10,426)** | **$(9,659)** | **$(29,335)** | **$(12.2)** | **$(14.5)** | -16% | **$(13.2)** | **$(13.6)** | **-3%** |
| **Gross Margin:** |  | **$2,698** | **$2,509** | **$4,033** | **$9,240** | **66%** | **7%** | **$2,932** | **$3,299** | **$2,435** | **$8,666** | **$6.3** | **$3.7** | **72%** | **$5.1** | **$4.0** | **27%** |
| **as % Net Sales** |  | 24% | 25% | 34% | 28% |  |  | 24% | 24% | 20% | 23% |  |  |  |  |  |  |

### Sales, Cost of Sales, and Gross Margins

As part of the Company’s ongoing initiative to simplify and streamline operations the Company has identified core products on which to place its strategic focus. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs.

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

Core brand gross billing decreased by 5% to $13,197 compared to $13,876 during the same period last year, driven by a Reed’s volume increase of 13% and Virgil’s volume decline of 22%. The result is a decrease in total gross billing of 5%, to $13,219 during the three months ended September 30, 2023, from $14,101 in the same period last year. Price on our core brands decreased 2% to $20.62 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.

Discounts as a percentage of gross sales was 10% compared to 14% in the same period last year. As a result, net sales revenue decreased 2% in the three months ended September 30, 2023, to $11,856, compared to $12,094 in the same period last year.

#### Cost of Goods Sold

Cost of goods sold decreased $1,836 during the three months ended September 30, 2023, 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, 2023, was 66% as compared to 80% for the same period last year. The decrease was primarily driven by lower supply chain and input costs.

The total cost of goods per case decreased to $12.22 per case in the three months ended September 30, 2023, from $14.52 per case for the same period last year. The cost of goods sold per case on core brands was $12.22 during the three months ended September 30, 2023, compared to $14.44 for the same period last year.

#### Gross Margin

Gross margin was 34% for the three months ended September 30, 2023, compared to 20% for the same period last year.

### Operating Expenses

#### Delivery and Handling Expenses

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 $341 in the three months ended September 30, 2023, to $1,908 from $2,249 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended September 30, 2023, were 16% of net sales and $2.98 per case, compared to 19% of net sales and $3.38 per case during the same period last year.

#### Selling and Marketing Expenses

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 $861 during the three months ended September 30, 2023, compared to $1,220 during the same period last year. As a percentage of net sales, selling and marketing costs was 7% during the three months ended September 30, 2023, as compared to 10% during the same period last year. The decrease was primarily driven by lower marketing expenditures, broker commissions, IT related charges, and travel and entertainment expenses, partially offset by higher employee related costs.

#### General and Administrative Expenses

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the three months ended September 30, 2023, to $1,407 from $1,420, a decrease of $13 over the same period last year. As a percentage of net sales, general and administrative expenses were 12% during the three months ended September 30, 2023, as compared to 12% during the same period last year. The decrease was driven by lower stock compensation, consultant fees, investor relation expenses and information technology expenditures, partially offset by higher employee related costs.

### Loss from Operations

The loss from operations was $143 for the three months ended September 30, 2023, as compared to a loss of $2,454 in the same period last year driven by increased gross profit offset by decreases in operating expenses discussed above.

### Interest Expense

Interest expense for the three months ended September 30, 2023, consisted of $1,293 of interest expense. During the same period last year, interest expense consisted of $777 of interest expense.

### Modified EBITDA

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, legal settlements, and one-time restructuring-related costs including employee severance and asset impairment.

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended September 30, 2023 and 2022 (unaudited; in thousands):

|  | Three Months Ended September 30 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | $(1,436) | $(3,231) |
| Modified EBITDA adjustments: |  |  |
| Depreciation and amortization | 68 | 58 |
| Interest expense | 1,293 | 777 |
| Stock option and other noncash compensation | 139 | 214 |
| Severance | 85 | - |
| Legal settlements | 12 | - |
| Total EBITDA adjustments | $1,597 | $1,049 |
| Modified EBITDA | $161 | $(2,182) |

4

We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

- Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
- Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
- Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and
- Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

### Results of Operations – Nine Months ended September 30, 2023, as compared to Nine Months Ended September 30, 2022

The following table sets forth key statistics for the nine months ended September 30, 2023 and 2022, respectively, in thousands.

|  | Nine months Ended September 30, 2023 | 2022 | Pct. Change |
| --- | ---: | ---: | ---: |
| Gross billing (A) | $36,837 | $42,892 | -14% |
| Less: Promotional and other allowances (B) | 3,819 | 4,891 | -22% |
| Net sales | $33,018 | $38,001 | -13% |
| Cost of goods sold | 23,778 | 29,335 | -19% |
| % of Gross billing | 65% | 68% |  |
| % of Net sales | 72% | 77% |  |
| Gross profit | $9,240 | $8,666 | 7% |
| % of Net sales | 28% | 23% |  |
| Expenses |  |  |  |
| Delivery and handling | $5,714 | $8,893 | -36% |
| % of Net sales | 17% | 23% |  |
| Dollar per case ($) | 3.17 | 4.13 |  |
| Selling and marketing | 3,567 | 5,523 | -37% |
| % of Net sales | 11% | 15% |  |
| General and administrative | 4,427 | 5,319 | -17% |
| % of Net sales | 13% | 14% |  |
| Total operating expenses | 13,708 | 19,835 | -31% |
| Loss from operations | $(4,468) | $(11,169) | -60% |
| Interest expense | (4,459) | (2,119) | 110% |
| **Net loss** | $(8,927) | $(13,288) | -33% |
| **Loss per share – basic and diluted** | $(2.69) | $(6.54) | -59% |
| Weighted average shares outstanding - basic & diluted | 3,322,959 | 2,030,503 | 64% |

*(A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing has been defined by our internal reporting practices.*

*(B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.*

### Sales, Cost of Sales, and Gross Margins

As part of the Company’s ongoing initiative to simplify and streamline operations the Company has identified core products on which to place its strategic focus. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs.

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

Core brand gross billing decreased by 5% to $36,626 compared to $42,135 during the same period last year, driven by Reed’s volume decline of 5% and Virgil’s volume decline of 29%. The result is a decrease in total gross billing of 14%, to $36,837 during the nine months ended September 30, 2022, from $42,892 in the same period last year. Price on our core brands increased 3% to $20.3 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.

Discounts as a percentage of gross sales was 10% compared to 11% in the same period last year. As a result, net sales revenue decreased 13% in the nine months ended September 30, 2023, to $33,018, compared to $38,001 in the same period last year.

#### Cost of Goods Sold

Cost of goods sold decreased $5,557 during the nine months ended September 30, 2023, 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, 2022, was 72% as compared to 77% for the same period last year. The decrease was primarily driven by lower supply chain and input costs.

The total cost of goods per case increased to $13.17 per case in the nine months ended September 30, 2023, from $13.63 per case for the same period last year. The cost of goods sold per case on core brands was $13.12 during the nine months ended September 30, 2023, compared to $13.55 for the same period last year.

#### Gross Margin

Gross margin increased to 28% for the nine months ended September 30, 2023, compared to 23% for the same period last year.

### Operating Expenses

#### Delivery and Handling Expenses

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 $3,179 in the nine months ended September 30, 2023, to $5,714 from $8,893 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the nine months ended September 30, 2023, were 17% of net sales and $3.17 per case, compared to 23% of net sales and $4.13 per case during the same period last year.

#### Selling and Marketing Expenses

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 $3,567 during the nine months ended September 30, 2023, compared to $5,623 during the same period last year. As a percentage of net sales, selling and marketing were 11% of net sales during the nine months ended September 30, 2023, as compared to 15% of net sales during the same period last year. The decrease was driven by lower marketing related expenditures, headcount, broker commissions, information technology charges, travel and entertainment expenses partially offset by stock compensation and trade show expenses.

#### General and Administrative Expenses

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the nine months ended September 30, 2023, to $4,427 from $5,319, a decrease of $892 over the same period last year. The decrease was driven by lower stock compensation, employee related expenses, information technology charges, consulting fees, and investor relation charges.

### Loss from Operations

The loss from operations was $4,468 for the nine months ended September 30, 2023, as compared to a loss of $11,169 in the same period last year driven by increased gross profit offset by decreases in operating expenses discussed above.

### Interest Expense

Interest expense for the nine months ended September 30, 2023, consisted of $4,459 of interest expense. During the same period last year, interest expense consisted of $2,119 of interest expense.

### Modified EBITDA

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

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

|  | Nine months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net loss | $(8,927) | $(13,288) |
| Modified EBITDA adjustments: |  |  |
| Depreciation and amortization | 214 | 165 |
| Interest expense | 4,459 | 2,119 |
| Stock option and other noncash compensation | 354 | 585 |
| Severance | 177 | 66 |
| Legal settlements | 12 | - |
| Total EBITDA adjustments | $5,216 | $2,935 |
| Modified EBITDA | $(3,711) | $(10,353) |

We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

- Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;
- Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
- Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and
- Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

8

### Liquidity and Capital Resources

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

For the nine months ended September 30, 2023, we recorded a net loss of $8,927. As of September 30, 2023, we had a cash balance of $1,004, with $14 of current availability, and $3,062 of additional borrowing capacity, a stockholder’s deficit of $12,760 and negative working capital of $4,177, compared to a cash balance of $533, with $110 of current availability, and $1,633 of additional borrowing capacity, a stockholder’s deficit of $8,470 and negative working capital of $1,563 at December 31, 2022.

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. As we seek additional sources of financing, there can be no assurance that such financing will 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.

We have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices.

### Critical Accounting Policies and Estimates

The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. There were no changes to our critical accounting policies described in the condensed financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that impacted our condensed financial statements and related notes included herein.

### Recent Accounting Pronouncements

See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements.

## Controls and procedures

As filed, 1,363 characters.

### Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023, to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

### Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

## Risk factors

As filed, 974 characters.

In addition to other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K (our Form 10-K) for the year ended December 31, 2022 and any subsequent filings with the Securities and Exchange Commission (SEC) made prior to the date hereof, which could materially affect our business, financial condition, results of operations or future results. These risks and uncertainties discussed in our Form 10-K and in any subsequent filings with the SEC made prior to the date hereof are not the only ones facing our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, cash flows, financial condition and/or results of operations. Please also read the Cautionary Notice Regarding Forward-Looking Statements and Information of this Quarterly Report on Form 10-Q.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001493152-23-040116. Last ingested by Listed: Nov 6, 2026, 18:11 ET. No prices; not investment advice.