REED'S, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed financial statements and the accompanying notes. Cautionary statements on page [ii] of this report and in “Part I, Item 1A. Risk Factors” of our 2023 Form 10-K as updated by “Part II, Item 1A” of this report, should be considered when evaluating our trends and future results. 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. Amounts presented in the discussion below are in thousands, except share and per share amounts. Results of Operations Overview 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. 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. Recent Trends – Market Conditions Although the U.S. economy continued to grow throughout 2023 and into Q3 2024, 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. 1 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. Results of Operations – Three Months Ended September 30, 2024, as compared to Three Months Ended September 30, 2023 The following table sets forth key statistics for the three months ended September 30, 2024 and 2023, respectively, in thousands. Three Months Ended September 30, Pct. 2024 2023 Change Gross billing (A) $ 8,901 $ 13,219 -33 % Less: Promotional and other allowances (B) 2,149 1,363 58 % Net sales $ 6,752 $ 11,856 -43 % Cost of goods sold 5,537 7,823 -29 % % of Gross billing 62 % 59 % % of Net sales 82 % 66 % Gross profit $ 1,215 $ 4,033 -70 % % of Net sales 18 % 34 % Expenses Delivery and handling $ 1,279 $ 1,908 -33 % % of Net sales 19 % 16 % Dollar per case ($) $ 2.99 $ 2.98 Selling and marketing 1,283 861 49 % % of Net sales 19 % 7 % General and administrative 1,791 1,407 27 % % of Net sales 27 % 12 % Total operating expenses 4,353 4,176 4 % Loss from operations $ (3,138 ) $ (143 ) 2,094 % Interest expense and other income (expense) $ (1,012 ) $ (1,293 ) -22 % Net loss $ (4,150 ) $ (1,436 ) 189 % Loss per share – basic and diluted $ (0.82 ) $ (0.34 ) 138 % Weighted average shares outstanding - basic & diluted 5,066,412 4,169,131 22 % 2 (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 2023 through the third quarter of 2024. 2024 2023 Q3 Per Case Sept YTD Per Case Q1 Q2 Q3 YTD Q3 vs PY YTD vs PY Q1 Q2 Q3 YTD 2024 2023 vs PY 2024 2023 vs PY Cases: Reed’s 348 413 253 1,014 -37 % -10 % 370 355 402 1,127 Virgil’s 151 239 175 565 -26 % -16 % 241 197 238 676 Total Core 499 652 428 1,579 -33 % -12 % 611 552 640 1,803 Non Core - - - - - % -100 % 2 - - 2 Total 499 652 428 1,579 -33 % -13 % 613 552 640 1,805 Gross Billing: Core $ 10,377 $ 13,584 $ 8,901 $ 32,862 -33 % -10 % $ 12,333 $ 11,095 $ 13,197 $ 36,626 $ 20.8 $ 20.6 1 % $ 20.8 $ 20.3 2 % Non Core 2 - - 2 -100 % -99 % 120 69 22 211 $ - $ - - % - .1 -99 % Total $ 10,379 $ 13,584 $ 8,904 $ 32,864 -33 % -11 % $ 12,453 $ 11,164 $ 13,219 $ 36,837 $ 20.8 $ 20.7 1 % 20.8 20.4 2 % Discounts: Total $ (784 ) $ (1,710 ) $ (2,149 ) $ (4,643 ) 58 % 22 % $ (1,296 ) $ (1,159 ) $ (1,363 ) $ (3,819 ) $ (5.0 ) $ (2.1 ) 136 % $ (2.9 ) $ (2.1 ) 39 % COGS: Core $ (6,182 ) $ (8,043 ) $ (5,537 ) $ (19,762 ) -29 % -16 % $ (8,422 ) $ (7,408 ) $ (7,820 ) $ (23,650 ) $ (12.9 ) $ (12.2 ) 6 % $ (12.5 ) $ (13.1 ) -5 % Non Core - - - - -100 % -100 % (87 ) (88 ) (3 ) (128 ) - - - % - .1 -5 % Total $ (6,182 ) $ (8,043 ) $ (5,530 ) $ (19,762 ) -29 % -17 % $ (8,459 ) $ (7,496 ) $ (7,823 ) $ (23,778 ) $ (12.9 ) $ (12.2 ) 6 % $ (12.5 ) $ (13.2 ) -5 % Gross Margin: $ 3,413 $ 3,831 $ 1,215 $ 8,459 -70 % 7 % $ 2,698 $ 2,509 $ 4,033 $ 9,240 $ 2.9 $ 6.3 -55 % $ 5.4 $ 5.1 5 % as % Net Sales 36 % 32 % 18 % 30 % 24 % 25 % 34 % 28 % 3 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, 2024, represents 100% of all beverage volume. Core brand gross billing decreased by 33% to $8,901 compared to $13,197 during the same period last year, driven by a Reed’s volume decrease of 37% and Virgil’s volume decrease of 26%. The result is a decrease in total gross billing of 33%, to $8,901 during the three months ended September 30, 2023, from $13,219 in the same period last year. Prices on our core brands increased 1% to $20.79 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. 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. Cost of Goods Sold 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. 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. Gross Margin Gross margin was 18% for the three months ended September 30, 2024, compared to 34% 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 $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. 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 $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. 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 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. 4 Loss from Operations 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. Interest and Other Expense 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. 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, tax expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, change in fair value of SAFE agreements, legal and insurance settlements, non-recurring professional fees inventory write-offs associated with exited categories and major packaging and formula changes, one-time changes in policy, impact of changes to accounting methodology 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, 2024 and 2023 (unaudited; in thousands): Three Months Ended September 30 2024 2023 Net loss $ (4,150 ) $ (1,436 ) Modified EBITDA adjustments: Depreciation and amortization 71 68 Tax expense (8 ) - Interest expense 2,405 1,293 Change in fair value of SAFE investments (1,393 ) - Production quality hold write-down 15 - Stock option and other noncash compensation 46 139 Professional fees - - Severance 16 85 Legal settlements - 12 Total EBITDA adjustments $ 1,152 $ 1,597 Modified EBITDA $ (2,998 ) $ 161 5 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, 2024, as compared to Nine Months Ended September 30, 2023 The following table sets forth key statistics for the nine months ended September 30, 2024 and 2023, respectively, in thousands. Nine Months Ended September 30, Pct. 2024 2023 Change Gross billing (A) $ 32,864 $ 36,837 -11 % Less: Promotional and other allowances (B) 4,643 3,819 22 % Net sales $ 28,221 $ 33,018 -15 % Cost of goods sold 19,762 23,778 -17 % % of Gross billing 60 % 65 % % of Net sales 70 % 72 % Gross profit $ 8,459 $ 9,240 -8 % % of Net sales 30 % 28 % Expenses Delivery and handling $ 4,204 $ 5,714 -26 % % of Net sales 15 % 17 % Dollar per case ($) 2.66 3.17 Selling and marketing 3,473 3,567 -3 % % of Net sales 12 % 11 % General and administrative 5,239 4,427 18 % % of Net sales 19 % 13 % Total operating expenses 12,916 13,708 -6 % Loss from operations $ (4,457 ) $ (4,468 ) 0 % Interest expense and other income (expense) (4,578 ) (4,459 ) 3 % Net loss $ (9,035 ) $ (8,927 ) 1 % Loss per share – basic and diluted $ (2.02 ) $ (2.69 ) -25 % Weighted average shares outstanding - basic & diluted 4,483,587 3,322,959 35 % 6 (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 have 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, 2024, represents 100% of all beverage volume. 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. 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. 7 Cost of Goods Sold 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. 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. Gross Margin Gross margin increased to 30% for the nine months ended September 30, 2024, compared to 28% 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 $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. 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 $3,473 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. 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 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. Loss from Operations 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. Interest and Other Expense 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. 8 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, tax expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, change in fair value of SAFE agreements, legal and insurance settlements, non-recurring professional fees inventory write-offs associated with exited categories and major packaging and formula changes, one-time changes in policy, impact of changes to accounting methodology 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, 2024 and 2023 (unaudited; in thousands): Nine Months Ended September 30, 2024 2023 Net loss $ (9,035 ) $ (8,927 ) Modified EBITDA adjustments: Depreciation and amortization 209 214 Income taxes 67 - Interest expense 4,578 4,459 Product quality hold write-down 44 - Stock option and other noncash compensation 268 354 Professional fees 334 - Severance expense 42 177 Legal settlements 170 12 Total EBITDA adjustments $ 5,712 $ 5,216 Modified EBITDA $ (3,323 ) $ (3,711 ) 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; 9 ● 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. Going Concern 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. 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. On July 26, 2024, Norman E. Snyder Jr, CEO of the Company, provided a personal guaranty for a $500 over advance on our existing line of credit with ACS. On August 1, 2024, the Company funded $1,400 pursuant to an option exercise by Whitebox under the Option Notes. 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. We have also 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. Notes Payable and Existing Financing Please refer to Notes 5 and 6 in the accompanying condensed financial statements for a description of our existing line of credit agreement and outstanding notes payable. 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 2023 10-K that impacted our condensed financial statements and related notes included herein. 10 Recent Accounting Pronouncements See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. A smaller reporting company is not required to provide the information required by this Item.