Item 7. Management’s Discussion and Analysis
Item
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 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.
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 year ended December 31, 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.
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.
Recent
Trends – Market Conditions
Although
the U.S. economy continued to grow throughout 2024 and 2023, inflation, actions by the Federal Reserve to address inflation,
fluctuations in energy prices, and the potential impacts of tariffs and geopolitical events 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.
21
During
the year ended December 31, 2024, the average cost of shipping and handling was $2.75 per case, as compared to $3.07 per case for the
year ended December 31, 2023. Although the Company has experienced decreases in freight costs, 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 continuing throughout 2025.
Through
December 31, 2024, 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 – Year Ended December 31, 2024
The
following table sets forth key statistics for the years ended December 31, 2024, and 2023, in thousands:
Year
Ended December 31,
Pct.
2024
2023
Change
Gross billing (A)
$ 44,316
$ 50,689
-13 %
Less: Promotional and
other allowances (B)
6,362
5,978
6 %
Net sales
$ 37,954
$ 44,711
-15 %
Cost of goods sold
26,578
31,884
-17 %
% of Gross billing
60 %
63 %
% of Net sales
70 %
71 %
Product quality hold
write-down
-
1,848
-100 %
% of Gross billing
0 %
4 %
% of Net sales
0 %
4 %
Provision for product hold
-
1,267
-100 %
% of Gross billing
0 %
2 %
%
of Net sales
0 %
3 %
Gross
profit
$ 11,376
$ 9,712
17 %
% of Net sales
30 %
22 %
Expenses
Delivery and handling
$ 5,863
$ 7,561
-22 %
% of Net sales
15 %
17 %
Dollar per case ($)
2.75
3.07
Selling and marketing
4,405
4,865
-9 %
% of Net sales
12 %
11 %
General and administrative
9 ,109
6,118
49 %
% of Net sales
24 %
14 %
Provision for receivable
with former related party
115
585
-80 %
%
of Net sales
0 %
1 %
Total Operating expenses
19,492
19,129
2 %
Loss from operations
$ (8,116 )
$ (9,417 )
-14 %
Interest expense and other
expense
$ (5,036 )
$ (6,106 )
-18 %
Net
loss
$ (13,152 )
$ (15,523 )
-15 %
Loss
per share – basic and diluted
$ (1.64 )
$ (4.39 )
-63 %
Weighted average shares outstanding – basic & diluted
8,041,496
3,537,882
127 %
22
(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 through the years ended December
31, 2024.
Total
Total
Per Case
Per Case
2024
2023
vs
PY
2024
2023
vs
PY
Cases:
Reed’s
1,373
1,530
-10 %
Virgil’s
760
870
-13 %
Total Core
2,133
2,400
-11 %
Non-Core
-
60
-100 %
Total
2,133
2,460
-13 %
Gross Billing:
Core
$ 44,161
$ 48,778
-9 %
$ 20.70
$ 20.32
2 %
Non-Core
155
1,911
-92 %
-
31.85
-100 %
Total
$ 44,316
$ 50,689
-13 %
20.78
20.60
1 %
Discounts: Total
$ (6,362 )
$ (5,978 )
6 %
$ (2.98 )
$ (2.43 )
23 %
COGS:
Core
$ (26,578 )
$ (30,777 )
-14 %
$ (12.46 )
$ (12.82 )
-3 %
Non-Core
-
(4,222 )
-100 %
-
$ (70.46 )
-100 %
Total
$ (26,578 )
$ (34,999 )
-24 %
$ (12.46 )
$ (14.22 )
-12 %
Gross Margin:
$ 11,376
$ 9,712
17 %
$ 5.33
$ 3.95
35 %
as % Net Sales
30 %
22 %
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 year ended December 31, 2024, represents 100% of all beverage volume.
Core
brand gross billing decreased by 9% to $44,161 compared to $48,778 during the same period last year, driven by Reed’s volume decline
of 10% and Virgil’s volume decline of 13%. The result is a decrease in total gross billing of 13%, to $44,316 during the year ended
December 31, 2024, from $50,689 in the same period last year. Price on our core brands increased 2% to $20.70 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 were 14% compared to 12% in the same period last year. As a result, net sales revenue decreased 15% during
the year ended December 31, 2024, to $37,954, compared to $44,711 in the same period last year driven by lower sales and elevated trade
spend.
Cost
of Goods Sold
Cost
of goods sold decreased $5,306 during the year ended December 31, 2024, as compared to the same period last year. As a percentage of
net sales, cost of goods sold for the year ended December 31, 2024, was 70% as compared to 71% for the same period last year. The decrease
was primarily driven by lower supply chain and input costs.
In
December 2023, the Company wrote off $1,848 of inventory comprised of $1,452 of packaging and ingredients related to major changes in
packaging and formulations, and $396 of candy as a result of exiting this line of business. These write-offs represented 4% of net sales.
During
2023 the Company discovered a closure failure in our seasonal swing-lid products which resulted in a product quality hold
write-down. The Company recorded expense of $1,267 related to costs associated with the product quality hold write-down for the year ended December 31, 2023. An
insurance claim is pending.
The
total cost of goods per case decreased to $12.46 per case for the year ended December 31, 2024, from $14.22 per case for the same period
last year. The cost of goods sold per case on core brands was $12.46 during the year ended December 31, 2024, compared to $12.82 for
the same period last year. Excluding the write-offs and provision for product quality hold write-down, total cost of goods sold per case
during the year ended December 31, 2023, would have been $12.96.
Gross
Margin
Gross
margin increased to 30% for the year ended December 31, 2024, compared to 22% 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 $1,698 for the year ended December 31, 2024, to $5,863 from $7,561 in the same period last
year, driven by our efforts to mitigate inflationary costs. Delivery costs for the year ended December 31, 2024, were 15% of net sales
and $2.75 per case, compared to 17% of net sales and $3.07 per case during the same period last year.
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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 $4,405 during the
year ended December 31, 2024, compared to $4,865 during the same period last year. As a percentage of net sales, selling and
marketing expenses were 12% of net sales during the year ended December 31, 2024, as compared to 11% of net sales during the same
period last year. The decrease was driven by lower employee related costs, syndicated data fees, customer fees, and product sampling
expenses 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 year ended December 31, 2024, to $9,109 from $6,118, an increase of $2,991
over the same period last year. The increase was driven by contract proceedings, impairment
of assets, professional fees, and quality assurance costs partially offset by lower bad debt and franchise tax expense.
Loss
from Operations
The
loss from operations was $8,116 for the year ended December 31, 2024, as compared to a loss of $9,417 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 was $5,036 for the year ended December 31, 2024, consisted of $5,481 of interest expense and $445 of other income
related to the reversal of accrued expense from prior years. During the same period last year, interest and other expense consisted
of $6,106 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 year ended December 31, 2024, and 2023 (in thousands):
Year
Ended December 31,
2024
2023
Net loss
$ (13,152 )
$ (15,523 )
Modified EBITDA adjustments:
Depreciation and amortization
289
281
Interest expense
5,481
6,106
Tax expense
111
251
Stock option and other noncash compensation
528
493
Provision for receivable with former related
party
115
585
Product quality hold write-down
42
1,267
Inventory write-offs associated with exited
categories and major packaging and formula changes
-
1,848
Impairment of assets
473
-
One-time change in policy for discounts
-
756
Professional fees
393
-
Contract Proceedings
1,593
12
Severance costs
57
256
Total
EBITDA adjustments
$ 9,082
$ 11,855
Modified EBITDA
$ (4,070 )
$ (3,668 )
25
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.
Liquidity
For
the year ended December 31, 2024, the Company recorded a net loss of $13,152 and used cash in operations of $6,124. During 2024, the Company took significant steps to convert high interest debt to equity, raise additional equity,
and refinance its credit facility. In accordance with
Accounting Standards Codification (“ASC”) 205-40, Going Concern , the Company’s management has evaluated whether
there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue
as a going concern within one year after the date the accompanying financial statements were issued. As of the issuance date of these
financial statements, management expects that the Company’s existing cash of $10,391 will be sufficient to fund the Company’s
current operating plan for at least twelve months from the date of issuance of these financial statements. The financial statements do
not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s
assessment whether there is sufficient cash on hand, together with expected capital raises, to assure operations for a period of at least
twelve months from the date these financial statements are issued, is based on conditions that are known and reasonably knowable to management,
considering various scenarios, projections, and estimates and certain key assumptions. These assumptions include, among other factors,
management’s ability to raise additional capital, and the expected timing and nature of the Company’s forecasted cash expenditures.
Historically,
the Company has financed its operations through public and private sales of common stock, convertible debt instruments, credit lines
from financial institutions, and cash generated from operations. 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.
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 financial
statements included in this Annual Report on Form 10-K for the fiscal year ended December 31, 2024, that impacted our condensed consolidated
financial statements and related notes included herein.
Recent
Accounting Pronouncements
See
Note 2 of the financial statements for a discussion of recent accounting pronouncements.
Item
7A. Quantitative and Qualitative Disclosures about Market Risk
As
a smaller reporting company, Reed’s is not required to provide the information required by this Item 7A.
26