Reeds, Inc.(REED) - 2025 Q2 - Quarterly Report

General Information Cautionary Statement Regarding Forward-Looking Statements and Information This disclaimer identifies forward-looking statements, highlighting inherent risks and uncertainties that could cause actual results to differ materially - The report contains 'forward-looking statements' identified by words like 'aim,' 'anticipate,' 'believe,' 'expect,' 'forecast,' 'intend,' 'may,' 'plan,' 'will,' or similar expressions, reflecting views about future performance[7] - These statements are based on currently available information, operating plans, and projections, but inherently involve risks and uncertainties that could cause actual results to differ materially[7] - Investors are cautioned not to place undue reliance on forward-looking statements, and the Company undertakes no obligation to update them[7] PART I - FINANCIAL INFORMATION Item 1. Condensed Financial Statements Presents Reed's, Inc.'s unaudited condensed financial statements and notes, detailing balance sheets, operations, equity, and cash flows Condensed Balance Sheets | ASSETS (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------------------------------------------- | :------------ | :---------------- | | Cash | $2,677 | $10,391 | | Accounts receivable, net | $5,002 | $3,979 | | Inventory, net | $13,180 | $8,114 | | Total current assets | $21,890 | $23,311 | | Property and equipment, net | $1,165 | $1,185 | | Intangible assets | $650 | $644 | | Total assets | $23,705 | $25,140 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | | | | Accounts payable | $8,478 | $6,956 | | Accrued expenses | $2,894 | $984 | | Senior secured loan, net | $9,736 | $9,571 | | Total current liabilities | $21,154 | $17,655 | | Total liabilities | $21,970 | $18,492 | | Total stockholders' equity | $1,735 | $6,648 | | Total liabilities and stockholders' equity | $23,705 | $25,140 | Condensed Statements of Operations | (Amounts in thousands, except share and per share amounts) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $9,523 | $11,874 | $19,552 | $21,469 | | Total cost of goods sold | $8,716 | $8,043 | $15,343 | $14,225 | | Gross profit | $807 | $3,831 | $4,209 | $7,244 | | Total operating expenses | $6,600 | $4,500 | $11,744 | $8,563 | | Loss from operations | $(5,793) | $(669) | $(7,535) | $(1,319) | | Interest expense | $(301) | $(1,150) | $(590) | $(2,173) | | Net loss | $(6,048) | $(3,212) | $(8,079) | $(4,885) | | Net Loss Attributable to Common Stockholders | $(6,053) | $(3,217) | $(8,084) | $(4,890) | | Loss per share – basic and diluted | $(0.13) | $(0.77) | $(0.18) | $(1.17) | | Weighted average number of shares outstanding | 46,367,047 | 4,187,291 | 45,871,898 | 4,187,291 | Condensed Statements of Changes in Stockholders' Equity (Deficit) | (Amounts in thousands except share amounts) | Common Stock Shares | Common Stock Amount | Preferred Stock Shares | Preferred Stock Amount | Additional Paid In Capital | Accumulated Deficit | Total Stockholders' Equity (Deficit) | | :------------------------------------------ | :------------------ | :------------------ | :--------------------- | :--------------------- | :------------------------- | :------------------ | :----------------------------------- | | Balance, December 31, 2024 | 45,371,247 | $5 | 9,411 | $94 | $158,433 | $(151,884) | $6,648 | | Fair value of vested options | - | - | - | - | $56 | - | $56 | | Dividends on Series A | - | - | - | - | - | $(5) | $(5) | | Common stock issued upon conversion of SAFE agreement | 76,668 | - | - | - | $115 | - | $115 | | Common stock issued for cash | 3,225,807 | - | - | - | $3,000 | - | $3,000 | | Net loss | - | - | - | - | - | $(8,079) | $(8,079) | | Balance, June 30, 2025 | 48,673,722 | $5 | 9,411 | $94 | $161,604 | $(159,968) | $1,735 | Condensed Statements of Cash Flows | (Amounts in thousands) | June 30, 2025 | June 30, 2024 | | :------------------------------------------ | :------------ | :------------ | | Net cash used in operating activities | $(10,410) | $(3,307) | | Net cash used in investing activities | $(101) | $(34) | | Net cash provided by financing activities | $2,797 | $3,064 | | Net decrease in cash | $(7,714) | $(277) | | Cash at beginning of period | $10,391 | $603 | | Cash at end of period | $2,677 | $326 | | Cash paid for interest | $400 | $1,146 | | Non-cash investing and financing activities: Reclass SAFE agreement from accounts payable to equity | $115 | - | | Dividends on Series A Convertible Preferred Stock | $5 | $5 | Notes to Condensed Financial Statements Detailed notes for condensed financial statements, covering accounting policies, liquidity, asset/liability categories, equity, and commitments 1. Summary of Significant Accounting Policies - The Company reported a net loss of $8,079 thousand and used $10,410 thousand in cash from operations for the six months ended June 30, 2025, primarily due to a $6,728 thousand investment in inventory[23] - As of June 30, 2025, the Company had a cash balance of $2,677 thousand and $100 thousand availability under its Senior Secured Loan, which is due on November 14, 2025[23] - On June 4, 2025, the Company completed a private placement, issuing 3,225,807 common shares for $3,000 thousand, with the majority stockholder participating as lead investor[25] - Management expects existing cash, cash from operations, and committed financing to fund operations for at least twelve months, but additional funding may be required for growth initiatives[26] - The Company is implementing strategies to improve operating performance and cash generation, including product portfolio optimization, sales increases, supply chain improvements, and vendor contract negotiations[28] - Market conditions, including inflation, Federal Reserve actions, energy prices, tariffs, and geopolitical events, create uncertainty and have led to supply chain challenges, increased lead times, and higher raw material, logistics, and labor costs[30] | Customer Concentration (Gross Billing) | Q2 2025 | H1 2025 | Q2 2024 | H1 2024 | | :----------------------------------- | :------ | :------ | :------ | :------ | | Customer 1 | 26% | 21% | 20% | 18% | | Customer 2 | 17% | 19% | 15% | 15% | | Customer 3 | 11% | 14% | 13% | 12% | | Accounts Receivable Concentration | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :---------------- | | Customer 1 | 48% | 17% | | Customer 2 | 17% | 14% | - The Company relies on seven co-packers for 100% of its product production, with a change in co-packers potentially causing production delays[42] - A new accounting pronouncement (ASU 2024-03) on expense disaggregation disclosures is effective for annual periods beginning after December 15, 2026, and the Company is evaluating its potential impact[49] 2. Inventory | Inventory (in thousands) | June 30, 2025 | December 31, 2024 | | :----------------------- | :------------ | :---------------- | | Raw materials and packaging | $5,574 | $5,144 | | Finished products | $7,606 | $2,970 | | Total | $13,180 | $8,114 | | Inventory reserve | $2,245 | $1,296 | - During the six months ended June 30, 2025, the Company incurred $1,661 thousand in inventory write-offs due to product portfolio optimization by new management[51] 3. Property and Equipment | Property and Equipment (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :---------------- | | Right-of-use assets under operating leases | $832 | $832 | | Leasehold improvements | $139 | $84 | | Computer hardware and software | $593 | $553 | | Machinery and equipment | $352 | $352 | | Total cost | $1,916 | $1,821 | | Accumulated depreciation and amortization | $(751) | $(636) | | Net book value | $1,165 | $1,185 | - Depreciation expense for the six months ended June 30, 2025, was $92 thousand, and amortization of right-of-use assets was $23 thousand[52] 4. Intangible Assets | Intangible Assets (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------- | :------------ | :---------------- | | Brand names | $576 | $576 | | Trademarks | $74 | $68 | | Total | $650 | $644 | 5. Senior Secured Loan Payable - The Senior Secured Loan has an aggregate commitment of $10,000 thousand, accrues interest at 8.00% per annum, and is due on November 14, 2025[54] - As of June 30, 2025, the principal outstanding was $9,900 thousand, with $100 thousand remaining availability[54] - The loan is secured by substantially all of the Company's assets, and the Company was in compliance with all terms as of June 30, 2025[55] 6. Lease Liabilities - Lease costs for the six months ended June 30, 2025, totaled $46 thousand, down from $89 thousand in the prior year[57] - As of June 30, 2025, operating lease liabilities totaled $862 thousand, with a weighted average remaining lease term of 10.42 years and a weighted average discount rate of 8.0%[57][58] 7. Issuance of Common Stock - On April 3, 2025, SAFE investments totaling $115 thousand were converted into 76,668 common shares[59] - On June 4, 2025, the Company completed a private placement, issuing 3,225,807 common shares for $3,000 thousand, with the majority stockholder participating for $1,000 thousand[60] 8. Stock-Based Compensation - The new CEO, Cyril Wallace, will be granted a restricted stock award of 280,000 shares (1-year vesting) and performance-based stock options for up to 1,388,166 shares (tranches 2025-2027, subject to performance metrics)[61] | Stock Option Activity (Shares) | Outstanding at Dec 31, 2024 | Outstanding at Jun 30, 2025 | | :----------------------------- | :-------------------------- | :-------------------------- | | Shares | 324,202 | 324,202 | | Weighted Average Exercise Price | $17.47 | $17.47 | | Weighted Average Remaining Contractual Terms (Years) | 8.03 | 7.54 | - The Company recognized $56 thousand in compensation expense for vested stock options during the six months ended June 30, 2025, with $49 thousand of unvested compensation remaining[63] 9. Stock Warrants | Stock Warrant Activity (Shares) | Outstanding at Dec 31, 2024 | Outstanding at Jun 30, 2025 | | :------------------------------ | :-------------------------- | :-------------------------- | | Shares | 549,292 | 549,292 | | Weighted Average Exercise Price | $8.77 | $8.77 | | Weighted Average Remaining Contractual Terms (Years) | 1.84 | 1.34 | | Aggregate Intrinsic Value | - | - | - As of June 30, 2025, the outstanding and exercisable warrants had no aggregate intrinsic value, given a closing market price of $1.00[65] 10. Transactions with California Custom Beverage, LLC, former related party - The Company has an ongoing arbitration with California Custom Beverage, LLC (CCB), a former related party, regarding disputed amounts[67] | (in thousands) | June 30, 2025 | December 31, 2024 | | :--------------- | :------------ | :---------------- | | Accounts receivable, net | $169 | $144 | | Accounts payable | - | $(144) | | Net (payable) receivable | $169 | - | - The Company believes the probability of realizing any loss on the demand from CCB is remote and has not recorded additional accruals[67] 11. Commitments and Contingencies - On July 1, 2025, the Company entered into a settlement agreement to pay an investment bank $1,600 thousand, releasing the Company from all liability[68] - Management evaluates routine claims and legal proceedings, providing for potential losses when estimable and probable, and believes no current matters will have a material adverse impact[69][70] 12. Segment Information - The Company operates and manages its business as a single reportable segment: a manufacturer of carbonated beverages under Reed's and Virgil's brand names[71] - The Chief Executive Officer, as the chief operating decision maker (CODM), reviews financial information and allocates resources based on net income (loss)[72] | Significant Segment Expenses (Six Months Ended June 30, in thousands) | 2025 | 2024 | | :------------------------------------------------------------------ | :--- | :--- | | Salaries | $2,449 | $1,892 | | Insurance | $250 | $259 | | Stock-based compensation | $57 | $222 | | Selling and marketing | $1,839 | $1,204 | | Freight and delivery | $2,549 | $2,222 | | Warehousing | $649 | $703 | | Other operating expenses | $3,951 | $2,061 | | Total operating expenses | $11,744 | $8,563 | | Interest and other expenses, net | $544 | $3,566 | | Net loss | $(8,079) | $(4,885) | 13. Subsequent Events - On July 1, 2025, the Company entered into a settlement and release agreement with an investment bank, agreeing to pay $1,600 thousand[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results, detailing sales, costs, expenses, and liquidity Overview - The Company focused on driving sales growth through channel expansion, in-store placements, new product innovation, and improved sales execution[80] - Gross margin enhancement initiatives included product portfolio optimization, equitable supplier negotiations, streamlining co-packer processes, and efficient inventory management[80] - The Company began strategic expansion into new geographic markets in the Asia Pacific region, forming a wholly owned subsidiary (Reed's (Asia) Limited) and three additional subsidiaries in Hong Kong, Japan, and Hainan[81] Recent Trends - Market Conditions - Uncertainty in the economic environment persists due to inflation, Federal Reserve actions, energy price fluctuations, tariffs, and geopolitical events[82] - The Company experienced supply chain challenges, including increased lead times and inflation of raw materials, logistics, and labor costs[82] - Average shipping and handling costs increased to $2.97 per case for the six months ended June 30, 2025, compared to $2.54 per case for the same period in 2024, reflecting a volatile pricing environment[84] Results of Operations – Three Months Ended June 30, 2025, as compared to Three Months Ended June 30, 2024 Q2 2025 financial performance declined significantly, with net sales down 20%, gross profit down 79%, and loss from operations up 766% Sales, Cost of Sales, and Gross Margins | Metric (in thousands) | Q2 2025 | Q2 2024 | % Change | | :-------------------- | :------ | :------ | :------- | | Gross billing | $11,569 | $13,584 | -15% | | Promotional allowances | $2,046 | $1,710 | 20% | | Net sales | $9,523 | $11,874 | -20% | | Cost of goods sold | $8,716 | $8,043 | 8% | | Gross profit | $807 | $3,831 | -79% | | Gross margin % of Net sales | 8% | 32% | -24 p.p. | - Core brand gross billing decreased by 15% due to volume declines in Virgil's (-19%) and Reed's (-10%), despite a 1% price increase[92] - Discounts as a percentage of gross sales increased to 18% in Q2 2025 from 13% in Q2 2024[93] - Cost of goods sold increased by $673 thousand, primarily driven by $1,606 thousand in inventory write-offs related to product portfolio optimization[94] - Total cost of goods sold per case increased to $15.70 in Q2 2025 from $12.34 in Q2 2024[95] Operating Expenses | Operating Expense (in thousands) | Q2 2025 | Q2 2024 | % Change | | :------------------------------- | :------ | :------ | :------- | | Delivery and handling expense | $1,572 | $1,423 | 10% | | Selling and marketing expense | $1,271 | $1,097 | 16% | | General and administrative expense | $3,757 | $1,980 | 90% | | Total operating expenses | $6,600 | $4,500 | 47% | - Delivery and handling expenses increased due to transportation costs associated with increased finished goods production, rising to $2.83 per case from $2.18 per case[97] - Selling and marketing expenses increased primarily due to higher employee-related costs and marketing expenditures[98] - General and administrative expenses increased significantly due to contract proceedings costs and investments in personnel and services for growth initiatives[100] Loss from Operations - Loss from operations increased by 766% to $(5,793) thousand in Q2 2025, compared to $(669) thousand in Q2 2024, driven by decreased gross profit and increased operating expenses[101] Interest and Other Expense - Interest expense decreased to $(301) thousand in Q2 2025 from $(1,150) thousand in Q2 2024[102] - The change in fair value of SAFE investments was $0 in Q2 2025, compared to $(1,393) thousand in Q2 2024[102] Modified EBITDA | Modified EBITDA Reconciliation (in thousands) | Q2 2025 | Q2 2024 | | :------------------------------------------ | :------ | :------ | | Net loss | $(6,048) | $(3,212) | | Total EBITDA adjustments | $3,103 | $3,257 | | Modified EBITDA | $(2,945) | $45 | - Modified EBITDA decreased significantly from $45 thousand in Q2 2024 to $(2,945) thousand in Q2 2025[105] Results of Operations – Six Months Ended June 30, 2025, as compared to Six Months Ended June 30, 2024 H1 2025 financial performance deteriorated, with net sales down 9%, gross profit down 42%, and loss from operations up 471% Sales, Cost of Sales, and Gross Margins | Metric (in thousands) | H1 2025 | H1 2024 | % Change | | :-------------------- | :------ | :------ | :------- | | Gross billing | $22,582 | $23,963 | -6% | | Promotional allowances | $3,030 | $2,494 | 21% | | Net sales | $19,552 | $21,469 | -9% | | Cost of goods sold | $15,343 | $14,225 | 8% | | Gross profit | $4,209 | $7,244 | -42% | | Gross margin % of Net sales | 22% | 34% | -12 p.p. | - Core brand gross billing decreased by 6% due to volume declines in Reed's (-6%) and Virgil's (-4%), despite a 1% price increase[113] - Discounts as a percentage of gross sales increased to 13% in H1 2025 from 10% in H1 2024[115] Cost of Goods Sold - Cost of goods sold increased by $1,118 thousand, primarily driven by $1,661 thousand in inventory write-offs related to product portfolio optimization[116] - Total cost of goods per case increased to $14.27 in H1 2025 from $12.36 in H1 2024[117] Gross Margin - Gross margin decreased to 22% in H1 2025 from 34% in H1 2024[118] Operating Expenses | Operating Expense (in thousands) | H1 2025 | H1 2024 | % Change | | :------------------------------- | :------ | :------ | :------- | | Delivery and handling expense | $3,199 | $2,925 | 9% | | Selling and marketing expense | $2,773 | $2,190 | 27% | | General and administrative expense | $5,772 | $3,448 | 67% | | Total operating expenses | $11,744 | $8,563 | 37% | - Delivery and handling expenses increased due to transportation costs, rising to $2.98 per case from $2.54 per case[119] - Selling and marketing expenses increased due to higher employee-related costs and marketing expenditures[120] - General and administrative expenses increased significantly due to contract proceedings costs and investments in personnel and services for growth initiatives[121] Loss from Operations - Loss from operations increased by 471% to $(7,535) thousand in H1 2025, compared to $(1,319) thousand in H1 2024, driven by decreased gross profit and increased operating expenses[122] Interest and Other Expense - Interest expense decreased to $(590) thousand in H1 2025 from $(2,173) thousand in H1 2024[123] - The change in fair value of SAFE investments was $0 in H1 2025, compared to $(1,393) thousand in H1 2024[123] Modified EBITDA | Modified EBITDA Reconciliation (in thousands) | H1 2025 | H1 2024 | | :------------------------------------------ | :------ | :------ | | Net loss | $(8,079) | $(4,885) | | Total EBITDA adjustments | $3,550 | $4,560 | | Modified EBITDA | $(4,529) | $(325) | - Modified EBITDA decreased significantly from $(325) thousand in H1 2024 to $(4,529) thousand in H1 2025[127] Liquidity and Capital Resources - For the six months ended June 30, 2025, the Company reported a net loss of $8,079 thousand and used $10,410 thousand in cash from operations, primarily due to a $6,728 thousand investment in inventory[130] - As of June 30, 2025, the Company had a cash balance of $2,677 thousand and $100 thousand availability under its Senior Secured Loan, which matures on November 14, 2025, and is currently being evaluated for refinancing[130] - The Company completed a private placement on June 4, 2025, raising $3,000 thousand through the issuance of common shares[132] - Management expects current cash, cash from operations, and committed financing to be sufficient for at least twelve months, but additional funding may be required for growth initiatives[133] - Net cash used in operating activities increased to $10,410 thousand in H1 2025 from $3,307 thousand in H1 2024, mainly due to increased inventory[137] - Net cash provided by financing activities was $2,797 thousand in H1 2025, primarily from the sale of common stock, compared to $3,064 thousand in H1 2024, which was mainly from a SAFE agreement[138] Critical Accounting Policies and Estimates - Management's financial statements rely on estimates and assumptions for areas such as credit loss reserves, inventory valuation, asset impairment, deferred tax assets, and potential liabilities[140] - There were no changes to the critical accounting policies described in the Company's 2024 Form 10-K that impacted the condensed financial statements[140] Recent Accounting Pronouncements - Refer to Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements[141] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Reed's, Inc. is exempt from detailed quantitative and qualitative market risk disclosures - The Company is a smaller reporting company and is not required to provide the information required by this Item[142] Item 4. Controls and Procedures Management evaluated disclosure controls and procedures, concluding effectiveness as of June 30, 2025, with no material changes to internal controls Evaluation of Disclosure Controls and Procedures - The Company's disclosure controls and procedures were evaluated by management, including the CEO and CFO, and concluded to be effective as of June 30, 2025[143] 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 June 30, 2025, that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting[144] PART II – OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in routine litigation, including arbitration, with management believing no material adverse financial impact - The Company is a party to ordinary, routine litigation incidental to its business, including matters tendered to insurance carriers[145] - Management evaluates exposure to claims and provides for potential losses if estimable and probable, believing that current litigation will not materially adversely impact financial position, liquidity, or results of operations[145][146] - Additional information regarding legal proceedings is available in Note 10 ('Transactions with California Custom Beverage, LLC, former related party') and Note 11 ('Commitments and Contingencies')[146] Item 1A. Risk Factors Updates 2024 Form 10-K risk factors, highlighting Senior Secured Loan maturity, refinancing uncertainty, capital needs, and international expansion - The Senior Secured Loan matures on November 14, 2025, with $9,900 thousand outstanding as of June 30, 2025, and the Company is evaluating refinancing alternatives, with no assurance of favorable terms or availability[148] - Failure to secure refinancing for the Senior Secured Loan could impair the Company's ability to operate and adversely affect its financial position[148] - The Company may require additional capital for business expansion, new products, and infrastructure, and future equity or debt financings could lead to significant stockholder dilution or restrictive covenants[149][150] - Expansion into new geographic markets, including the Asia Pacific region, poses challenges such as understanding consumer preferences, increased competition, political/legal risks, and higher costs, which could adversely affect the business[151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or uses of proceeds have occurred that were not previously disclosed in a Form 8-K - No unregistered sales of equity securities or use of proceeds have occurred that have not been previously disclosed in a Current Report on Form 8-K[152] Item 3. Defaults Upon Senior Securities No defaults upon senior securities occurred during the reporting period - There have been no defaults upon senior securities[153] Item 4. Mine Safety Disclosures This item is not applicable to the Company as its operations do not involve mining activities - This item is not applicable to the Company[154] Item 5. Other Information No directors or executive officers adopted, modified, or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during Q2 2025 - During the three months ended June 30, 2025, none of the Company's directors or executive officers adopted, modified, or terminated a 'Rule 10b5-1 trading arrangement' or a 'non-Rule 10b5-1 trading arrangement'[155] Item 6. Exhibits Lists all exhibits filed as part of this Form 10-Q, including organizational documents, agreements, and certifications - The section lists all exhibits filed as part of this Form 10-Q, including the Certificate of Incorporation, Amended and Restated Bylaws, executive employment agreements, securities purchase agreements, and certifications[162] - Exhibits include certifications from the CEO and CFO pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[162] - Many exhibits are incorporated by reference from previous SEC filings, such as Form 10-K and Form 8-K[162]