Executive Summary / Key Takeaways

• Reed's, Inc. is undergoing a significant operational and strategic transformation, shifting from past supply chain and liquidity challenges to a renewed focus on efficiency, product innovation, and market expansion.
• Recent capital infusions and leadership changes have stabilized operations, drastically reducing short shipments and enabling a strategic pivot towards high-growth functional beverages and core brand revitalization.
• The company's differentiated technology, centered on natural ginger and functional ingredients, positions it uniquely in the rapidly expanding "better-for-you" beverage market, with specific formulations offering low sugar, adaptogens, and prebiotic fiber.
• Despite recent financial losses and declining net sales, management anticipates a return to top-line growth and gross margin expansion in 2025, driven by improved inventory, strategic product launches, and a disciplined approach to trade spend.
• Key risks include the need for successful refinancing of its Senior Secured Loan by September 2026, intense competition from larger players, and the inherent challenges of expanding into new international markets.

The Brew of Transformation: Reed's Strategic Reawakening

Reed's, Inc. (OTCQX: REED), a long-standing player in the natural beverage sector since 1989, is currently in the midst of a profound strategic reorientation. Known for its handcrafted ginger beers, ginger ales, and Virgil's sodas, the company is leveraging its heritage in plant-based ingredients to carve out a stronger position in the evolving beverage landscape. This transformation is not merely an incremental adjustment but a fundamental shift towards operational excellence, product innovation, and disciplined market expansion, all aimed at driving sustainable growth and profitability.

The company's core business revolves around manufacturing carbonated beverages, with a recent strategic focus on its Reed's and Virgil's branded products, while streamlining its portfolio by categorizing Wellness Shots, candy, and slower-selling SKUs as non-core. This strategic simplification is crucial for concentrating resources on high-velocity items that align with current demand and support a more efficient, profitable portfolio.

Technological Edge and Innovation Pipeline

Reed's differentiates itself through its commitment to natural, handcrafted beverages, with a particular emphasis on ginger. This foundational strength is now being amplified by significant technological differentiation and an ambitious innovation roadmap. The company's core technology lies in its unique formulations, particularly evident in its new multifunctional soda line. This innovative line combines Reed's signature bold flavors with functional wellness ingredients, including organic ginger, prebiotic fiber, and adaptogenic mushrooms. Each serving is formulated to contain 5 grams of sugar, approximately 30 to 45 calories, 500 milligrams of adaptogens, and 2,000 to 5,000 milligrams of organic ginger. This "multidimensional" approach, as described by management, offers a distinct advantage over "single dimensional" prebiotic or adaptogen-only beverages, directly addressing the rising consumer demand for health-conscious, functional refreshment options.

The company's R&D initiatives are focused on a comprehensive brand and product restage. A full packaging and brand restage for Reed's Ginger Beer and Ginger Ale is slated for July 2026, which will introduce new Ginger Ale flavors like cranberry and blackberry, alongside reformulated Zero Sugar offerings and new club soda and tonic mixers. Concurrently, a complete restage of the functional soda line is also planned for July 2026, aiming to reestablish Reed's as a "category disruptor" with an elevated design and a bold innovation pipeline targeting incremental consumption occasions. Furthermore, the Virgil's and Flying Cauldron brands are transitioning from glass to cans, with a full restage scheduled for 2027, and the ready-to-drink (RTD) range, including Reed's Mules and Hard Ginger Ale, is being reformulated to enhance quality, flavor, and consistency. These technological and product development efforts are critical for Reed's competitive moat, aiming to drive higher average selling prices (ASPs), lower manufacturing costs through packaging efficiencies, and ultimately, better margins and market positioning.

Competitive Landscape and Strategic Positioning

Reed's operates in a competitive beverage industry, facing off against both global giants and niche craft players. Its primary direct competitors include Coca-Cola (KO), PepsiCo (PEP), and Keurig Dr Pepper (KDP), all of whom possess significantly larger scale, broader distribution networks, and substantial marketing budgets. While precise, directly comparable market share figures for all niche competitors are not publicly detailed, Reed's Ginger Ale 4-pack stands out as the #1 SKU in dollar sales within the expanded natural channel for the 52 weeks ending February 23, 2025, generating $1.9 million in sales and holding a 6% market share in this category. This highlights its strong brand recognition and consumer loyalty within its specific niche.

Reed's competitive advantage lies in its authentic, natural, and now functionally enhanced product offerings. Its focus on artisanal quality and unique ginger-based flavors appeals to consumers seeking authenticity and better-for-you options, a segment where larger competitors, despite their diversified portfolios, may not always capture the same depth of loyalty. The new multifunctional soda line, with its unique blend of ginger, adaptogens, and prebiotic fiber, is positioned as a "best-in-class entry" into the functional beverage category, offering a "big point of difference" that could allow Reed's to gain traction against more generalized offerings from rivals.

However, Reed's smaller scale presents significant vulnerabilities. Its gross profit margin (TTM) of 22.99% and operating profit margin (TTM) of -42.55% lag behind the typically robust margins of industry leaders like Coca-Cola and PepsiCo, which benefit from immense economies of scale and efficient global supply chains. This disparity in financial efficiency makes it challenging for Reed's to compete on pricing in mass markets and necessitates a strategic focus on premium positioning and targeted distribution. The company's expansion into new geographic markets, particularly in the Asia Pacific region (e.g., Hong Kong, Japan, Singapore), will expose it to increased competition from larger, established brands and present challenges in understanding local consumer preferences and navigating diverse political and legal systems.

Operational Turnaround and Financial Performance

The company's recent history has been marked by significant operational challenges, including inventory production constraints, vendor credit limits, and short order shipments, which led to a decline in net sales in 2024. Net sales for the fourth quarter of 2024 were $9.7 million, down from $11.7 million in Q4 2023, primarily due to these constraints. Management explicitly stated that "short shipments really got to a very dangerous level".

However, 2025 has seen a concerted effort to stabilize and improve operations. Following a $10 million private placement in December 2024, funds were deployed in mid-January 2025 to bolster inventory levels and enhance sales and marketing. This led to a dramatic reduction in short shipments from approximately 20% at the start of Q1 2025 to under 2% by April, indicating a fundamental shift in operational capability. Net sales for Q1 2025 increased 4.5% to $10 million, driven by higher volumes with recurring national customers.

Despite these improvements, the financial picture remains challenging. For the nine months ended September 30, 2025, Reed's reported a net loss of $12.061 million and used $13.230 million in cash from operations. Net sales for this period decreased 6% to $26.585 million, attributed to lower volumes with recurring national customers and higher promotional allowances. Gross profit for Q3 2025 was flat at $1.2 million, with a gross margin of 17%, down from 18% in the prior year, primarily due to $0.1 million in inventory write-offs related to product portfolio optimization. Similarly, Q2 2025 saw a gross margin of 8%, significantly impacted by $1.6 million in inventory write-offs. Excluding these write-offs, Q2 gross profit would have been $2.4 million or 25% of net sales. Delivery and handling expenses, a key focus for reduction, decreased by 14% to $1.1 million in Q3 2025, primarily due to lower transportation costs. However, general and administrative expenses have risen, increasing by 60% to $2.861 million in Q3 2025, reflecting investments in personnel and services to support growth initiatives.

Liquidity and Capital Structure

Reed's has actively managed its capital structure to support its turnaround. As of September 30, 2025, the company had a cash balance of $4.136 million and no remaining availability under its Senior Secured Loan. The company has historically relied on a mix of existing cash, cash from operations, and public/private equity and debt issuances. Recent financing activities include a $5.0 million private placement completed on September 15, 2025.

A critical development was the amendment of the Senior Secured Loan agreement on September 26, 2025. This reduced the revolving credit commitment to $9.250 million from $10.000 million, adjusted interest payments to a monthly basis, and extended the maturity date to September 30, 2026. In connection with this, $650,000 of the principal balance was repaid. Management expects that existing cash, cash generated from operations, and committed financing will be sufficient to fund the operating plan for at least twelve months from the 10-Q filing date (November 4, 2025). However, additional funding may be required for further growth initiatives, and the ability to secure such financing on favorable terms is subject to market conditions and company performance.

Outlook and Risks

Management's outlook is cautiously optimistic, focusing on a return to growth and improved profitability. Cyril Wallace, CEO, noted "early signs of improvement in Q4" and anticipates "continued gross margin expansion going forward" as the company transitions away from legacy distributor arrangements. The company is positioned for "accelerated organic growth in 2026 and beyond". Douglas McCurdy, CFO, expects gross margins to return to the "30s". Key initiatives include channel expansion, new product innovation (especially the functional soda line), and improved sales execution. The company anticipates product sales from the Costco Reed's Winter Ginger Ale Variety Pack to reach the 7-figure range in the second half of 2025.

Despite the positive outlook, significant risks persist. The Senior Secured Loan matures in September 2026, and the company's ability to secure refinancing on favorable terms, or at all, is not assured. This could materially impact its financial position and operations. The ongoing inflationary environment, supply chain challenges, and fluctuations in raw material and logistics costs continue to create uncertainty. While Reed's has minimal direct exposure to tariffs, it actively monitors trade dynamics and evaluates alternative suppliers. The company's expansion into the Asia Pacific region, while strategic, carries inherent risks related to understanding new markets, increased competition, and navigating complex regulatory environments. Furthermore, the company's past struggles with short shipments and lost placements highlight the ongoing challenge of rebuilding retailer confidence and market share in a competitive industry.

From a capital markets perspective, Reed's is preparing for an uplist to a major exchange, viewing it as an "important milestone that will enhance visibility, improve liquidity and broaden our access to institutional capital". As part of this process, a 1-for-6 reverse stock split was effected on October 31, 2025. Management believes that "a couple of sustained quarters of operating performance" should bring the company close to satisfying all criteria for uplisting.

Conclusion

Reed's, Inc. stands at a pivotal juncture, having laid a foundational groundwork for a potential turnaround. The company's strategic pivot towards operational discipline, coupled with a robust innovation pipeline in the high-growth functional beverage segment, presents a compelling narrative for investors. Its differentiated technology, rooted in natural ginger and enhanced with adaptogens and prebiotics, offers a unique value proposition in a market increasingly seeking healthier options. While recent financial performance reflects the lingering effects of past operational challenges, the significant improvements in fulfillment rates and management's clear guidance towards top-line growth and margin expansion in 2025 signal a potential inflection point.

However, the investment thesis is not without its complexities. The need to refinance its Senior Secured Loan, the intense competitive pressures from industry giants, and the inherent risks of international expansion demand careful monitoring. The success of Reed's hinges on its ability to consistently execute its operational improvements, effectively market its innovative product lines, and strategically navigate the competitive landscape. For discerning investors, Reed's represents an opportunity to invest in a company actively transforming its operations and product portfolio to capitalize on evolving consumer trends, with the potential for enhanced visibility and liquidity through a prospective uplisting.