Reed's, Inc. Aktie

Good morning, and welcome to Reed's First Quarter 2026 Earnings Conference Call for the 3 months ended March 31, 2026.

My name is Joelle, and I will be your conference call operator for today. Today's call will include prepared remarks from Neal Cohane, Reed's Interim Chief Executive Officer; and Doug McCurdy, Reed's Chief Financial Officer. Following their remarks, we will open the call for questions.

Before we begin, please take note of the company's cautionary statement. Today's call will include forward-looking statements, including statements about Reed's business plan, growth initiatives, operational improvements, including the company's belief that its first quarter results are not indicative of future performance and the impact of its corrective efforts. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, May 13, 2026. Reed's assumes no obligation and does not intend to update these forward-looking statements, except as required by law.

For more information, please refer to the risk factors section of the company's annual report filed with the Securities and Exchange Commission on March 25, 2026, and in other filings that the company makes from time to time with the SEC. When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items from reported results.

Please refer to Reed's first quarter 2026 earnings release on Reed's investor website at investor.reedsinc.com and the company's quarterly report on Form 10-Q for the quarter ended March 31, 2026. Expected to be available on the website soon. For definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements. While we believe the non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.

I will now turn the call over to Mr. Cohane.

Thanks, Joelle, and good morning, everyone. I first would like to say the company's operating performance in Q1 should not be viewed as indicative of our expanded performance for the balance of the year. Several factors contributed to the quarter's results, many of which we believe are transitional and are already being addressed through corrective actions initiated early in 2026. We see 5 factors that impacted our performance in Q1. They are as follows: number one, inventory liquidation and write-offs. The company incurred significant charges related to liquidation of underperforming discontinued and aged SKUs as well as write-offs associated with excess raw material inventory.

We have since completed comprehensive physical inventory counts and implemented enhanced inventory controls designed to minimize the likelihood of similar charges recurring. Number two, elevated SG&A expenses. SG&A expenses were not appropriately aligned with the size and current priorities of the business. We have taken action to rightsize the cost structure, and we remain focused on rebuilding trust with retail and distributor partners while reengaging consumers and supporting brand growth initiatives.

Third, sales execution challenges. Q1 sales performance was negatively impacted by several operational commercial factors, including the discontinuation of our heritage glass bottle packaging. The execution -- two, the execution challenges associated with the transition from sleek cans to standard cans. Three, we had limited promotional trade activity during the quarter. Four, underperformance and evolving strategic focus behind Virgil's Zero platform, which is currently being restaged for future relaunch and growth. Five, we missed category review windows that resulted in reduced shelf placement for certain Reed's and Virgil's SKUs at key retail accounts, right?

The fourth, gross margin pressure. Gross margins were negatively affected by rising input costs and wholesale selling costs on certain packages that were insufficient to optimize margin contribution. Fifth, distributor and retail partner engagement. The company experienced inconsistent engagement with certain distributor and retail partners, which contributed to weakened communication, reduced alignment, top line pressures across portions of the business. So beginning in early Q1 in 2026, management initiated a series of corrective actions intended to stabilize the business, improve execution and position the company for profitable growth in the future.

First thing we did was we reengaged with our retail and distributor partners nationwide to strengthen relationships, secure new SKU placements and develop promotional plans for the remainder of 2026. On the product side of things, we canceled the planned elimination of the Reed's and Virgil's heritage glass bottles and Virgil's Zero Sugar cans. Consumer and retail partner demand contributed to our decision to reverse course on those discontinuations. We also expanded our retail media and e-commerce support. The company launched sponsored product and retail media initiatives across key e-commerce platforms, including Instacart, walmart.com, albertsons.com and kroger.com, among others.

We also initiated cost reduction. We implemented meaningful reductions in headcount and marketing-related SG&A expenses and postponed a planned brand restage initiative until the business demonstrates sustained growth and momentum. We also -- to expand our retail and consumer reach, we retained one of the nation's largest commission-based sales agencies to present the Reed's portfolio of brands across all channels of business in the U.S. This partnership immediately expanded our retail coverage and field presence with more than 80 sales professionals working alongside Reed's sales management. We liquidated tens of thousands of cases of low-margin and nonstrategic inventory to improve working capital efficiency and streamline portfolio.

We also restructured Amazon. We exited a third-party Amazon fulfillment warehouse arrangement that had been generating approximately $1 million in annual losses and simultaneously partnered with a leading Amazon marketplace operator focused on driving profitable growth. On the gross margin improvement, management conducted a comprehensive review of cost of goods and portfolio level gross profit margins. Following our analysis, we began implementing strategic pricing actions designed to improve profitability and support long-term financial performance.

Finally, to support the execution of the above initiatives, we've recently appointed Damian Warshall as Chief Operating Officer. Damian has a history with Reed's, and we believe his operational experience positions him well to lead this next phase of improved operating performance. The team's immediate priority has been to stabilize the business, improve execution, and rebuild confidence across all aspects of the organization. While our first quarter results clearly fell short of expectations, we have moved quickly and decisively to address operational inefficiencies, strengthen customer and distributor relationships, streamline our cost structure and refocus the company down the path of profitability.

Reed's and Virgil's remain highly recognizable brands with strong consumer awareness and significant untapped potential in both retail and e-commerce channels. We believe the actions taken over the past several months are laying the foundation for improved execution, stronger margins and renewed top line momentum as we move through 2026. Although there is still substantial work ahead, I am encouraged by the early progress we are seeing across the business and remain confident in our ability to reposition the company for long-term sustainable growth and shareholder value creation.

Thanks to all today. Appreciate your time. Our CFO, Doug, will now cover the financial highlights for the quarter in more detail.

Doug?

Thank you, Neal. Turning to our results. All variance commentary is on a year-over-year basis, unless otherwise noted. Net sales for the first quarter of 2026 were $7.1 million compared to $10.0 million in the prior year period. The decrease was primarily driven by lower volumes with recurring national customers and higher promotional and other allowances. Gross profit for the first quarter of 2026 was $0.7 million compared to $3.4 million in the prior year period. Gross margin was 10% compared to 34% in the prior year period. The decrease in gross margin was primarily driven by liquidation of select slow-moving product and inventory write-offs related to changes in product portfolio optimization.

Delivery and handling costs decreased by 31% to $1.1 million during the first quarter of 2026 compared to $1.6 million in the first quarter of 2025, primarily driven by continued improvements in logistics efficiency and freight optimization. Delivery and handling costs were 16% of net sales or $2.57 per case compared to 16% of net sales or $3.17 per case during the same period last year. Selling, general and administrative expenses were $5.8 million compared to $3.5 million in the prior year period. The increase was primarily driven by investments in personnel, marketing and related services to support our Asia growth initiative.

Net loss during the first quarter of 2026 was $6.5 million or negative $0.55 per share compared to a net loss of $2.0 million or negative $0.27 per share in the prior year period. EBITDA was negative $6.2 million in the first quarter of 2026 compared to negative $1.7 million in the year ago period. For the first quarter of 2026, cash used in operations was $5.8 million compared to cash used of $5.4 million in the year ago period. As of March 31, 2026, Reed's had approximately $4.6 million of cash and $9.2 million of total debt net of deferred financing fees. This compares to $10.4 million of cash and $9.2 million of total debt net of deferred financing fees at December 31, 2025.

I will now turn the call back to Neal for closing remarks.

Thanks, Doug. Obviously, Q1 was challenging and our results reflect that. But it was also a real important quarter, one in which we made deliberate investments in building a stronger foundation for the business. We believe that the work will serve us well as we move through the year. We look forward to showing you that progress in the quarters ahead.

With that, operator, we're ready to open the call for some questions.

[Operator Instructions] Your first question comes from Aaron Grey with Alliance Global Partners.

First question for me, just -- I guess, how do we think -- you talked some of the remedies before. How do we think about the progress and how long it will take for the remediation to take force? And are you already seeing some improvement in 2Q about halfway through the quarter? Any type of KPIs that you can help provide us to show there's been some progress in that?

Yes. Aaron, thanks for the question. Yes, we absolutely -- we got on this very early in Q1. So we've been working on all those fronts that I just went through and covered. So we -- obviously, we've reduced and restructured our inventory and got the majority of the inventory situation cleaned up. We're seeing margin improvement immediately and early. And we are -- we did a very deep analysis on what we were charging customers, what we were charging our distributors for wholesale costs. The -- we needed to rightsize that. So we've taken immediate action on that.

We're starting to see some early syndicated data that says some of our kind of, we'll call it, Instacart and walmart.com and places where we're investing, we're starting to see a good return on ad spend on that, and that's reflecting in some of the syndicated data. But on all fronts, we're making very quick, swift progress. It's going to take a little while, but it's not going to take -- by the end of this quarter we're in, we will have gotten ourselves back on the right track.

Yes, Aaron, just a couple of quick notes. Obviously, first quarter was a transition quarter as we get into and continue through second quarter, our expectation is that we'll get back on the path of sequential improvement quarter-to-quarter, and we expect to see that in net sales, gross margin and net loss.

Okay. I appreciate that. More specifically, just on the missed category review windows with some of the national retailers. I know shelf resets are very important. So given that window was missed, like how hard is it to get back that shelf space that might have been lost? Do you need to wait another year or until fall shelf reset? Just give us some color in terms of the progress and how potentially you win back some shelf space with those national retailers.

Yes. So Aaron, we're going back and I have a long-standing relationship with lots of retailers, lots of distributors. We're going back immediately to where we can, where we can affect change. That's the first places we're going to now, where we can affect change now, and we're having success. But the other really good point that has happened is we've kind of unleashed a large national sales broker agency with, as I said in the script, the 80 people, and they're all engaging right now. So it's -- we're going for the low-hanging fruit now. There are some that are -- there are some retailers that are dead set on their category reviews happening at a certain period of time. But we're already speaking with them. It doesn't hold us up from speaking with them about the future and upcoming new business. So we're moving forward on it.

Okay. Great. That's helpful. And my third question was going to be on that in terms of the new commission-based sales force that you brought online. So first quick question. So the 80, how does that compare to the number that you guys had internally? And then secondly, do you feel like the inventory is in the right position to kind of, as you said, unleash this type of sales force and that you have the product available to complement the gunpowder, if you will, of the increased sales force base?

Yes. Yes. Inventory, we're very confident that we're going to be secure in inventory. So that is not a worry of mine at this moment. As far as where we were, we were -- when I came into the company in January, it was probably about 12 sales -- field sales folks. And now we have what I call them, I call them we have field sales generals out there now that are aligned and attached to the hip with our field brokers. So it's -- the only thing we're doing right now, Aaron, is we're creating KPIs, right, key performance indicators for all in the company for the -- for our broker partner. So that we're hitting milestones and we're measuring success and fixing things that we need to fix as we move along.

Yes, Aaron, just a note on the inventory piece and having product available to support. We continue to have short ships be essentially 0. And we're managing inventory probably more efficiently than the company has managed in many years, but we have the inventory to support the growth.

There are no further questions at this time. I will now turn the call over to Neal for closing remarks.

Thank you. Thank you for joining us today. We appreciate everybody's continued support, right? We look forward to updating you on our progress. We'll be completely transparent as we move forward. But we're looking forward to nothing but success in the future. So thank you.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.

Good morning, and welcome to Reed's Fourth Quarter and Full Year 2025 Earnings Conference Call for the 3 and 12 months ended December 31, 2025.

My name is Joelle, and I will be your conference call operator for today. We will have prepared remarks from Neal Cohane, Reed's Interim Chief Executive Officer and Chief Operating Officer; and Doug McCurdy, Reed's Chief Financial Officer. Following their remarks, we will take your questions.

Before we begin, please take note of the company's cautionary statements. Today's call will include forward-looking statements, including statements about Reed's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, March 25, 2026, and the company is under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items from reported results.

Please refer to Reed's fourth quarter and full year 2025 earnings release on Reed's investor website at investor.reedsinc.com and its annual report on Form 10-K for the 2025 fiscal year for the period ended December 31, 2025, expected to be available on the website soon for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

I will now turn the call over to Mr. Cohane.

Thank you, Joelle, and appreciate everybody joining us today for the call, the fourth quarter and full year 2025 results. Before diving in to our results, I'd like to briefly address the leadership transition.

As announced in our earnings press release, Cyril Wallace has stepped down as CEO. I will assume the additional role of Interim CEO while continuing as Chief Executive Officer -- as Chief Operating Officer, and I will also join Reed's Board of Directors. On behalf of the entire Reed's team, I want to thank Cyril for his contribution and wish him all the best in his future endeavors.

I'm honored to step into this role at an important time for the company. Reed's is a strong brand with long heritage, a loyal consumer base and robust operational foundation. Having spent many years with the business and recently returning as COO, I have a clear understanding of both the opportunities ahead and the work required to improve execution and performance.

The Board has initiated a search for a permanent CEO. And in the interim, I am focused on advancing the operational priorities necessary to support profitable growth.

Let's turn to our results. We made important strides during the fourth quarter to stabilize the business and reinforce the operational framework needed to support sustainable growth. We also saw sequential improvements in net sales, gross margin and net loss, which we view as early indicators that the actions we have taken are starting to gain traction.

We saw encouraging sequential sales improvements across several channels, including natural specialty, grocery, mass and e-commerce. This was driven by a combination of increased sales velocity and seasonal product launches during the quarter. A couple of the retailers helping to drive this growth with Sprouts, Costco, Walmart and our Amazon and Shopify business.

While we're still early in the process, these results reflect meaningful progress in improving execution. We are rebuilding and expanding distribution relationships, strengthening our presence on the shelf and driving greater efficiency across our supply chain and product portfolio to support more consistent performance over time.

From a production and supply chain standpoint, we're making meaningful progress in driving efficiencies and reducing costs across the business. This includes optimizing our manufacturing network, improving plant productivity and implementing tighter operational controls to better align production with demand.

We're also enhancing our sourcing strategy by leveraging scale, renegotiating key supplier relationships and improving procurement discipline. At the same time, we are actively identifying additional opportunities to lower our per unit cost structure, including packaging optimization, freight and logistics efficiencies and SKU rationalization.

As we continue to streamline the supply chain and improve throughput, we expect these initiatives to expand margins, improve service levels with our retail partners and position the business for more scalable and consistent performance over time.

Looking ahead in 2026, we are focused on expanding our presence in under-penetrated channels, particularly food service and convenience, which represent meaningful white space opportunities for the Reed's brand. These channels are highly complementary to our core retail business, enabling us to reach consumers in new consumption occasions and drive incremental trial and brand awareness.

I'd like to share a few updates on our product portfolio. First, we are launching the Reed's -- new Reed's Ginger Ale Cranberry and Blackberry in Q2 2026 as a line extension to our #1 selling SKU, which is the Reed's Ginger Ale. The core item, the Reed's Ginger Ale, remains the #1 premium ginger ale in total U.S. and continues to grow and is plus 13.7% in dollar sales over the past 52 weeks.

Second, we are expanding into high-growth adjacent categories with the launch of nonalcoholic mixers in early Q3 2026, providing incremental sales opportunities in the back half of the year.

Third, we are amplifying visibility at the digital shelf. In March 2026, we went live across Instacart, walmart.com and albertsons.com, reaching over 4 million targeted shoppers monthly through sponsored search, sponsored product and banner advertising.

Finally, we launched a social media strategy in Q1 2026, targeting over 100,000 viewers per month. We partner with recognizable talent, including a retired NFL player, Hayden Hurst, alongside a network of high-reach influencers. This approach is designed to authentically integrate Reed's into our culture, driving awareness, engagement and trial in a scalable, cost-efficient manner.

Overall, these initiatives reflect a deliberate multipronged growth strategy, building on our core and expanding into high potential agencies and fully supporting the brand through digital and cultural relevance.

Now let me take you through a couple of the fourth quarter operational highlights. During the quarter, we continued our efforts to evaluate and manage finished goods inventory, including actions to address slower moving and obsolete product as part of our effort to simplify the portfolio and focus on higher-performing items.

On the logistics and supply chain front, we continued executing our rebalancing initiatives to optimize inventory placement across regions and improve overall delivery efficiency. These efforts are focused on reducing freight distances, enhancing service levels and minimizing out of stocks in key markets.

We are beginning to see the tangible benefits from these actions with delivery and handling expenses declining 35% year-over-year in the fourth quarter. While still early in the process -- while still early, the process reinforces that we are moving in the right direction, and we remain focused on further refining our logistics network to drive continued efficiency gains and cost reductions over time.

We continue expansion into the Asian market and we'll be exhibiting at the sugar and wine trade show in Chengdu, China, one of the biggest food and beverage trade events in the world.

We will be launching our latest take on new modern energy drink called [ U Oxygen ], Reed's U Oxygen. U Oxygen will be making its debut for the first time, introducing innovative flavors to key industry retailers and distributors. Reed's U Oxygen builds on Reed's natural ginger base and innovatively integrates the classic eastern herbs of astragalus and ginseng to deliver clean, balanced energy for today's health-conscious consumer.

During the fourth quarter, we completed a $10 million underwritten public offering and uplisted our shares to the New York Stock Exchange American, marking a significant milestone in the evolution of Reed's. This transaction strengthens our balance sheet and enhances our financial flexibility providing additional capital to support key growth initiatives across the business, including distribution expansion, brand investment and continued operational improvements.

Additionally, uplisting to the New York Stock Exchange American meaningfully elevates our visibility within the investment community and broadens access to institutional investors while improving overall trading liquidity for our shareholders. As we continue to execute against our strategic priorities, we believe this enhanced capital markets platform, combined with our stronger financial foundation, provides Reed's to accelerate growth and drive long-term value creation.

Looking ahead, our priorities remain centered on improving overall operating performance and driving more consistent, profitable growth. We see a clear path to margin expansion through a combination of more disciplined trade spend, improved pricing and promotional effectiveness and continued operational efficiency gains across our supply chain and organization.

We're also continuing to invest in our international expansion in Asia, where we see a significant long-term opportunity to extend the reach of Reed's brand and capture incremental growth. We believe the combination of these initiatives will enable us to execute our growth and profitability objectives ahead.

Before wrapping up with closing remarks, our CFO, Doug, will cover financial highlights and fourth quarter and full year in more detail. Doug?

Thank you, Neal. Turning to our results. All variance commentary is on a year-over-year basis, unless otherwise noted.

Net sales for the fourth quarter of '25 were $7.5 million compared to $9.7 million in the year ago quarter. The decrease was primarily driven by lower volumes with recurring national customers and higher promotional and other allowances.

Gross profit for the fourth quarter of 2025 was $1.5 million compared to $2.9 million in the year ago quarter. Gross margin was 20% compared to 30% in the year ago quarter. The decrease in gross margin was primarily driven by inventory write-offs and higher cost of goods sold.

Delivery and handling costs were reduced by 35% to $1.1 million during the fourth quarter of 2025 compared to $1.7 million in the year ago quarter. As a percentage of net sales, delivery and handling costs were 14% or $2.46 per case in Q4 2025 compared to 17% or $3 per case in the year ago quarter.

Selling, general and administrative expenses were reduced by 19% to $4.0 million compared to $4.9 million in the year ago quarter. The decrease was primarily driven by lower contract proceedings and asset impairments.

Net loss during the fourth quarter of 2025 improved to $3.8 million or negative $0.44 per share compared to $4.1 million or negative $1.33 per share in the year ago quarter. EBITDA was negative $3.6 million in the fourth quarter of 2025 compared to negative $3.1 million in the year ago quarter.

For the fourth quarter of 2025, we used $3.8 million of cash from operating activities compared to cash used of $3.9 million in the year ago quarter. As of December 31, 2025, we had approximately $10.4 million of cash and $9.3 million of total debt, net of capitalized financing fees. This compares to $10.4 million of cash and $9.6 million of total debt, net of capitalized financing fees at December 31, 2024.

I will now turn the call back to Neal for closing remarks.

Thanks, Doug. Our fourth quarter reflects important strides in stabilizing the business and reinforcing the operational foundation needed to support sustainable growth. While there is still work to do, we are encouraged by the sequential improvement in several key financial metrics and remain focused on executing against our priorities to drive profitable growth for our shareholders.

With that, Joelle, we're ready to open the line for any questions.

[Operator Instructions] Your first question comes from Aaron Grey with Alliance Global Partners.

This is [ John ] on for Aaron. So how best is it to think about the cadence of distribution gains in 2026 and whether the spring resets have presented any opportunities?

John, thanks for the question. I think we have some work to do when it comes to getting placements right now. We're working on it as we speak. We have the sales team aligned. We're bringing on people to help and support, picking up and gaining more placements, and we're also working on velocities, to improve velocities at store level.

So we're going to be completely focused in 2026 on the customer and on our distributors. And it's going to be all about velocities and increasing shelf placement.

Okay. Great. And how should we think about the path to profitability and some of the margin initiatives you have in place starting to flow through the P&L?

The path to profitability is -- Doug and I have been meeting extensively on this. And we're looking at a couple of things here. It's one, we're looking to reduce expenses, which we are doing year-over-year, quarter-over-quarter, we're reducing expenses. But at the same time, we're driving -- we're going to be driving growth this year.

So I think what you see today is going to look a lot different than in, say, Q4 of this year. But it's going to be a combination, like I said, of reducing expenses and driving volume at store level.

Okay. Great. And then just lastly, is there any additional detail you can provide on the timing of the Smarter Soda (sic) [ SodaSmarter ] launch or color on learnings from the past launch to improve the product, flavor, packaging or otherwise?

On which launch, I'm sorry?

The SodaSmarter.

Yes. The SodaSmarter launch right now is -- that is one of the first things that I spoke with our flavor house that helps us with launches as I want to improve flavors. But at the same time, we're launching our new mixer line. And our new mixer line, which I think is going to be a great addition to what we're all about as a Reed's brand, we're working on that line and that launch at this moment.

And then we're coming back to the SodaSmarter, and we're going to be looking at improving flavors, improving formulas, and then we're going to improve execution on that at the same time.

There are no further questions at this time. I will now turn the call over to Mr. Cohane for closing remarks.

Well, thank you, everybody. I appreciate everybody joining today. We appreciate your continued interest in Reed's. We look forward to updating you on our progress, and we'll do that on further calls. We have a lot of work to do, and we're getting it done. But thanks for everybody and their time today.

Ladies and gentlemen, this concludes the conference call for today. We thank you for participating and ask that you please disconnect your lines.

Good morning, and welcome to Reed's Third Quarter 2025 Earnings Conference Call for the 3 and 9 months ended September 30, 2025. My name is Lilly, and I will be your conference call operator for today.

We will have the prepared remarks from Cyril Wallace, Reed's Chief Executive Officer; and Doug McCurdy, Reed's Chief Financial Officer. Following their remarks, we will take your questions.

Before we begin, please take note of the company's cautionary statement. Today's call will include forward-looking statements, including statements about Reed's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, November 4, 2025, and the company is not under obligation to update them.

When discussing results, the presenter may refer to non-GAAP measures, which exclude certain items from the reported results. Please refer to Reed's Investors website at investors.reedsinc.com and its quarterly report on Form 10-Q for the period ended September 30, 2025. This should be expected to be available on the website soon.

For definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

I will now turn the call over to Mr. Wallace.

Thank you, operator, and good morning, everyone. We appreciate you joining us today to discuss our third quarter 2025 results. Q3 marked another period of steady operational progress as we continue executing our plan to strengthen our foundation for sustainable long-term growth and profitability.

We advanced our manufacturing initiatives to better align production capacity and capabilities with current demand, enabling us to meet customer needs more efficiently while maintaining a strong focus on quality and operational discipline. At the same time, we're identifying additional opportunities to streamline processes, enhance scalability and drive further improvements in overall performance.

During this quarter, we saw higher-than-anticipated trade spend as we leaned on 2 large distributors to help fulfill order volume and ensure on-time delivery to key customers following prior supply chain challenges. This approach enabled us to maintain strong customer relationship and service levels.

However, it did not yield the expected efficiencies, and we have since begun redefining our approach with these distributors. We're evaluating our strategy to move away from short-term 3-month promotions to a fully integrated 52-week strategy that aligns more closely with retailer planning cycles and support stronger year-round execution.

With a more disciplined approach, we expect greater predictability and control over trade spend. We're already seeing early signs of improvement in Q4. And as we transition away from legacy distributor arrangements, we believe these actions will support continued gross margin expansion going forward.

From a production standpoint, we are working to drive greater efficiency and cost reduction through enhanced manufacturing processes, tighter operational controls and improved sourcing discipline. We are actively identifying new opportunities to lower unit costs and enhance overall performance across the supply chain.

Turning to our core product sales. During the third quarter, our sales team continued to execute against our refined commercial strategy, driving meaningful wins across both new and existing retail partners. These successes reflect stronger alignment between our sales, marketing and operation teams and demonstrate the progress we're making in rebuilding placements and expanding distribution within key national and regional accounts.

We achieved notable retail gains this quarter, highlighted by our partnership with Costco to develop a winner Ginger Ale variety pack, expanding seasonal innovation opportunities. Core distribution grew 4% year-over-year across top accounts, including Kroger, Sprouts, Ahold Delhaize, reinforcing momentum within our core Ginger Ale, Ginger Beer and Virgil's portfolio.

A successful Walgreens test further validated consumer demand and merchandising performance, paving the way to broader expansion discussions in priority small format channels such as drug and convenience. Additionally, we remain focused on regaining lost distribution with key regional wins at Harmons, Fashes and Festival Foods.

Looking ahead, we're focused on expanding our presence in underrepresented channels and particularly food service and convenience, which represent meaningful long-term opportunities to expand the reach and visibility of Reed's brand. I'd like to share a few updates on our product portfolio, starting with our core categories.

We're reinvigorating the Ginger core with full packaging and brand restage across Reed's Ginger Beer and Ginger Ale, launching July 2026. The update introduces new Ginger ale flavors, cranberry, blackberry and reformulated Zero Sugar offerings plus new club soda and tonic mixers.

Together, these moves simplify our lineup, sharpen shelf presence and strengthen Reed's leadership in authentic craft ginger beverages across retail and on-premise channels. A complete restage of our functional soda line also slated for July 2026 will reestablish Reed's as a category disruptor. Designed to leapfrog the modern service space, the new platform delivers wellness proposition with purposeful ingredients, elevated design and a bold innovation pipeline targeting incremental consumption occasions.

We're optimizing Virgil's and Flying Couldron, transitioning from glass to cans with full restate slated for 2027 and reformulating our RTD range, Reed's Mules and Hard Ginger Ale to enhance quality, flavor and consistency.

Internationally, Reed's launches its Ginger core in Greater China and Japan, followed by broader Asia in 2026. To support our next phase of growth and brand evolution, we've strengthened our leadership team with several key additions who bring deep expertise across marketing, commercial execution and governance.

In early September, we appointed Tina Reejsinghani as Chief Marketing Officer. Tina brings over 2 decades of global marketing leadership across lifestyle, spirits and consumer packaged goods. She has built a scaled iconic brands at Unilever, Pernod Ricard, and Remy Cointreau, delivering double-digit growth award-winning campaigns across multiple categories.

Her expertise in brand storytelling, innovation and premium positioning will be instrumental as we modernize and elevate Reed's Inc. portfolio on its path to becoming a high-growth beverage powerhouse. Next, we welcome Keith Johnson as Reed's Chief Go-To-Market and Customer Officer. Keith has almost 30 years of CPG beverage experience, spanning sales, distributor operations, marketing and revenue growth.

He spent 21 years in leadership positions at Coca-Cola, building high-performing collaborative teams. Over the past 10 years, Keith led national and regional customer teams at Molson Coors and most recently served as VP of Strategic Regional Accounts and Military at Diageo, driving channel strategy, joint customer supply growth and talent development.

We believe he is well positioned to lead our channel development strategy and go-to-market execution. Lastly, we appointed Michael Tu to our Board of Directors. Michael brings nearly 3 decades of experience in corporate governance and securities law, advising and representing boards, committees and executives at numerous public and private companies.

His deep understanding of regulatory framework, compliance and Board governance will help guide our long-term strategy and ensure we continue to build a strong transparent foundation of sustainable value creation.

Now let's dive into our third quarter operational highlights. Similar to Q2, we completed another review of our finished goods inventory and wrote down approximately 114,000 of obsolete product. This initiative is part of our broader effort to rationalize SKUs and sharpen our focus on high-velocity items that align with current demand and support a more efficient, profitable portfolio.

By streamlining our product mix, we can better concentrate resources on core SKUs that drive volume and margin expansion. On the logistics and supply chain front, we continued executing the rebalancing plan initiated last quarter to optimize inventory placement across regions. These actions are designed to improve deliver efficiency, reduce freight distances and minimize out of stocks in key markets.

We're beginning to see tangible benefits. Delivery and handling expenses declined 14% year-over-year in Q3, reflecting early progress from these operational improvements. We remain focused on refining our logistic network to further drive efficiency and reduce costs over time. We are advancing our transition from glass to cans across both Reed's and Virgil's portfolio, an initiative aimed at improving cost efficiency, sustainability and operational flexibility.

We expect this transition to strengthen margins while supporting continued consumer and retail adoption across our core brands. We also continue to strengthen our balance sheet through our recent financing repayment of approximately $650,000 of debt and the refinancing of our credit facility. These actions improved our liquidity and provided additional flexibility to execute on our core growth plan.

From a capital markets perspective, we're preparing for an uplift to a major exchange. We view this as an important milestone that will enhance visibility, improve liquidity and broaden our access to institutional capital as we enter our next phase of growth. As part of this process, we implemented a 1-for-6 reverse stock split effective October 31.

Looking ahead, our priorities are clear: improve margins, optimize operations and drive sales growth within our core Reed's and Virgil's portfolios. The investments we're making today, coupled with our recently fortified balance sheet, will accelerate our progress towards sustainable profitable growth ahead.

Before wrapping up and closing remarks, our CFO, Doug, will cover financial highlights for the third quarter in more detail. Doug, over to you.

Thank you, Cyril. Turning to our results. All variance commentary is on a year-over-year basis, unless otherwise noted. As Cyril mentioned, we affected a 1-for-6 reverse stock split and all per share data is on a post-split basis. Net sales for the third quarter of 2025 increased 4% to $7.0 million compared to $6.8 million in the year ago quarter.

The increase was primarily driven by higher volumes of Reed's branded products with recurring national customers. Gross profit for Q3 2025 remained flat at $1.2 million. Gross margin was 17% compared to 18% in the year ago quarter. The year-over-year decrease in gross margin was primarily driven by $0.1 million of inventory write-offs related to product portfolio optimization.

Excluding these inventory write-offs, gross profit for the third quarter of 2025 was $1.3 million or 19% of net sales. Delivery and handling costs were reduced by 14% to $1.1 million during the third quarter of 2025 compared to $1.3 million in the third quarter of 2024, primarily driven by lower transportation costs.

Delivery and handling costs were 16% of net sales or $2.50 per case compared to 19% of net sales or $2.99 per case during the same period last year. Selling, general and administrative costs were $4.2 million during the third quarter of 2025 compared to $3.1 million in the year ago quarter. The increase in SG&A was primarily driven by investments in personnel, marketing and related services to support growth initiatives.

Total operating expenses were $5.3 million compared to $4.4 million in the year ago period. Net loss during the third quarter of 2025 improved to $4.0 million or negative $0.48 per share compared to $4.2 million or negative $4.91 per share in the third quarter of 2024.

Modified EBITDA loss was $3.9 million in the third quarter of 2025 compared to $3.0 million in the third quarter of 2024. For the third quarter of 2025, we used $2.8 million of cash from operating activities compared to $1.1 million of cash provided by operating activities for the same period in 2024.

As of September 30, 2025, we had $4.1 million of cash and $9.2 million of total debt net of deferred financing fees. This compares to $10.4 million of cash and $9.6 million of total debt net of deferred financing fees at December 31, 2024.

I will now turn the call back to Cyril for closing remarks.

Thanks, Doug. Our third quarter reflects continued progress in strengthening Reed's operational foundation and advancing the key initiatives that will drive long-term growth and profitability. While there's still work to do, I'm encouraged by our team's focus and execution to build a strong foundation and position Reed's for accelerated organic growth in 2026 and beyond.

With that, operator, we're ready to open up the line for questions.

[Operator Instructions] Your first question comes from Aaron Grey from Alliance Global Partners.

First one for me. I just want to get in better color in terms of expectations for distribution gains and how best to think about how shelf resets might come into play and opportunities that might differ between Reed's traditional and Reed's functional beverages there.

Yes, it's a good question. Listen, I mean, our -- within the changes that we just recently made within the organization, we essentially restructured our entire sales team and added key positions so that we could focus on channels and customers or retailers that we're currently not focused on today.

So I think what you'll see here, coupled with focusing on and making sure that we understand the time lines in which resets to some of these key customers take place, we're in the process right now of building those relationships, building out that network to ensure that, one, that we're focused on the right time line and also have the right product mix to go after these customers with our core business and also our modern soda line.

Now as we -- as I discussed earlier, we are looking to take our current modern soda line and restage it, reformulate it, retool it and relaunch it to be in store July of 2026. So within that, right, that would constitute us to have to focus on for that particular line for fall resets. So think core, Ginger Ale, our 2 new flavors will come out in Q1 of this year.

The broader restage of our core functional Reed's will take place in the second half of next year. Along with that is the restaging of our modern soda line. So most of that will come into play within our fall resets on both our existing customers and also new customers where it makes sense that we're targeting.

That's helpful. On the switching right from bottles to cans across the portfolio, just help us understand and triangle that maybe are there some near-term kind of costs, obviously, long term, cost savings you're expecting. So just as we think about the P&L, potential impacts potentially on the near-term charges and how much benefits we should expect and when that kind of flows through the P&L?

Yes, sure. So for bottles to cans, it's a conversion that I think first is kind of in line with the trending of the industry as a whole. I think it's an opportunity to give the consumer a packaging set that they're interested in and is better for them in addition to better for you.

And then as we think about some of the efficiencies directly to the P&L, what we see is simply the cost of bottles versus the cost of cans is a nice shift improvement, and there's a benefit in margin as well. So we would anticipate that as we move forward with the transition, the transition will happen over some period of time that's measured in months and quarters.

But we would imagine that as we enter into first quarter, we'll be moving along smartly to affect that transition. And I would imagine that by the end of the second half -- by the end of the first half of 2026, we should be well into it.

And some of the considerations are we want to be mindful of the customer set and making sure that we're making that transition in partnership with our customer set and making sure that, one, the customers are pleased with the approach and invested in the approach. And two, we want to make sure that there's no disruption to the shelf space that we have and the P&L benefit that we're going to gain from it.

Appreciate that. Last one for me, if I could. As we think about marketing, obviously, beverages remains a competitive category. You guys have a focus on profitability. How best to think about the marketing spend line how -- and what levers you think are best available to the best bang for your buck to build up brand equity as you look to expand these different brands and product portfolios?

Yes. We want to be very targeted and strategic around how we're spending dollars on marketing. Now understand that from where we are today to where we're headed tomorrow, it will be an exponential shift in the strategy and also investment in terms of how we're thinking about marketing our core brand restage in the middle part of next year, along with our functional line, along with this new mixer line as well.

So I think what we're focused on is grassroots marketing campaign and building from there, right? So it will be very targeted. It will be very specific but it will be certainly exponential in terms of what we're spending today. And we feel like just given where we are, we've got a great opportunity to kind of build out this campaign given the -- already our high consumer appeal amongst consumers who tried our product and repeat purchasers as well.

So I think there's a story that we have to tell there, but we'll be very targeted and specific as how we use those dollars, which is -- it's a new area for us in terms of investing in marketing, but we'll do it grassroots and it will be very targeted.

Our last question comes from Sean McGowan from ROTH Capital Partners.

Actually, 2 questions. One quick housekeeping. Doug, do you have a sense of what the timing could be on the uplist? And whether those steps need to be taken to satisfy all those requirements?

And then more broadly, on the last call, we talked about maybe having lost some listings or some outlets. What progress have you made on kind of reestablishing some of the existing customer base that you had and getting back some listings that you may have lost?

Yes. Thanks, Sean. Nice to hear your voice. In terms of timing for all things uplifting and related, I think the first kind of milestone that we were able to achieve to move forward with that was affecting the 1-for-6 reverse stock split. So on Friday at 5:00 p.m., we were able to get ourselves in a place where we could affect that.

Our stock began trading under the ticker RED with an extra D, 2Ds, which signifies corporate action that there's a split. But we began trading yesterday morning at the open on a split-adjusted basis. So we'll kind of watch that settle out. We'll monitor the market and where we are in terms of some of the other preparation considerations.

But in an ideal world, we would be able to move forward prudently, but get to the point where we could uplist to the major exchange sooner rather than later because we think that there's nice value for our existing investor base and a nice opportunity for potential new investors as well.

And then, Sean, to answer your question around loss distribution, yes, we're doing some work to build that into our AOP for next year, and it's certainly a focal point for us. What I'm excited about is that we are starting to see some of that business come back, which I highlighted in my earlier comments around key regional wins at Harmons, Fashes and Festival Foods. There are some obviously larger, more strategic retailers that we're focused on regaining some of that lost distribution or also getting back in.

And I think Keith and the team are really going to be focused on that in the first quarter of next year. And I think the story to tell, which is where we saw successes already with winning back some of these regional accounts is we got to do what we say we're going to do, right, build -- leveraging the relationships, but also telling the story of how the team has done a nice job of kind of rebalancing and reentering our sales around our operational efficiency and maintaining that quarter-over-quarter and being able to prove it out to show the customer that they can count on us from an in-stock perspective. that, along with just continuing to rebuild these relationships, I think, will allow us to be able to get back in to some of these retailers.

Not only that, but I would also highlight we're now talking and moving in a position where we're building our innovation pipeline. So that will get customers and retailers excited about leaning in as well. And then this whole notion of this core restage of our Reed's functional line and also our core products is something that also that we're leaning on.

So I think we continue the course, stay focused on operational efficiency, continuing to maintain that, we'll be able to continue to regain some of these lost customers that we lost.

Okay. And if I could follow that up, at the risk of sounding maybe a little impolitic. Do you think that the experience that some of these guys have had with the past couple of years of some being late or not delivering on time? Is that going to make it harder to launch a new product? Or are they willing to give you kind of a fresh look?

No, I think -- I mean, obviously, I can't speak for retailers and put words in their mouth. But I think any time a CPG company goes to a buyer with a new proposition, right, they've got to make sure that it makes sense for the category and make sure it makes sense for the set, right? What is the innovation? Is it an A1 type innovation? Or how does it separate itself from anything else that we're currently selling.

So I think there's always a story to tell as it relates to trying to sell innovation or a new item or even your core flavor extension in where there may be already a flavor that exists today. So there's certainly work to be done to go tell that story. I don't think it makes it any easier or harder. I do believe that given our recent history, building that confidence in terms of operational stability helps us to kind of tell that story and shore up that end of the equation.

The other thing is just in terms of which is normal for any type of CPG that's going in talking to a buyer around innovation, how does this innovation work for me? How does it drive consumer engagement and appeal? And does it make sense for our sets.

There are no further questions at this time. I will now turn over the call to Mr. Wallace. Please continue.

Thank you, operator, and thank you for joining us today. I want to express our appreciation to our employees, customers and shareholders for their continued support. We're excited about the opportunities ahead, and we believe we are well positioned to execute on our 2026 plan. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Good morning, and welcome to Reed's Second Quarter 2025 Earnings Conference Call for the 3 and 6 months ended June 30, 2025. My name is Annis, and I'll be your conference call operator for today. We will have prepared remarks from Cyril Wallace, Reed's Chief Executive Officer; and Doug McCurdy, Reed's Chief Financial Officer. Following their remarks, they will take your questions.

Before we begin, please take note of the company cautionary statement. Today's call will include forward-looking statements, including statements about Reed's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, August 13, 2025, and the company is under no obligation to update them.

When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items for operating results. Please refer to Reed's second quarter 2025 earnings release on Reed's investor website at investor.reedsinc.com. And its quarterly report on Form 10-Q for the period ended June 30, 2025, expected to be available on the website soon. for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

I will now turn the call over to Mr. Wallace.

Thank you, Annis, and good morning, everyone. We appreciate you joining us today to discuss our second quarter 2025 results. We are in the early stages of strengthening our commercial execution and better positioning Reed's for long-term growth and profitability. Although we saw softer order volumes during the quarter, we are making meaningful progress in streamlining operations, refining our marketing approach and investing in channel development initiatives. We believe these efforts will help restore key placements and open new growth avenues in underpenetrated channels such as convenience and food service.

In Q2, we began to see downstream effects of last year's supply chain disruptions, which impacted order volumes during the quarter. To mitigate further disruptions, we are investigating in sales personnel to rebuild key relationships and have taken steps to rebalance manufacturing to better align with the demand forecast. We believe these actions will better position us to recapture loss placements as retailers enter formal reset periods in the fall and spring. At the same time, internal execution is improving, and we're actively pursuing new distribution opportunities to diversify our channel mix and support long-term growth.

To support this initiative in July, we appointed Rachel Fox-Greenwood as Vice President of On-Premise Sales to lead our expansion into food service and convenience channels. Rachel is a seasoned commercial executive with a proven track record of driving market expansion, forging strategic partnerships and building scalable programs across the beverage industry. She has held leadership roles at French Bloom, Catalina Wines and Empire Merchants where she consistently delivering results in both honors and retail environments. Her expertise will be instrumental as we broaden our reach, strengthened channel execution and further elevate the Reed's brand.

Our growth strategy pairs channel expansion with ongoing product innovation. Our new Reed's functional soda has been well received within the grocery and natural channel. Velocity is steadily ramping and the most recent data has shown encouraging signs of acceleration. Consumer feedback also has led us to believe that our functional soda line will be successful in the months and years to come. Since launching in April, our team has amassed more than 9,000 points of distribution, including national distribution of Spouts and placement at retailers such as Kroger, Giant Carlisle, Hannaford, Duane Reade.

In addition, Harris Teeter added all 4 of our functional SKUs chain-wide, while National Co+op Grocers or NCG, incorporated the full lineup into its core assortment. Our formulations combine Reed's signature bold flavors with functional wellness ingredients, including organic beer, prebiotic fiber and adaptogenic mushrooms. So far, we've seen encouraging traction on our Root Beer and Berry Bubbly SKUs. We're only working through our initial inventory as we prepare to roll out updated formulations later this year, incorporating feedback from both retailers and consumers. This measured approach reflects our focus on rebuilding sustained velocity in a competitive category.

Our goal is to deliver our product that aligns with evolving better-for-you trends while staying true to Reed's uncompromised committed to quality. We view the functional space as a long-term opportunity, and we'll continue to invest in the vertical as it grows.

Turning to our core product sales. For the quarter, our sales team continued to deliver a solid commercial wins and build momentum across both new and existing retail partners. I'd like to highlight some of these wins. First, we reached a key milestone at Costco securing approval for our Reed's Winter Ginger Ale Variety Pack. Based on current commitments, we anticipate product sales in the second half of 2025 to reach the 7-figure range, a meaningful achievement for the brand.

At Safeway, we built on the success of our Q1 secondary display program with expanded commitments for the second half of the year. Our sales team has secured over 25,000 cases of pre-committed secondary displays, scheduled to land in Q3 and early Q4. This program spans both seasonal and everyday items and will be launched in more than 500 stores.

We also completed a shipper gram at Kroger placing over 500 displays across our legacy Ginger beer and new functional SKUs. The program spanned 5 divisions and concluded in late Q2. We're encouraged by the results, and we look forward to expanding our presence across the broader footprint.

At Whole Foods market, we're preparing to execute our third consecutive year of national secondary displays. Set for September, the program will support our alcohol portfolio and reflects a strong long-term partnership and consistent performance within the chain. Beyond these major retailers, we significantly grew our secondary distribution securing meaningful displays at Sprouts, National Grocers by Vitamin Cottage and NCG, further reinforcing our presence in key natural and grocery channels.

Finally, our direct-to-consumer channel advanced with the launch of our new website aimed at enhancing the user experience, deepening engagement with our customer base and driving steady subscription-based revenue growth. While their sales channel represents a small portion of business today, we will continue to invest, and it has become a larger contributor in the future.

Now to dive into our second quarter operational highlights. During the quarter, we remained focused on executing the functional initiatives established earlier this year while adapting to evolving demand trends. Our priorities continue to center on improving execution, enhancing commercial capabilities and driving efficiency across the organization. As a part of our efforts to align operations with current demand trends, we evaluated inventory and determined that $1.6 million of write-offs were necessary based on product portfolio optimization. Although it's impacted gross margin for the quarter, we believe it was an important step to improve inventory management and working capital efficiency, and to ensure our manufacturing and supply chain resources our focus on high-demand actively supported SKUs.

On the logistics and supply chain front, we rebalanced inventory across regions to improve delivery efficiency and minimize out of stocks in key markets. While this led to elevated delivery and handling costs for the quarter, these investments are already enhancing service levels and better positioning us to support retail partners ahead of the fall reset period. We also continue to advance our transition from glass to cans across both Reed's and Virgil's portfolios. This initiative is driving greater savings through reduced freight costs and is receiving positive feedback from both retailers and consumers.

Looking ahead, our focus is on driving sales growth within our core Reed's, Virgil's and portfolios, improving margins and positioning Reed's for sustained growth and profitability. Rebuilding key relationships takes time, but we're encouraged by the foundation we've established and believe we're on the right path to drive sustained improvement in long-term growth.

Before wrapping up with closing remarks, our CFO, Doug will cover financial highlights for the quarter in more detail. Doug, over to you.

Thank you, Cyril. All variance commentary is on a year-over-year basis, unless otherwise noted.

Net sales for the second quarter of 2025 were $9.5 million compared to $11.9 million in the year ago quarter. The decrease was primarily driven by lower volumes with recurring national customers. Gross profit for the second quarter of 2025 was $0.8 million compared to $3.8 million in the year ago period. Gross margin was 8% compared to 32% in the year ago quarter. The decrease in gross margin was primarily driven by $1.6 million of inventory write-offs related to changes in product portfolio optimization made by new management. Excluding these inventory write-offs, gross profit for the second quarter of 2025 was $2.4 million or 25% of net sales.

Delivery and handling costs were $1.6 million during the second quarter of 2025 compared to $1.4 million in the second quarter of 2024. Delivery and handling costs were 17% of net sales or $2.83 per case compared to 12% of net sales or $2.18 per case during the period last year. Selling, general and administrative expenses were $5.0 million during the second quarter of 2025 compared to $3.1 million in the year ago quarter. The increase in SG&A was primarily driven by contract proceeding costs and our investments in personnel, marketing and related services to support growth initiatives.

Altogether, operating expenses were $6.6 million compared to $4.5 million in the year ago period. Net loss during the second quarter of 2025 was $6.0 million or negative $0.13 per share compared to $3.2 million or negative $0.77 per share in the second quarter of 2024. Modified EBITDA was negative $2.9 million in the second quarter of 2025 compared to $45,000 in the second quarter of 2024. For the second quarter of 2025, we used approximately $5.0 million of cash from operating activity compared to cash used of $0.9 million for the same period in 2024.

As of June 30, 2025, we had $2.7 million of cash and $9.7 million of total debt net of deferred financing fees. This compares to $10.4 million of cash and $9.6 million of total debt net of deferred financing fees at December 31, 2024.

I will now turn the call back to Cyril for closing remarks.

Thanks, Doug. While Q2 results were challenged, they highlight the important work underway to rebuild our foundation for sustainable long-term growth and profitability. I'm encouraged by the alignment across our organization and believe we are well positioned to execute on our goals ahead. I look forward to sharing our continued progress later this year.

With that, Annis, we're ready to open up the line for questions.

[Operator Instructions] The first question comes from Sean McGowan with ROTH Capital Partners.

I want to start with questions about revenue. I feel like this is the first time in many quarters where you -- the story isn't, hey, we could have done better if we add money and if we had inventory, you had the money, you had the inventory and yet not only are sales down, but you're actually calling out losses of placement and declining orders at national REIT. So what changed? What -- I guess, was it not really the money in the inventory? Like what has changed on the revenue side?

Yes. Sean, I think, first of all, I appreciate the question. It's a great question. I think what you're seeing with retailers, right, we had some challenges, call it, in 2024. And I think this is just building, right, where we had operational challenges and we lost placements and sets in stores. And I think you're seeing the continuation of that being put in the penalty box, so to speak, in which we've lost distribution and facings across some key retailers and which that is what you're seeing.

And so I think the steady -- the decline you saw in Q2 represents that impact from our operational challenges that maybe started back in 2024. Now the team is working to close down those voids. And we've had some promising conversations with some retailers. But one of the things that I'll highlight is that it's very difficult, right? I think we all know like when you lose placements, you don't just go back in just because we improved on our operational efficiencies overnight. That takes time, right, to rebuild.

And also, there's a window in period in which retailers will allow you to go back in to earn your way back into the space that generally happen in the spring and the fall. So I would say that we're pushing towards trying to reclose those voids, but it's certainly an area that, in the short term, has impacted our revenue.

Okay. And Cyril, I understand a lot of what the commentary in the past predates your tenure. But I don't remember any of these calls, somebody saying we lost placements. In fact, it was the opposite. It was despite not having the inventory and despite the sales decline and being late or whatever, we kept the placements. So this is the first, I think, I'm hearing that you loss placements, which is just -- so what visibility do you have on when we could actually expect the sales recovery?

Yes. I mean, like I said, I think these are ongoing conversations that we're having with retailers. And there's a period in which you can regain these placements and sets. They happen in the spring and the fall, right? And so our teams are working hard in order to reclaim those placements and also get new placements as well, too, with our new functional lines. So it's ongoing, Sean. I couldn't really give you a time period in terms of which it will take place, but we're seeing and having some positive conversation with retailers.

Okay. Looking at gross margin, even if you exclude the write-off, the margin was below a year ago and below, I think, what you'd like to see it at. So what else is going on, on the gross margin line?

Doug, do you want to tackle that one?

Absolutely. Sean, I think the key driver for gross margin being down, obviously, was the inventory write-off. And as you point out, Sean, excluding inventory write-off, we're probably, I don't know, 8 or 10 points below where we would like to be in the mid-30s. The primary driver of being down was trade spend being higher than expected, higher than budgeted. And we're managing that as we came out of second quarter. We put a little bit tighter rein on trade spend and managing that going forward.

So I would anticipate that you'll see us move forward now that we've done some of the housekeeping with inventory, and we're focused on trade spend and certainly cost of goods sold and the production side as well. But I would imagine that you'll see us get back to the 30s here.

Okay. That's helpful. And then my last question is maybe you could give more color on how delivery costs could be up so much when revenue is down. What's the spending going on there?

Yes. I think it ties directly to some of the work that the team is doing to ensure that we're on time and full across all of our customers and the operations team has done a phenomenal job in making sure that we're working directly with our sales team to pair our manufacturing costs with actual forecast and demand.

I think some of the challenges that you saw in Q2 is just with moving inventory from one part of the country to the other to ensure that we remain in on-time and full. And so as we continue to optimize our forecast, Sean, for East Coast and West Coast, I think those costs will continue to come down, right? Just making sure that we're being very timeful in where we're placing manufacturing based on where the forecast is so that you don't see that increase in enhanced shipping costs from one end of the country to the other.

So we should expect that this is not indicative of the percent of revenue that we would see on that line going forward?

That's correct, Sean.

Okay. I guess another way to look at it is, in the past, I think the company kind of declined to make some shipments rather than make shipments that might be less profitable. And now in an order to keep in stock, you're making decisions that might be suboptimal at the moment, but are better for satisfying customers. Is that the right way to look at it?

That's right. I think that and I think that mindset along with just ensuring that your manufacturing product based on where the demand is so that you can minimize your shipping cost. But yes, there is a full court press to ensure that we're ensuring that we remain on time in full with our customers.

[Operator Instructions] There are no further questions at this time. I will turn it back to Mr. Wallace for some closing remarks.

Okay. Thank you, operator. Thank you for joining this morning's earnings call. On behalf of the entire team, I want to extend our sincere appreciation to our employees, customers and shareholders for their continued support. We value your partnership and wish you all a great day. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.