Reed’s, Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2023; financial statements are unaudited. Dollar figures below are in thousands unless otherwise noted. The company produces Reed’s and Virgil’s beverages and uses third-party co-packers for all production.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $11,856 | $12,094 | $33,018 | $38,001 |
| Gross profit / margin | $4,033 / 34% | $2,435 / 20% | $9,240 / 28% | $8,666 / 23% |
| Operating loss | $(143) | $(2,454) | $(4,468) | $(11,169) |
| Interest expense | $1,293 | $777 | $4,459 | $2,119 |
| Net loss | $(1,436) | $(3,231) | $(8,927) | $(13,288) |
| Loss per share, basic and diluted | $(0.34) | $(1.43) | $(2.69) | $(6.54) |
| Modified EBITDA (non-GAAP) | $161 | $(2,182) | $(3,711) | $(10,353) |
Net sales fell 2% in Q3 and 13% year to date. Management attributed lower sales principally to volume declines, price increases, and insufficient inventory amid tighter supplier credit. Q3 gross billing declined 6%; promotional and other allowances fell 32%. Year-to-date gross billing declined 14%, while allowances declined 22%.
Gross margin improved, which the company attributed primarily to lower supply-chain and input costs. Operating expenses declined 15% in Q3 and 31% year to date, including lower delivery and handling, selling and marketing, and general and administrative costs. Interest expense rose 66% in Q3 and 110% year to date, limiting the benefit of operating improvement. Modified EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP results or cash flow.
Cash flow, balance sheet, debt and liquidity
- For the nine months ended September 30, operating cash outflow was $4,084, versus $16,507 in the prior-year period. Investing cash outflow was $17; financing cash inflow was $4,572. Cash increased by $471 to $1,004.
- At September 30, cash was $1,004, current assets were $23,501 and current liabilities were $27,678, producing negative working capital of $4,177. Stockholders’ deficit was $12,760, compared with $8,470 at December 31, 2022.
- Revolving credit borrowings were $9,939 before financing costs ($9,697 net on the balance sheet). The facility had only $14 of current availability, with $3,062 of additional borrowing capacity reported. Rates ranged from 13.25% to 18.00%, depending on borrowing type.
- Whitebox secured convertible notes had $14,500 principal and $3,267 accrued interest at September 30. The balance-sheet carrying amount was $17,101, including accrued interest and net of financing costs. Of that amount, $7,380 was classified as current and $9,721 as long term.
- The notes include $4,050 issued in February and May 2023, due November 28, 2023. Whitebox had waived scheduled amortization payments through October 2023; payments were to resume November 1. The company also reported $2,152 of deferred excess ABL fees due November 28, 2023.
- In May 2023, the company raised net proceeds of $4,016 through a common-stock and warrant offering. Common shares outstanding increased from 2,519,485 at December 31, 2022 to 4,169,131 at September 30, 2023. A 1-for-50 reverse split was applied retroactively to share data.
Changes, outlook and risks
Management continued margin-improvement and cost-control efforts, including outsourced manufacturing, product portfolio streamlining, vendor contract negotiations, pricing changes, and freight and warehouse cost reduction. Average shipping and handling cost fell to $2.98 per case in Q3 from $3.38, and to $3.17 year to date from $4.13. The company cited ongoing inflation and supply-chain pressures, although it expected these pressures and inflation to moderate through 2023. It gave no specific financial guidance in the provided filing text.
The filing states that recurring losses, negative working capital, stockholders’ deficit and financing needs raise substantial doubt about the company’s ability to continue as a going concern within one year of issuance. Management was evaluating financing alternatives, but gave no assurance that funding would be available on acceptable terms or at all. The statements contain no adjustments that might be required if the company cannot continue as a going concern.
Key risks include refinancing or repaying debt, the November 2023 obligations and resumed note amortization, access to additional capital, supplier credit and inventory availability, input and freight costs, demand and pricing pressures, and dependence on co-packers. Sales and receivables are concentrated among a limited number of customers. A former related-party co-packer, California Custom Beverage (CCB), disputes part of a $1,315 receivable; the company recorded a $538 reserve. CCB also demanded payment of outstanding amounts, for which the company said an additional loss was remote. The filing reports no material litigation matters at the time.
Management concluded disclosure controls and procedures were effective as of September 30, 2023, and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the company obtained financing or otherwise addressed the obligations due November 28, 2023, and resumed note amortization.
- Actual borrowing availability under the credit facility, including collateral eligibility, lender waivers and covenant status.
- Whether operating cash use, negative working capital and the stated going-concern uncertainty improve or worsen.
- Whether lower sales volumes and inventory constraints persist, and whether gross-margin gains continue as supply and freight costs change.
- Developments in the CCB receivable dispute and demand, and any impact on cash, production or reported balances.
- The dilutive effects of the May equity and warrant financing and the convertible notes; the filing lists 2,170,782 potentially dilutive securities excluded from diluted loss per share as antidilutive.