Reed’s, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statement amounts below are in thousands of dollars, except per-share amounts and where noted. The interim statements are unaudited.
Business context
Reed’s sells Reed’s and Virgil’s beverages and relies entirely on third-party co-packers for production. Management says it is prioritizing core brands, improving margins, reducing freight and operating costs, and expanding sales and product innovation. The company attributed weaker sales partly to insufficient inventory amid tighter supplier credit terms.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $10,005 | $13,725 | $21,162 | $25,907 |
| Gross profit | $2,509 | $3,299 | $5,207 | $6,231 |
| Gross margin | 25% | 24% | 25% | 24% |
| Operating loss | $(1,747) | $(4,536) | $(4,325) | $(8,715) |
| Net loss | $(3,134) | $(5,077) | $(7,491) | $(10,057) |
| Basic and diluted loss per share | $(0.99) | $(2.25) | $(2.59) | $(4.79) |
| Modified EBITDA, non-GAAP | $(1,606) | $(4,335) | $(3,871) | $(8,171) |
Q2 gross billing declined 26%; net sales fell 27%. For the first half, gross billing and net sales each declined 18%. Management reported core-brand volume declines of 13% for Reed’s and 44% for Virgil’s in Q2; first-half declines were 12% and 33%, respectively. Core-brand pricing per case increased 2% in Q2 and 5% year to date.
Operating expenses fell 46% in Q2 and 36% in the first half, led by lower delivery and handling costs. Q2 delivery expense was $1,686, or $3.04 per case, versus $3,832, or $5.00 per case, a year earlier. Interest expense increased to $1,387 in Q2 from $541 and to $3,166 for the first half from $1,342.
Cash, debt and liquidity
- Cash was $447 at June 30, 2023, down from $533 at year-end 2022. First-half operating cash use was $2,288, compared with $16,330 in the prior-year period; financing provided $2,135. Cash at the end of June 2022 was $280.
- Current assets were $19,528 and current liabilities were $23,113, resulting in negative working capital of $3,585. Stockholders’ deficit was $11,463.
- The company disclosed $6,842 outstanding on its Alterna credit line ($6,560 net of financing costs). It reported no current availability and $6,158 of additional borrowing capacity. Rates were 13.00% on receivables-based borrowings and 13.65% on inventory-based borrowings; the overadvance rate was 18.00%.
- Whitebox secured convertible notes had $14,500 principal and $2,557 accrued interest at quarter-end. The balance-sheet carrying amount was $16,186, including accrued interest and net of financing costs. A $4,050 tranche issued in February and May was due September 29, 2023; monthly amortization on other notes was scheduled to resume October 1, 2023. The company reported $1,672 of deferred excess ABL fees due September 29, 2023.
- In May, Reed’s issued 1,566,732 common shares and warrants for 313,346 shares, generating $4,016 net proceeds. Common shares outstanding increased from 2,519,485 at December 31, 2022 to 4,169,131 at June 30, 2023.
Outlook, risks and unusual items
Management said inflation and supply-chain pressures were expected to continue through 2023, while noting moderation in inflation and freight costs. Average shipping and handling cost declined to $3.04 per case in Q2 from $5.00, and to $3.26 for the first half from $4.47. The filing provides no quantified revenue or earnings guidance.
The company and its auditor had identified substantial doubt about Reed’s ability to continue as a going concern. Management was evaluating potential financing through equity, debt, mezzanine securities, strategic partners, or financial institutions, but gave no assurance funding would be available on acceptable terms or at all. The filing cites a history of operating losses, financing needs, debt repayment and extension risk, supplier and co-packer dependence, customer concentration, cost inflation, demand and competitive pressures, and supply-chain disruptions.
A related-party receivable from former co-packer California Custom Beverage (CCB) included $777 recognized on the balance sheet, net of a $538 reserve. CCB disputes $1,043 of the $1,315 recorded receivable, and Reed’s says the ultimate settlement is uncertain. CCB also demanded payment of outstanding amounts; the company considered a loss on that demand remote and recorded no additional accrual. The filing reports no material litigation matters. Management stated disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether Reed’s can raise sufficient capital and manage the September 29, 2023 note and deferred ABL-fee obligations, and how the October amortization resumption affects liquidity.
- Whether reported additional borrowing capacity is practically accessible given zero current availability, collateral eligibility, lender terms, and covenant waivers.
- Whether sales volumes and inventory availability recover, particularly for Virgil’s, and whether margin gains persist despite higher first-half cost per case and elevated interest expense.
- The recoverability and timing of the disputed CCB receivable, and any effect of the related payment demand.
- The dilutive impact of the May share-and-warrant financing and potential conversion of notes; the filing lists 1,415,826 common shares issuable on conversion of notes and 549,292 warrants outstanding.