Reed’s, Inc. — FY2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022, compared with FY2021. Reed’s sells handcrafted ginger beverages and Virgil’s craft sodas through retail, distributor, and online channels; it also sells ready-to-drink alcoholic beverages. The company relies entirely on third-party co-packers for production.
Financial results and condition
Amounts below are in thousands of dollars, except per-case, share, and per-share data.
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Gross billings | $59,464 | $54,658 | +9% |
| Promotional and other allowances | $6,423 | $5,059 | +27% |
| Net sales | $53,041 | $49,599 | +7% |
| Cost of goods sold | $40,929 | $36,001 | +14% |
| Gross profit / margin | $12,112 / 23% | $13,598 / 27% | Profit down 11%; margin down 4 percentage points |
| Operating expenses | $26,946 | $29,569 | -9% |
| Loss from operations | $(14,834) | $(15,971) | Loss narrowed |
| Interest expense | $5,223 | $1,201 | Increased substantially |
| Net loss | $(20,057) | $(16,402) | Loss increased 22% |
| Modified EBITDA (non-GAAP) | $(13,146) | $(13,509) | Loss narrowed modestly |
- Volume and pricing: Total cases declined 3%; core beverage cases fell 7%. Reed’s brand volume declined 1% and Virgil’s 13%. Core-brand gross billings rose 3%, with reported core price per case up 10%.
- Margins and costs: Cost of goods sold rose to 77% of net sales from 73%. Cost of goods per case increased to $13.92 from $11.91. Management cited raw-material inflation, labor shortages, freight and logistics disruption, and port congestion as factors pressuring margins.
- Operating costs: Delivery and handling expense was $11,603, or 22% of net sales, versus $11,939, or 24%, in 2021. Selling and marketing fell 24% to $7,316; general and administrative expense fell 6% to $7,489. A $538 provision was recorded against a receivable from a former related party.
- Cash flow and liquidity: Cash used in operations was $15,530, compared with $17,589 in 2021. Cash at year-end was $533. Working capital was negative $1,563, versus positive $2,981 a year earlier; stockholders’ deficit was $8,470, compared with equity of $4,203.
- Debt: Year-end revolving-credit borrowings were $11,337 before $363 of unamortized financing costs. Convertible notes had $10,450 principal and $1,052 accrued interest; the balance-sheet carrying amount was $10,526 after debt discounts. The notes bear 10% annual interest, mature May 9, 2025, and are secured by substantially all company assets, including intellectual property. Lease liabilities totaled $394.
- Other financial indicators: Inventory was $16,175, down from $17,049. Two customers represented approximately 17% and 16% of sales, respectively. The filing reports a basic and diluted loss per share of $9.07; share and per-share data were retrospectively adjusted for the 1-for-50 reverse split.
Material changes, outlook, and risks
- Net sales grew, but core beverage volume declined and gross margin contracted. Lower operating expenses partly offset the gross-profit decline; much higher interest expense drove the larger net loss.
- Management said it was focused on sales growth, distribution and store placement, product launches, margin improvement, and reducing freight and operating costs. It reported continued growth in Reed’s Real Ginger Ale and Classic Mule and expansion of the Classic Mule into 42 states during 2022.
- Management expected inflationary trends and supply-chain pressures to continue through 2023, with a continued impact from logistics, input costs, labor availability, and freight. It described strong long-term demand expectations but provided no quantified financial guidance.
- Going concern: Management and the auditor identified substantial doubt about the company’s ability to continue as a going concern within one year of issuance. The company said existing cash and borrowing resources were insufficient for the next 12 months and that it needed additional financing, operating efficiencies, expenditure reductions, and ultimately profitable operations. Financing may not be available on acceptable terms or at all.
- Financing and listing developments: In February 2023, Whitebox waived specified covenant violations and deferred a fee; it also exercised an option for $2,550 of additional notes, due June 20, 2023. The notes’ fundamental-change repurchase price was amended to 110% of principal plus accrued interest. The company’s shares were delisted from Nasdaq on February 16, 2023, and began trading on OTCQX.
- Related-party matter: California Custom Beverage, a former related party and co-packer, disputed $1,043 of a recorded receivable. Reed’s reserved $538 and reported a net payable to CCB of $1,248 at year-end. CCB subsequently demanded payment of amounts including the $2,025 payable; Reed’s stated it believed a loss on that demand was remote.
- Key operating risks include dependence on co-packers and distributors, customer concentration, inventory and demand forecasting, packaging and ingredient availability and costs, seasonality, competition, and the ability to pass costs on to customers. The company also highlighted risks from regulation of sweetened and alcoholic beverages, economic conditions, and climate-related impacts on water and agricultural inputs.
- The auditor issued an unqualified opinion on the financial statements but included a going-concern section. Critical audit matters included inventory valuation and the payable to the former related party. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether Reed’s obtained sufficient financing and maintained compliance with its debt agreements after the filing date, including the status and terms of Whitebox notes, waivers, and repayment obligations.
- Available liquidity and borrowing capacity in practice, and the timing and terms of any further capital raise or strategic financing.
- Whether gross-margin pressure eased, and whether net sales growth can be sustained despite declining core volume and higher promotional allowances.
- The recoverability and demand outlook for $16.2 million of inventory, including the assumptions behind inventory reserves and forecasts.
- The outcome of the CCB receivable and payable dispute, any offsets, and the financial effect of CCB’s payment demand.
- The effects of Nasdaq delisting, OTCQX trading, potential dilution, and the notes’ conversion and fundamental-change provisions on common shareholders.