Reed’s, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited interim results; amounts below are in millions of dollars unless noted. Reed’s sells branded beverages including Reed’s and Virgil’s.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $12.094 | $13.402 | $38.001 | $36.818 |
| Gross profit / margin | $2.435 / 20% | $3.872 / 29% | $8.666 / 23% | $10.994 / 30% |
| Operating loss | $(2.454) | $(3.653) | $(11.169) | $(11.614) |
| Net loss | $(3.231) | $(3.887) | $(13.288) | $(11.536) |
| Loss per share, basic and diluted | $(0.03) | $(0.04) | $(0.13) | $(0.13) |
- Q3 gross billings declined 3% to $14.101 million; promotional and other allowances rose 77% to $2.007 million, contributing to a 10% decline in net sales. Core brand price per case rose 17%, while Reed’s and Virgil’s volumes declined 15% and 18%, respectively.
- For the first nine months, gross billings increased 6% and net sales 3%. Cost of goods sold rose 14%; management cited raw-material, labor, logistics and freight inflation. Cost of goods sold was 77% of net sales versus 70% a year earlier.
- Operating expenses fell 35% in Q3 and 12% year to date. Q3 delivery and handling fell 27%, selling and marketing fell 54%, and general and administrative expense fell 21%. Operating losses narrowed, but higher interest expense contributed to a larger nine-month net loss.
- Modified EBITDA, a non-GAAP measure, was a loss of $2.182 million in Q3 versus $3.090 million, and a loss of $10.353 million for nine months versus $9.591 million.
Cash, liquidity and debt
- Cash was only $25,000 at September 30, 2022. Operating cash use was $16.507 million for the first nine months, compared with $15.305 million a year earlier; financing activities provided $16.485 million.
- Current assets were $28.845 million and current liabilities $25.311 million; the MD&A reports approximately $3.533 million of working capital. Total liabilities were $33.733 million and stockholders’ equity was a deficit of $3.436 million.
- The asset-based Alterna Capital Solutions (ACS) line had $9.506 million outstanding before financing costs. The filing reports $151,000 of current availability and $3.494 million of additional borrowing capacity. Its stated borrowing limit is $13 million, with interest rates tied to prime and minimum rates of 8%–16%, depending on the advance.
- Secured convertible notes had $13.350 million of principal and $386,000 of accrued interest at quarter-end; the balance-sheet carrying amount, net of financing costs, was $12.579 million. Notes bear 10% interest, mature May 9, 2025, and are secured by substantially all assets, including intellectual property.
- The company was not in compliance with a note covenant at September 30. On November 13, Whitebox waived the violation in exchange for $96,000 and 2,470,118 shares. In November, Reed’s also paid off $2.5 million of notes in cash and issued 3,483,993 shares for make-whole interest.
- Common shares outstanding increased to 112.753 million at quarter-end from 93.734 million at year-end 2021; the March 2022 private placement generated approximately $5.0 million net and included warrants.
Outlook, risks and notable items
- The filing states that recurring losses and operating cash use raise substantial doubt about the company’s ability to continue as a going concern within one year of issuance. Management said it was evaluating financing alternatives and projected that operations and available credit would be adequate for at least one year; it cautioned that additional financing might not be available on favorable terms or at all.
- Management focused on sales growth, margin improvement, freight-cost reduction, supply-chain strengthening and lower operating costs. It reported Q3 shipping and handling costs of $3.38 per case, down from $4.47 per case in the first half of 2022, but expected inflation and supply-chain pressures to continue through the remainder of 2022. No formal revenue or earnings guidance was provided.
- Nasdaq had granted continued-listing relief through February 13, 2023, subject to conditions, after citing failure to meet minimum bid-price and stockholders’ equity requirements. Reed’s expected to complete a reverse stock split by December 31, 2022, but warned that it might not restore compliance. Delisting could trigger a fundamental-change repurchase right under the notes, which the company warned could likely render it insolvent.
- Other risks include dependence on financing and cash generation, customer and vendor concentration, competition, COVID-19 impacts, and possible supply interruptions. The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
Investor verification points
- Confirm current cash, actual availability under ACS, and the company’s ability to fund operations and debt service.
- Review subsequent note repayments, waiver terms, amortization requirements, conversion and dilution exposure, and any further covenant compliance.
- Check whether Reed’s met Nasdaq’s interim conditions and minimum bid-price and equity requirements, and whether a reverse split occurred.
- Track whether sales, promotional allowances, product volume and gross margins improved after Q3, and whether freight and input-cost pressures eased.
- Reconcile liquidity disclosures: the balance-sheet amounts imply working capital of about $3.534 million, while the MD&A states $3.533 million; clarify current versus additional borrowing availability.