Reed’s, Inc. — FY 2023 Form 10-K
Reporting period: Year ended December 31, 2023; comparisons are with FY 2022. Unless otherwise noted, financial amounts are in millions of dollars. The filing was signed April 1, 2024.
Business context
Reed’s sells premium natural beverages, principally Reed’s ginger drinks and Virgil’s craft sodas, through retail and food-service channels. Products are made entirely by third-party co-packers. The company reported distribution in more than 45,000 outlets. Its common stock was delisted from Nasdaq in February 2023 and is quoted on OTCQX under “REED.”
Financial results and liquidity
| Metric | FY 2023 | FY 2022 | Change |
|---|---|---|---|
| Gross billings | $50.689 | $59.464 | -15% |
| Net sales | $44.711 | $53.041 | -16% |
| Gross profit | $9.712 | $12.112 | -20% |
| Gross margin | 22% | 23% | -1 percentage point |
| Operating loss | $(9.417) | $(14.834) | Loss narrowed |
| Net loss | $(15.523) | $(20.057) | Loss narrowed |
| Modified EBITDA, non-GAAP | $(3.668) | $(13.146) | Loss narrowed |
| Cash used in operating activities | $(4.266) | $(15.530) | Use decreased |
Net loss per share was $4.39, compared with $9.07 in 2022; weighted-average shares rose 60% to 3,537,882. The filing presents per-share amounts after retroactive adjustment for the 1-for-50 reverse split.
- Volume and pricing: Cases sold fell 16% to 2.46 million. Reed’s volume declined 3%, Virgil’s 28%, and core-brand gross billings declined 11%. Core-brand price per case increased 4% to $20.32.
- Margins and expenses: Cost of goods sold excluding separately presented write-offs and product-quality charges was $31.884 million, or 71% of net sales versus 77% in 2022. Delivery and handling fell 35% to $7.561 million; selling and marketing fell 34% to $4.865 million; G&A fell 18% to $6.118 million. Interest expense increased 17% to $6.106 million.
- Year-end balance sheet: Cash was $0.603 million; current assets were $17.761 million and current liabilities $27.190 million. Inventory was $11.300 million, down from $16.175 million. Total assets were $18.883 million, total liabilities $38.064 million, and stockholders’ deficit $19.181 million.
- Debt: The ABL balance was approximately $9.959 million gross. Secured convertible notes had $14.300 million principal and $3.883 million accrued interest at year-end; the balance-sheet carrying amount, net of financing costs and discount, was $17.611 million. The notes are secured by substantially all company assets and carry substantial covenant, maturity, and refinancing risk.
Material changes and unusual items
- Revenue contraction reflected lower volumes, including a steep decline in Virgil’s, and reported inability to produce enough inventory to meet demand amid tighter supplier credit terms. The company also continued to streamline non-core products.
- FY 2023 gross profit included $1.848 million of inventory write-offs, primarily for packaging and formula changes and exited candy products, plus a $1.267 million write-down related to a quality hold on seasonal swing-lid products. An insurance claim was pending.
- A one-time December 2023 discount-policy change added $0.756 million of deductions. Management said gross margin would have been 30% excluding the discount adjustment, inventory write-offs, and quality-hold charge; this is a company-adjusted presentation, not reported GAAP margin.
- Average shipping and handling cost decreased to $3.07 per case from $3.95. Management attributed improved cost performance and the narrower operating loss to lower supply-chain costs and reduced operating expenses.
- The company issued 1,566,732 common shares in a May 2023 financing, raising net proceeds of $4.016 million, and issued warrants. Shares outstanding increased from 2,519,485 to 4,187,291 during the year.
Outlook, risks, and contingencies
Management said it expects inflation moderation to continue through 2024 and is focused on sales growth, channel expansion, new products, gross-margin improvement, freight savings, and expanding co-packer capacity. It described plans for new “better-for-you” products, anticipated EU expansion through local production during 2024, and a relaunched e-commerce platform with subscriptions. The filing gives no quantified revenue, earnings, or cash-flow guidance.
- Going concern and financing: The company reported a $15.523 million net loss and $4.266 million operating cash outflow. Management said year-end cash of $0.603 million plus $4.1 million received after year-end from stockholder SAFE investments was expected to fund its operating plan for at least 12 months from issuance of the financial statements. This depends on forecasts and financing assumptions; the auditor identified going-concern evaluation as a critical audit matter.
- Debt developments after year-end: A February 2024 agreement temporarily waived specified defaults and deferred payments on Whitebox notes. The company and Whitebox had tentatively agreed to further amendments, including revised conversion terms and maturities; certain terms remained tentative in the filing. The SAFE proceeds are recorded as a liability until conversion and are expected to convert at the lesser of $1.50 per share or the next financing price.
- Operating and market risks: The company depends on third-party co-packers, suppliers, distributors, and a small number of customers. Two customers represented approximately 24% and 15% of 2023 gross sales. Supply constraints, input-cost volatility, demand forecasting, and competition could affect sales, availability, and margins.
- Other exposures: A disputed receivable from former related-party co-packer California Custom Beverage remains subject to a reserve; the filing describes routine litigation but no material pending legal proceeding. The company also identifies product quality, regulation, packaging, water availability, climate, and cybersecurity risks.
- Governance and trading: The company disclosed significant stockholder influence, including D&D’s preemptive rights and board nomination rights. It does not expect to pay cash dividends in the foreseeable future. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to ICFR, as the company is exempt as a smaller reporting company.
Important facts for investors to verify
- Whether the SAFE financing converts as expected, on what final terms, and with what dilution and control effects.
- Whether the Whitebox amendments are finalized, whether waivers remain in effect, and how the company will meet debt service and maturity obligations.
- Whether cash forecasts and operating assumptions support the stated 12-month liquidity outlook, particularly if sales or margins fall short.
- The outcome and recoverability of the seasonal product quality claim and pending insurance claim, as well as the collectability of the CCB receivable.
- Whether sales volumes, particularly Virgil’s, recover and whether co-packer capacity and inventory can support demand while improving reported margins.