REED's, INC. quarterly report, Q2 FY2022

Business context and reporting period

Reed’s, Inc. (NASDAQ: REED) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2022. The company sells Reed’s and Virgil’s branded beverages and other products. Financial amounts below are in thousands of dollars unless stated otherwise.

Financial performance and liquidity

Q2 gross billing increased 20% to $15,155; six-month gross billing rose 11% to $28,791. These company-defined measures are not GAAP revenue. Higher product costs and freight weighed on profitability: Q2 cost of goods sold rose 30%, faster than sales, and delivery and handling expense increased 53% to $3,832. For the first half, cost of goods sold increased 21% and delivery and handling expense rose 15% to $6,644. Selling and marketing and general and administrative costs declined over the six-month period.

Cash used in operations was $16,330 in the first half, compared with $10,309 in 2021. Financing activities provided $16,561, including $10,008 net proceeds from secured convertible notes and $5,034 from common-stock sales. Cash at June 30 was $280. Inventory was $24,193, up from $17,049 at year-end, and accounts receivable was $7,704, up from $5,183.

At June 30, current assets were $34,617 and current liabilities were $27,800, yielding reported working capital of $6,817. Stockholders’ equity was a deficit of $419. The balance sheet reports the line of credit net of financing costs at $11,094; the facility balance was $11,537. Convertible notes and accrued interest totaled $11,410 before unamortized financing costs; the reported net carrying amount was $10,227. The company reported $969 of current availability and $1,361 of additional borrowing capacity under its credit facility.

Material changes versus the prior comparable period

• Sales growth did not translate into higher gross profit: first-half gross profit fell 13%, and gross margin declined six percentage points to 24%.
• First-half net loss widened by $2,408. Interest expense was $1,342 versus $458 in the prior period; the 2021 comparison also included a $770 gain on forgiveness of a PPP note.
• Weighted-average shares increased 18% for the first half to 105.0 million, reflecting equity issuance; common shares outstanding were 112.7 million at June 30.
• The company replaced its prior receivables-and-inventory credit facility with a three-year Alterna Capital Solutions facility in March 2022 and issued $11.25 million of secured convertible notes in May.

Outlook, risks, contingencies and unusual items

The filing states that supply-chain constraints, labor shortages, raw-material inflation, logistics disruptions, port congestion and elevated freight costs suppressed margins and were expected to continue through the remainder of 2022. Management described initiatives to grow sales, improve margins, reduce freight costs and operating expenses, and expand channels and product offerings. New products mentioned include rebranded Virgil’s zero-sugar cans, Reed’s Hard Ginger Ale and Reed’s Stormy Mule. The filing provides no quantified revenue, earnings or margin guidance.

The financial statements disclose substantial doubt about the company’s ability to continue as a going concern within one year of issuance, citing the first-half net loss and operating cash use. Management said it projected adequate cash from operations and available credit for at least one year, while also evaluating additional financing; availability and terms are not assured.

The notes carry 10% annual interest, with half payable in cash and half added to principal, and mature May 9, 2025. Beginning in August 2022, holders could elect monthly principal amortization of $200 plus interest. The company reported making its first $200 cash amortization payment on August 9. On August 11, it obtained a waiver of a June 30 covenant violation and amendments that increased permitted ACS borrowings through September 30. The notes are secured by substantially all company assets, including intellectual property, and include cash repayment obligations in specified circumstances. The filing warns that the company may lack funds to meet these obligations.

Reed’s was not in compliance with Nasdaq’s $1 minimum bid-price rule. Its extended compliance period ran through August 15, 2022; the company said it intended to appeal and seek shareholder approval for a reverse split of up to 1-for-25. Delisting could reduce share liquidity and affect financing, and would constitute a fundamental change under the notes. The filing also identifies COVID-19, inflation, energy prices and the war in Ukraine as risks. Disclosure controls were deemed effective, and no material change in internal control was reported. No material legal proceedings were disclosed.

Important facts for investors to verify

• Current liquidity, credit availability and cash-burn trajectory, including the impact of inventory and receivables growth.
• Whether gross-margin and freight-cost improvement initiatives offset inflation and supply-chain pressures.
• The terms and ongoing compliance status of the convertible notes, including amortization, cash-settlement requirements, covenant waivers and potential dilution.
• The outcome of Nasdaq compliance efforts, reverse-split approval and any effect of delisting on the notes or access to capital.
• Financing needs and management’s basis for its going-concern projection, given the substantial-doubt disclosure and lack of assurance of additional funding.