Reed’s, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; amounts below are in thousands of dollars unless stated otherwise. Reed’s sells branded beverages, including Reed’s and Virgil’s products, and outsources all product manufacturing to co-packers.
Financial performance and liquidity
- Sales: Net sales were $11,157, down 8% from $12,182. Gross billings declined 9% to $12,453. Total cases fell 15%; core brand price per case rose 9%, while management cited lower volumes and insufficient inventory availability.
- Profitability: Gross profit was $2,698, down 8%; gross margin held at 24%. Cost of goods sold was 76% of net sales, unchanged year over year, though cost per case increased 8% to $13.81.
- Expenses and loss: Operating expenses fell 26% to $5,276, including lower delivery and handling, selling and marketing, and general and administrative expenses. Operating loss improved to $2,578 from $4,179. Interest expense increased to $1,779 from $801; net loss was $4,357 versus $4,980. Basic and diluted loss per share was $1.70 versus $2.56.
- Cash flow: Operating activities provided $1,117, compared with $2,207 used in Q1 2022. The company used $1,183 in financing activities; cash declined $66 to $467. Operating cash flow benefited from working-capital movements, including changes in receivables, inventory, and payables.
- Balance sheet and liquidity: Total assets were $23,123 and total liabilities were $35,445. Stockholders’ deficit was $12,322, and management reported negative working capital of $4,952. The company had $62 of current availability and $5,084 of additional borrowing capacity under its credit facility, as reported in the filing.
- Debt: The revolving credit facility had $7,915 outstanding before financing costs, with interest rates of 12.75% on receivables-based borrowings and 13.40% on inventory-based borrowings at quarter-end. Secured convertible notes had $13,000 of principal and $2,165 of accrued interest; the notes bear 10% interest and are secured by substantially all company assets. Q1 interest expense included $747 related to an excess line-of-credit debt fee.
- Other measure: Modified EBITDA, a non-GAAP measure, was a loss of $2,265, compared with a loss of $3,836 a year earlier.
Material changes and management commentary
- Reed’s beverage cases declined 11% and Virgil’s declined 20%. Management attributed volume pressure to price increases and inadequate inventory to meet demand, linked in part to tighter supplier credit terms. Core gross billings per case increased, but lower volume reduced total billings.
- Delivery and handling expense fell 25% to $2,120; shipping and handling cost declined to $3.46 per case from $3.90. Selling and marketing expense declined 34%, and general and administrative expense declined 19%.
- Management cited continued supply-chain constraints, labor and input-cost inflation, logistics issues, and port congestion. It expected inflationary trends and supply-chain pressures to continue through 2023, while noting moderation in freight costs and inflation.
- Management said it was pursuing sales growth, margin improvement, and cost reductions through channel expansion, product introductions, packaging savings, co-packer upgrades, vendor negotiations, and operating efficiencies. The filing provides no specific revenue or earnings guidance.
Going concern, contingencies, and subsequent events
- The filing states that recurring losses, stockholders’ deficit, and financing needs raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. Management was evaluating additional financing, but gave no assurance it would be available on acceptable terms or at all.
- On May 25, 2023, after quarter-end, investors agreed to purchase common shares and warrants for gross proceeds of approximately $4.1 million. On May 30, Whitebox agreed to provide approximately $1.5 million of additional notes. These subsequent financings are not reflected in March 31 cash or debt balances and may involve dilution and additional obligations.
- A former related party, California Custom Beverage (CCB), disputes $1,043 of a $1,315 receivable recorded by Reed’s; the company recorded a $538 reserve. CCB also demanded payment of amounts including $1,859 payable at March 31. Management considered an additional loss on the demand remote and recorded no additional accrual.
- All manufacturing is outsourced to co-packers. CCB, which is owned by the company’s founder and former CEO, is among the co-packers; disruption or a change in co-packers could affect production. The filing reports no material litigation matters.
- Disclosure controls and procedures were assessed as effective as of March 31, 2023, and the company reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the May financing proceeds and additional note issuance materially improve near-term liquidity, and the terms, repayment needs, and dilution associated with them.
- Whether the company can address its going-concern uncertainty, negative working capital, high borrowing costs, and upcoming debt obligations.
- Whether beverage volumes and product availability recover, and whether higher per-case costs or ongoing supply-chain pressures constrain margins.
- The outcome and collectability of the CCB receivable dispute and payment demand, including any effects on cash flow or co-packing arrangements.
- How much Q1 operating cash generation depended on working-capital changes, given the company’s continuing net losses.