Reed's, Inc. (OTC:REED) is a renowned beverage company that has been making waves in the natural ginger drink market for over two decades. Founded in 1989, Reed's has established itself as a leader in the industry, known for its handcrafted, all-natural ginger beverages that have captured the hearts and taste buds of health-conscious consumers across the United States.
Business Overview and History
Reed's was founded in 1987 as a small ginger beer company based in Los Angeles, California. Over the years, the company has expanded its product portfolio to include a variety of ginger-based sodas, hard ginger ales, and other specialty beverages, establishing itself as the owner of the nation's leading portfolio of handcrafted, natural ginger beverages.
In 2018, Reed's signed a co-packing agreement with California Custom Beverage, LLC (CCB), an entity owned by the company's former chairman, Christopher J. Reed. This agreement allowed Reed's to produce certain products for agreed-upon fees. However, in 2023, the company received a demand letter from CCB regarding outstanding amounts owed, adding to its financial challenges.
Throughout its history, Reed's has faced various obstacles, including supply chain issues, inflation of raw materials and logistics costs, and inventory management problems. In 2023, the company experienced tightened credit terms from suppliers, which restricted its liquidity and impacted its ability to purchase raw materials. This led to reduced collateral and limited borrowing capacity on the company's revolving line of credit.
To address these challenges, Reed's has focused on strengthening its supply chain, implementing gross margin enhancement initiatives, driving efficiencies in transportation and warehouse costs, and reducing operating expenses. The company has also worked to diversify its co-packer network and secure national and regional approvals to transition from glass to can packaging across its product portfolio.
In the early 2000s, Reed's experienced significant growth, with its products gaining distribution in major retail outlets nationwide. The company's commitment to using high-quality, all-natural ingredients and its focus on craftsmanship have been integral to its success, setting it apart from the competition and appealing to health-conscious consumers seeking alternatives to traditional carbonated soft drinks.
However, in recent years, Reed's has faced a series of operational and financial challenges that have tested the resilience of the organization. The company has navigated through supply chain disruptions, inflationary pressures, and liquidity constraints, which have impacted its ability to meet customer demand and maintain its growth trajectory.
Financial Performance and Liquidity
Reed's financial performance has been a mixed bag in recent quarters. While the company has reported double-digit net sales growth and gross margin expansion in some periods, it has also grappled with significant operating losses and liquidity challenges.
In the third quarter of 2024, Reed's net sales declined 43% year-over-year to $6.8 million, primarily due to tightened credit terms from suppliers and a reduced collateral base that restricted the company's ability to purchase raw materials. Gross profit for the quarter was $1.2 million, with a gross margin of 18% compared to 34% in the prior-year period. The company's operating loss during the third quarter of 2024 was $3.1 million, or $0.62 per share, compared to a loss of $0.1 million, or $0.03 per share, in the same period of 2023.
For the nine months ended September 30, 2024, net sales revenue decreased 15% to $28.22 million, compared to $33.02 million in the same period last year. This decline was driven by lower sales volumes and elevated trade spending/discounts, which increased from 10% to 14% of gross sales. Cost of goods sold decreased 17% during this period, and as a percentage of net sales, improved from 72% to 70%. Gross margin increased from 28% to 30% year-over-year.
Operating expenses for the nine-month period declined 6%, with delivery and handling expenses down 26% and selling and marketing expenses down 3%. However, general and administrative expenses increased 18% due to higher employee costs, legal settlement expenses, professional fees, and quality assurance spending.
Overall, the company reported a net loss of $9.04 million for the nine months ended September 30, 2024, compared to a net loss of $8.93 million in the prior year period.
In terms of liquidity, as of September 30, 2024, Reed's had approximately $306,000 in cash and $27.1 million in total debt, net of capitalized financing fees. The company's debt-to-equity ratio stands at -1.24, indicating a highly leveraged financial position. Reed's has a current ratio of 0.38 and a quick ratio of 0.13, suggesting potential challenges in meeting short-term obligations.
Despite these challenges, Reed's has taken decisive steps to strengthen its financial position and liquidity. In November 2024, the company secured a new $10 million revolving credit facility with Whitebox, a long-term partner, and its largest shareholder, D&D Source of Life Holding LTD, assumed all of Reed's outstanding secured notes. These strategic transactions have provided the company with the necessary capital and financial flexibility to rebuild inventory levels, fulfill customer demand, and execute its growth initiatives.
Product Segments and Performance
Reed's operates in two main product segments: Core products and Non-Core products.
The Core products segment consists of Reeds and Virgils branded beverages, which are the strategic focus areas for the company. During the nine months ended September 30, 2024, the Core beverage volume represented 100% of all beverage volume. However, Core brand gross billing decreased by 10% to $32.86 million compared to $36.63 million during the same period in the prior year. This decline was driven by a 10% decrease in Reeds volume and a 16% decrease in Virgils volume, primarily due to price increases and inventory challenges. Prices on the core brands increased 1% to $20.81 per case.
The Non-Core products segment, which primarily consisted of Wellness Shots, candy, and slower-selling discontinued Reeds and Virgils SKUs, saw its gross billing decrease by 100% to $0 during the nine months ended September 30, 2024, compared to $211,000 in the prior year period. This reduction aligns with the company's strategy to focus on its Core products.
Operational Improvements and Growth Initiatives
To navigate the operational and financial headwinds, Reed's has implemented a series of optimization initiatives aimed at improving efficiency, reducing costs, and positioning the company for sustained growth. These efforts have included:
1. Streamlining the product portfolio: Reed's has identified its core Reeds and Virgils branded beverages as the strategic focus, simplifying operations and allocating resources to drive growth in these key product lines.
2. Enhancing the supply chain: The company has solidified its co-packer network, ensuring geographic coverage and optimizing freight efficiencies to mitigate supply chain challenges.
3. Expanding distribution and channel diversification: Reed's has successfully secured new authorizations and distribution with major retailers, including Safeway Albertsons, Giant Eagle, National Grocers Vitamin Cottage, and Harris Teeter, among others. The company has also made progress in its e-commerce channel, which is expected to contribute over $1 million in sales in 2025.
4. Launching innovative product lines: Reed's is in the final stages of developing a new line of better-for-you beverages featuring organic ginger, adaptogens, and lower calorie and sugar content. This functional beverage line is expected to complement the core product portfolio and capitalize on the growing demand for healthier refreshment options.
5. Fully outsourcing manufacturing: To address supply chain challenges and improve efficiency, Reed's has fully outsourced its manufacturing process.
6. Restructuring selling prices: The company has implemented price adjustments to help offset increased costs and maintain profitability.
Risks and Outlook
While Reed's has made significant strides in addressing its operational and financial challenges, the company still faces several risks that investors should consider:
1. Ongoing supply chain and inflationary pressures: The beverage industry continues to grapple with supply chain disruptions and inflationary costs, which could impact Reed's ability to maintain profitability and meet customer demand.
2. Competitive landscape: Reed's operates in a highly competitive market, with both established players and emerging brands vying for market share. The company's ability to differentiate its products and maintain its brand appeal will be crucial.
3. Regulatory changes: The beverage industry is subject to various regulatory requirements, and any changes in labeling, packaging, or other compliance standards could impact Reed's operations and costs.
4. Liquidity constraints: The company's current financial position, with low cash reserves and high debt levels, poses a risk to its ability to fund operations and growth initiatives.
Despite these risks, Reed's is cautiously optimistic about its future prospects. The company has withdrawn its full-year 2024 guidance due to inventory challenges faced year-to-date and is not providing new guidance at this time. However, the successful launch of the new functional beverage line and the strengthened liquidity position through the new credit facility provide a solid foundation for the company to regain its growth momentum and solidify its position as a leading player in the natural ginger beverage market.
Conclusion
Reed's has faced a challenging period, but the company's commitment to innovation, operational excellence, and financial discipline has positioned it for a potential turnaround. With the recent strategic transactions and a renewed focus on its core product lines, Reed's is poised to regain its fizz and capitalize on the growing consumer demand for healthier, all-natural beverages. As the company continues to execute its optimization initiatives and expand its distribution, investors will keenly watch to see if Reed's can reclaim its status as a ginger powerhouse in the beverage industry.