REED’s, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Dollar amounts below are in millions unless otherwise noted.
Business context and results
Reed’s sells branded beverages and related products, including Reed’s and Virgil’s. It reported increased sales volume and expanded distribution efforts, including drug, convenience, and e-commerce channels. The company continued using co-packers and streamlining its product portfolio.
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $12.146 | $9.523 | +28% |
| Gross profit | $3.853 | $2.870 | +34% |
| Gross margin | 32% | 30% | +2 percentage points |
| Operating loss | $(4.251) | $(2.250) | Loss increased |
| Net loss | $(4.507) | $(2.580) | Loss increased 75% |
| Basic and diluted loss per share | $(0.05) | $(0.05) | No change |
| Modified EBITDA, non-GAAP | $(3.444) | $(1.409) | Loss increased |
Cash flow, liquidity, and debt
- Cash used in operating activities was $5.059 million, compared with $2.352 million in Q1 2020. Investing activities used $0.097 million; financing activities provided $4.716 million. Cash ended the quarter at $0.155 million, down from $0.595 million at year-end 2020.
- Working capital was $5.698 million, versus $9.528 million at December 31, 2020. Stockholders’ equity was $6.770 million, down from $10.404 million.
- The revolving line of credit balance was $4.256 million, with $2.513 million of unused borrowing capacity. The facility’s stated maximum capacity is $13 million; the company reported compliance with its financial covenants at quarter-end.
- The PPP loan balance was $0.770 million, bearing 1% interest. Reed’s applied for full forgiveness but said forgiveness was not assured. Lease liabilities totaled $0.663 million.
- Management stated it projected adequate cash from operations and available credit to continue as a going concern for at least one year from the report date.
Material changes and management commentary
- Gross sales rose 26%; net sales increased 28%. Core beverage volume increased 33%, led by Reed’s (+37%) and Virgil’s (+29%). Discounts as a share of gross sales declined to 9% from 10%.
- Cost of goods sold increased 25%, but declined to 68% of net sales from 70%, supporting higher gross margin.
- Delivery and handling expense more than doubled to $3.286 million, or 27% of net sales versus 13%. Management attributed the increase to higher volume, e-commerce fulfillment, and freight-rate inflation; delivery cost per case rose to $4.43 from $2.26.
- Selling and marketing expense increased 15% to $2.215 million. General and administrative expense increased 35% to $2.603 million, partly due to legal settlements, employee costs, consulting, and public-company and licensing costs. Modified EBITDA included $0.353 million for legal settlements.
- Management described margin initiatives including outsourced manufacturing, a narrower product portfolio, improved vendor terms, revised pricing, and cost mitigation. It expected transportation costs to remain elevated and increase through 2021; no numerical earnings or revenue guidance was provided.
Risks, contingencies, and subsequent events
- COVID-19 could affect demand, staffing, and the supply chain; management anticipated continued pandemic effects during 2021. Freight capacity constraints and rising costs could pressure margins, and the company may not be able to pass those costs to customers.
- Two customers represented 23% and 12% of Q1 2021 gross sales. Two vendors each represented approximately 13% of purchases. These concentrations, together with reliance on distributors and third-party brewers, expose the business to counterparty and supply risks.
- The company warned that PPP forgiveness or eligibility could be challenged, potentially requiring repayment and other consequences. No legal proceedings requiring disclosure were reported.
- After quarter-end, Reed’s sold 6.68 million common shares at $1.18 per share in an offering that closed May 7, 2021. The placement agent fee was 6.5% of gross proceeds. This followed 86.8 million shares outstanding at March 31; the filing reported 93.6 million shares outstanding as of May 11.
Investor verification points
- Assess whether revenue growth and improved gross margin can offset sharply higher freight and delivery costs.
- Verify operating cash burn, borrowing availability, and compliance with the credit facility’s working-capital and tangible-net-worth covenants.
- Track the SBA’s decision on the $0.770 million PPP loan forgiveness application and any repayment obligation.
- Review the post-quarter share issuance, net proceeds after fees, and resulting dilution; also consider outstanding options and warrants.
- Evaluate customer and supplier concentration, inventory growth, and management’s assumptions about continued demand and supply-chain stability.