Reed’s, Inc. — FY2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing provides annual results, not standalone fourth-quarter figures. Financial amounts below are in millions of dollars unless stated otherwise.
Business context
Reed’s sells natural and craft beverages, principally Reed’s ginger beer and ginger ale and Virgil’s craft sodas, through more than 40,000 outlets. Production is fully outsourced to co-packers. In 2020, the company launched Reed’s Real Ginger Ale, zero-sugar versions, wellness ginger shots, and an alcoholic Moscow Mule product through a licensing arrangement.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Gross sales | $46.801 | $39.300 | +19% |
| Net sales | $41.615 | $33.820 | +23% |
| Gross profit / margin | $12.766 / 31% | $7.876 / 23% | Margin +8 points |
| Operating expenses | $21.382 | $22.732 | -6% |
| Operating loss | $(8.616) | $(14.856) | Loss narrowed 42% |
| Net loss | $(10.177) | $(16.112) | Loss narrowed 37% |
| Basic and diluted loss per share | $(0.17) | $(0.46) | Loss per share narrowed |
| Modified EBITDA (non-GAAP) | $(6.815) | $(12.765) | Loss narrowed |
Gross margin improvement reflected lower promotional discounts and cost savings. Core beverage case volume rose 20%; Reed’s volume rose 29% and Virgil’s rose 11%. Selling and marketing expense declined 18%, while delivery and handling expense increased 14% with higher volume.
- Cash flow: Cash used in operating activities was $9.496, compared with $18.161 used in 2019. Investing activities used $0.161; financing activities provided $9.339. Cash decreased by $0.318 to $0.595 at year-end.
- Liquidity: Working capital was $9.528, versus $4.885 in 2019; stockholders’ equity was $10.404, versus $1.147. The company reported $5.166 of unused borrowing capacity under its Rosenthal facility at year-end.
- Debt: The Rosenthal revolving line had no balance at year-end and a $13.0 maximum capacity; it was scheduled to mature March 30, 2021, with annual renewals thereafter. The $0.770 PPP loan remained outstanding, and lease liabilities totaled $0.685. Total liabilities were $9.653, down from $14.845.
- Capital raising and dilution: Two 2020 stock offerings generated $16.564 net proceeds. Shares outstanding increased from 47.6 million to 86.3 million; weighted-average shares rose 73% to 60.6 million.
Material changes and unusual items
- Net sales increased 23%, while promotional and other allowances fell to $5.186 from $5.480. Gross profit rose 62%.
- The company settled its related-party Raptor note in December 2020: paid $4.250 cash, issued 1.339 million shares on conversion of $0.750 of the note, and issued a five-year warrant for 1.0 million shares. The settlement resulted in a $0.262 loss on extinguishment of debt.
- The company received a $0.770 PPP loan in April 2020 and applied for full forgiveness on March 17, 2021. Forgiveness was not assured in the filing.
- Management reported that prior-year material weaknesses in controls over outsourced IT providers and segregation of accounting duties were remediated by December 31, 2020. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation.
Outlook, management commentary, and risks
Management stated that COVID-19 had no material net impact on 2020 operating results or year-end liquidity and projected adequate operating cash flow and credit availability for at least one year from issuance of the financial statements. It cited sales growth, channel expansion, new products, improved sales execution, co-packer and purchasing efficiencies, and cost control as priorities. It did not provide quantified revenue or earnings guidance.
- Despite improved results, the company remained loss-making and used substantial operating cash. Continued financing access and achievement of sales targets are important to its liquidity outlook.
- Supply-chain risks include industry aluminum-can shortages, packaging and ingredient cost increases, freight costs, and reliance on short-term co-packing arrangements and distributors.
- Two broker/distributors represented approximately 25% and 12% of 2020 gross sales. One customer accounted for 23% of year-end gross accounts receivable.
- The company disclosed a $0.682 receivable from related-party co-packer CCB and $0.557 payable to CCB at year-end. CCB is owned by founder Christopher Reed.
- Other risks include intense competition, changing consumer preferences, inventory forecasting and obsolescence, distributor/customer concentration, potential dilution from future equity issuance, and the possibility that PPP loan forgiveness is denied.
- The independent auditor issued an unqualified opinion on the financial statements and identified inventory reserves and management’s liquidity assessment as critical audit matters. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether 2021 operating cash flow and available credit support management’s liquidity forecast, including renewal terms for the Rosenthal facility.
- Whether the PPP loan was forgiven, and any remaining repayment obligation.
- Whether sales growth and margin gains persist after promotional reductions and cost-saving initiatives.
- Exposure to can availability, co-packer capacity, distributor/customer concentration, and related-party balances and arrangements.
- Potential dilution from outstanding options, warrants, equity plans, and future financing needs.