REED’s, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2021. Reed’s sells branded beverages, primarily Reed’s and Virgil’s; management says these core beverages represented 99% of beverage volume. Amounts below are in thousands of dollars, except per-share data, percentages, and share counts.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $13,402 | $10,562 | $36,818 | $30,938 |
| Gross profit | $3,872 | $3,386 | $10,994 | $9,244 |
| Gross margin | 29% | 32% | 30% | 30% |
| Operating expenses | $7,525 | $5,662 | $22,608 | $15,204 |
| Operating loss | $(3,653) | $(2,276) | $(11,614) | $(5,960) |
| Net loss | $(3,887) | $(2,590) | $(11,536) | $(6,920) |
| Loss per share, basic and diluted | $(0.04) | $(0.04) | $(0.13) | $(0.12) |
| Modified EBITDA, non-GAAP | $(3,090) | $(1,954) | $(9,591) | $(4,808) |
Q3 gross billings increased 22% to $14,538; net sales rose 27%, reflecting lower promotional allowances. For the first nine months, gross billings rose 17% and net sales rose 19%. Core-brand case volume grew 25% year to date: Reed’s volume increased 25% and Virgil’s 19%.
Q3 cost of goods sold rose 33%, faster than sales, and gross margin fell to 29% from 32%. The company attributed pressure principally to supply-chain costs. For the nine-month period, gross margin held at 30%, while operating expenses rose 49%, notably delivery and handling (+80%), selling and marketing (+39%), and general and administrative (+28%).
Cash flow, debt, and liquidity
- Cash from operating activities was negative $15,305 for the nine months, versus negative $6,768 a year earlier. Investing activities used $101; financing activities provided $15,752. Ending cash was $941, up from $595 at December 31, 2020.
- At September 30, working capital was $7,102, down from $9,528 at year-end; stockholders’ equity was $8,177, down from $10,404.
- Revolver borrowings were $8,255, with $1,293 of reported unused capacity under the Rosenthal facility. The facility matures March 30, 2022, is secured by substantially all assets (with specified collateral provisions), and includes minimum working-capital and tangible-net-worth covenants. The company reported compliance at quarter-end.
- The $770 Paycheck Protection Program loan was forgiven during the period, producing a $770 gain and leaving no balance outstanding.
Changes, outlook, and risks
Despite higher sales, losses widened: Q3 net loss increased 50% year over year and nine-month net loss increased 67%. The nine-month comparison includes the $770 PPP forgiveness gain in 2021. Weighted-average shares increased 49% in Q3 and 59% year to date, reflecting equity issuance; 6.68 million shares were sold in a May 2021 offering for net proceeds of $7,327.
Management cited freight capacity constraints and higher freight rates, raw-material inflation and procurement delays, labor shortages, logistics challenges, and port congestion. These issues constrained the company’s ability to fulfill demand and suppressed margins and income. Management expected elevated costs for the remainder of 2021 and expected supply-chain effects to continue through mid-2022. It described plans to improve capacity and mitigate cost pressure, including co-packer utilization, vendor negotiations, portfolio streamlining, and pricing actions. No numeric financial guidance was provided.
Management stated that cash from operations and available credit were projected to support going-concern operations for at least one year from issuance of the financial statements. This assessment is subject to substantial operating and liquidity pressures: the company reported a nine-month operating cash outflow of $15,305 and only $1,293 of remaining revolver capacity. COVID-19 could further disrupt demand, employees, or suppliers.
Other items and exposures include customer concentration (one customer represented 24% of Q3 gross billings; one customer accounted for 27% of gross receivables at quarter-end), related-party receivables of $826 and payables of $856, and 11.26 million outstanding options. John J. Bello received 400,000 restricted shares for related collateral support to the revolver. The filing says ordinary-course legal proceedings were not required to be disclosed; it also reports $345 of legal settlements in the nine-month Modified EBITDA reconciliation. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether sales growth can translate into improved margins as freight, raw-material, and supply-chain costs remain elevated.
- Whether operating cash burn, revolver availability, and covenant compliance support management’s going-concern outlook; confirm facility terms and renewal or refinancing plans before the March 2022 maturity.
- The sustainability and cash-flow implications of higher inventory, receivables, and payables, including customer and vendor concentration and related-party balances.
- The effects of equity issuance, outstanding options and warrants, and future stock-based compensation on dilution and reported performance.
- The nature and status of the $345 legal-settlement adjustment and the terms and remaining amortization of the financing-cost arrangement tied to the 400,000 restricted shares.