Business context and reporting period
Reed’s, Inc. is a beverage company selling Reed’s ginger beverages and Virgil’s craft sodas through retail, distributor, e-commerce and on-premise channels. This 10-K reports the fiscal year ended December 31, 2021; the figures below compare full-year 2021 with full-year 2020, not fourth-quarter results alone. Financial statement amounts are in thousands of dollars unless otherwise noted.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Gross billings | $54.658 million | $46.801 million | +17% |
| Net sales | $49.599 million | $41.615 million | +19% |
| Gross profit / margin | $13.598 million / 27% | $12.766 million / 31% | Profit +7%; margin down 4 percentage points |
| Operating expenses | $29.569 million | $21.382 million | +38% |
| Operating loss | ($15.971 million) | ($8.616 million) | Loss widened |
| Net loss | ($16.402 million) | ($10.177 million) | Loss widened 61% |
| Basic and diluted loss per share | ($0.18) | ($0.17) | Worsened |
| Cash used in operating activities | $17.589 million | $9.496 million | Outflow increased |
| Cash at year-end | $49,000 | $595,000 | Down |
Delivery and handling costs rose 74% to $11.939 million, or 24% of net sales versus 16% in 2020. Cost of goods sold increased 25% to $36.001 million and rose to 73% of net sales from 69%. Selling and marketing expense increased 29% to $9.665 million; general and administrative expense increased 13% to $7.965 million.
Modified EBITDA, a non-GAAP measure, was a loss of $13.509 million, compared with a loss of $6.815 million in 2020. The company reported a $770,000 gain from forgiveness of its PPP loan; interest expense was $1.201 million.
At December 31, 2021, current assets were $24.705 million and current liabilities were $21.724 million, yielding reported working capital of $2.981 million. The balance sheet included $10.229 million outstanding on the revolving line of credit, $22.118 million in total liabilities, and $4.203 million in stockholders’ equity. Inventory increased to $17.049 million from $11.119 million. The company reported only $109,000 of unused borrowing capacity on its then-current facility.
Material changes versus 2020
- Core beverage volume increased 22% to 2.993 million cases; Reed’s volume grew 28% and Virgil’s 15%. Core gross billings rose 18%.
- Despite sales growth, gross margin fell from 31% to 27%, reflecting higher product and distribution costs. Management cited freight inflation, labor shortages, raw-material cost increases, logistics challenges and port congestion.
- Operating expenses grew faster than gross profit, and operating and net losses widened. Weighted-average shares outstanding increased 50% to 91.2 million, reflecting equity issuance and other share activity.
- The company raised $7.327 million net in a May 2021 public offering of 6.68 million shares. It also expanded products and channels, including canned ginger beer, mocktails and a zero-sugar alcoholic Classic Mule.
Outlook, risks and unusual items
Management focused on channel expansion, new product launches, improved sales execution, co-packer upgrades, purchasing leverage and operating-cost reduction. It did not provide quantified financial guidance. Management expected supply-chain and cost pressures to continue through 2022 and expressed a belief that long-term demand for its products would remain strong.
The company and its auditor stated that substantial doubt exists about Reed’s ability to continue as a going concern. Management said year-end cash was insufficient to fund operations for the following 12 months and that additional financing may be required; there is no assurance financing will be available on acceptable terms. The auditor’s report includes a going-concern emphasis and identifies inventory valuation as a critical audit matter. The statements do not include adjustments that might result if the company cannot continue as a going concern.
Subsequent to year-end, Reed’s completed a March 2022 private placement of common stock and warrants, with approximately $5.1 million in net proceeds. It also entered a three-year, up-to-$13 million asset-based credit facility with Alterna Capital Solutions and paid off the Rosenthal facility on March 30, 2022. The new facility carries minimum interest rates of 8.0% on receivables advances, 8.5% on inventory advances and 16.0% on over-advances, plus fees.
Other key risks include Nasdaq’s minimum-bid-price requirement, with an August 15, 2022 deadline to regain compliance; the company had authorization for a reverse stock split if needed. Additional risks include dependence on distributors and contract manufacturers, aluminum-can and other supply constraints, customer concentration, premium-beverage competition, seasonal demand, potential dilution from financing, and product, labeling and alcohol regulation. No material pending legal proceedings were reported. Management assessed disclosure controls and internal control over financial reporting as effective at year-end; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether the March 2022 financing and replacement credit facility provide sufficient liquidity, and the facility’s borrowing availability, covenants, collateral and ongoing cost.
- Whether the company can reduce freight, packaging and manufacturing costs enough to recover gross margin while sustaining sales growth.
- Inventory demand forecasts and recoverability: inventory rose substantially, and inventory valuation was the auditor’s critical audit matter.
- Progress toward Nasdaq bid-price compliance by the stated deadline and any reverse-split action.
- The dilution and potential future share issuance associated with equity offerings, outstanding options and warrants, including the March 2022 warrants.
- Customer and distributor concentration, co-packer capacity, and the collectability of the $933,000 related-party receivable from California Custom Beverage.