Reed’s, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unless stated otherwise, amounts are in millions of dollars; the filing presents financial statements in thousands.
Business context and reporting period
Reed’s sells branded beverages under the Reed’s and Virgil’s names, alongside smaller non-core product lines. The company said it was expanding sales channels, including club, drug, convenience and e-commerce, and using co-packers for manufacturing. Management’s stated priorities were sales growth, margin improvement and operating-cost control.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net sales | $11.270 | $10.853 | $23.416 | $20.376 |
| Gross profit | $3.269 | $2.988 | $7.122 | $5.858 |
| Gross margin | 29% | 28% | 30% | 29% |
| Operating loss | $(3.709) | $(1.434) | $(7.961) | $(3.684) |
| Net loss | $(3.141) | $(1.750) | $(7.649) | $(4.330) |
| Loss per share, basic and diluted | $(0.03) | $(0.03) | $(0.09) | $(0.08) |
For the first half, gross profit improved, but operating expenses rose 58% to $15.083 million. Delivery and handling expense increased 111% to $5.795 million; selling and marketing rose 38% to $4.849 million; and general and administrative expense rose 35% to $4.439 million. Management attributed cost increases to freight and e-commerce fulfillment, sales-force growth, stock compensation, employee and consulting costs, legal settlements and public-company costs.
Operating cash flow was $(10.309) million in H1, compared with $(5.028) million in H1 2020. Investing cash use was $0.101 million; financing provided $10.469 million, including $7.334 million net proceeds from a stock offering. Cash increased $0.059 million to $0.654 million.
At June 30, 2021, working capital was $10.470 million, stockholders’ equity was $11.566 million, and the company had $2.939 million drawn on its revolving credit line with $4.343 million of additional borrowing capacity. The credit facility’s maximum capacity is $13 million and was renewed to March 30, 2022. Lease liabilities totaled $0.627 million; the PPP loan was forgiven, leaving no note payable balance. Management said available operating cash and line capacity were expected to support going concern for at least one year from issuance of the statements.
Material changes versus prior periods
- Q2 net sales rose 4%, while operating loss widened to $3.709 million from $1.434 million, primarily as operating expenses outpaced gross-profit growth.
- H1 net sales increased 15% and gross margin improved one percentage point, but net loss widened to $7.649 million from $4.330 million and operating cash use more than doubled.
- Q2 results included a $0.770 million gain from forgiveness of the PPP loan; H1 results also included that gain and $0.345 million in legal settlements.
- In May, Reed’s issued 6.68 million common shares at $1.18 per share, receiving $7.333 million net. Common shares outstanding rose from 86.3 million at year-end to 93.6 million at June 30; 12.17 million options and 3.09 million warrants were outstanding at quarter-end.
Outlook, risks and unusual items
- Management anticipated freight and raw-material costs would remain elevated or continue increasing through the balance of 2021. It cited freight-capacity constraints, higher raw-material prices and procurement delays, and said mitigation plans were underway. The filing provides no specific revenue or earnings guidance.
- COVID-19 had affected operating results, and management expected continued impact for the rest of the year. It identified potential consumer-demand weakness and possible workforce or supply-chain disruptions, while noting recent demand growth and expected long-term product demand.
- The company’s risk disclosures highlight that product price sensitivity may limit its ability to pass freight-cost increases to customers. Customer concentration included two customers representing 19% and 12% of Q2 gross billings; two vendors each represented 12%–13% of H1 purchases.
- Related-party matters include a $0.740 million receivable from California Custom Beverage, a related-party company, and a $0.799 million payable to it. Chairman John Bello received 400,000 restricted shares in exchange for collateral support for the credit facility.
- Management reported effective disclosure controls as of June 30, 2021 and no material changes in internal control over financial reporting during the quarter. It reported no legal proceedings required to be disclosed in the filing.
Important facts for investors to verify
- Whether revenue growth and improved gross margin can offset rising delivery, marketing and administrative costs.
- Whether operating cash burn moderates and the company maintains sufficient availability under its asset-based credit facility and compliance with its covenants.
- The extent and duration of freight, raw-material, COVID-19 and supply-chain pressures, and whether mitigation actions are effective.
- The impact of the May equity issuance and outstanding options and warrants on future share dilution.
- Collection of the related-party receivable, the status of collateral supporting the credit facility, and the implications of related-party transactions.