Business context and reporting period
Reed’s, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2020, with comparable 2019 periods. The company sells Reed’s and Virgil’s beverages and related products. It emphasized core beverage brands, outsourced production through co-packers, expanded e-commerce sales, and efforts to grow sales while reducing costs.
Financial performance
Amounts below are in millions of dollars unless otherwise noted; financial statement amounts are rounded from thousands.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $10.562 | $8.740 | $30.938 | $26.669 |
| Gross profit | $3.386 | $2.502 | $9.244 | $7.279 |
| Gross margin | 32% | 29% | 30% | 27% |
| Operating loss | $(2.276) | $(4.378) | $(5.960) | $(11.365) |
| Net loss | $(2.590) | $(4.565) | $(6.920) | $(12.289) |
| Loss per share, basic and diluted | $(0.04) | $(0.14) | $(0.12) | $(0.38) |
- Q3 net sales increased 21%; nine-month sales rose 16%. Gross sales, a company-defined non-GAAP measure, increased 18% in Q3 and 14% year to date.
- For the nine months, cash used in operating activities was $6.768 million, versus $14.628 million in 2019. Investing activities used $0.158 million; financing activities provided $6.888 million. Cash declined $38,000 to $875,000.
- At September 30, cash was $875,000 and unused borrowing capacity was $3.037 million. Current assets were $16.053 million and current liabilities $16.260 million, resulting in negative working capital of $207,000. Stockholders’ equity was $558,000.
- Debt and lease obligations included a $4.596 million gross revolving-line balance ($4.272 million net of financing costs), a $5.128 million related-party convertible note including accrued interest, a $770,000 PPP loan, and $706,000 of lease liabilities. The revolving line matures March 30, 2021; the related-party note matures April 21, 2021.
- Non-GAAP Modified EBITDA remained negative: $(1.954) million in Q3 versus $(3.329) million, and $(4.808) million for nine months versus $(8.978) million. The company cautions that this measure is not a substitute for GAAP results or operating cash flow.
Material changes versus prior comparable periods
- Higher sales and improved gross margin reflected increased core-brand volume, particularly Reed’s, and lower promotional allowances as a share of gross sales. Management reported Q3 core-brand volume growth of 17% and nine-month growth of 13%.
- Operating expenses declined 18% in Q3 and 18% year to date, mainly due to lower selling and marketing costs and lower general and administrative costs. Q3 selling and marketing spending was down 25%; nine-month spending was down 30%.
- Delivery and handling expense increased with volume: 16% year to date, although it remained 16% of net sales. Cost of goods sold as a share of net sales improved to 68% in Q3 from 71%, and to 70% year to date from 72%.
- The April 2020 public offering raised $5.310 million net through issuance of 15,333,334 shares. Common shares outstanding increased to 62,960,570 at September 30 from 47,595,206 at year-end 2019.
Outlook, risks and unusual items
- No numerical revenue, earnings, or cash-flow guidance is provided. Management said it was focused on sales growth, channel expansion, new products, improved execution, margin improvement, co-packer upgrades, purchasing efficiency, and cost reductions.
- Management reported no material net operating-results or liquidity impact from COVID-19 through September 30, but warned of possible demand, employee, supplier, transportation, and broader economic disruptions. Q3 shipments were 14% above Q1 and 2% below Q2, which management described as consistent with seasonal patterns.
- The company reported a nine-month net loss of $6.920 million, operating cash use of $6.768 million, and negative working capital. It relies on available credit and access to capital markets to support liquidity; the filing states the statements were prepared on a going-concern basis.
- The $770,000 PPP loan is repayable unless forgiven. Reed’s intended to apply for forgiveness but could not assure any amount would be forgiven; the filing also describes eligibility and potential repayment risks.
- Disclosure controls and internal control over financial reporting were deemed ineffective. Identified material weaknesses involved controls over outsourced IT providers and inadequate segregation of accounting duties. Management expected remediation by year-end 2020, subject to validation and testing.
- Customer concentration was notable: two customers represented 24% and 12% of Q3 gross sales; for the first nine months, two customers represented 25% and 13%. One customer accounted for 23% of gross accounts receivable at quarter-end.
- Related-party matters include the $5.128 million Raptor convertible note and receivables from an entity owned by Christopher J. Reed, including $391,000 due at September 30. The filing also describes options, warrants, and restricted shares that may dilute shareholders.
Important facts for investors to verify
- Whether operating cash flow, working capital, and borrowing availability are sufficient as the revolving credit line approaches its March 2021 maturity.
- The outcome and timing of the PPP loan-forgiveness application, and any repayment or eligibility consequences.
- Whether sales growth and margin improvements persist without a material rebound in promotional, marketing, freight, or production costs.
- Progress in remediating the disclosed internal-control material weaknesses and whether remediation is independently validated.
- Customer and vendor concentration, related-party receivables and guarantees, and the potential dilution from outstanding options, warrants, and convertible debt.