REED’S, INC. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Amounts below are in thousands of dollars unless otherwise noted. Reed’s sells branded beverages, including Reed’s and Virgil’s products.
Financial results
| Metric | Q1 2022 | Q1 2021 | Change / context |
|---|---|---|---|
| Gross billings | $13,636 | $13,281 | Up 3% |
| Promotional and other allowances | $1,454 | $1,135 | Up 28%; 11% of gross billings versus 9% |
| Net sales | $12,182 | $12,146 | Up less than 1% |
| Cost of goods sold | $9,250 | $8,293 | Up 12%; 76% of net sales versus 68% |
| Gross profit / margin | $2,932 / 24% | $3,853 / 32% | Gross profit down 24%; margin down 8 percentage points |
| Operating expenses | $7,111 | $8,104 | Down 12% |
| Operating loss | $(4,179) | $(4,251) | Slightly improved |
| Interest expense | $801 | $256 | Higher, including financing-cost amortization |
| Net loss | $(4,980) | $(4,507) | Loss increased 10%; loss per share was $(0.05) in both periods |
| Modified EBITDA | $(3,836) | $(3,444) | Non-GAAP measure; worsened |
Operating cash use was $2,207, compared with $5,059 in Q1 2021. Investing cash use was zero versus $97; financing provided $2,280 versus $4,716. Cash ended the quarter at $122, up from $49 at year-end. The operating cash outflow included a $3,810 inventory increase, partly offset by a $5,926 increase in accounts payable.
At March 31, current assets were $28,827 and current liabilities $25,425, yielding working capital of $3,402. Inventory was $20,848, up from $17,049 at year-end. Total liabilities were $25,775 and stockholders’ equity $4,616. The revolving facility had $7,945 outstanding before $470 of unamortized financing costs ($7,475 net on the balance sheet); operating lease liabilities totaled $518.
Changes and business developments
- Core-brand gross billings rose 3%; Reed’s volume increased 5%, while Virgil’s volume declined 11%. Total cases fell 3%, and core-brand price per case rose 5%.
- Higher product costs drove gross margin deterioration: cost of goods sold per case increased to $12.83 from $11.18. Management attributed pressure to raw-material inflation and supply-chain disruption.
- Delivery and handling expense fell 14% to $2,812, and G&A fell 19% to $2,121, which management attributed in part to cost mitigation and lower stock compensation and legal settlements. Selling and marketing expense was down 2%.
- On March 28, the company entered a three-year Alterna Capital Solutions asset-based credit facility, replacing its Rosenthal facility, which was repaid March 30. The new facility permits up to $13,000, plus a limited overadvance; no unused capacity was available at March 31. The filing also describes $5,100 of additional borrowing capacity in its liquidity discussion.
- A March private placement generated approximately $5.1 million net proceeds through issuance of 18.6 million common shares and warrants for 9.3 million shares. Common shares outstanding increased to 112.6 million at March 31 from 93.7 million at year-end.
Liquidity, outlook, risks, and notable items
- Going concern: The filing states that the quarterly net loss and operating cash use raise substantial doubt about the company’s ability to continue as a going concern within one year of issuance. The auditor had also raised substantial doubt in its 2021 report. Management said it projected adequate operating cash and credit availability for at least one year, but acknowledged that future financing may not be available on favorable terms or at all.
- Subsequent financing: On May 9, 2022, Reed’s issued $11,250 of secured convertible notes, receiving approximately $10,013 net. The notes mature in 2025, bear 10% interest, and are secured by substantially all assets, including intellectual property, subject to a collateral-sharing agreement with ACS. A majority of holders may elect monthly amortization beginning August 2022; conversion and payment terms may create substantial dilution. The company was still determining the notes’ accounting.
- Management priorities: Expand channels, introduce products and improve sales execution; enhance margins through co-packer upgrades, purchasing and efficiency; and reduce operating costs. The company cited a rebranded Virgil’s zero-sugar line and a planned hard ginger ale launch.
- Risks: COVID-19-related effects, labor and supply-chain disruption, port congestion, raw-material inflation, freight and logistics costs, customer and distributor dependence, competition, brand protection, capital needs and significant debt. Management expected supply-chain and elevated transportation challenges to continue through 2022. No specific numerical full-year guidance was provided.
- Concentration and related parties: Two customers represented 18% and 12% of Q1 sales. One customer accounted for 23% of gross receivables. Related-party balances included a $941 receivable from CCB and $735 payable to CCB at March 31. Directors and officers participated in the March equity offering.
- The company reported effective disclosure controls as of March 31 and no material changes in internal control over financial reporting. It disclosed no legal proceedings requiring reporting under the specified item and no defaults upon senior securities.
Important facts for investors to verify
- Reconcile reported $5.1 million additional borrowing capacity with the statement that no current capacity was available under the ACS facility, and confirm ongoing borrowing availability and covenant status.
- Assess the company’s going-concern funding needs, cash burn, inventory buildup, vendor-payment growth and ability to obtain further financing.
- Review the convertible notes’ collateral, amortization election, conversion and make-whole provisions, dilution potential, and final accounting treatment.
- Track whether gross-margin initiatives offset higher input, freight and logistics costs, and whether sales growth improves after promotional allowances.
- Consider potential dilution from the expanded share count and outstanding warrants, options and convertible securities.