Reed’s, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; it does not provide a separate fourth-quarter financial results breakdown. Unless noted otherwise, financial amounts below are in millions of dollars.
Business context
Reed’s sells premium natural beverages, principally Reed’s Craft Ginger Beer and Virgil’s Handcrafted Sodas, through retail and distributor channels. In 2019, it continued its shift to an asset-light model after selling its manufacturing plant, outsourcing all production to co-packers, and concentrating on core brands. The company reported products in more than 30,000 outlets.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Gross sales | $39.300 | $41.974 | -6% |
| Promotional and other allowances | $5.480 | $3.872 | +42% |
| Net sales | $33.820 | $38.102 | -11% |
| Gross profit / margin | $7.876 / 23% | $10.678 / 28% | Profit -26% |
| Operating loss | $(14.856) | $(8.122) | Loss widened |
| Net loss | $(16.112) | $(10.325) | Loss widened 56% |
| Modified EBITDA, non-GAAP | $(12.765) | $(4.957) | Loss widened |
| Cash used in operating activities | $(18.161) | $(9.258) | Cash use increased |
- Core Reed’s and Virgil’s gross sales rose 9% to $37.769 million; Virgil’s case volume increased 23%, while Reed’s case volume fell 3%. Total cases declined 9%, in part reflecting the exit from non-core products.
- The company said product availability and co-packer delays led to approximately $2.751 million of short-shipped customer orders. Core-brand pricing per case was flat, while promotional allowances rose to 14% of gross sales from 9%.
- Selling and marketing expense increased 88% to $9.188 million; advertising costs were $2.570 million versus $0.300 million. Delivery and handling expense rose 9% to $5.993 million. General and administrative expense declined 9% to $7.596 million.
- Year-end cash was $0.913 million. Working capital was positive $4.885 million, compared with a $3.297 million shortfall in 2018; stockholders’ equity was $1.147 million versus a $6.743 million deficit.
- At year-end, the Rosenthal credit line had $3.661 million outstanding before unamortized finance costs ($3.177 million net carrying value) and $3.235 million of unused borrowing capacity. The facility permits borrowing up to $13 million, matures April 2021, and had a 7.1% effective rate on outstanding borrowings. The related-party convertible note had a $3.400 million principal balance plus accrued interest, for a $4.689 million total obligation; it bears 12% interest and matures in April 2021. Lease liabilities totaled $0.786 million.
- Two 2019 common-stock offerings generated net proceeds of $14.867 million and $7.474 million. Shares outstanding increased from 25.7 million at year-end 2018 to 47.6 million at year-end 2019.
Outlook, material developments, and risks
- Management projected that cash from operations and available line-of-credit capacity would be adequate in 2020 to continue as a going concern, despite the 2019 loss and operating cash outflow. No specific revenue or earnings guidance was provided.
- Planned second-quarter 2020 launches included Reed’s Wellness Ginger Shots, Real Ginger Ale, and Craft Ginger Mule. Management emphasized core-brand growth, marketing, product innovation, cost reductions, and expanding co-packer capacity.
- Management reported lower-than-expected production and innovation delays as constraints on fulfillment. Risks also include dependence on co-packers and distributors, ingredient and packaging availability and costs, freight costs, competition, consumer demand, and seasonality.
- The filing discusses COVID-19 as a developing risk that could disrupt operations, demand, supply chains, and financial markets; its impact and duration were not predictable at the filing date.
- The company disclosed material weaknesses in controls over outsourced IT providers and segregation of accounting duties. Management reported remediation efforts underway; the auditor issued an adverse opinion on internal control over financial reporting, while giving an unqualified opinion on the financial statements.
- A related-party transaction merits attention: California Custom Beverage, owned by founder and director Christopher Reed, purchased the former plant and also co-packs products. Reed’s reported $1.600 million of 2019 purchases from CCB, $0.182 million payable to CCB, and $0.356 million receivable from CCB, including royalty and inventory-advance amounts. The company also said only $0.800 million of the required $1.200 million lease security had been deposited by year-end; additional shares were in escrow, and release from the lease obligation was expected after the remaining security was provided.
- Nasdaq notified the company of a minimum-bid-price deficiency in November 2019; it reported regaining compliance in January 2020. The filing also notes a CEO transition effective March 1, 2020.
Important facts for investors to verify
- Whether core sales growth, improved fulfillment, and new product launches translate into higher net sales and gross margins, given increased promotions and short shipments.
- Whether operating cash burn declines and management’s 2020 liquidity projection is achieved; assess borrowing availability, facility covenants, and the April 2021 debt maturities.
- Whether the two material control weaknesses are remediated and how the adverse internal-control opinion affects reporting reliability.
- Whether co-packer capacity and supply availability improve, and whether the related-party lease security and outstanding balances with CCB are resolved on the stated terms.
- Potential dilution from equity financing, outstanding options and warrants, and the related-party convertible note; the filing reported 47.6 million common shares outstanding at year-end 2019.