REED'S, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this Annual Report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under "Risk Factors" and elsewhere in this Annual Report.
Amounts presented in the discussion below are in thousands, except share and per share amounts.
Results of Operations Overview
During the year ended
A public equity offering which closed during the year ended
The Company remains focused on driving sales growth and improving margin. The sales growth focus is on channel expansion, new product introduction and improved sales execution. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs.
28 COVID-19 Considerations
During the year ended
Through
Our ability to operate without significant incremental negative operational
impact from the COVID-19 pandemic will in part depend on our ability to protect
our employees and our supply chain. The Company has endeavored to follow the
recommended actions of government and health authorities to protect our
employees. Since the inception of the COVID-19 pandemic and through
Net sales for the year ended
For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to "Risk Factors" in Part I, Item 1A of this Form 10-K.
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Results of Operations - Year Ended
The following table sets forth key statistics for the years endedDecember 31, 2021 and 2020, in thousands: Year Ended December 31, Pct. 2021 2020 Change Gross billing (A)$ 54,658 $ 46,801 17 % Less: Promotional and other allowances (B) 5,059 5,186 -2 % Net sales$ 49,599 $ 41,615 19 % Cost of goods sold 36,001 28,849 25 % % of Gross billing 66 % 62 % % of Net sales 73 % 69 % Gross profit$ 13,598 $ 12,766 7 % % of Net sales 27 % 31 % Expenses Delivery and handling$ 11,939 $ 6,856 74 % % of Net sales 24 % 16 % Dollar per case ($) 3.95 2.76 Selling and marketing 9,665 7,503 29 % % of Net sales 19 % 18 % General and administrative 7,965 7,023 13 % % of Net sales 16 % 17 % Total Operating expenses 29,569 21,382 38 % Loss from operations$ (15,971 ) $ (8,616 ) 85 % Interest expense and other expense$ (431 ) $ (1,561 ) -72 % Net loss$ (16,402 ) $ (10,177 ) 61 % Loss per share - basic and diluted$ (0.18 ) $ (0.17 ) 7 % Weighted average shares outstanding - basic & diluted 91,234,406 60,644,842 50 %
(A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing has been defined by our internal reporting practices.
(B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company's agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.
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Sales, Cost of Sales, and Gross Margins
The following chart sets forth key statistics for the transition of the
Company's top line activity through the years ended
Total Total Per Case Per Case
2021 2020 vs PY 2021 2020 vs PY
Cases:
Reed's 1,605 1,254 28 %
Virgil's 1,388 1,204 15 %
Total Core 2,993 2,458 22 %
Non Core 2 2 0 %
Candy 28 26 8 %
Total 3,023 2,486 22 %
Gross Billing:
Core $ 53,263 $ 45,324 18 % $ 17.8 $ 18.4 -3 %
Non Core 362 556 -35 % 181.0 278.0 -35 %
Candy 1,033 921 12 % 36.9 35.4 4 %
Total $ 54,658 $ 46,801 17 % 18.1 18.8 -4 %
Discounts: Total $ (5,059 ) $ (5,186 ) -2 % $ (1.7 ) $ (2.1 ) -20 %
COGS:
Core $ (34,804 ) $ (28,139 ) 24 % $ (11.6 ) $ (11.4 ) 2 %
Non Core (304 ) (110 ) 176 % (152.0 ) $ (55.0 ) 176 %
Candy (893 ) (600 ) 49 % (31.9 ) $ (23.1 ) 38 %
Total $ (36,001 ) $ (28,849 ) 25 % $ (11.9 ) $ (11.6 ) 3 %
Gross Margin: $ 13,598 $ 12,766 7 % $ 4.5 $ 5.1 -12 %
as % Net Sales 27 % 31 %
Sales, Cost of Sales, and Gross Margins
As part of the Company's ongoing initiative to simplify and streamline
operations the Company has identified core products on which to place its
strategic focus. These core products consist of
Core beverage volume for the year ended
Core brand gross billing increased by 18% to
Discounts as a percentage of gross billing decreased to 9% from 11% in the same
period last year. As a result, net sales revenue grew 19% in the year ended
Cost of Goods Sold
Cost of goods sold increased
The total cost of goods per case increased to
Gross Margin
Gross margin was 27% for the year ended
31 Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and
warehousing costs incurred for handling our finished goods after production.
Delivery and handling expenses increased by
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing
support costs. Selling expenses consist of all other selling-related expenses
including personnel and contractor support. Total selling and marketing expenses
increased
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive,
administrative, operations and finance personnel, as well as professional fees.
General and administrative expenses increased in the year ended
Loss from Operations
The loss from operations was
Interest and Other Income (Expense)
Interest and other income for the year ended
Modified EBITDA
In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.
Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
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Set forth below is a reconciliation of net loss to Modified EBITDA for the year
ended
Year Ended December 31,
2021 2020
Net loss $ (16,402 ) $ (10,177 )
Modified EBITDA adjustments:
Depreciation and amortization 243 204
Interest expense 1,201 1,307
Stock option and other noncash compensation 1,927 1,592
Gain on extinguishment of debt (770 ) -
Legal settlement 292 -
Loss on extinguishment of debt - 262
Change in fair value of warrant liability - (8 )
Impairment and severance costs - 5
Total EBITDA adjustments $ 2,893 $ 3,362
Modified EBITDA $ (13,509 ) $ (6,815 ) We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:
? Modified EBITDA does not reflect our cash expenditures, or future
requirements, for capital expenditures or contractual commitments;
? Modified EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
? Modified EBITDA does not reflect future interest expense, or the cash
requirements necessary to service interest or principal payments, on
our debts; and
? Although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and Modified EBITDA does not reflect any cash requirements for
such replacements.
Liquidity, Capital Resources and Going Concern
The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern for one year from the date these financial statements are issued. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
For the year ended
During 2021, the Company conducted public offerings and sold 6.7 million of its
common shares and received net proceeds of
On
33
Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. Management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. In addition, we have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices.
Critical Accounting Policies and Estimates
Use of Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivables, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company's liquidity.
Accounts Receivable. Accounts receivable are recorded at the invoiced amounts. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer's inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company's historical losses and an overall assessment of past due trade accounts receivable outstanding.
Inventory. Inventory is stated at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management's estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Revenue Recognition. Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company's performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer.
Stock Compensation Expense. The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
Recent Accounting Pronouncements
See Note 2 of the financial statements for a discussion of recent accounting pronouncements.
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