REED'S, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Cautionary Statement Regarding Forward-Looking Statements and Information 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 report. In addition to our GAAP results, the following discussion includes Modified EBITDA as a supplemental measure of our performance. 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 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. The following discussion also includes the use of gross billing, a key performance indicator and metric. Gross billing represents invoiced amounts to distributors and retailers, excluding sales adjustments. Gross billing may include deductions from MSRP or “list price”, where applicable, and excludes promotional costs of generating such sales. Management utilizes gross billing to monitor operating performance of products and salespersons, which performance can be masked by the effect of promotional or other allowances. Management believes that the presentation of gross billing provides a useful measure of Reed’s operating performance. Overview During the first quarter of 2022, the Company continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses. In addition, it continues to build its innovation pipeline with sustained growth in Reed’s Real Ginger Ale and Reed’s Classic Mule. At the end of the quarter, the Company shipped its rebranded Virgil’s zero sugar line in 12 oz. sleek cans and produced its new line of hard ginger ale for its pending launch. As noted above, 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 particularly delivery and handling expenses. During 2021, the Company experienced elevated transportation costs over the prior year and anticipates these costs to remain elevated for the balance of 2022. Plans have been implemented to mitigate the impact of these costs. COVID-19 Considerations During the period ended March 31, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products. Through March 31, 2022, the Company was able to lower its freight costs despite a higher transportation market as the capacity in the freight market has not kept up with demand. The Company believes these challenges will continue throughout the year. In addition, the Company experienced increases in the pricing of several of its raw materials and delays in procuring several of these items. However, mitigation plans have been implemented to manage this risk. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company anticipates a continued impact throughout 2022. 1 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 protect 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 March 31, 2022, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. Through March 31, 2022, we continued to generate cash flows to meet our short-term liquidity needs, and we expected to maintain access to the capital markets. We did not observe any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. Results of Operations – Three Months Ended March 31, 2022, as compared to March 31, 2021 The following table sets forth key statistics for the three months ended March 31, 2022 and 2021, respectively, in thousands. Three Months Ended March 31, Pct. 2022 2021 Change Gross billing (A) $ 13,636 $ 13,281 3 % Less: Promotional and other allowances (B) 1,454 1,135 28 % Net sales $ 12,182 $ 12,146 0 % Cost of goods sold 9,250 8,293 12 % % of Gross billing 68 % 62 % % of Net sales 76 % 68 % Gross profit $ 2,932 $ 3,853 -24 % % of Net sales 24 % 32 % Expenses Delivery and handling $ 2,812 $ 3,286 -14 % % of Net sales 23 % 27 % Dollar per case ($) $ 3.90 $ 4.43 Selling and marketing 2,178 2,215 -2 % % of Net sales 18 % 18 % General and administrative 2,121 2,603 -19 % % of Net sales 17 % 21 % Total operating expenses 7,111 8,104 -12 % Loss from operations $ (4,179 ) $ (4,251 ) 0 % Interest expense and other expense $ (801 ) $ (256 ) 213 % Net loss $ (4,980 ) $ (4,507 ) 10 % Loss per share – basic and diluted $ (0.05 ) $ (0.05 ) -2 % Weighted average shares outstanding - basic & diluted 97,377,408 86,631,304 12 % (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 . 2 (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. Sales, Cost of Sales, and Gross Margins The following chart sets forth key statistics for the transition of the Company’s top line activity from the first quarter of 2021 through the first quarter of 2022. 2022 2021 vs PY Q1 Per Case Q1 Q1 Q1 2022 2021 vs PY Cases: Reed’s 415 395 5 % Virgil’s 302 339 -11 % Total Core 717 734 -2 % Non Core - - - Candy 4 8 -46 % Total 721 742 -3 % Gross Billing: Core $ 13,287 $ 12,955 3 % $ 18.5 $ 17.6 5 % Non Core 75 33 127 % - - - % Candy 274 293 -6 % 63.8 36.6 74 % Total $ 13,636 $ 13,281 3 % 18.9 17.9 6 % Discounts: Total $ (1,454 ) $ (1,135 ) 28 % $ (2.0 ) $ (1.5 ) 32 % COGS: Core $ (9,150 ) $ (8,122 ) 13 % $ (12.8 ) $ (11.1 ) 15 % Non Core (13 ) (6 ) 113 % - - - Candy (87 ) (165 ) -47 % (20.3 ) (20.6 ) -1 % Total $ (9,250 ) $ (8,293 ) 12 % $ (12.8 ) $ (11.2 ) 15 % Gross Margin: $ 2,932 $ 3,853 -24 % $ 4.1 $ 5.2 -22 % as % Net Sales 24 % 32 % 3 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 Reed’s and Virgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs. Core beverage volume for the three months ended March 31, 2022, represents 99% of all beverage volume. Core brand gross billing increased by 3% to $13,287 compared to $12,955 during the same period last year, driven by Reed’s volume growth of 5% offset by Virgil’s volume decline of 11%. The result is an increase in total gross billing of 3%, to $13,636 during the three months ended March 31, 2022, from $13,281 in the same period last year. Price on our core brands increased 5% to $18.54 per case. Discounts as a percentage of gross sales increased to 11% from 9% in the same period last year. As a result, net sales revenue increased less than 1% in the three months ended March 31, 2022, to $12,182, compared to $12,146 in the same period last year. Cost of Goods Sold Cost of goods sold increased $957 during the three months ended March 31, 2022, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended March 31, 2022, was 76% as compared to 68% for the same period last year. The total cost of goods per case increased to $12.83 per case in the three months ended March 31, 2022, from $11.18 per case for the same period last year. The cost of goods sold per case on core brands was $12.77 during the year months ended March 31, 2022, compared to $11.07 for the same period last year. Gross Margin Gross margin decreased to 24% for the three months ended March 31, 2022, compared to 32% for the same period last year. 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 decreased by $474 in the three months ended March 31, 2022, to $2,812 from $3,286 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended March 31, 2022, were 23% of net sales and $3.90 per case, compared to 27% of net sales and $4.43 per case during the same period last year. 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 were $2,178 during the three months ended March 31, 2022, compared to $2,215 during the same period last year. As a percentage of net sales, selling and marketing costs remained flat at 18% during the three months ended March 31, 2022, as compared to the same period last year. General and Administrative Expenses General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the three months ended March 31, 2022, to $2,121 from $2,603, a decrease of $482 over the same period last year. The decrease was driven by lower stock compensation and legal settlements. 4 Loss from Operations The loss from operations was $4,179 for the three months ended March 31, 2022, as compared to a loss of $4,251 in the same period last year driven by decreased gross profit offset by decreases in operating expenses discussed above. Interest and Other Expense Interest and other expense for the three months ended March 31, 2022, consisted of $801 of interest expense. During the same period last year, interest and other expense consisted of $256 of interest expense. 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, legal settlements, 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. Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended March 31, 2022 and 2021 (unaudited; in thousands): Three Months Ended March 31 2022 2021 Net loss $ (4,980 ) $ (4,507 ) Modified EBITDA adjustments: Depreciation and amortization 52 56 Interest expense 801 256 Stock option and other noncash compensation 291 398 Legal settlements - 353 Total EBITDA adjustments $ 1,144 $ 1,063 Modified EBITDA $ (3,836 ) $ (3,444 ) 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. 5 Liquidity and Capital Resources The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three months ended March 31, 2022, the Company recorded a net loss of $4,980 and used cash in operations of $2,207. As of March 31, 2022, we had a cash balance of $122, with no current availability, and $5,100 of additional borrowing capacity, a stockholder’s equity of $4,616 and a working capital of $3,402, compared to a cash balance of $49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981 at December 31, 2021 . Notwithstanding the net loss for the three months ended March 31, 2022, management projects adequate cash from operations and available line of credit to ensure continuation of the Company as a going concern for at least one year from the date of this quarterly report. 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. 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 The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. There were no changes to our critical accounting policies described in the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that impacted our condensed consolidated financial statements and related notes included herein. Recent Accounting Pronouncements See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. A smaller reporting company is not required to provide the information required by this Item.