REED’s, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statement amounts below are in millions unless otherwise stated; shares and per-share amounts are stated separately.
Business context and operating results
Reed’s sells branded beverages, including Reed’s and Virgil’s products. Management said it expanded use of co-packers, upgraded quality protocols, launched Reed’s Really Real Ginger Ale and Wellness Shots, and continued to streamline its product range. Core beverages represented 98% of beverage volume.
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $9.523 | $8.449 | +13% |
| Gross profit | $2.870 | $2.504 | +15% |
| Gross margin | 30.1% | 29.6% | +0.5 percentage points |
| Operating loss | $(2.250) | $(2.882) | Loss narrowed 22% |
| Net loss | $(2.580) | $(3.264) | Loss narrowed 21% |
| Basic and diluted loss per share | $(0.05) | $(0.11) | |
| Modified EBITDA (non-GAAP) | $(1.409) | $(2.301) |
Cash flow, debt and liquidity
- Operating cash use was $2.352, compared with $8.756 in Q1 2019. Investing cash use was $0.022; financing provided $1.489. Cash declined by $0.885 to $0.028 at quarter-end.
- At March 31, working capital was $3.173, versus $4.885 at December 31, 2019. Stockholders’ deficit was $0.653, compared with equity of $1.147 at year-end.
- The Rosenthal revolving facility showed $5.173 outstanding before capitalized finance costs ($4.785 net on the balance sheet), with $2.961 of unused borrowing capacity and a 7.2% effective interest rate. It matures April 20, 2021. The company reported compliance with its facility covenants at quarter-end.
- The related-party Raptor convertible note totaled $4.831, including accrued interest, bears 12% interest and matures April 21, 2021. Lease liabilities totaled $0.757 at March 31.
- After quarter-end, the company raised $5.362 net from an offering of 15,333,334 shares at $0.375 per share and received a $0.770 Paycheck Protection Program loan on April 29. The filing describes the offering proceeds as available for working capital and general corporate purposes.
Material changes and management commentary
- Gross sales rose 11% to $10.551; promotional and other allowances declined to $1.028 from $1.071, helping net sales grow 13%. Reed’s core-brand volume increased 21%; total cases increased 7%.
- Cost of goods sold increased 12% to $6.653, and remained about 70% of net sales. Management attributed higher cost per case partly to selling higher-cost inventory carried over from 2019.
- Delivery and handling costs rose 23% to $1.263, reflecting higher volume and COVID-19-related market cost pressures. Selling and marketing expense declined 4% to $1.925, and general and administrative expense declined 19% to $1.932, partly due to the absence of prior-year transition costs and lower temporary staffing.
- Management’s stated priorities are sales growth through channel expansion, new products and improved sales execution; margin improvement through co-packer and purchasing efficiencies; and strategic operating-cost reductions. No quantified earnings or revenue guidance is provided.
Risks, contingencies and unusual items
- Management warned that COVID-19 could reduce consumer spending and product demand and disrupt operations; the duration and financial impact were not predictable at filing time.
- The company reported only $0.028 of cash at quarter-end and a quarterly operating cash outflow of $2.352. Its financial statements assume it will continue as a going concern; subsequent financing provided additional capital.
- Nasdaq notified the company of deficiencies in the $1.00 minimum bid-price requirement and the $35 million minimum market value of listed securities requirement. The filing gives different bid-price timing descriptions: one passage says the compliance period would resume July 1, 2020, while another says it was extended through December 21, 2020. The market-value compliance period was stated to end October 19, 2020; failure to regain compliance could lead to delisting.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of March 31, 2020. Identified material weaknesses concerned controls over outsourced IT providers and inadequate segregation of accounting duties. Management said remediation was underway and expected to be completed during 2020, subject to validation over reporting cycles.
- Customer concentration is material: two customers represented 22% and 14% of Q1 gross sales. Raptor is both a related-party lender and a significant shareholder; the filing also describes related-party arrangements involving a former manufacturing plant sale and receivables from CCB.
- Stock-based compensation was a notable noncash expense: $0.780 in the company’s Modified EBITDA reconciliation. The company granted 1,617,800 options and 500,000 restricted shares during the quarter.
Important facts for investors to verify
- Cash burn, available borrowing capacity, facility covenant compliance and the ability to fund operations as cash needs evolve.
- Use of the April equity proceeds and PPP loan, including the PPP loan’s terms and any forgiveness eligibility.
- Nasdaq bid-price and market-value compliance status and the differing bid-price deadlines stated in the filing.
- Progress and testing of the material-weakness remediation plan.
- Whether sales growth and improved gross margin continue despite higher delivery costs, inventory costs and COVID-19-related uncertainty.
- Potential dilution from the April share offering and outstanding options, warrants, convertible debt and restricted shares.