REED’S, INC. — FY2018 Form 10-K
Business context and reporting period. The filing covers the year ended December 31, 2018; it is an annual report, not a standalone Q4 filing. Reed’s sells natural craft beverages, principally Reed’s ginger beer and Virgil’s sodas, through more than 30,000 retail outlets. In December 2018, it sold its Los Angeles manufacturing facility and shifted all production to co-packers, positioning itself as an asset-light sales and marketing company.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. FY2017 is the comparable period.
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Gross sales | $41.974 | $41.718 | Up 1%; non-GAAP measure |
| Net sales | $38.102 | $37.714 | Up 1% |
| Gross profit / margin | $10.678 / 28% | $6.893 / 18% | Margin improved 10 percentage points |
| Operating loss | $(8.122) | $(11.749) | Loss narrowed |
| Net loss | $(10.325) | $(18.373) | Loss narrowed 44% |
| Modified EBITDA | $(4.957) | $(4.218) | Non-GAAP; loss increased |
| Cash used in operating activities | $(9.258) | $(3.422) | Cash use increased |
| Cash at year-end | $0.624 | $12.127 | Significant decline |
| Working capital | $(3.297) | $2.303 | Moved to a shortfall |
| Stockholders’ equity (deficit) | $(6.743) | $0.508 | Moved to a deficit |
Core Reed’s and Virgil’s gross revenue rose 8%, with core volume up 3% and price per case up 5%; Reed’s case volume fell 8%, while Virgil’s rose 19%. Total cases declined 3%. Cost of goods produced fell 10%, and idle-plant costs were $2.428 million, contributing to the gross-margin improvement. Delivery and handling expense rose 39% to $5.489 million; selling and marketing rose 62% to $4.879 million; and general and administrative expense rose 46% to $8.383 million.
At year-end, the balance sheet reported $6.980 million of net line-of-credit liabilities (gross borrowings of $7.657 million before capitalized finance costs) and a $4.161 million related-party convertible note, including accrued interest. The note bears 12% interest compounded monthly and matures in April 2021. The Rosenthal facility offers up to $13 million in borrowings; reported unused capacity at year-end was $1.201 million. The company also reported $0.852 million in lease liabilities.
Material changes and unusual items
- Core cost reductions, price restructuring and lower packaging costs helped lift gross margin, but higher freight, marketing and administrative expenses remained significant.
- The company recorded a $0.229 million impairment of the Sonoma Sparkler trademark in 2018. In 2017, it recorded $5.925 million of impairment charges on the Los Angeles plant assets. The 2018 plant sale generated a $0.180 million gain.
- Interest expense declined to $2.201 million from $3.491 million. FY2017 also included $2.776 million of financing and warrant-modification costs and a $3.632 million loss on extinguishment of a convertible note.
- Management attributed the $2.629 million increase in G&A principally to noncash performance-based equity awards, bonus accruals, and transition and severance costs. Equity-based and other noncash compensation totaled $2.081 million in the company’s Modified EBITDA reconciliation.
Liquidity, outlook and risks
In October 2018, Reed’s refinanced with Rosenthal & Rosenthal, reporting an approximately $1.5 million annualized reduction in debt-service requirements. It failed the facility’s minimum working-capital and tangible-net-worth covenants at December 31, 2018; the lender waived the breach for a $5,000 fee. The company said the February 2019 equity offering would address the covenant position.
On February 15, 2019, Reed’s completed an underwritten offering of 7,733,750 shares at $2.10 per share, including a fully exercised overallotment, for net proceeds of approximately $14.906 million. The filing’s pro forma presentation applies $6.980 million to repay the line of credit and shows pro forma cash of $8.550 million, working capital of $11.609 million and stockholders’ equity of $8.163 million. The offering materially increased the share count; 33,496,297 shares were outstanding on March 15, 2019.
Management said the financing was expected to fund sales and marketing, product development and general working capital through 2020. It also stated that if sales goals fall short, it believes costs could be reduced sufficiently to achieve positive operating cash flow, while cautioning that profitability and adequate future liquidity are not assured. No quantified revenue or earnings guidance is provided.
Growth plans include Virgil’s Zero Sugar products, Reed’s Zero Sugar launches planned for 2019, and pilot tests of a hemp-extract ginger beer and ready-to-drink Mule. Management reported Virgil’s Zero Sugar cans in 5,000 outlets and brand growth of more than 30% in Q4 2018. These initiatives carry execution, demand, competition and regulatory risks; hemp/CBD rules and supply availability remain uncertain.
Other material risks include continued operating losses and cash burn; reliance on distributors, major customers, vendors and contract manufacturers; raw-material, packaging and freight costs; seasonal demand; product acceptance and competition; potential sugar-related regulation; and the possibility of further financing on dilutive or unfavorable terms. Two broker/distributors accounted for approximately 24% and 17% of 2018 sales. The plant sale was to an entity owned by founder and director Christopher Reed, making the related-party terms and lease release important to monitor. The company reported no material litigation at year-end. Its financial statements received an unqualified audit opinion; management reported effective disclosure controls and internal control over financial reporting, but the auditor did not attest to internal-control effectiveness.
Key investor verification points
- Track post-offering cash use, sales growth, and progress toward positive operating cash flow; compare results with management’s stated funding horizon.
- Confirm covenant compliance, facility availability and debt-service requirements after the equity offering and line repayment.
- Assess whether core-brand growth and margin gains persist after the plant sale, including freight, co-packing and marketing costs.
- Review the related-party plant-sale arrangements, including CCB’s required $1.2 million lease security deposit by December 31, 2019 and the company’s release from the lease obligation.
- Evaluate dilution from the offering and outstanding options, warrants and convertible related-party debt; verify current share counts and potential conversion or exercise effects.
- Check actual launch timing, regulatory status and commercial performance of the Zero Sugar, hemp-extract and ready-to-drink Mule products.