Reed’s, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless otherwise noted, financial amounts below are in thousands of dollars. The filing was signed November 13, 2019.
Business context
Reed’s makes and sells branded beverages, including Reed’s and Virgil’s. Following the December 2018 sale of its Los Angeles manufacturing facility, the company described itself as asset-light and reliant on outsourced manufacturing. Management said it was focusing on core brands, new products, sales and marketing, and expanded co-packer capacity.
Financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $8,740 | $10,796 | $26,669 | $28,473 |
| Gross profit | $2,502 | $2,681 | $7,279 | $8,026 |
| Gross margin | 29% | 25% | 27% | 28% |
| Operating expenses | $6,880 | $4,760 | $18,644 | $14,052 |
| Operating loss | $(4,378) | $(2,079) | $(11,365) | $(6,026) |
| Net loss | $(4,565) | $(2,674) | $(12,289) | $(7,665) |
| Loss per share, basic and diluted | $(0.14) | $(0.10) | $(0.38) | $(0.30) |
| Operating cash used | — | — | $(14,628) | $(10,496) |
- Quarterly sales and margins: Net sales declined 19%. Gross margin improved to 29%, largely as idle-capacity costs fell to zero from $1,110 in Q3 2018. Delivery and handling expense rose 36% to $1,902; selling and marketing expense rose 82% to $2,508; and G&A increased to $2,470, including $643 of severance accruals.
- Nine-month trend: Net sales declined 6%, while gross margin slipped to 27%. Operating expenses increased 33%, principally due to selling and marketing expense, which more than doubled to $7,718. Modified EBITDA, a company-defined non-GAAP measure, was a loss of $8,978 for the nine months, versus a loss of $3,273 a year earlier.
- Cash and liquidity at September 30: Cash was $1,016; working capital was $1,394, compared with a $3,297 shortfall at December 31, 2018. Cash used in operations was $14,628 for the nine months. Financing activities provided $15,263, including $14,867 net proceeds from the February equity offering.
- Debt and obligations: The revolving credit facility had $7,661 outstanding before unamortized financing costs, with $1,019 of unused borrowing capacity; the net balance-sheet amount was $7,079. The facility is secured by substantially all company assets, bears an effective interest rate of 8.2%, and matures April 20, 2021. A related-party convertible note and accrued interest totaled $4,551 and bears 12% interest; it matures April 21, 2021. Lease liabilities totaled approximately $798.
Material changes and management commentary
- Management reported that core-brand gross sales increased 5% in Q3, with Virgil’s volume up 22% and Reed’s volume down 5%. Total gross sales fell 15%, partly reflecting discontinued/private-label products no longer in the portfolio. Nine-month core-brand gross sales grew 11%, while total gross sales fell 2%.
- Product unavailability led to approximately $1,200 of Q3 orders and $2,300 of nine-month orders being short-shipped. Management attributed supply constraints to production and innovation delays. It also said Q3 promotional allowances increased, weighing on net sales.
- Management cited increased marketing investment and logistics costs, including freight to rebalance inventory and support new retail accounts. It expected transportation costs to decline as co-packer capacity expanded, and said it did not anticipate further idle plant costs after exiting the Los Angeles facility.
- The company reported a $522 inventory-obsolescence reserve at September 30, versus $197 at December 31, 2018. Management linked higher reserves and write-offs to rebranding and formulation changes.
Outlook, risks and subsequent events
- The filing provides no specific numerical revenue, earnings or cash-flow guidance. Management described plans to invest in marketing, new products, working capital and supply-chain capacity. It cautioned that nine-month results are not necessarily indicative of full-year results.
- The company reported recurring losses and substantial operating cash use while relying on equity financing, credit facilities and other funding sources. The financial statements are prepared on a going-concern basis; the filing does not provide a clear quantified runway estimate.
- In October 2019, the company completed an offering of 13,416,667 shares at $0.60 per share, generating $7,536 in net proceeds. This followed the February offering of 7,733,750 shares at $2.10 per share, which generated $14,867 net. The October financing increased cash resources but materially expanded the share count.
- Nasdaq notified the company on November 12, 2019 that its share price had been below $1 for 30 consecutive business days. The company had until May 11, 2020 to regain compliance; failure could lead to delisting, and a reverse stock split was identified as a possible cure if needed.
- CEO Valentin Stalowir’s employment ended October 31, 2019; the separation agreement included 392,002 shares issued October 31 and 50,000 shares issued November 8. CFO Iris Snyder planned to resign effective November 22, and Joann Tinnelly was named interim CFO.
- Release of Reed’s from obligations connected with the sold Los Angeles facility depended on California Custom Beverage depositing $1.2 million of security with the lessor by December 31, 2019. The filing said $650 had been deposited in escrow and the remainder was expected by that date.
- Customer and vendor concentration is notable: in Q3, the two largest customers represented 15% and 12% of gross sales; the three largest vendors represented approximately 13%, 11% and 10% of purchases.
Important facts for investors to verify
- Whether the company restored Nasdaq’s minimum bid-price compliance by the deadline and what action, if any, was required.
- Whether the October offering proceeds and available credit were sufficient to fund operating cash needs, given the nine-month cash burn.
- Whether co-packer output and fulfillment improved, reducing short-shipped orders and elevated freight costs.
- Whether core-brand growth, promotional spending and inventory reserves translated into sustainable net sales and gross-margin improvement.
- Whether the former Los Angeles facility’s lease-related security requirement was fully satisfied and the company was released from the associated obligation.
- The dilution from the October offering and other equity compensation or potential securities; the filing reported 47,595,206 common shares outstanding as of November 11, 2019.