REED’S, INC. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 13, 2017. Reed’s sells beverages and other products under the Reed’s and Virgil’s brands. Results are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $10.887 million | $12.329 million | $28.046 million | $33.326 million |
| Gross profit / margin | $2.062 million / 19% | $2.886 million / 23% | $4.830 million / 17% | $7.381 million / 22% |
| Operating income (loss) | $(2.990) million | $0.196 million | $(5.647) million | $(1.352) million |
| Net loss | $(5.617) million | $(0.219) million | $(7.457) million | $(2.591) million |
| Loss per share | $(0.37) | $(0.02) | $(0.52) | $(0.19) |
- For the first nine months, cash used in operating activities was $4.729 million, versus $1.605 million in 2016. Investing activities used $0.535 million; financing activities provided $5.161 million. Cash declined $0.103 million to $0.348 million.
- At September 30, cash was $0.348 million and working capital was negative $2.312 million, based on current assets of $11.652 million and current liabilities of $13.964 million. Total liabilities were $22.654 million; stockholders’ deficit was $3.643 million.
- Debt included $5.153 million outstanding on a $6 million revolving line, $7.135 million in PMC term and capital-expansion loans, and a $3.4 million 12% convertible note issued in April. The convertible note is shown net of discounts at $0.748 million. PMC borrowing availability was $0.305 million; the company reported $0.330 million of additional capital-expansion loan availability. PMC loans mature October 21, 2018.
- Nine-month interest expense was $2.270 million. Financing and warrant-related items were significant and included a $3.236 million gain from the change in warrant-liability fair value.
Material changes and unusual items
- Q3 net sales declined 12% year over year; nine-month sales declined 16%. Nine-month gross profit fell 35%, and net loss widened to $7.457 million from $2.591 million.
- Management reported nine-month volume down 16.4% and gross sales down 13.8%. A mid-quarter price increase lifted gross revenue per 12-ounce serving, but promotional allowances increased 31.9% year over year per serving, limiting the increase in net sales per serving to 0.7%.
- Idle-plant costs rose to $2.067 million for the first nine months from $1.125 million. Q3 delivery costs increased 24% and G&A increased 27% year over year; selling and marketing costs declined.
- The company recorded a $2.0 million impairment on production equipment classified as held for sale. Management was evaluating alternatives for its property, plant, equipment, and manufacturing footprint; approximately $5 million of other net assets were also under review. Further impairment, exit, or transition costs were possible.
- Management described a strategy to prioritize Reed’s and Virgil’s, reduce the portfolio from 111 SKUs to 28 core SKUs, discontinue or evaluate non-core products, and potentially outsource more manufacturing. Management said shipments and future orders had rebounded after a temporary volume impact from the price increase.
Liquidity, outlook, and risks
- The filing raises substantial liquidity concerns: the company reported a $7.457 million nine-month net loss, $4.729 million of operating cash use, a working-capital deficit, limited cash, and little remaining availability on its line.
- Management stated it believed available working capital would support existing operations for at least 12 months and expected to pursue positive operating cash flow through sales goals and cost reductions. It also expected to renew or renegotiate PMC loans, but said there was no assurance refinancing would be completed. No quantified earnings or revenue guidance was provided.
- The company filed a rights offering on October 23, 2017 intended to fund initiatives and retire debt; success was not assured. The convertible note is non-prepayable, bears 12% interest, and may be converted after 180 days; related warrants and possible equity issuance create dilution risk.
- Customer and supplier concentration is notable: two customers represented 30% of Q3 sales; one vendor represented 18% of nine-month purchases and 24% of payables at September 30. Manufacturing changes, customer demand, pricing and promotional costs, refinancing, and asset-sale outcomes are key uncertainties.
- The company stated disclosure controls were effective as of September 30, 2017 and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the rights offering raised sufficient capital and how proceeds were used.
- Whether PMC debt was refinanced or repaid before its October 21, 2018 maturity, and the terms and availability of credit meanwhile.
- Whether management’s stated liquidity runway and path to positive operating cash flow were achieved.
- Actual results of the manufacturing review, including equipment sales, plant utilization, outsourcing, and any additional impairment or exit costs.
- Whether pricing changes, reduced promotions, and the core-SKU strategy stabilized volume and improved gross margins.
- Resolve the filing’s inconsistent MD&A wording for working capital and stockholders’ deficit: the balance sheet amounts indicate a $2.312 million working-capital deficit and a $3.643 million stockholders’ deficit.