REED’s, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Unless otherwise noted, financial amounts are in thousands of dollars. Reed’s describes the quarter as part of its shift to an asset-light model after selling its Los Angeles manufacturing facility in December 2018 and outsourcing manufacturing.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Gross sales (non-GAAP measure) | $9,520 | $8,855 | +8% |
| Net sales | $8,449 | $8,288 | +2% |
| Gross profit | $2,504 | $2,303 | +9% |
| Gross margin | 29.6% | 27.8% | +1.8 percentage points |
| Operating expenses | $5,386 | $3,428 | +57% |
| Operating loss | $(2,882) | $(1,125) | Loss widened |
| Net loss | $(3,264) | $(1,615) | Loss widened |
| Loss per share, basic and diluted | $(0.11) | $(0.06) | |
| Modified EBITDA (non-GAAP) | $(2,324) | $(684) |
Promotional and other allowances rose 89% to $1,071, equal to about 11% of gross sales versus 6% a year earlier, limiting net-sales growth. Core beverage volume increased 14%; core brand gross sales rose 15%, with Virgil’s volume up 46%. Reed’s brand volume declined 8%. Cost of goods sold was $5,945, down slightly from $5,985; idle-capacity costs fell to $150 from $676. Selling and marketing expense nearly doubled to $2,015, while general and administrative expense increased 65% to $2,371, including equity awards, bonus accruals and $220 of plant-sale transition costs.
Cash flow, liquidity and debt
- Operating cash outflow was $8,756, compared with $4,636 in Q1 2018. Inventory increased by $3,268 during the quarter.
- Cash at March 31, 2019 was $2,650, up from $624 at year-end 2018. Working capital was $9,101, compared with a $3,297 shortfall at December 31, 2018. Stockholders’ equity was $5,512, versus a deficit of $6,743 at year-end.
- The February public offering of 7,733,750 shares at $2.10 per share generated net proceeds of $14,867. The weighted-average share count increased 16% year over year.
- The revolving credit facility had $3,361 outstanding before $602 of unamortized financing costs (net carrying amount $2,759); unused borrowing capacity was $6,826. The facility is secured by substantially all company assets, bears an effective interest rate of 7.7%, and matures April 20, 2021. The company reported compliance with its quarterly financial covenants.
- A related-party convertible note had a $3,400 principal balance plus $887 accrued interest, totaling $4,287. It bears 12% interest, is secured and subordinated to the revolving lender, and matures April 21, 2021.
- Management reported a Q1 net loss and significant operating cash use, while stating the offering and available borrowing capacity improved liquidity. The financial statements assume the company will continue as a going concern.
Outlook, commentary and risks
Management said it plans to invest in sales support, marketing and working capital, and highlighted a fully integrated marketing campaign launched May 10, 2019. Several new products were planned for Q2 2019, including Reed’s cans and zero-sugar products in cans and bottles. Management said it did not anticipate idle and other costs to be material in the second half of 2019. The filing provides no quantified revenue, earnings or cash-flow guidance.
Risks and contingencies include customer concentration (two customers represented 25% and 9% of Q1 gross sales), reliance on major vendors, and debt secured by company assets. The company’s release from obligations on the former Los Angeles facility lease remained contingent on CCB depositing $1.2 million of security with the lessor by December 31, 2019. The filing reports no material change to previously disclosed risk factors and no legal proceedings requiring disclosure. Management stated disclosure controls were effective as of March 31, 2019.
Key facts for investors to verify
- Whether sales growth, core-brand volume and gross-margin improvements continue after the quarter, given higher promotional allowances.
- Whether increased marketing and administrative spending translates into sustained sales growth and a narrower operating loss.
- Cash burn, inventory levels and available borrowing capacity, particularly in light of the operating cash outflow.
- Terms, covenant compliance and repayment or conversion prospects for the secured revolving facility and related-party note.
- Whether CCB satisfies the $1.2 million lease-security requirement by the stated deadline.
- Potential dilution from the increased share count and outstanding options, warrants and convertible securities.