Reed’s, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 15, 2018. Financial statements are unaudited. Reed’s described the quarter as part of its transition from beverage manufacturer to beverage brand company.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $8.288 million | $8.295 million |
| Gross profit / margin | $2.303 million / 27.8% | $1.056 million / 12.7% (reported as 13%) |
| Operating expenses | $3.428 million | $2.642 million |
| Operating loss | $1.125 million | $1.586 million |
| Net loss attributable to common stockholders | $1.615 million | $1.993 million |
| Basic and diluted loss per share | $0.06 | $0.14 |
| Modified EBITDA (non-GAAP) | $(684,000) | $(1.325) million |
| Cash used in operating activities | $4.636 million | Cash provided: $527,000 |
Gross sales fell 5% to $8.855 million, while promotional and other allowances fell 46% to $567,000, leaving net sales essentially flat. Core beverage volume declined 7.4%, while selling price per case increased 4.2%. Management attributed improved gross margin chiefly to lower glass packaging costs and SKU-related productivity gains. Cost of goods sold, including idle-plant costs, was $5.985 million; the MD&A separately presents tangible-goods costs of $5.309 million and idle-capacity costs of $676,000.
Financial position, liquidity and debt
- At March 31, cash was $3.376 million, down from $12.127 million at year-end 2017. Working capital was $1.384 million, versus $2.303 million at year-end; stockholders’ deficit was $833,000, compared with equity of $508,000.
- Operating cash outflow was $4.636 million; investing activities provided $69,000 and financing activities used $4.184 million. The operating outflow included a $2.829 million reduction in accounts payable. Financing cash use included repayment of the $3.301 million revolving-line balance.
- The revolving line had no borrowings outstanding at quarter-end, with $4.432 million available. The company reported total cash availability of $7.808 million, including cash.
- Bank notes were $6.440 million; the related-party convertible note, including accrued interest, was $3.802 million; the long-term financing obligation, net, was $1.450 million; and capital lease obligations totaled $429,000. The revolving line and bank loans mature in October 2018. The convertible note bears 12% interest and matures April 2021.
- Accounts payable was $4.543 million, down from $7.480 million at year-end. Inventory increased to $6.835 million from $5.931 million.
Material changes, outlook and risks
- Operating expenses rose 30% to $3.428 million. Delivery and handling increased 29%, selling and marketing increased 29%, and general and administrative expense increased 31%. Management cited warehouse transitions and higher freight rates, marketing investment, noncash equity compensation, and other administrative costs.
- Management said it expects new brokerage partners and targeted promotional spending to support customer and product growth during the rest of 2018. It provided no quantified sales, earnings, or cash-flow guidance.
- Management expected a summer 2018 sale of substantially all assets of the Los Angeles plant for $1.25 million cash, with relief of an associated $1.4 million financing liability. The offer came from a party partially owned by officer and director Chris Reed; the filing said Board approval and closing were anticipated, not completed. The sale was expected to reduce idle-plant costs, but could result in cash costs, impairment, discontinued-operations accounting, or other exit-related charges.
- The company said it believed it could renew or replace the revolving line and restructure the $6.9 million of bank notes due in October, using cash and anticipated asset-sale proceeds. It also estimated liquidity would cover anticipated working capital for the next 12 months. These plans were not assured: the filing cites operating losses, substantial operating cash use, debt maturities, and the possibility that revenues or financing may be insufficient. The financial statements are prepared on a going-concern basis.
- Sales and supply concentrations warrant attention: two customers represented 27% and 11% of gross sales; one customer accounted for 24% of receivables. Three vendors represented 71.5% of accounts payable in aggregate.
- Potentially dilutive securities totaled approximately 12.5 million shares, including warrants, options, the convertible note, and preferred stock; they were excluded from diluted loss per share as antidilutive. The quarter included substantial equity awards, and approximately $830,000 of unvested restricted-stock compensation and $2.4 million of unvested option compensation remained for future recognition. Some awards were subject to shareholder approval of an increase to the incentive-plan share pool.
- ASC 606 was adopted January 1, 2018, with no quantitative effect on previously reported balances or Q1 results. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the related-party-connected plant sale received approval and closed on the anticipated terms, and whether it generated additional costs or accounting charges.
- Whether the October 2018 bank maturities and revolving-line expiry were refinanced, renewed, or repaid, and the resulting interest and liquidity terms.
- Whether operations can reduce cash burn and achieve positive operating cash flow, particularly as the company transitions to new logistics and sales partners.
- Whether gross-margin gains persist despite lower volume, and whether planned marketing and promotional spending produces sales growth.
- The effects of customer and vendor concentration, outstanding equity awards, and potential dilution on future results and ownership.