REED’S, INC. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Interim financial statements are unaudited. Reed’s sells beverages and other products, including Reed’s and Virgil’s brands.
Financial performance and position
| Metric | Q1 2017 / March 31, 2017 | Comparable period / December 31, 2016 |
|---|---|---|
| Gross sales | $9.354 million | $10.777 million, Q1 2016 |
| Net sales | $8.295 million | $10.004 million, Q1 2016 |
| Gross profit / margin | $1.056 million / 12.7% | $1.893 million / 18.9%, Q1 2016 |
| Operating loss | $1.586 million | $1.202 million, Q1 2016 |
| Net loss attributable to common stockholders | $1.993 million; $0.14 per share | $1.580 million; $0.12 per share, Q1 2016 |
| Modified EBITDA | Loss of $1.252 million | Loss of $0.772 million, Q1 2016 |
| Operating cash flow | Provided $527,000 | Used $755,000, Q1 2016 |
| Cash | $197,000 | $451,000 at Dec. 31, 2016 |
| Working capital | Deficit of $3.551 million | Deficit of $1.565 million at Dec. 31, 2016 |
| Total liabilities / stockholders’ deficiency | $20.753 million / $3.510 million | $20.509 million / $1.657 million deficiency at Dec. 31, 2016 |
Current assets were $8.504 million and current liabilities $12.055 million. The balance sheet reported a $3.530 million line-of-credit balance, $7.030 million in bank notes before current classification, discounts and presentation, $1.534 million net long-term financing obligation, and $576,000 in capital lease obligations. Line-of-credit availability was stated as $191,000 in the liquidity discussion and $192,000 in the debt note.
Material changes and management commentary
- Net sales declined 17%; gross sales declined 13%. Total volume fell 13.8%, with notable declines in Kombucha and private-label products. Promotional and other allowances rose 37% to $1.059 million.
- Gross margin fell to 12.7% from 18.9%. Management attributed the deterioration principally to higher promotional costs and idle-plant costs, which rose to $734,000 from $273,000.
- Operating expenses declined 15% to $2.642 million, but the reduction did not offset lower sales and weaker gross profit. Interest expense increased to $416,000 from $378,000.
- Operating cash flow was positive, helped by a $1.319 million inventory reduction and increases in accounts payable and other working-capital movements; cash nevertheless fell by $254,000 during the quarter.
- Christopher J. Reed resigned as CEO and Stefan Freeman was appointed interim CEO. Management said it was evaluating the business, simplifying the product portfolio, and reducing more than 100 packaging options, while seeking to lower supply-chain costs and return to growth and profitability.
Liquidity, outlook and risks
- On April 21, 2017, after quarter-end, the company issued a $3.4 million subordinated convertible note and warrants; reported net proceeds were $3.240 million. The note carries 12% annual interest compounded monthly, matures in two years, is secured behind PMC’s first-priority security interest, and may not be prepaid. Conversion and warrant exercise are subject to waiting periods and other terms.
- The company stated it expected to have sufficient cash and liquidity for anticipated working capital over the next 12 months, and believed resources could support operations until PMC loans mature in October 2018. It also acknowledged that refinancing is not assured and that sales shortfalls or failure to reduce costs could require further cost cuts or financing.
- PMC facilities are secured by substantially all company assets. The filing describes interest rates linked to EBITDA and reports that low borrowing availability can increase loan rates; the debt note also contains varying rate figures, so the applicable terms should be checked against the loan documents.
- Sales concentration is material: one customer represented 21% of Q1 2017 gross sales and 23% of receivables at quarter-end. One vendor represented about 18% of purchases.
- No formal financial guidance was provided. Management cautioned that quarterly results are not necessarily indicative of full-year results. It reported no brand-name impairment and no material change in internal control over financial reporting; disclosure controls were judged effective.
Important facts for investors to verify
- Confirm the exact available borrowing under the PMC line, given the filing’s $191,000 and $192,000 figures, and the current borrowing-base and covenant terms.
- Review the April 21 note, conversion feature, warrants, security priority, and dilution implications, including the additional warrants and amended investor rights described in the filing.
- Assess whether the product and packaging rationalization, improved plant utilization, and cost actions can restore sales growth and gross margins.
- Monitor cash burn, working-capital deficit, debt service, and the company’s ability to refinance PMC obligations before their October 2018 maturity.
- Track customer and supplier concentration and the effect of promotional allowances on net sales and cash receipts.