REED’S, INC. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2018; year-to-date comparisons are against the same 2017 period. Reed’s sells beverages under the Reed’s and Virgil’s brands. Its strategy emphasizes fewer core products, increased outsourced manufacturing, price restructuring, and investment in sales and marketing. Unless stated otherwise, financial amounts below are in thousands of dollars.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $10,796 | $10,887 | $28,473 | $28,046 |
| Gross profit / margin | $2,681 / 25% | $2,062 / 19% | $8,026 / 28% | $4,830 / 17% |
| Operating loss | $(2,079) | $(2,990) | $(6,026) | $(5,647) |
| Net loss | $(2,674) | $(5,617) | $(7,665) | $(7,457) |
| Loss per share | $(0.10) | $(0.37) | $(0.30) | $(0.52) |
| Modified EBITDA, non-GAAP | $(1,481) | $(849) | $(3,273) | $(2,908) |
- Revenue and margins: Q3 net sales declined 1%; nine-month net sales increased 2%. Management attributed margin improvement to prior price increases, lower packaging costs, and productivity gains from SKU reductions. The filing reports an 11-percentage-point year-to-date gross-margin improvement.
- Expenses and profitability: Q3 operating expenses were $4,760, down 6% from $5,052, partly because 2017 included a $2,000 impairment charge. Delivery and handling rose 25% to $1,395, selling and marketing rose 66% to $1,378, and G&A rose 80% to $1,987. For nine months, operating expenses increased 34% to $14,052, including higher marketing and compensation costs.
- Cash flow: Operating activities used $10,496 in the first nine months of 2018, versus $4,729 in 2017. Investing activities used $50; financing activities used $1,393. Cash fell by $11,939 from $12,127 at year-end 2017 to $188 at September 30, 2018.
- Liquidity and balance sheet: At September 30, current assets were $12,103 and current liabilities $14,291, a working-capital deficit of $2,188. Stockholders’ deficit was $4,824, compared with equity of $508 at December 31, 2017. Total liabilities were $19,810.
- Debt: September 30 borrowings under the PMC facility totaled $8,729: revolving credit $2,689, term loans $3,000, and CAPEX loan $3,040. The balance sheet also showed a $4,036 related-party convertible note, net long-term financing obligations of $1,380, and capital leases of $247.
Material changes and unusual items
- Core-brand gross revenue increased 3% in Q3 and 6% year to date, while Q3 core volume was essentially flat year over year. Core product pricing per 12-ounce case rose 4% in Q3 and 5% year to date.
- September included a $492 inventory revaluation for products outside the strategic focus. Management said Q3 gross margin would have been 29% absent this one-time charge.
- Nine-month G&A included $1,619 of non-cash stock-based compensation, $774 of bonus and tax accruals, $642 of severance related to the headquarters move, and $285 of headquarters transition costs.
- The company completed its headquarters relocation to Norwalk, Connecticut, in September and expected to complete its exit from the Los Angeles plant in 2018. Los Angeles assets held for sale had a net book value of $1,921; prior impairment charges totaled $5,925.
- Weighted-average shares increased 76% year to date to 25.2 million. At September 30, potentially dilutive securities totaled 13.3 million shares, including warrants, options, restricted stock, and the related-party convertible note; they were excluded from diluted loss per share as anti-dilutive.
Outlook, financing, and risks
- On October 4, 2018, Reed’s replaced the PMC facility with a 2.5-year Rosenthal & Rosenthal facility providing up to $13,000 of borrowing capacity. It repaid PMC $8,758 and reported $1,300 of unused capacity upon closing. Management expected annual debt service requirements to decline by approximately $1,500.
- The new facility is secured by substantially all company assets and has interest, fees, and minimum monthly charges. Its over-advance is supported by a $1,500 letter of credit from affiliates of a director. The refinancing also amended the related-party Raptor note and reduced the exercise price on 750,000 Raptor warrants to $1.10.
- Management stated it expects freight costs per case could decline 5%–10% as operations improve. It also said cost reductions could support positive operating cash flow if sales goals are not achieved, but cautioned that there is no assurance of sufficient future revenue or profitable operations. Failure to achieve profitability could leave insufficient working capital for ongoing operations and planned investment.
- The filing identifies possible additional cash and non-cash costs from the Los Angeles facility exit, including severance, lease or contract termination, closure, and relocation costs. It also notes customer concentration: the two largest customers represented 22% and 18% of Q3 gross sales.
- The report was prepared on a going-concern basis despite substantial operating cash use, low cash, and a working-capital deficit. Management described the refinancing as supporting liquidity; the filing does not provide a guarantee that financing or operating cash flow will be sufficient.
Most important facts for investors to verify
- Whether the new credit facility provides adequate borrowing availability under its receivables and inventory eligibility requirements, and whether its fees and covenants affect liquidity.
- Whether sales growth and margin gains persist, and whether the Los Angeles exit removes idle-plant costs as management expects.
- How quickly operating cash use declines, given $188 cash at quarter-end and $10,496 of nine-month operating cash use.
- The full cost of restructuring and headquarters relocation, including any further impairment, severance, or facility-exit charges.
- Potential dilution and related-party exposure from warrants, options, restricted stock, and the Raptor convertible note and financing arrangements.