Reed’s, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statement amounts below are in thousands of dollars unless otherwise noted. The company sells Reed’s and Virgil’s beverages and described its post-plant-sale model as asset-light, with manufacturing outsourced.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $9,480 | $9,389 | $17,929 | $17,677 |
| Gross profit / margin | $2,273 / 24% | $3,042 / 32% | $4,777 / 27% | $5,345 / 30% |
| Operating loss | $(4,106) | $(2,822) | $(6,987) | $(3,947) |
| Net loss | $(4,460) | $(3,375) | $(7,724) | $(4,991) |
| Loss per share, basic and diluted | $(0.13) | $(0.13) | $(0.25) | $(0.20) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(11,520) | $(10,415) |
- Q2 gross sales rose 4%, but promotional and other allowances increased 31% to $1,278, leaving net sales up only 1%. For the first half, gross sales rose 6%, while allowances rose 53% to $2,350 and net sales increased 1%.
- Q2 operating expenses were $6,379, including selling and marketing of $3,194, up 164%. General and administrative expense declined 49% to $1,749. For the first half, selling and marketing rose 134% to $5,208; total operating expenses increased 27% to $11,764.
- Management attributed weaker gross margin partly to approximately $617 of Q2 inventory obsolescence reserves and write-offs associated mainly with rebranding and formulation changes. First-half idle and other costs declined to $309 from $1,068.
- Modified EBITDA, a non-GAAP measure, was a loss of $3,443 in Q2 (versus a loss of $1,108) and a loss of $5,649 for the first half (versus a loss of $1,792).
Liquidity, debt and capital
- At June 30, cash was $1,604, working capital was $5,718, and stockholders’ equity was $1,988. At December 31, 2018, cash was $624, working capital was negative $3,297, and stockholders’ equity was a deficit of $6,743.
- First-half operating cash use was $11,520. Investing activities used $91; financing activities provided $12,591. Cash increased $980 to $1,604.
- The February 2019 public offering of 7,733,750 shares at $2.10 per share generated net proceeds of $14,867. Shares outstanding increased from 25.7 million at year-end to 33.7 million at June 30.
- The revolving facility had $4,855 outstanding before unamortized financing costs, a net balance of $4,328, and $5,386 of unused borrowing capacity. It matures April 20, 2021, is secured by substantially all company assets, and carried a stated effective rate of 7.7%. The company reported compliance with its financial covenants at June 30.
- A related-party convertible note had a $3,400 principal balance and $1,017 of accrued interest, for a total obligation of $4,417. It bears 12% interest, matures April 21, 2021, and is convertible at $1.50 per share. Lease liabilities totaled approximately $810.
Changes, outlook and risks
- Core-brand gross revenue grew 13% in Q2 and 14% in the first half, led by Virgil’s volume growth. The company said Q2 orders were short-shipped by approximately $1,100 and first-half orders by approximately $1,300 because co-packer output was below expectations and innovation production was delayed.
- Management cited increased promotions, new product launches and a broad marketing campaign as drivers of higher selling and marketing expense. It said the plant sale reduced idle costs, anticipated idle and other costs would not be material in the second half, and expected transportation costs to decline as its co-packer footprint and capabilities expanded. No numerical earnings or sales guidance was provided.
- The filing reports a first-half net loss and substantial operating cash use. It states the financial statements assume the company will continue as a going concern; available cash and borrowing capacity, together with future financing and operating performance, remain important to liquidity.
- Customer concentration was significant: the two largest customers represented 29% and 14% of Q2 gross sales; one customer accounted for 32% of gross accounts receivable at June 30. The Rosenthal credit facility includes restrictive covenants and is secured by company assets.
- The Los Angeles facility sale to an entity owned by founder and director Christopher Reed left the company dependent on the buyer depositing $1.2 million of security with the lessor by December 31, 2019 for Reed’s release from the lease obligation. The filing says a further $550 was to be deposited by October 31, 2019 to satisfy the requirement.
- The company recorded a $108 first-half expense from the change in fair value of warrant liabilities. It reported no material changes to previously disclosed risk factors and no legal proceedings requiring disclosure in this filing.
Key facts for investors to verify
- Whether core volume growth can translate into net sales growth after elevated promotional allowances and any continued order short-shipping.
- Whether gross margins recover as inventory write-offs ease and co-packer production, product availability and logistics improve.
- Cash burn, remaining borrowing capacity, covenant compliance, and the company’s ability to fund operations through the credit facility and other sources.
- Completion and timing of the required $1.2 million lease-security deposit related to the facility sale, and the resulting release from lease obligations.
- Potential dilution from the enlarged share count, outstanding options and warrants, and the convertible related-party note; also review related-party terms and obligations.