Reed’s, Inc. — Q2 2018 Form 10-Q
Business context and reporting period. The unaudited quarter and six-month periods ended June 30, 2018; comparisons are with the same 2017 periods. Reed’s sells Reed’s and Virgil’s beverages and is shifting toward an asset-light model, narrowing its product portfolio, and exiting its Los Angeles production facility. Unless noted otherwise, dollar amounts below are in millions.
Financial performance and liquidity
- Revenue: Q2 net sales were $9.389 million, up 6%; six-month net sales were $17.677 million, up 3%. Q2 gross sales, a company-defined non-GAAP measure, rose 6% to $10.361 million. Core beverage volume increased 7% in Q2, while core selling price per case rose 6%.
- Margins: Q2 gross profit was $3.042 million, up 81%, and gross margin was 32% versus 19%. Six-month gross profit was $5.345 million, up 93%, with a 30% margin versus 16%. Management attributed gains mainly to pricing, lower packaging costs, SKU rationalization, and productivity improvements.
- Expenses and earnings: Q2 operating expenses rose 105% to $5.864 million; operating loss was $2.822 million versus $1.173 million. Net loss was $3.375 million versus net income of $0.153 million, or $(0.13) per share versus $0.01. Six-month operating loss was $3.947 million and net loss was $4.991 million, versus $2.657 million and $1.840 million, respectively; loss per share was $(0.20) versus $(0.13). Six-month Modified EBITDA, a non-GAAP measure, was negative $1.792 million versus negative $1.526 million.
- Cash flow: Cash used in operating activities was $10.415 million for the first six months, compared with $3.170 million in 2017. Cash declined from $12.127 million at year-end to $1.807 million; cash at June 30, 2017 was $0.251 million. Management attributed the 2018 operating cash use largely to inventory investment and payment of stretched payables.
- Liquidity and debt: Working capital was negative $0.289 million, versus positive $2.303 million at December 31, 2017; stockholders’ deficit was $2.734 million. The company reported $3.811 million of cash and available revolver capacity combined. At June 30, the revolver balance was $3.996 million, bank notes were $6.244 million, a related-party convertible note and accrued interest totaled $3.917 million, and net long-term financing obligations were $1.421 million. The revolver and bank notes were due in October 2018. Total liabilities were $22.237 million against total assets of $19.503 million.
Material changes, outlook, and risks
- Q2 operating expenses increased substantially: delivery and handling rose 43%, selling and marketing 66%, and general and administrative 171%. G&A included $0.820 million of non-cash stock compensation, $0.571 million of bonus accruals, and $0.642 million of one-time severance related to the planned headquarters move. Six-month G&A also included these items, with stock compensation of $1.065 million.
- Q2 interest expense fell to $0.435 million from $0.995 million, but year-over-year net income comparisons were affected by warrant valuation: 2017 included a $3.299 million gain, while 2018 included a $0.118 million expense. The six-month periods likewise included a $3.308 million gain in 2017 and a $0.123 million expense in 2018.
- Management said it had signed a July 19, 2018 term sheet to refinance the PMC credit facilities and expected refinancing before October maturity. The term sheet was subject to definitive agreements; completion was not reported as a certainty. Management also said it expects positive operating cash flow to become a primary funding source, but provided no quantified revenue or earnings guidance.
- The company planned to complete its Los Angeles plant exit in 2018 and warned of possible additional cash costs, impairment charges, and facility, lease, or employee-related costs. In August 2018, it concluded negotiations for a Norwalk, Connecticut headquarters lease of 6.5 years, with monthly payments of $10,000 for the first three years and $20,000 thereafter through December 2024.
- Management cited uncertainty over achieving profitable operations and refinancing on acceptable terms, warning that failure could leave insufficient working capital to sustain operations or fund plans. The filing states a going-concern assumption despite the six-month loss, operating cash outflow, and working-capital deficit. Sales and receivables were concentrated among a small number of customers; one vendor accounted for 24% of accounts payable at June 30.
- Other notable items: inventory rose to $10.447 million from $5.931 million, primarily in support of manufacturing transition and expected demand. Common shares outstanding increased to 25.526 million from 24.620 million at year-end; weighted-average shares for the six-month period rose 79% year over year. Management reported effective disclosure controls and no material change in internal control during Q2.
Important facts for investors to verify
- Whether the refinancing was completed before the October 2018 debt maturities, and its final terms, covenants, and available borrowing capacity.
- Whether inventory converts to sales and cash as planned, and whether operating cash use and working capital improve.
- Progress and total costs of the Los Angeles plant exit and Norwalk relocation, including any further severance, impairment, or contract-termination charges.
- Whether core-brand volume and pricing gains persist after increased sales, marketing, freight, and distribution costs.
- The effects of stock awards, warrants, and the related-party convertible note on future dilution and reported earnings.