Reed’s, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparative figures are for FY 2016. Reed’s sells natural beverage products, principally Reed’s Ginger Beer and Virgil’s craft sodas. The company reported one operating segment. This is an annual filing, not a standalone fourth-quarter report.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Gross sales (company-defined measure) | $41.718 million | $46.198 million | -10% |
| Net sales | $37.714 million | $42.472 million | -11% |
| Cost of goods sold | $30.821 million | $33.230 million | -7% |
| Gross profit | $6.893 million | $9.242 million | -25% |
| Gross margin | 18.3% | 21.8%* | Down |
| Loss from operations | $(11.749) million | $(2.799) million | Loss widened |
| Net loss | $(18.373) million | $(5.009) million | Loss widened |
| Basic and diluted loss per share | $(1.24) | $(0.37) | Loss per share widened |
| Cash used in operating activities | $(3.422) million | $(2.533) million | Use increased |
*Calculated from reported gross profit divided by net sales. The filing’s MD&A gives differing margin presentations in places; investors should verify the comparable margin calculation.
- Promotional and other allowances rose to $4.004 million from $3.726 million. The company’s gross-sales measure is non-GAAP and is not a substitute for net sales.
- Idle-capacity production costs increased to $3.041 million from $1.604 million, which management attributed in part to underutilization of the Los Angeles plant and additional freight and handling.
- Management reported modified EBITDA of $(4.218) million versus $(1.254) million in 2016. This is a non-GAAP measure and should not be viewed as cash flow or a replacement for GAAP results.
Liquidity, debt and capital
- At December 31, 2017, cash was $12.127 million, versus $451,000 a year earlier. Working capital was $2.303 million, compared with a $1.563 million deficit in 2016. The improvement followed financing proceeds, not positive operating cash flow.
- Financing activities provided $15.911 million in 2017, including $13.087 million net from common-stock sales, $1.650 million from warrant exercises and $3.083 million net from a convertible-note financing. The December rights offering issued 9.33 million shares and warrants and generated $12.887 million net.
- Current liabilities were $18.645 million. Debt included $3.301 million outstanding on the secured revolving line, $6.947 million of bank notes classified as current, and a $3.690 million related-party convertible note. The line and bank notes were due in October 2018; the company said it expected to renew or replace the facility and restructure the notes. The related-party note bears 12% interest and its conversion and maturity terms were amended.
- The company reported $1.012 million of remaining borrowing availability under its line of credit at year-end. It stated that liquidity was sufficient for anticipated working capital needs for the following 12 months, while warning that failure to achieve profitability or refinance debt could leave it short of funds.
- Common shares outstanding increased to 24.62 million from 13.98 million. At year-end, 7.33 million warrants were outstanding; the filing also identifies potential shares from the convertible note and options, creating significant potential dilution.
Changes, outlook and material matters
- Management described 2017 as a restructuring and operational-review year, with a shift toward an asset-light, sales-and-marketing-led model. The company reduced its portfolio from more than 100 SKUs to about 28, focusing on Reed’s and Virgil’s core products.
- Core case volume declined 7.3% for the year, but management said the year-over-year decline eased from 8.2% in the second quarter to 4.3% in the fourth quarter. Total portfolio volume declined 10.6% for the year; fourth-quarter total volume was up 1.9% year over year.
- A core-product price increase took effect in August 2017. Management reported fourth-quarter core revenue per case up 6% year over year and fourth-quarter core cost per case down 2.2%. It expected sequential improvement in volume, price and cost of goods sold into 2018, but provided no formal numerical guidance.
- Management expected selling and marketing spending to double in 2018 as staffing, advertising and broker use increased. It also expected freight costs to decline as production moved closer to customers and logistics arrangements changed. These are expectations, not guarantees.
- In December 2017, Reed’s entered strategic arrangements with a glass supplier and a North American logistics provider, seeking cost savings. It was also trialing natural soda-fountain products with a large restaurant chain.
- After year-end, the company received a March 24, 2018 letter of intent from a party partially owned by founder and director Christopher Reed to buy substantially all assets of the Los Angeles plant. The proposed consideration was $1.25 million cash plus assumption or relief of an attached liability; the filing cites differing liability amounts ($1.4 million and $1.472 million). The company recorded a $5.925 million impairment based on the proposed transaction. The sale was anticipated for summer 2018 and remained subject to approval and closing.
- Other key risks include substantial customer concentration (two customers represented approximately 23% and 16% of 2017 sales), dependence on distributors and co-packers, competitive pricing and shelf-space pressure, raw-material and glass costs, and the ability to generate cash and refinance debt. The company also noted potential costs from a plant sale or exit, including termination, lease and closure expenses, and risk to NYSE American listing compliance.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; the auditor did not attest to internal-control effectiveness.
Most important facts for investors to verify
- Whether the Los Angeles plant asset sale closed, its final proceeds and liability relief, the related-party approval process, and any additional exit costs or impairment charges.
- Whether the October 2018 bank debt and revolving facility were refinanced, renewed or repaid, and the resulting interest expense, covenants and liquidity position.
- Whether the reported volume stabilization and expected improvements in pricing, product costs and freight translated into improved net sales, margins and operating cash flow.
- The scale of dilution from outstanding warrants, the convertible note and equity awards, including later grants and exercises.
- The effect of customer concentration and the company’s ability to retain distribution, expand sales and manage working-capital needs without further financing.
- The filing’s inconsistent margin presentations and differing stated amounts for the liability tied to the proposed plant sale.