Update 7/12/2016: Reeds Inc received two faxed proposals from two shareholders before the deadline for submissions. It looks like shareholders will get to vote on both proxy access and creating an independent chairman. Maybe shareholders can help to turn our company around. Institutional investors only hold about 14% of Reeds Inc and insiders hold 26%, so retail shareholders will need to do the heavy lifting. We’d better get in shape. Hope springs eternal; stock up over 6% for the day.
Reeds Inc doesn’t have their annual meeting until December but proxy proposals are due Monday. I’m submitted a proposal on proxy access but almost submitted a proposal to split the chair and CEO positions. Reeds Inc really needs both. I’m hoping another shareholder will submit a proposal to split the chair and CEO positions. If you own shares in Reeds Inc but aren’t sure how to file a proposal, check out our Shareowner Action Handbook. Still can’t figure it out how to submit a proposal or want some help? Please get in touch. I would be happy to help.
In preparation for December’s annual meeting, I’ll be building more arguments about why change is needed at Reeds Inc but the following are a few thoughts off the top of my head.
Reeds Inc: A Loser
If you are a shareholders in Reeds Inc, you are probably losing out financially. On July 20, 2015, shares were trading for $6.33. Today, the price is $2.62. At least that’s better than $2.37 a few weeks ago. In the last year, Reeds Inc is down 57%, while the NASDAQ is down 1%. Over two years Reeds Inc is down 48%; the NASDAQ is up 13%. Five years: Reeds Inc +32%; NASDAQ +78%. Ten years: Reeds Inc -64%; NASDAQ +90%.
So why do I stick with a looser? One of the biggest reasons is also one of the company’s biggest problems. Chris Reed, the charismatic founder of Reeds Inc, keeps spinning out threads of hope. A few years ago it was a very promising line of kombucha… something I drink just about every day to help my gut bacteria. The sugar content is negligible compared to normal soda – health, instead of junk calories.
What ever happened to the Reeds Inc version, Culture Club? Taste tests showed it to be a winner. Culture Club came out with a bang. It cost a little more than the leading competitor but many customers were willing to pay the price. Last year at the annual meeting, we sampled Reeds Inc’s bag in a box fountain products. With quality natural ingredients and no sodium benzoate, it promised to be the only real natural product available through soda machines.
I had originally been drawn in by the natural ginger brew. As far as I was concerned, the only better one was a private label sold through Trader Joe’s. (Yes, I’m pretty sure it came from Reeds Inc.) Every time I would think of bailing out of Reeds Inc, Chris Reed would pull another rabbit out of the hat and I’d hope the magic was about to begin.
Reeds Inc: Problems Galore
Reliability is probably the core manufacturing and distribution issue at Reeds Inc. Several of the stores in my area aren’t willing to carry many Reeds Inc products because they can’t get their orders filled reliably. That might be expected from a startup but Reeds Inc has been around for more than a decade. During that time Mr. Reed has come up with many great products. What he hasn’t been able to do is to deliver his products in a reliable manner. Exploding bottles, faulty labels, and unenforceable contracts with unreliable bottlers haven’t made for a pretty picture. According to Yahoo! Finance, return on assets is -13%; return on equity -346%. Total cash per share is $0.05 and the book value per share is -$0.05.
When I attended last year’s annual meeting, Mr. Reed stated that most of the staff only worked there for a year or less. That might be something to brag about for a company that is growing and hiring new staff but at Reeds Inc the problem is being able to retain employees. It takes a while before new employees even pay for themselves. Employees have a lot of firm-specific knowledge that can’t easily be replaced. At Reeds Inc it seems likely that only Chris Reed and a few others have been there long enough to acquire much of it. Certainly turnover of the person occupying the role of CFO every two or three years is problematic. One too many arguments with Mr. Reed, I suspect, and they are probably out. The search then begins for a new CFO and it usually takes a substantial amount of stock to entice them into the position. Repeating that process several times isn’t a recipe for success; it is a failure to grow.
Reeds Inc: Founder’s Syndrome
It is difficult to analyze a corporate board from the outside, since we don’t know what goes on at the meetings or elsewhere. I suspect the biggest problem at Reeds Inc from a corporate governance perspective is that the company is run like a dictatorship. If performance is good, many could argue the company is best left as a democratic-free zone. At a company with the performance of Reeds Inc it is hard to buy into that logic. Reeds Inc has generally had two insiders on its board, Mr. and Ms. Reed, as well as three outside ‘independent’ director positions. All appear to be longtime friends of Mr. Reed. How independent can those directors really be? It takes an agreement of all three independent directors to override the Reeds. I wonder if that has ever happened.
As I have noted previously, neither Mr. Muffoetto nor Michael Fischman report owning any stock in Reed Inc and neither earn enough through Reed’s to incentivize active monitoring. Assuming they put in average director hours, as reported by NACD, Mr. Fischman got paid about $3.62/hour for his board work, while Mr. Muffoletto earned about $44.78/hour. How much monitoring and advice would you provide under such circumstances? (Zombie Director Voted Out at Reed’s – Again) I have experience on the board of a retail grocer and a wholesale grocer but wouldn’t be interested in a board appointment at Reeds Inc under current circumstances.
As small-cap consultant Adam Epstein noted in a guest column last December, “those who manage trillions of dollars believe that better governed companies will put more money in their clients’ pockets, yet scores of micro- and small-cap CEOs appear to believe that corporate governance is a waste of time.” (Gordon Gekko and Governing Small-Caps: Greed Works) Epstein went on the describe ‘founder’s syndrome.’
Many small public companies are inextricably linked to their founders. Those founders rarely lack confidence, and often feel like they, themselves, are uniquely suited to guide the company forwards (perhaps quite rightly sometimes, by the way). In other words, visionaries require unimpeded views of the future, so all “non-visionaries” should best stay out of the line of sight.
Epstein then described how he thought his part on a panel discussion went over like a thud at an NACD meeting but that he later received numerous phone calls from CEOs in attendance who had been converted to the idea that effective governance, led by an independent board, would put more money in their pockets. Will Mr. Reed ever have such a conversion experience? Maybe, but it probably won’t come from attending an NACD event. I’m not sure he’s ever heard of the organization. In case he is curious, here’s a link to the Southern California Chapter.
Reeds Inc: Three Attempts to Get Proxy Right
Putting out a corporate proxy statement and ballot is a relatively simple undertaking. Thousands of publicly traded companies do so every year. Here’s a just a brief portion of a December 24th post, Reeds Delivered a Corrected Proxy for Christmas:
Update 12/29/2015: Yesterday I noticed the latest e-mail I got from my broker told me the meeting day is 12/30/2015 but it didn’t say where or what time and it provided a link to the corrected ballot but it did not link to the corrected proxy, only to the old uncorrected proxy, which said the meeting is on 12/21 and incorrectly titled my proxy proposal.
The original proxy was filed on 11/9/2015. Then on 11/24 a Revised definitive proxy was filed, correcting the title of my proposal #5 but not correcting the proxy card. The additional definitive proxy was filed on 12/18. It discusses the revised proxy card and corrected proposal #5. This filing also changed the date of the annual meeting from 12/21 to 12/30.
It appears that Reeds paid to have a link to the revised proxy card sent out but they did they did not pay to have Broadridge’s ProxyVote.com link to either the revised or additional definitive proxy; instead it links to the original proxy.
Prior to that fiasco, Reeds Inc already had a track record of misstatements and fumbles in their proxy, such as this argument against proxy access:
Under this proposal, a special interest group could elect a board member who has no holdings of Reed’s stock at all.
Then thy realized two out of the then current five board members didn’t own any stock either. Oops. There are too many ‘oopses’ to detail in this brief post, so we’ll just move on.
Reeds Inc: In the News
Let’s just take a quick look at a couple of recent news stories reported on Yahoo! Finance:
- Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard – Recently, due to the decrease in the trading price of the company’s common stock, the company is not meeting the $50,000,000 market capitalization exception. The company has 18 months during which to meet the listing standards. (6/28)
- Entry into a Material Definitive Agreement, Unregistered Sale of Equity Securities – Because of a shortage of operating funds, a private financing transaction was entered to issue and sell 692,412 shares of common stock and warrants for gross proceeds to Reed’s of $2,354,200. The Offering was made solely to accredited investors. Also noted, “On June 1, 2016, Mark Harris resigned from his position as director of Reed’s. Mr. Harris’ resignation was not due to any disagreements with Reeds.” (6/3)
And at Seeking Alpha: To Succeed, Reed’s Needs A Little Less Reed – Terrier Investing argues Reeds Inc won’t succeed unless Chris Reed takes a step back from the business. One person shouldn’t be making all the company’s decisions.
Reeds Inc is in tight financial circumstances. By going out for a private placement they diluted the value of our existing stock. A substantial reduction in the value of stock means Reeds Inc will be delisted if they can’t rebuild the company sufficiently. The departure of Mark Harris isn’t a good sign. Directors don’t usually resign if they expect their company to outperform and Harris actually owned some stock in Reeds Inc, according to the last report I saw. As a former board member, he probably knows a lot more than we do about the company’s chances of success. Harris’ resignation leaves four directors on the board. Even if the two remaining independent directors are conscientious, Chris Reed and his wife can block any action.
Reeds Inc: The Way Forward
I can see only one clear path forward for Reeds Inc. Founder Chris Reed needs to open his eyes to the possibility that his employees and board members can add real value.
He should focus less on being bought out by Coca Cola or some other large conglomerate and more on building Reeds Inc for the long-term. Consistent performance will create a variety of sustainable options. Where is the succession planning? How about a board skills matrix and a discussion of the annual board evaluation process in the proxy? A third-party consultant is needed but don’t don’t pay for one unless you are willing to listen.
Embrace proxy access. Allow shareholders to nominate two truly independent board members who aren’t under the CEOs thumb. One of those new board members should replace Reed’s wife, Judy, on the board. Take the pressure off her and make the board truly independent. Pay them an appropriate amount for their service. Split the CEO and chairman positions. The chairman should be an independent board member who is fully empowered to hold executive sessions without Chris Reed in the room and to replace him if such drastic action is deemed appropriate.
I would also like to see Mr. Reed cut his holdings in half, preferably by setting up an ESOP and selling the stock to his employees over time. He should pass through the voting rights to employee-owners. If he does a good job, his employees will know it and vote accordingly. If he don’t, they’ll help him all the more with succession planning, which is needed either way.
My proxy access proposal was submitted today. (download REED-ProxyAccess-7-7-2016) Before the annual meeting in December, I’ll be writing a lot more about why proxy access is needed at Reeds Inc.
Reeds Inc: Take Action Today
If you are a shareholder at Reeds Inc who has owned more than $2,000 worth of common stock for over a year, you have an opportunity to make a real difference… but you have to act fast. Help send a message to the CEO, Board and other shareholders. File a proposal to split the chairman and CEO positions. Here’s a link (see page 34) to a proposal I submitted to EMC that can easily be modified for submittal to Reeds Inc. The deadline is Monday, July 11, so you’ll have to act NOW. Filing is easy. If you want help, contact me today. I would be happy to present it for you at the annual meeting.
Chris Reed owns 25% of the company, so any such proposal isn’t likely to pass. However, if it gets a high vote among other shareholders, that will send a real message to Mr. Reed. Its time to wake up and let your company grow up. Start cutting the apron strings. Adopt proxy access, let Ms. Reed step off the Board, allow the Board elect an independent chairman, bring in a consultant, set up an ESOP for your employees. Take these and a number of other steps and Reeds Inc will be ready to grow to profitable maturity.
Here’s a video I posted on December 12 2013, the last time I filed a proxy access proposal. Yes, the video’s production value isn’t great, but situation I describe still has a lot of validity.