REED’S, INC. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The interim financial statements are unaudited. Reed’s sells branded beverages; management attributed the quarter’s results to supply-chain and production interruptions, particularly affecting products outside its Reed’s ginger-beverage line.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $10.713 million | $12.319 million | $33.561 million | $32.456 million |
| Gross profit / margin | $1.560 million / 15% | $3.885 million / 32% | $8.457 million / 25% | $10.494 million / 32% |
| Operating income (loss) | ($2.144 million) | $246,000 | ($2.597 million) | $1.029 million |
| Net income (loss) | ($2.465 million) | $48,000 | ($3.423 million) | $466,000 |
| Modified EBITDA (non-GAAP) | ($1.753 million) | $477,000 | ($1.119 million) | $1.880 million |
Q3 basic and diluted loss per share was $0.19; nine-month loss per share was $0.26. Nine-month operating cash flow was negative $2.046 million, compared with positive $1.557 million a year earlier. Investing cash use was $415,000 and financing provided $2.705 million; cash increased $244,000 to $1.203 million.
At September 30, cash was $1.203 million, current assets were $13.851 million and current liabilities were $14.312 million, resulting in negative working capital of $461,000. Stockholders’ equity was $1.018 million, down from $3.652 million at year-end 2014. Outstanding borrowings included a $4.329 million revolving line and $4.831 million in term and capital-expansion loans. The company also reported a $1.613 million net long-term financing obligation and $510,000 of capital lease obligations.
Material changes and operating drivers
- Q3 net sales fell 13% year over year, while nine-month sales rose 3%. Management said Q3 Reed’s ginger-branded beverages grew 5%, but other brands declined 26% amid production interruptions.
- Q3 gross profit fell 60%, and margin declined to 15%. Management cited product mix, co-packer quality issues, dated product, and higher inventory obsolescence; it said these factors were linked to the disruption. Nine-month cost of tangible goods sold rose 13%, faster than sales.
- Operating expenses rose to $3.704 million in Q3 and $11.054 million for nine months. Nine-month delivery and handling increased 26%; general and administrative costs increased 22%, including personnel-transition expenses.
- Inventory increased to $7.900 million from $6.306 million at year-end, with the obsolescence reserve rising to $526,000 from $90,000. Accounts receivable increased to $3.744 million from $2.500 million.
Liquidity, outlook, and risks
Management said it believed working capital was sufficient for at least the next 12 months, expected normal operations to resume after adding two East Coast co-packers and a Midwest facility, and anticipated gross margins returning toward historical levels beginning in the current quarter. These are management expectations, not guarantees. It identified operating cash flow as its primary capital source and warned that failure to meet sales goals, achieve profitability, or obtain acceptable additional financing could require reductions in operations and spending.
The company had a $6 million revolving facility secured by substantially all assets and reported $1.365 million of availability at September 30 in the debt note. Elsewhere, the filing says borrowing availability was zero, and MD&A describes availability terms differently; the precise availability is unclear from the filing text. The September 1 Term Loan B carried a stated 14.85% rate, while other applicable borrowing rates could increase depending on EBITDA and borrowing availability.
After quarter-end, on November 9, 2015, the company restructured $3 million of Term Loans A and B, extending their lump-sum maturity to April 1, 2017, under the same rates and conditions. It agreed to provide 125,000 warrants, with value to be determined under the terms described in the filing. Other notable risks include reliance on concentrated customers and suppliers: two customers represented 41% of nine-month sales, one customer represented 20% of receivables, and one vendor represented 25% of purchases.
The company reported no material changes in internal control over financial reporting and concluded disclosure controls were effective as of September 30, 2015. It reported no legal proceedings requiring disclosure and no defaults upon senior securities.
Important facts for investors to verify
- Whether production and co-packer changes resolved the supply disruption, and whether management’s expected margin recovery occurred.
- Actual borrowing-base availability and compliance with lender terms, given the filing’s conflicting availability statements; also review the cost and warrant terms of the post-quarter loan extension.
- Whether operating cash flow, working capital, inventory levels, and the elevated obsolescence reserve improved after quarter-end.
- Customer and supplier concentration, collection of receivables, and the company’s ability to fund operations and plant expansion without additional financing.
- The sustainability of sales growth and profitability, particularly given Q3 losses, higher interest expense, and negative nine-month modified EBITDA.