Reed’s, Inc. — FY2014 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2014. Reed’s develops, manufactures, markets and sells natural beverages, including ginger brews, premium sodas and Culture Club Kombucha, as well as candies and ice creams. Products are sold mainly in the United States through distributors and direct retailer relationships. Most beverage production is performed by a Pennsylvania contract packer; the Los Angeles facility produces Kombucha, certain sodas and private-label products.
Financial performance
| Metric | FY2014 | FY2013 | Change / context |
|---|---|---|---|
| Gross sales, before promotional allowances | $48.061 million | $42.242 million | Up 14%; company-defined, non-GAAP measure |
| Promotional and other allowances | $4.639 million | $4.961 million | Down; 9% versus 12% of gross sales |
| Net sales | $43.422 million | $37.281 million | Up 16% |
| Cost of goods sold | $30.416 million | $26.487 million | Up 15% |
| Gross profit / margin | $13.006 million / 30% | $10.794 million / 29% | Profit up 20%; margin improved 1 percentage point |
| Operating income (loss) | $41,000 | ($869,000) | Returned to a small operating profit |
| Interest expense | $793,000 | $651,000 | Increased |
| Net loss | ($754,000) | ($1.520 million) | Loss narrowed; loss attributable to common stockholders was $759,000, or $0.06 per share, versus $1.525 million, or $0.12 per share |
| Operating cash flow | $1.016 million | $1.193 million | Positive, but lower year over year |
| Capital expenditures | $330,000 cash purchases | $602,000 | FY2014 also included $493,000 of equipment acquired through capital leases |
Management attributed sales growth to strong same-store sales, new accounts and branded-product growth of approximately $5.161 million, or 18%. Kombucha represented approximately 12% of net revenue. Cost pressures included higher co-packing fees and temporary commodity price increases in the second half. Gross margin also benefited from lower promotional allowances. Selling and marketing expense rose to $4.838 million, including $431,000 for a national cable television campaign. General and administrative expense increased to $3.649 million but declined as a percentage of sales.
The company reported modified EBITDA of $1.205 million for 2014 versus $13,000 for 2013. This is a company-defined, unaudited non-GAAP measure; the filing defines it as net income or loss before interest, taxes, depreciation and amortization, and non-cash share-based compensation.
Liquidity, debt and capital
- At December 31, 2014, cash was $959,000, working capital was $2.207 million, and stockholders’ equity was $3.652 million. Current assets were $11.499 million and current liabilities were $9.292 million.
- Cash flow from operations was $1.016 million; investing activities used $330,000; and financing activities used $831,000. Cash decreased by $145,000 during the year.
- The PMC credit agreement was amended and extended to December 5, 2016. The revolving line has a $6 million maximum; $3.009 million was outstanding at year-end, with reported availability of $1.042 million. The line is secured by substantially all company assets.
- Year-end debt and financing included a $1.5 million term loan, due at maturity in December 2016; a $672,000 capital-expansion loan; capital lease obligations with a $601,000 present value; and a long-term financing obligation with $2.673 million gross principal, shown at $1.642 million net of valuation discount before its current portion.
- The amended loans carried an effective rate of 9%. The term and capital-expansion loans generally require interest-only payments before principal repayment. The capital-expansion facility allows up to $3 million for equipment purchases, with $2.328 million of borrowing availability reported at year-end.
Material changes, outlook and risks
- Sales growth and lower promotional spending helped move operating results from an operating loss to a small operating profit, while the company remained unprofitable after interest expense.
- Management said working capital was sufficient to support existing operations for at least the next 12 months and identified positive operating cash flow as the primary capital source. It cautioned that sales shortfalls, continued losses or inability to secure acceptable financing could constrain growth and require spending or operating reductions. No specific financial guidance was provided.
- The company was in default under two loan covenants at December 31, 2013; the defaults were waived in March 2014. In December 2014, the amendment removed substantially all loan covenants. The filing cites a prior $500,000 annual capital-expenditure limit and reported that 2014 spending exceeded that amount.
- Customer concentration was significant: two customers generated approximately 33% and 14% of 2014 sales. One vendor represented approximately 27% of purchases and 32% of year-end accounts payable. The company also relied on a single contract packer for a majority of beverage production; a change could delay production and affect results.
- In October 2014, the company issued 200,000 warrants with a $5.60 exercise price, valued at $584,000, in exchange for release of a CEO personal guarantee and brewery-equipment collateral. The filing also reports 1,007,296 outstanding options, warrants and rights under its equity compensation disclosure, creating potential dilution.
- Risks include competition and pricing pressure, changing consumer preferences, raw-material availability and costs, retailer or distributor decisions, food-labeling and safety regulation, and the ability to maintain production capacity and cash flow. Management reported no material litigation matters and no impairment charges on property, equipment or brand names in 2014.
- The independent auditor issued an unqualified opinion on the financial statements. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor did not attest to internal-control effectiveness.
Key facts for investors to verify
- Reconcile the cash figures: the audited balance sheet and cash-flow statement show $1.104 million at December 31, 2013 and $959,000 at December 31, 2014, while MD&A cites $1.163 million as the 2013 comparison.
- Confirm the financing cash-flow direction: the audited cash-flow statement reports a net financing outflow of $831,000, whereas the MD&A narrative describes net financing activities of $831,000 as a source.
- Assess whether positive operating cash flow and reported borrowing availability are sufficient given the continuing net loss, upcoming term-loan maturity and equipment-investment needs.
- Monitor customer, supplier and contract-packer concentration, including any change in terms, supply continuity or receivable collection.
- Review the dilution implications of outstanding options and warrants, including the 200,000 warrants issued in connection with the financing amendment.