REED’S, INC. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Reed’s sells branded and private-label beverages, including Reed’s, Virgil’s and kombucha products.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Sales | $8.126 million | $6.539 million |
| Gross profit / margin | $2.535 million / 31% | $1.985 million / 30% |
| Operating income (loss) | $(239,000) | $44,000 |
| Net loss | $(403,000) | $(124,000) |
| Loss per share, basic and diluted | $(0.03) | $(0.01) |
| Modified EBITDA, company-defined non-GAAP | $25,000 | $268,000 |
| Cash used in operating activities | $(932,000) | $(363,000) |
- Sales increased 24%; management attributed growth mainly to branded-product volume and broader distribution. Private-label products were approximately 15% of sales in both periods; kombucha represented approximately 7% of Q1 2013 case volume.
- Cost of tangible goods sold declined to 60% of sales from 64%, but idle-capacity costs rose to $686,000 from $369,000. Gross margin improved to 31% from 30%.
- Operating expenses increased to $2.774 million from $1.941 million. Delivery and handling rose 89% to $906,000, while selling and marketing increased to $880,000 and general and administrative expense to $988,000.
- Cash was $726,000 at March 31, down from $1.163 million at year-end. Working capital was reported as $2.076 million, versus $2.298 million at December 31, 2012. Stockholders’ equity was $3.923 million.
- Revolving credit outstanding was $3.665 million, with approximately $211,000 available; the line bears interest at prime plus 3.75% (7% at quarter-end) and is secured by substantially all assets. The term loan balance was $533,000, with a minimum rate of 14.85%. The long-term financing obligation was $2.290 million net of discount; capital lease obligations totaled $151,000.
- On May 1, 2013, the term loan was increased to $750,000 and the company received a $200,000 overadvance on its revolving line of credit.
Changes, outlook and risks
- Despite revenue and gross-profit growth, Reed’s moved from operating income to an operating loss and its net loss widened. Cash used in operations increased substantially, with inventory growth and higher receivables contributing to the cash outflow.
- Management said kombucha sales were gaining momentum and anticipated the product line would become a material part of sales in 2013. It cited production inefficiencies, particularly slow kombucha co-packing, as a cause of higher idle-capacity costs, and said it was working to improve production methods and increase Los Angeles plant capacity.
- Higher freight costs reflected production at a Pennsylvania co-packer for West Coast customers, Pacific Northwest growth and refrigerated winter shipments. Management expected delivery costs as a share of sales to ease as West Coast capacity expanded and refrigerated freight was limited to kombucha.
- Management stated it believed available working capital could support existing operations for at least 12 months and that cost reductions could help maintain positive operating cash flow if sales goals were missed. It also warned that failure to achieve profitability or obtain acceptable additional financing could constrain operations, growth and investment.
- Customer concentration is material: two customers accounted for approximately 35% and 10% of Q1 2013 sales; one customer represented 28% of quarter-end receivables. The company also disclosed cash balances above the FDIC insurance limit during the quarter.
Important facts for investors to verify
- Reconcile the MD&A working-capital statement: it gives a $22,000 decrease, while the reported balances imply a $222,000 decrease.
- Check the tax note’s stated net losses of $354,000 and $133,000 against the statements of operations, which report $403,000 and $124,000.
- Confirm the preferred-stock share count in the equity rollforward: it shows 45,602 Series B shares at December 31, while the balance sheet shows 45,062; the note says 45,602 were converted.
- Assess whether production-capacity improvements and the post-quarter financing are sufficient to address operating cash use, limited revolver availability and elevated freight and idle-capacity costs.
- Monitor customer concentration, inventory growth, collection risk and the company’s ability to convert sales growth into sustained operating profitability and cash flow.