Reed’s, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Financial statements are unaudited. Reed’s sells branded beverages, including kombucha and natural sodas, as well as private-label products.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $10.076 million | $7.888 million | $27.721 million | $22.258 million |
| Gross profit | $3.176 million | $2.457 million | $8.168 million | $7.139 million |
| Gross margin | 32% | 31% | 29% | 32% |
| Operating income (loss) | $214,000 | $183,000 | ($394,000) | $835,000 |
| Net income (loss) | $34,000 | $22,000 | ($863,000) | $342,000 |
| Modified EBITDA, non-GAAP | $372,000 | $395,000 | $255,000 | $1.495 million |
- Management-reported gross sales, a non-GAAP measure, rose 33% in Q3 and 29% for the nine-month period. Net sales rose 28% and 25%, respectively, after promotional and other allowances.
- Q3 sales growth reflected higher branded-product sales and a 19% increase in private-label revenue. Kombucha represented about 11% of Q3 net revenue and 9% of nine-month net revenue.
- Nine-month operating results were pressured by a $412,000 one-time loss on a private-label contract, increased promotions, and higher delivery, marketing, and administrative costs. Q3 gross margin improved year over year; nine-month gross margin declined.
- Q3 operating expenses were $2.962 million, versus $2.274 million a year earlier. Nine-month operating expenses were $8.562 million, versus $6.304 million.
Cash flow, liquidity, and debt
- Operating cash flow was negative $1.035 million for the first nine months, versus positive $646,000 in 2012. Investing cash outflow was $447,000, mainly for property and equipment; financing provided $1.365 million. Cash decreased $117,000 to $1.046 million.
- At September 30, cash was $1.046 million, current assets $11.783 million, current liabilities $10.001 million, and working capital $1.782 million. Working capital was down from $2.298 million at December 31, 2012. The company reported about $365,000 available under its revolving credit line.
- Outstanding balances included a $4.313 million revolving line of credit, a $684,000 term loan, a $2.270 million long-term financing obligation (net of discount), and $128,000 in capital leases. The line carried a 7% rate and expired November 7, 2014; the term loan’s minimum rate was 14.85%.
- Accounts receivable rose to $3.185 million from $1.961 million, inventory to $6.705 million from $5.794 million, and accounts payable to $5.215 million from $3.368 million.
Material changes, outlook, and risks
- The revolving credit facility was increased to $4.5 million in September, with a temporary increase to $4.8 million and a temporary $500,000 inventory over-advance through February 28, 2014. The company had borrowed $4.313 million at quarter-end.
- Management said production at its Los Angeles plant had increased about 25% in 2013 and expected further improvements, lower idle-capacity costs, and reduced freight costs as more branded product is made there. It also planned kombucha flavors and packaging improvements in 2014. No quantified earnings or revenue guidance was provided.
- Management believed available working capital could support operations for at least 12 months and identified operating cash flow as its primary expected capital source. It cautioned that failure to meet sales or profitability goals could leave insufficient working capital and require additional financing or reductions in operations.
- Customer and supplier concentration is significant: one customer accounted for 33% of Q3 sales and 34% of nine-month sales; one vendor accounted for 31% and 29% of purchases, respectively. One customer represented 21% of receivables and one vendor 35% of payables at September 30.
- The company reported a net loss for the nine months, substantial promotional spending, elevated inventory, and negative operating cash flow. It also noted dependence on estimates for receivable reserves, inventory obsolescence, and asset impairment. No impairment was identified in Q3. No income tax provision was recorded; net operating loss carryforwards offset taxable income.
- Series B preferred stock was converted into common stock during the period. Common shares outstanding were 12,809,992 at October 29, 2013. Prior-year inventory adjustments were reclassified between cost-of-goods-sold categories for presentation.
Important facts for investors to verify
- Whether sales growth and promotional spending translate into sustainable gross margins and positive operating cash flow.
- Whether plant upgrades improve production efficiency and reduce idle-capacity and freight costs as management expects.
- Availability and terms of borrowing under the asset-based credit facility, including the temporary over-advance’s February 2014 expiration and the facility’s November 2014 maturity.
- Customer and vendor concentration, collection of receivables, inventory demand and obsolescence, and the company’s ability to manage working capital.
- The $412,000 private-label contract loss and the basis for management’s non-GAAP modified EBITDA presentation.