Reed’s, Inc. — FY2012 Form 10-K Summary
Business context and period. This is the annual report for the fiscal year ended December 31, 2012, filed March 25, 2013. Reed’s develops, manufactures, markets and sells natural beverages, including Reed’s Ginger Brews, Virgil’s sodas and its newly introduced Culture Club kombucha, along with candies, ice creams and private-label products. It sells primarily through distributors and retail accounts in the United States. The filing reports annual results, not separate fourth-quarter financial statements.
Key financial metrics
| Metric | FY2012 | FY2011 |
|---|---|---|
| Sales | $30.007 million | $25.013 million |
| Gross profit / margin | $9.144 million / 30% | $7.405 million / 30% |
| Operating income (loss) | $136,000 | $(250,000) |
| Net loss | $(524,000) | $(941,000) |
| Net loss attributable to common stockholders | $(569,000), or $(0.05) per share | $(1.006) million, or $(0.09) per share |
| Modified EBITDA, a non-GAAP measure | $1.004 million | $834,000 |
| Cash provided by (used in) operating activities | $1.177 million | $(2.264) million |
| Cash and cash equivalents at year-end | $1.163 million | $713,000 |
| Working capital at year-end | $2.298 million | $2.655 million |
| Stockholders’ equity at year-end | $4.098 million | $4.305 million |
Cost of tangible goods sold was $18.943 million, or 63% of sales, in both years. Idle-capacity production costs were $1.920 million, up from $1.761 million. Delivery and handling costs were $2.634 million; selling and marketing expense was $3.145 million; general and administrative expense was $3.229 million. Interest expense was $660,000.
At year-end, the company reported a $3.023 million revolving credit balance, a $575,000 term loan, a $2.298 million long-term financing obligation net of discount, and $167,000 of capital-lease obligations. The $4 million revolving facility had approximately $234,000 available. Its stated rate was 7% at December 31, 2012; the term loan had a minimum rate of 14.85%. Current assets were $9.331 million and current liabilities were $7.033 million.
Material changes versus FY2011
- Sales rose 20% to $30.007 million. Branded sales increased more than 19%, while private-label sales reached approximately $5.2 million, up approximately 23%.
- Gross margin remained 30%. Management said average costs for core 12-ounce branded sodas fell approximately 2%, helped by lower packaging costs despite increases in some raw-material prices.
- Operating results improved by $386,000, from a $250,000 operating loss to $136,000 of operating income. Net loss narrowed by $417,000.
- Operating cash flow improved by $3.441 million, from cash use to cash generation. Year-end cash increased by $450,000.
- Working capital declined by $357,000, and stockholders’ equity fell by $207,000.
- Promotional allowances and sales incentives increased to approximately $2.345 million from $1.463 million. The filing attributes increased allowances in part to introductory kombucha discounts and distributor promotions.
- Accounts-receivable reserves for doubtful accounts, returns and discounts increased to $399,000 from $135,000. Two customers represented approximately 30% and 10% of FY2012 sales, respectively.
Outlook, risks and unusual items
- Management reported a strong start to 2013 in both private-label and branded sales, expected kombucha to contribute increasingly to branded revenue, and planned additional kombucha flavors. It anticipated higher Brewery production in 2013 to help reduce idle-capacity costs.
- Management said it believed available capital was adequate for existing 2013 plans and that the company had sufficient working capital for at least the next 12 months. These are management expectations, not guarantees; the filing warns that inadequate sales or financing could constrain operations and growth.
- Key risks include continued net losses and dependence on future profitability and operating cash flow; limited availability under the revolving facility; high borrowing costs; customer and distributor concentration; competition and promotional pricing; changes in consumer demand and input costs; and reliance on a single contract packer for a majority of beverage production.
- The company reported that Los Angeles plant output of equivalent cases was about 60% lower in 2012, citing initial kombucha production and plant upgrades and maintenance. Idle-capacity costs rose 9%.
- A major customer’s lower-than-expected fourth-quarter purchases caused private-label sales to fall short of expectations. The filing does not provide a clear standalone fourth-quarter revenue or earnings value.
- A disclosed securities-law matter relates to certain shares issued in 2005–2006 that may have been subject to rescission. The company stated that it could remain exposed to rescission claims, statutory interest, fines or sanctions, although it believed the rescission offer provided defenses. Management did not expect the outcome of claims and proceedings to materially affect financial position, liquidity or results.
- The company reported an unmodified audit opinion on its financial statements and management concluded internal controls over financial reporting were effective as of December 31, 2012. The auditor did not express an opinion on internal-control effectiveness.
- After year-end, the company mandatorily converted its remaining Series B preferred stock into common shares and issued additional common shares for accrued dividends. In March 2013 it granted employee options covering 256,000 shares at a $4.00 exercise price.
Important facts for investors to verify
- Whether 2013 sales growth, including private-label and kombucha demand, translated into sustained positive operating income and cash flow.
- Whether production increases reduced the $1.920 million idle-capacity expense without requiring significant additional capital or operating costs.
- Customer concentration, collection trends and the adequacy of the $399,000 receivables reserve, especially given the increase in promotional allowances.
- Current borrowing availability, covenant status, repayment requirements and the cost and renewal terms of the credit facility and other financing obligations.
- The status and potential financial exposure of the legacy securities rescission matter and any distributor termination-fee commitments.
- Share-count dilution from preferred-stock conversions, option and warrant exercises, and subsequent equity awards.