REED’S, INC. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The interim financial statements are unaudited. Reed’s sells branded beverages, including Ginger Brew, Virgil’s and Kombucha, as well as private-label products.
Financial performance
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Six months ended June 30, 2013 | Six months ended June 30, 2012 |
|---|---|---|---|---|
| Sales | $9.519 million | $7.831 million | $17.645 million | $14.370 million |
| Gross profit | $2.457 million | $2.697 million | $4.992 million | $4.682 million |
| Gross margin | 26% | 34% | 28% | 33% |
| Operating income (loss) | $(369,000) | $608,000 | $(608,000) | $652,000 |
| Net income (loss) | $(494,000) | $444,000 | $(897,000) | $320,000 |
| Net income (loss) attributable to common stockholders | $(499,000) | $421,000 | $(902,000) | $288,000 |
| Loss per share, basic | $(0.04) | $0.04 | $(0.07) | $0.03 |
- Quarterly sales rose 22%; six-month sales rose 23%, driven mainly by branded-product volume. Kombucha, introduced after Q2 2012, represented about 9% of revenue.
- Operating expenses increased to $2.826 million for the quarter and $5.600 million for six months. Delivery and handling, selling and marketing, and general and administrative costs all rose.
- Management’s modified EBITDA, a non-GAAP measure, was a loss of $147,000 for Q2 2013 versus income of $831,000 in Q2 2012, and a loss of $117,000 for the first half versus income of $1.099 million in the prior-year period. The filing’s six-month schedule heading says “March 31,” although the surrounding discussion and cash-flow statements identify the six months ended June 30.
Cash flow, liquidity and debt
- First-half operating cash flow was negative $1.200 million, compared with positive $1.145 million in 2012. Investing cash outflow was $286,000, principally for property and equipment. Financing provided $1.139 million, mainly from increased line-of-credit borrowings.
- Cash declined to $816,000 from $1.163 million at December 31, 2012. Working capital was $1.765 million, down from $2.298 million; stockholders’ equity was $3.493 million, down from $4.098 million.
- At June 30, current assets were $11.061 million and current liabilities were $9.296 million. Inventory was $6.385 million and accounts receivable was $3.235 million.
- Borrowings included $4.072 million outstanding on a revolving line of credit, a $711,000 term loan, a long-term financing obligation recorded net at $2.281 million, and $147,000 of capital-lease obligations. Total liabilities were $12.100 million.
- The revolving credit facility was increased to $4 million, with a $200,000 overdraft feature; reported availability was approximately $154,000. Its rate was prime plus 3.75% (7% at June 30), and it was secured by substantially all company assets. The term loan carried a minimum rate of 14.85% and was secured by unencumbered assets.
Material changes and unusual items
- A customer rejected a private-label product run. Reed’s recorded a $412,000 reserve for affected inventory and product sold, disputed the customer’s right to reject the goods, and said the matter remained at a preliminary stage. Management attributed the quarterly operating loss primarily to this charge and said that, excluding it, the company would have reported positive operating income and EBITDA.
- Higher promotional discounts, freight and warehouse costs, and idle-capacity costs pressured margins. First-half idle-capacity expense increased 53% to $1.024 million, primarily due to Kombucha production inefficiencies; management said production runs had recently become more efficient.
- The company increased its revolving credit facility and term loan in May. During the first half, all remaining Series B preferred shares converted into common stock; common shares outstanding increased to 12,666,117 at June 30 from 12,084,673 at year-end.
Outlook, commentary and risks
- Management cited strong sales-volume growth and expected continued increases in Ginger Brew and Virgil’s, with Kombucha growth accelerating. It planned to reduce freight costs by producing more branded products at its Los Angeles plant, lower promotions as Kombucha gains scale, and improve plant efficiency.
- The company stated that it believed working capital could support existing operations for at least 12 months and expected positive operating cash flow to be its primary capital source. This outlook depends on sales goals and cash-flow improvement; management warned that insufficient profitability or financing could constrain growth and require cost reductions.
- Customer concentration is significant: two customers represented approximately 34% and 9% of Q2 sales. One customer accounted for $1.420 million, or 39%, of accounts receivable at June 30. The filing also notes cash balances exceeded FDIC-insured limits during the period.
- No formal revenue or earnings guidance is provided. The filing describes forward-looking statements as subject to risks and uncertainties. Management reported disclosure controls were effective as of June 30, 2013, and no material change in internal control was reported.
Important facts for investors to verify
- Resolution and recoverability of the $412,000 private-label dispute and related reserve.
- Whether sales growth can translate into improved gross margins and operating cash flow despite promotions, freight costs and idle capacity.
- Liquidity and borrowing availability, including the reported $154,000 facility availability, the $4.072 million line balance, and high-cost term debt.
- Customer concentration, collection of the large customer receivable, and potential impact of customer loss or delayed payment.
- Reconciliation and period labeling of the modified EBITDA schedule, and the extent to which management’s adjusted-performance characterization excludes the unusual contract charge.