Reed’s, Inc. — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015; comparative figures are for FY 2014. Reed’s develops, manufactures, markets and sells natural beverages, including ginger brews, Virgil’s sodas and Culture Club Kombucha, as well as candy and private-label products. Its products are sold mainly in the United States through distributors and directly to retailers. The financial statements received an unqualified audit opinion.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Net sales | $45.948 million | $43.422 million | +5.8% |
| Gross profit / margin | $11.605 million / 25.3% | $13.006 million / 30.0% | Profit down 10.8% |
| Operating income (loss) | $(2.730) million | $0.276 million | Turned to loss |
| Net loss | $(3.961) million | $(0.754) million | Loss increased |
| Basic and diluted loss per share | $(0.30) | $(0.06) | — |
| Cash from (used in) operations | $(1.348) million | $1.016 million | Cash use |
| Cash and cash equivalents, year-end | $1.816 million | $0.959 million | +$0.857 million |
| Working capital, year-end | $0.730 million | $2.207 million | Down $1.477 million |
| Stockholders’ equity, year-end | $0.785 million | $3.652 million | Down $2.867 million |
- Cost of goods sold rose 12.9% to $34.343 million, faster than sales. Delivery and handling costs increased 14% to $5.100 million; selling and marketing was nearly flat at $4.867 million, while general and administrative expense rose to $4.368 million.
- Management’s non-GAAP modified EBITDA was a loss of $0.919 million, compared with income of $1.440 million in 2014. The measure adds back interest, taxes, depreciation and amortization, and non-cash share-based compensation.
- Investing activities used $0.532 million, primarily for plant improvements. Financing activities provided $2.737 million, chiefly from borrowings, including a new $1.5 million term loan and increased line-of-credit borrowings.
Material changes and drivers
- Gross sales increased 3%; net sales rose 5.8%, partly reflecting promotional and other allowances falling 19% to $3.765 million. Reed’s-branded beverages grew 19%, while Virgil’s declined 5% and Kombucha declined 12%. Beverage case volume increased 9.1% to 3.9 million eight-ounce-equivalent cases.
- An East Coast production disruption constrained product availability during 2015, contributing to lost sales, increased delivery distances and inventory waste. Direct inventory write-offs rose to $0.518 million from $0.053 million; the obsolescence reserve increased by $0.200 million to $0.290 million. Management attributed the lower gross margin primarily to inventory write-offs and reserve increases.
- Production and packaging costs also increased. Management cited higher packaging costs of $0.35 per case and ingredient costs of $0.25 per case, partly offset by labor productivity savings of $0.25 per case.
- Non-beverage items such as candy, ingredients, packaging and mail order generated $1.739 million in gross sales, down 20%, which the company attributed to a California lawsuit requiring alternative suppliers. Reed’s said it had engaged new suppliers in 2016.
Liquidity, debt and outlook
- At year-end, the company had a $6 million secured revolving facility with $4.443 million outstanding. The financial-statement note reports $216,000 of borrowing availability at December 31, 2015; elsewhere the filing says availability was currently zero. This difference should be clarified.
- Term-loan principal totaled $3.0 million after the September 2015 $1.5 million borrowing. The new loan carried a stated rate of 14.85%; the existing asset-based facility and Term Loan A were generally stated at 9%, subject to EBITDA and borrowing-availability conditions. Both term-loan maturities were extended to April 1, 2017, and 125,000 warrants were issued to the lender.
- The company also reported a $1.883 million Capital Expansion Loan balance, a $1.603 million net long-term financing obligation and $0.643 million of capital lease obligations. Interest expense increased to $1.231 million from $1.028 million.
- Management said it believed cash and liquidity were sufficient for anticipated working capital needs for the next 12 months and expected the secured working-capital facility, which matures in December 2016, to be renewed or replaced. It identified positive operating cash flow as its primary capital source and said it could reduce costs if sales goals were not met.
- The filing cautions that profitability is not assured and that additional financing may not be available on acceptable terms, or at all. A shortfall could constrain operations, expansion, marketing and product development. The company reported a net loss and operating cash use in 2015 while relying on borrowing and financing activities to increase cash.
Risks, contingencies and other notable disclosures
- Key business risks include consumer demand and preference shifts, competition and pricing pressure, raw-material availability and cost, distributor and retailer decisions, regulation of food safety and labeling, and dependence on co-packers. By October 2015, Reed’s said it had qualified two additional co-packers, bringing the total to three.
- Customer and supplier concentration is significant: two customers represented approximately 28% and 14% of 2015 sales; one vendor represented approximately 25% of purchases. Two customers accounted for 36% of year-end receivables.
- Certain distributor agreements may require termination fees if ended early or not renewed without cause; no fees were accrued because the company said it had no plans to terminate or not renew agreements. Management stated it knew of no material litigation matters at the time of filing.
- The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2015. The independent auditor did not attest to internal control effectiveness.
- The company has federal and state net operating loss carryforwards but recorded a full valuation allowance, citing its history of losses; no net deferred tax asset was recognized.
Important facts for investors to verify
- Reconcile the reported $216,000 year-end revolver availability with the filing’s separate statement that borrowing availability was zero, and confirm the facility’s renewal or replacement before its December 2016 maturity.
- Assess whether production recovery and the additional co-packers resolved supply constraints, and whether inventory write-offs, obsolete stock and delivery costs normalized after 2015.
- Confirm the terms, rates, collateral and repayment requirements across the revolving facility, term loans and Capital Expansion Loan, including the April 2017 term-loan maturity and any EBITDA-linked rate changes.
- Evaluate whether improved sales and gross margins can reverse operating losses and cash use, given the reduced working capital and stockholders’ equity at year-end.
- Monitor major-customer and supplier concentration, the alternative suppliers engaged after the California lawsuit, and any resulting effect on product supply or costs.