REED’S, INC. — Second Quarter 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The interim financial statements are unaudited. Reed’s sells beverages and related products and was upgrading and expanding production capacity at its Los Angeles plant.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $12.178 million | $11.187 million | $22.850 million | $20.136 million |
| Gross profit | $3.640 million | $3.704 million | $6.900 million | $6.606 million |
| Gross margin | 30% | 33% | 30% | 33% |
| Operating income (loss) | ($493,000) | $816,000 | ($563,000) | $783,000 |
| Net income (loss) | ($686,000) | $638,000 | ($957,000) | $418,000 |
| Net loss per common share | ($0.05) | — | ($0.07) | — |
Q2 modified EBITDA, a non-GAAP measure defined by the company, was $94,000 versus $1.098 million. For the first half it was $450,000 versus $1.305 million. The company cautions that this measure may not be comparable to similarly named measures used by other companies.
Cash flow, liquidity and debt
- Cash was $215,000 at June 30, 2015, down from $959,000 at December 31, 2014. First-half operating cash outflow was $1.844 million, investing outflow was $430,000, and financing provided $1.530 million.
- Working capital was $1.967 million, compared with $2.207 million at year-end 2014; stockholders’ equity was $3.281 million, down from $3.652 million.
- Inventory rose to $8.937 million from $6.306 million, while accounts receivable increased to $3.586 million from $2.500 million. Management attributed much of operating cash use to the inventory build, partly offset by higher accounts payable.
- At June 30, borrowings included $4.635 million on a $6 million revolving line, a $1.500 million term loan, and a $1.389 million capital expansion loan. The company also reported a $1.620 million net long-term financing obligation and $538,000 in capital lease obligations. The loans carried a stated 9% rate; the revolving line and loans mature in December 2016. Revolver availability was $1.365 million and capital-expansion-loan availability was $1.611 million.
Changes and management commentary
- Net sales increased 9% in Q2 and 13% in the first half. Q2 growth was led by Ginger Beer, up 21%, and other branded products, up 15%; Kombucha sales rose 11% in the quarter. For the first half, Reed’s ginger products rose 24.3%, while Kombucha declined 13.1% and private-label sales declined 5.1%.
- Despite sales growth, gross margin fell to 30% from 33%. Management cited a shift in production locations and product mix, higher production costs, and increased idle-capacity expense. First-half idle-capacity costs increased to $1.342 million from $924,000.
- Operating expenses rose substantially. Q2 delivery and handling increased 54%, selling and marketing increased $286,000, and general and administrative expense increased $456,000. First-half G&A included $308,000 in noncash and $52,000 in cash personnel-transition costs; Q2 G&A included $302,000 of one-time personnel-transition costs.
- Management described plans to increase Los Angeles plant capacity from 100 to 300 bottles per minute in one shift. It expected idle-plant costs to decline as production increased, and said it believed working capital was sufficient for at least the next 12 months. It provided no specific revenue or earnings guidance and cautioned that sales shortfalls could require cost reductions or additional financing.
Risks, contingencies and unusual items
- Liquidity is sensitive to operating performance: cash declined, operations used cash, and the company relied on additional line-of-credit borrowing. Management warned that adequate financing might not be available on acceptable terms and that continued losses could constrain expansion and operations.
- Customer and supplier concentration is notable. Two customers accounted for approximately 43% of first-half sales; one customer represented 25% of receivables at June 30. One vendor accounted for approximately 27% of first-half purchases.
- Stock-option compensation was $560,000 for the first half, versus $217,000 in the prior-year period. The company granted 538,000 options during the first half; potential dilution should be considered alongside the reported weighted-average shares.
- The company reported no material legal proceedings requiring disclosure, no defaults upon senior securities, and no impairment of long-lived assets in the first half. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether sales growth can translate into improved gross margins and operating profitability as plant capacity and production locations change.
- Whether the inventory build converts to sales and cash, and whether receivables, payables, and customer concentration create collection or working-capital pressure.
- Whether cash, borrowing availability, and the December 2016 loan maturities are sufficient to fund operations and the plant upgrade without further financing.
- The treatment and recurrence of personnel-transition expenses, stock compensation, and management’s non-GAAP modified EBITDA measure.
- The filing contains inconsistent or unclear narrative figures: it reports first-half gross profit of $6.900 million versus $6.606 million in the statements, but elsewhere describes gross profit as decreased; the statements show an increase. The first-half MD&A also says tangible-goods costs increased over the same period “in 2015,” which appears unclear. Verify against the filed financial statements and any subsequent filings.