Business context and reporting period
Reed’s, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. The company develops, manufactures, markets, and sells natural beverages, candies, and ice creams, including Reed’s Ginger Brews and Virgil’s sodas. It sells primarily in the United States through distributors and retail customers, and produces goods at its Los Angeles facility and through contract packers.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Sales | $25.013 million | $20.376 million |
| Gross profit / margin | $7.405 million / 30% | $6.063 million / 30% |
| Operating loss | $250,000 | $724,000 |
| Net loss | $941,000 | $1.310 million |
| Net loss attributable to common stockholders | $1.006 million; $0.09 per share | $1.383 million; $0.14 per share |
| Modified EBITDA, non-GAAP | $834,000 | $456,000 |
| Cash from operating activities | $(2.264) million | $(811,000) |
| Cash from investing activities | $(356,000) | $(383,000) |
| Cash from financing activities | $2.249 million | $972,000 |
| Cash at year-end | $713,000 | $1.084 million |
| Working capital | $2.655 million | $1.830 million |
| Total liabilities | $9.050 million | $7.734 million |
Sales rose 23%; branded sales increased more than 19%, and private-label sales grew approximately 46% to $4.2 million. Tangible goods costs declined to 63% of sales from 64%, but idle-capacity costs increased to $1.761 million from $1.195 million. Delivery and handling costs increased 34% to $2.307 million. Operating loss narrowed as sales and margin contribution improved, while interest expense increased to $691,000 from $586,000.
Cash use in operations was driven in part by increased receivables and inventory. Inventory rose to $6.099 million from $4.555 million. At year-end, the company reported $307,000 available under its revolving credit line. The PMC facility includes a $3 million revolver, reported borrowings of $3.095 million, and a $750,000 term loan with a minimum interest rate of 14.85%; the revolver rate was 7% at year-end. Reed’s also reported a $2.944 million long-term financing obligation before a $626,000 valuation discount, plus capital-lease obligations.
Management outlook, risks, and unusual items
Management anticipated further increases in branded and private-label sales in 2012 and expected gross-margin percentage to remain broadly constant. It said available working capital was adequate for at least the next 12 months, while cautioning that continued losses could require additional financing or reduced operations. The company has not yet achieved profitability.
- Customer concentration: two customers generated approximately 28% and 11% of 2011 sales; they represented 27% and 15% of year-end receivables.
- Production concentration: the company relies on one contract packer for a majority of beverage production; a transition could delay production.
- Financing and liquidity: operating cash use, limited revolver availability, high-cost term debt, and dependence on sales growth and financing remain material concerns.
- Legal contingency: certain shares issued in connection with the 2005–2006 IPO may be subject to rescission claims or regulatory sanctions. Potential exposure is not quantified clearly in the filing.
- Other unusual items: 2011 G&A included $327,000 of legal costs related to a former industrial employee and an $82,000 one-time reduction in recycling-fee costs. Prior-year delivery and handling costs were reclassified from cost of goods sold to operating expenses.
- Related-party activity: the company paid $66,000 in 2011 commissions to a distributor controlled by the CEO’s brothers.
The financial statements received an unqualified audit opinion. Management reported effective disclosure controls and internal control over financial reporting; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether 2012 sales growth materialized and whether gross margins held up after higher idle-capacity and distribution costs.
- Operating cash flow, inventory and receivables conversion, and actual borrowing availability under the PMC facility and its covenants.
- Debt repayment terms, financing costs, and the carrying value and future obligations of the sale-leaseback financing arrangement.
- Exposure to the two largest customers and continuity plans for the principal contract packer.
- Status and potential financial exposure of the IPO-related rescission matter and the former-employee legal claim.
- Potential dilution: the filing reports 3.929 million potentially dilutive securities, including options, warrants, and convertible preferred stock; these were excluded from diluted loss per share as antidilutive.