REED’S, INC. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The interim financial statements are unaudited. Reed’s sells branded and private-label beverages.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Sales | $6.400 million | $5.428 million | $17.731 million | $14.345 million |
| Gross profit / margin | $2.025 million / 32% | $1.577 million / 29% | $5.378 million / 30% | $4.489 million / 31% |
| Operating income (loss) | $1,000 | ($249,000) | ($90,000) | ($400,000) |
| Net loss | ($174,000) | ($398,000) | ($594,000) | ($821,000) |
| Net loss attributable to common stockholders | ($185,000) | ($410,000) | ($649,000) | ($883,000) |
| Loss per share, basic and diluted | ($0.02) | ($0.04) | ($0.06) | ($0.09) |
- Q3 sales rose 18%; nine-month sales rose 24%. Management reported Q3 branded sales growth of 19% and private-label growth of 7%; nine-month private-label sales increased 79% to approximately $1.525 million.
- Q3 reported gross margin improved to 32%, helped by customer price increases and lower average costs on branded 12-ounce sodas, but was partly offset by idle-capacity costs. Nine-month margin declined to 30% from 31%, as higher idle-capacity expense more than offset improved pricing and product costs.
- Operating expenses were $2.024 million in Q3 and $5.468 million for nine months. Q3 G&A included $281,000 in legal costs and an $82,000 one-time reduction from adjusting an over-accrual of recycling fees. Nine-month legal costs were $327,000. The employee claim was settled, with no further costs expected.
- Interest expense increased to $175,000 for Q3 and $504,000 for nine months, primarily due to greater line-of-credit borrowing. Management’s non-GAAP modified EBITDA was $269,000 for Q3 versus $32,000 and $693,000 for nine months versus $374,000. These figures are not GAAP earnings; management separately estimated Q3 net income of $106,000 and modified EBITDA of $550,000 excluding the $281,000 legal cost.
Cash flow, liquidity, and debt
- For the first nine months, operating cash flow was negative $1.521 million, investing cash flow was negative $297,000, and financing cash flow was positive $1.288 million. Cash declined by $530,000 to $554,000.
- Working capital was $2.236 million at September 30, 2011, versus $1.830 million at December 31, 2010. Stockholders’ equity was $4.504 million. Inventory increased to $6.121 million from $4.555 million; accounts receivable rose to $2.164 million from $1.295 million.
- The existing $3 million revolving line had $2.789 million outstanding and only approximately $123,000 available at quarter-end; its stated interest rate was 18%. Total liabilities were $9.494 million, including the line of credit, a $2.321 million net long-term financing obligation, and $222,000 in capital lease obligations.
- After quarter-end, the company entered a three-year credit agreement with PMC Financial Services Group. It retained a $3 million revolver and added a $750,000 term loan. The revolver rate was reduced to Prime plus 3.75% (stated as currently 7%), with a monthly collateral monitoring fee; the term loan rate is Prime plus 11.6%, subject to a 14.85% floor, payable over 48 monthly installments. A debt-service coverage covenant applies if revolver availability falls below $100,000. The agreement is secured by unencumbered company assets.
Changes, outlook, and risks
- Management said branded sales should continue growing at double-digit rates in Q4 and forecast well over $2 million in private-label revenue in that quarter. It expects organic growth to accelerate in 2012 with improving margins, citing sales initiatives and pipeline opportunities; these are forward-looking expectations, not guarantees.
- Management cited a marked increase in production volume in October and expected continued higher production and cost-reduction measures to reduce idle-capacity costs. It believed available working capital would support operations for at least 12 months, while identifying operating cash generation as its primary future capital source.
- The company warned that failure to meet sales goals or achieve profitability could leave working capital inadequate, require additional financing on uncertain terms, or force reductions in operations and growth investment. Cash use was driven in part by higher receivables, inventory, and inventory prepayments.
- Customer concentration is notable: two customers represented approximately 40% of Q3 sales and 41% of nine-month sales; one customer represented 23% of quarter-end receivables. Management also disclosed cash balances above the FDIC insurance limit during the period.
- Comparative 2010 delivery and handling costs were reclassified from cost of goods sold to operating expenses to align with 2011 presentation. The filing states the interim results are not necessarily indicative of full-year results. Management reported no trademark or long-lived-asset impairment for the nine months.
Key facts for investors to verify
- Whether Q4 revenue, branded growth, and private-label shipment expectations were achieved, and whether 2012 growth and margin improvement followed.
- Subsequent borrowing, availability, fees, covenant compliance, and repayment terms under the PMC agreement, particularly given the limited quarter-end availability on the prior facility.
- Whether operating cash flow improves as receivables and inventory are converted to cash, and whether the company can achieve sustained GAAP profitability.
- The persistence of customer concentration, inventory growth, idle-capacity costs, and the claimed benefit of management’s non-GAAP adjusted performance measures.