REED’S, INC. — Q3 2016 Form 10-Q
Business context and reporting period. Reed’s manufactures and sells craft beverages, including Reed’s, Virgil’s and Kombucha products, as well as private-label beverages and other products. This unaudited report covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance
| Metric | Three months ended Sept. 30, 2016 | Three months ended Sept. 30, 2015 | Nine months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2015 |
|---|---|---|---|---|
| Net sales | $12.329 million | $10.713 million | $33.326 million | $33.561 million |
| Gross profit / margin | $2.886 million / 23.4% | $1.560 million / 14.6% | $7.381 million / 22.1% | $8.457 million / 25.2% |
| Operating income (loss) | $196,000 | $(2.144) million | $(1.352) million | $(2.597) million |
| Net loss | $(219,000) | $(2.465) million | $(2.591) million | $(3.423) million |
| Modified EBITDA (non-GAAP) | $557,000 | $(1.753) million | $(214,000) | $(1.199) million |
- Quarterly net sales rose 15.1%; reported eight-ounce volume rose 18.1%. Gross sales, a company-defined non-GAAP measure, rose 12.9%. Nine-month net sales declined 0.7%, while reported volume rose 0.7%.
- Quarterly gross margin improved substantially against a 2015 quarter affected by supply-chain disruption and unusable-inventory write-offs. For the nine-month period, margin fell to 22.1%, primarily reflecting higher product costs, including packaging and co-packer labor.
- Nine-month operating expenses declined 21.0% to $8.733 million, helping narrow the operating and net losses. Interest expense increased 50.0% to $1.239 million.
- Cash was $1.947 million at September 30, 2016, versus $1.816 million at year-end 2015. Nine-month operating cash use was $1.605 million; investing cash use was $585,000; financing provided $2.321 million.
- Working capital was $274,000, down from $730,000 at December 31, 2015. Stockholders’ equity was $972,000. Current assets were $13.617 million and current liabilities $13.343 million.
- Major debt and financing balances at September 30 included a $4.905 million revolving line, $3.0 million in term loans, a $3.022 million capital-expansion loan, a $1.569 million net long-term financing obligation, and $598,000 in capital leases. The company reported $946,000 of maximum borrowing availability under the line. Debt maturities were extended to October 1, 2017.
Material changes and management commentary
- Quarterly results improved sharply year over year as sales volume and gross margin increased and operating expenses fell. Management attributed lower delivery costs partly to better rates and rail shipments, and lower expenses to cost-containment measures.
- For the nine months, Reed’s and private-label beverage sales grew modestly, but Kombucha gross sales fell 50.9% and candy gross sales fell 21.4%. Product and customer mix affected sales per serving.
- The company continued upgrading its Los Angeles plant to increase capacity and potentially reduce transportation costs. Nine-month property-and-equipment purchases were $585,000; management reported $753,000 of capital equipment outlay in Q3. Construction in progress rose to $3.584 million.
- The company recognized a $261,000 impairment for equipment expected to be retired as the plant project nears completion.
- In June, Reed’s sold common shares and warrants in a private financing; reported net proceeds were $2.113 million. Management also reported $117,000 from sales of shares to senior management. These transactions increased shares outstanding and created potential dilution.
Outlook, risks and contingencies
- Management said available working capital should support existing operations in the near term and anticipated seeking renewal of its credit facility. It cautioned that refinancing is not assured and identified positive operating cash flow as its primary expected capital source.
- Management warned that failure to achieve sales goals or profitability could lead to inadequate working capital and require additional financing or reductions in operations. It stated that acceptable financing may not be available.
- Substantially all company assets secure the revolving facility. The company disclosed that $341,000 of equipment placed at a co-packer could become immediately payable if it cannot secure access to the equipment following a co-packer failure.
- Sales and receivables were concentrated: two customers represented 37% of nine-month sales and 40% of accounts receivable at September 30. One vendor represented 24% of nine-month purchases and 21% of accounts payable.
- Management reported effective disclosure controls as of September 30 and no material changes to internal control over financial reporting during the quarter. It stated that ordinary-course legal proceedings did not require disclosure in the filing.
Important facts for investors to verify
- Whether the company can renew or refinance its credit facility and other obligations before their October 1, 2017 maturities, and the actual borrowing availability under the line.
- Whether the quarterly margin improvement is sustainable, given weaker nine-month gross margin and rising unit costs, and the extent to which Q3 comparisons reflect the prior-year supply-chain disruption.
- Whether the Los Angeles plant expansion is completed on schedule, delivers expected capacity and cost benefits, and avoids further impairment or cash demands.
- Trends in Kombucha and candy sales, customer and vendor concentration, operating cash flow, and working capital.
- The dilution impact of the 2016 share issuance and outstanding warrants and options. The filing reports 13,908,247 common shares outstanding at September 30, 2016.