REED’S, INC. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited; comparisons are with Q1 2015 unless otherwise noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $10.004 million | $10.672 million | Down 6.3% |
| Gross profit / margin | $1.893 million / 18.9% | $3.259 million / 30.5% | Margin down 11.6 percentage points |
| Operating loss | $1.202 million | $17,000 | Loss increased |
| Net loss / diluted loss per share | $1.580 million / $0.12 | $271,000 / $0.02 | Loss increased |
| Net cash used in operating activities | $755,000 | $458,000 | Cash use increased |
Revenue volume declined 4.6% on an eight-ounce equivalent basis. Reed’s beverage sales grew 5.3%, while Virgil’s sales fell 11.2%, kombucha fell 17.3%, and candy sales fell 30.4%. Gross margin deterioration reflected higher product costs and inventory adjustments, along with increased promotional allowances. Cost of goods sold rose 9.4% despite lower sales; idle-plant costs declined to $274,000 from $668,000.
Delivery and handling expense fell to $849,000 from $1.169 million, and selling and marketing expense fell to $1.041 million from $1.193 million. General and administrative expense rose to $1.205 million; management cited increased bad-debt expense, compensation, fee amortization, filing fees, and IT costs. Interest expense rose to $378,000 from $254,000. Management’s non-GAAP modified EBITDA was negative $772,000, compared with positive $354,000.
Liquidity, debt, and balance sheet
Cash was $648,000 at March 31, down $1.168 million from year-end. Investing activities used $186,000, primarily for plant equipment; financing activities used $227,000. Working capital was negative $645,000, versus positive $730,000 at December 31, 2015. Stockholders’ equity moved from $785,000 to a deficit of $581,000.
At quarter-end, borrowings included a $4.250 million revolving line, $3.0 million in term loans, and a $2.237 million capital expansion loan. The balance sheet also reported a $1.594 million long-term financing obligation (net of discount) and $687,000 in capital lease obligations. The $6 million revolver matures December 5, 2016; the term loans mature in a lump sum on April 1, 2017. The company reported $908,000 of remaining CAPEX-loan availability. Disclosed line availability is inconsistent: the debt note states maximum borrowing availability of $1.750 million, while MD&A says current borrowing availability is zero.
Management outlook, risks, and notable items
- Management said retailer restocking resistance was easing and highlighted year-over-year growth in ginger products and Virgil’s root beer. It expects upgraded Los Angeles plant capacity to support volume growth and lower freight costs. No numerical revenue or earnings guidance was provided.
- Management believed working capital could support existing operations until the revolver matures and expected to renew it, but stated that renewal was not assured. It cited positive operating cash flow as the primary capital source and said cost reductions may be needed if sales goals are missed.
- Profitability, liquidity, and access to acceptable additional financing remain significant risks; management warned that inadequate funds could constrain growth and require operating reductions. The company reported a working-capital deficit, stockholders’ deficit, and continuing losses.
- A California lawsuit involving candy sourcing locations affected candy sales; the filing says a new supplier had been identified and affected-line sales were expected to resume in late Q2. No related contingency amount is clearly provided. The company also placed $341,000 of equipment at a co-packer; if access is lost following co-packer failure, that amount becomes immediately payable.
- On April 29, 2016, the board approved a revolver amendment allowing qualifying prepaid inventory in the borrowing base, with the $6 million limit and rates unchanged. The company agreed to issue PMC 10,000 warrants at $4.50 per share, to be recorded as a Q2 financing cost.
- Two customers represented 25% and 10% of Q1 gross sales. Management reported disclosure controls effective at March 31 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Actual availability under the revolver, the effect of the prepaid-inventory amendment, and the likelihood and terms of renewal before the December 2016 maturity.
- Whether gross margins recover and inventory adjustments, promotional allowances, and bad-debt expense moderate.
- Progress and costs of plant upgrades, the CAPEX-loan repayment schedule, and the impact of expanded capacity on cash generation.
- Resolution and financial exposure, if any, from the candy-related lawsuit and the co-packer equipment arrangement.
- Customer concentration, cash runway, and the company’s ability to achieve positive operating cash flow and profitability.