Business context and reporting period
Reed’s, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2014. The company sells branded beverages, including kombucha, as well as private-label products. Comparisons below are with the three months ended March 31, 2013 unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $8.950 million | $8.126 million; up 10% |
| Gross profit / margin | $2.903 million / 32% | $2.535 million / 31% |
| Operating loss | $32,000 | $239,000 loss |
| Net loss | $220,000 | $403,000 |
| Basic and diluted loss per share | $0.02 | $0.03 |
| Operating cash flow | $85,000 provided | $932,000 used |
| Capital expenditures | $73,000 | $98,000 |
| Cash at quarter-end | $1.104 million | $726,000 at March 31, 2013 |
Modified EBITDA, a non-GAAP measure defined by the company, was $248,000, compared with $25,000. The filing reports working capital of $1.258 million at March 31, 2014, down $89,000 from December 31, 2013; stockholders’ equity was $3.286 million, versus $3.387 million at year-end.
At quarter-end, current liabilities were $9.037 million and total liabilities were $11.695 million. Debt and financing obligations included a $4.593 million revolving credit balance, a $608,000 term loan, a $2.245 million net long-term financing obligation (including its current portion), and $155,000 of capital leases. The revolving facility bears interest at prime plus 3.75%; the term loan bears interest at prime plus 11.6%, subject to a 14.85% floor.
Material changes and management commentary
- Management attributed sales growth primarily to kombucha sales, up 143%, and other branded products, up 23%; private-label sales fell 45%.
- Gross profit rose 15%. Management said supplier price increases raised tangible goods costs to 62% of net sales from 60%, while increased Los Angeles production reduced idle-capacity costs by $216,000, to $470,000, or 5% of net sales from 8%.
- Selling and marketing expense increased to $1.068 million from $880,000, chiefly due to advertising, trade-show, and compensation costs. Interest expense increased to $188,000 from $164,000, primarily because of higher revolving-credit borrowings.
- Operating cash flow improved by $1.017 million year over year. The company cited improved operating performance, lower inventory, and higher accounts payable as contributing factors.
Outlook, risks, contingencies, and unusual items
Management said it believed existing working capital could support operations for at least 12 months and expected positive operating cash flow to be its primary capital source. It also cautioned that sales may not meet plan, profitability is not assured, and further losses could constrain working capital, expansion, marketing, and product development; additional financing may not be available on acceptable terms.
Credit availability under the revolving facility was below $100,000 at March 31, triggering a debt-service coverage covenant and placing the company in default under the loan agreement. PMC waived the default on May 12, 2014. The facility was scheduled to mature in November 2014. The filing also describes a $500,000 over-advance and temporary increase in the revolver that were due to step down after May 31, 2014.
Customer concentration was significant: two customers represented approximately 34% and 12% of Q1 sales, and one customer accounted for 37% of receivables at March 31. One vendor represented approximately 25% of Q1 purchases. Cash balances exceeded the $250,000 FDIC insurance limit during the quarter. No legal proceedings requiring disclosure were reported, and management identified no asset impairments for the quarter.
Subsequent to quarter-end, the company granted 257,500 options to employees and consultants on April 10, 2014, with a $5.05 exercise price and vesting over three to four years; the options were valued at $629,000 and are to be expensed as they vest. The company reported effective disclosure controls as of March 31, 2014.
Important facts for investors to verify
- Confirm the status and terms of the revolving facility after the May 12 covenant-default waiver, including availability, any step-down in over-advance capacity, and the November 2014 maturity or any refinancing.
- Assess whether operating cash flow and working capital can support operations and planned production, marketing, and product-development spending.
- Monitor supplier pricing, Los Angeles plant utilization, and whether improved gross margin can be sustained as branded sales grow.
- Evaluate customer and vendor concentration, particularly the customer representing 37% of quarter-end receivables.
- Consider the effects of the April option grant and other potential dilution; 13,042,952 common shares were outstanding as of May 14, 2014.
- Note that management’s full-year results are not assured by Q1 performance, and that the filing provides no specific numerical revenue or profit guidance.