Reed’s, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparative periods ended June 30, 2013. Interim financial statements are unaudited. Reed’s sells Reed’s Ginger Brew, Virgil’s beverages, Kombucha, and private-label products.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $11.187 million | $9.519 million | $20.136 million | $17.645 million |
| Gross profit / margin | $3.704 million / 33% | $2.457 million / 26% | $6.606 million / 33% | $4.992 million / 28% |
| Operating income (loss) | $816,000 | $(369,000) | $783,000 | $(608,000) |
| Net income (loss) | $638,000 | $(494,000) | $418,000 | $(897,000) |
| Modified EBITDA (non-GAAP) | $1.098 million | $(147,000) | $1.305 million | $(122,000) |
- Q2 net sales increased 18%; six-month net sales increased 14%. Six-month gross profit rose 32%.
- Q2 operating expenses totaled $2.888 million, up 2%; six-month operating expenses totaled $5.823 million, up 4%. Six-month interest expense increased to $365,000 from $289,000.
- For the first half, operating cash flow was $973,000 versus cash used of $1.2 million in 2013. Investing used $155,000 and financing used $709,000. Cash increased $109,000 to $1.213 million.
- At June 30, current assets were $10.639 million and current liabilities $8.601 million; working capital was $2.038 million. Stockholders’ equity was $4.053 million.
- Debt and financing balances included a $3.982 million revolving-line balance, $567,000 term loan, and $2.231 million net long-term financing obligation. Capital leases totaled $131,000, including current portions. The revolver rate was prime plus 3.75%; the term loan rate was prime plus 11.6%, with a 14.85% floor.
Changes and management commentary
- Sales growth was led by six-month Kombucha sales up 74%, Reed’s Ginger Brew up 24%, and Virgil’s/root beer and craft sodas up 10%; private-label sales fell 48%. In Q2, Kombucha and Reed’s Ginger Brew volume rose 35% and 34%, respectively, while private-label revenue fell 54%.
- Promotional and other allowances were $1.137 million in Q2 versus $1.606 million, and $2.319 million for the first half versus $2.455 million. Management said promotions were being reduced and optimized; these allowances are company-defined disclosures and gross sales is a non-GAAP internal measure.
- Management attributed improved margins to lower product costs and manufacturing efficiencies. First-half idle-capacity costs fell 10% to $924,000, or 5% of net sales, and management expects plant efficiencies and increased Los Angeles production to help reduce costs and cross-country freight.
- Management said Kombucha had attained a national No. 2 sales position and highlighted opportunities to expand distribution and the product line. It also cited rising freight rates, refrigerated Kombucha shipping costs, and the need to improve production scale as ongoing challenges.
- The 2013 comparison included a $412,000 write-off for a rejected private-label contract, which management said materially affected prior-year gross margin and operating results.
Liquidity, outlook, and risks
- Management believed available working capital could support existing operations for at least 12 months, with positive operating cash flow as the primary capital source. It cautioned that this depends on sales goals and that failure to achieve profitability could impair liquidity and growth; additional financing may not be available on acceptable terms.
- The revolving credit facility was scheduled to mature in November 2014. A temporary increase and $500,000 over-advance were due to expire September 30, 2014; the filing states that availability at June 30 was above the $100,000 threshold for the debt-service-coverage covenant. The facility is secured by substantially all company assets.
- Customer concentration was significant: two customers represented approximately 50% of Q2 sales, and one customer accounted for 37% of June 30 receivables. One vendor represented 26% of first-half purchases. Cash balances exceeded FDIC insurance limits during the period.
- No income-tax provision was recorded for 2014, as federal net operating-loss carryforwards were used to offset taxable income. Management maintained a valuation allowance against deferred tax assets.
- Subsequent events: on July 1, the company issued a $300,000 letter of credit to secure advertising-campaign invoices, expiring December 31, 2014; on July 25, it granted 110,000 employee options.
- No formal numerical revenue or earnings guidance was provided. Management’s outlook and forward-looking statements are subject to risks and actual results may differ.
Important facts for investors to verify
- Whether the revolver was renewed or refinanced before its November 2014 maturity, and the effect of the September 2014 temporary facility changes.
- Whether sales growth and margin improvement continued, particularly as promotional spending changed and private-label sales weakened.
- Customer receivable concentration, collections, and the company’s reliance on major customers and suppliers.
- Whether plant upgrades deliver the expected production efficiencies and lower freight and idle-capacity costs.
- The cash-flow and liquidity effects of the advertising campaign, ongoing investment, and high-cost borrowing.