REED’S, INC. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; financial statements are unaudited. Comparisons are with Q1 2014 unless otherwise noted. Reed’s sells beverages, including ginger beer, root beer and kombucha, and is expanding production capacity at its Los Angeles plant.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $10.672 million | $8.950 million | +19% |
| Gross profit | $3.259 million | $2.903 million | +12% |
| Gross margin | 31% | 32% | Down 1 percentage point |
| Operating loss | $71,000 | $32,000 | Loss widened |
| Net loss | $271,000 | $220,000 | Loss widened |
| Basic and diluted loss per share | $0.02 | $0.02 | No change as reported |
| Modified EBITDA (non-GAAP) | $354,000 | $248,000 | +43% |
Gross sales, as defined by management and before promotional and other allowances, were $11.351 million, up 12%. Allowances were $679,000, down 42% from $1.172 million. Modified EBITDA is a company-defined non-GAAP measure; the filing reconciles it from net loss.
Cash flow, liquidity and debt
- Operating cash flow was negative $458,000, versus positive $85,000 in Q1 2014. The company attributed the 2015 use primarily to its net loss and a $2.054 million increase in inventory, partly offset by a $1.267 million increase in accounts payable.
- Investing cash use was $351,000, primarily for Los Angeles plant machinery. Financing provided $1.071 million, including a $1.104 million net draw on the revolver. Cash increased $262,000 to $1.221 million.
- At March 31, current assets were $13.901 million and current liabilities $11.674 million; working capital was $2.227 million. Stockholders’ equity was $3.624 million, versus $3.652 million at year-end 2014.
- Inventory rose to $8.360 million from $6.306 million. Accounts payable increased to $7.161 million from $5.894 million.
- Borrowings included $4.113 million outstanding on a $6 million revolving line, a $1.500 million term loan and a $1.233 million capital expansion loan. Revolver availability was $856,000; stated CAPEX-loan availability was $1.767 million. The loans carry a stated 9% interest rate and mature in December 2016. The revolver is secured by substantially all company assets.
- Other financing obligations included $1.491 million of long-term financing obligation, net of discount, and $568,000 in capital lease liabilities. The filing reports $200,000 of interest expense for the quarter.
Material changes and management commentary
- Ginger beer sales rose 33%, Virgil’s root beer 12%, and other branded products 23%; kombucha sales fell 36%. Management cited lower kombucha promotion, an out-of-stock period and distributor losses, while reporting that supply had improved and some distributors had been regained.
- Cost of tangible goods sold rose 21%, faster than sales, and reached 63% of net sales versus 62%. Management cited price increases from a primary supplier and intends to offset costs by shifting production to Los Angeles.
- Idle-capacity costs increased 42% to $668,000, or 6% of net sales, as production units declined 14% and the company prepared for plant-equipment installation. Management expects capacity utilization to improve as production grows and anticipates lower costs and less cross-country freight over time.
- Delivery and handling expense increased 31% to $1.169 million, partly due to higher sales and a 21% increase in average miles per shipment. Selling and marketing expense rose to $1.193 million; general and administrative expense was approximately flat at $968,000.
- Management said it believes working capital is sufficient to support existing operations for at least 12 months, with positive operating cash flow as the primary capital source. It cautioned that failure to meet sales goals or achieve profitability could constrain expansion and require cost reductions or additional financing, which may not be available on acceptable terms.
- The company reported a national No. 2 kombucha sales position and plans to expand the line and improve production techniques. No numerical revenue or earnings guidance was provided.
Risks, contingencies and other items
- Customer and supplier concentration is notable: two customers represented approximately 30% and 15% of Q1 sales; one vendor represented about 30% of purchases. Two customers represented 39% of receivables at quarter-end, and two vendors represented 42% of accounts payable.
- The company disclosed cash balances above the $250,000 FDIC insurance limit during the quarter. Capital leases include personal guarantees by the CEO for most leases; the filing also describes historical personal-guarantee provisions tied to financing.
- No impairment was identified in Q1. Estimates subject to judgment include receivable and inventory reserves, asset impairment and stock-based compensation. The filing says Q1 results are not necessarily indicative of full-year results.
- Subsequent to quarter-end, the board approved a new 500,000-option plan, and the company granted employees 110,000 options on April 6, 2015. Management reported disclosure controls were effective and no material change in internal control during the quarter. Legal proceedings in the ordinary course were not required to be disclosed; no defaults upon senior securities were reported.
Important facts for investors to verify
- Whether kombucha supply and distributor recovery translate into renewed sales growth after the 36% quarterly decline.
- Whether planned Los Angeles plant upgrades increase output and reduce idle-capacity, supplier and freight costs as expected.
- Inventory growth, negative operating cash flow and reliance on additional revolver borrowing; confirm actual borrowing availability and financing terms.
- Customer and vendor concentration, including the sustainability of major customer relationships and supplier continuity.
- The filing gives different eligible-inventory advance rates for the revolver: 60% in the loan note and 50% in the liquidity discussion. Verify the governing borrowing-base terms.
- Potential dilution from options and warrants, including the new post-quarter option grants and unvested stock-based compensation.