Reed’s, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited; comparisons are with the corresponding 2011 periods unless otherwise noted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Sales | $7.888 million | $6.400 million | $22.258 million | $17.731 million |
| Gross profit | $2.457 million | $2.025 million | $7.139 million | $5.378 million |
| Gross margin | 31% | 32% | 32% | 30% |
| Operating income (loss) | $183,000 | $1,000 | $835,000 | $(90,000) |
| Net income (loss) | $22,000 | $(174,000) | $342,000 | $(594,000) |
| Net income (loss) attributable to common stockholders | $14,000 | $(185,000) | $303,000 | $(649,000) |
- Q3 sales grew 23%; nine-month sales grew 26%. Management attributed growth to branded-product volume and distribution expansion, with private-label products contributing approximately 15% of Q3 sales versus 9% a year earlier and approximately 14% of nine-month sales versus 9%.
- Q3 gross margin declined to 31% from 32%, mainly due to higher idle-capacity costs associated with kombucha production. Nine-month margin improved to 32% from 30%, reflecting lower costs and selected price increases.
- Q3 delivery and handling expense was $763,000, up 30%; selling and marketing was $818,000, up $248,000. General and administrative expense fell to $693,000 from $867,000, largely because approximately $200,000 of prior-year legal costs did not recur.
- Interest expense was $161,000 for Q3 and $493,000 year to date, versus $175,000 and $504,000, respectively, in 2011. No income-tax provision was recorded; federal net operating loss carryforwards offset taxable income.
Cash flow, liquidity, and obligations
- Nine-month operating cash flow was positive $646,000, compared with negative $1.521 million in 2011. Investing cash outflow was $334,000, principally for property and equipment; financing cash inflow was $404,000.
- Cash increased to $1.429 million at September 30 from $713,000 at December 31, 2011. Working capital was $3.221 million, up from $2.655 million; stockholders’ equity was $4.899 million, up from $4.305 million.
- Current assets were $10.764 million and current liabilities $7.543 million. Accounts receivable increased to $2.899 million from $1.626 million; accounts payable rose to $3.354 million from $2.310 million.
- The revolving credit line had $3.574 million outstanding against a $4 million facility, with approximately $332,000 available. Its interest rate was 7% at quarter-end, and it was secured by substantially all company assets. The facility expires November 7, 2013.
- Other reported obligations included a $615,000 term loan, a $2.304 million net long-term financing obligation, and $168,000 of capital lease liabilities. The term loan’s stated minimum interest rate was 14.85%.
- On October 17, 2012, the credit agreement was amended to permit up to $250,000 of additional borrowing secured by equipment purchases; the company borrowed $48,000 for equipment.
Management outlook, risks, and notable items
- Management expected favorable trends in Q4 and described 2012 as potentially a turning point, while emphasizing that forecasts are uncertain. Kombucha launch discounts and elevated production costs were expected to continue in Q4; management anticipated higher product margins in 2013 as production methods improve.
- The company was adding plant equipment and processes to expand Los Angeles production capacity, and management cited upcoming private-label launches. It reported plant production up more than 20% in Q3 year over year.
- Management said available working capital should support existing operations through 2012 and considered the credit facility adequate for current plans. It also warned that sales shortfalls, continued losses, expansion costs, or inability to obtain acceptable additional financing could constrain operations and growth.
- Customer concentration is material: two customers represented approximately 41% of Q3 sales and 42% of nine-month sales. One customer accounted for 33% of quarter-end receivables.
- Cash deposits exceeded FDIC insurance limits during the period. No impairment was identified in Q3. The filing reported no legal proceedings requiring disclosure and no defaults upon senior securities; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether kombucha production costs and promotional discounts moderate as planned, and whether anticipated 2013 margins materialize.
- Whether sales growth converts into sustained operating cash flow, given the increase in receivables and accounts payable and limited remaining revolver availability.
- How customer concentration and the 33% receivables exposure to one customer affect collection risk.
- Whether plant-capacity investments and new private-label products improve utilization and profitability without requiring additional financing.
- Share dilution and potential overhang from outstanding options, warrants, and convertible preferred stock; common shares outstanding were 11,982,845 as of November 6, 2012.