REED’S, INC. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. The interim financial statements are unaudited. Reed’s sells branded and private-label beverages.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Sales | $6.191 million | $4.905 million | $11.331 million | $8.917 million |
| Gross profit | $1.936 million | $1.529 million | $3.353 million | $2.912 million |
| Gross margin | 31% | 31% | 30% | 33% |
| Operating income (loss) | $115,000 | $(41,000) | $(91,000) | $(151,000) |
| Net loss | $(55,000) | $(164,000) | $(420,000) | $(423,000) |
| Loss per common share | $(0.01) | $(0.02) | $(0.04) | $(0.05) |
| Modified EBITDA (non-GAAP) | $395,000 | $210,000 | $423,000 | $342,000 |
Q2 sales rose 26%; management attributed growth to price and volume increases, broader grocery distribution, and stronger sales across core products. Six-month sales rose 27%, including branded sales growth of 24%. Q2 operating results improved to income, but the six-month period remained loss-making. Interest expense increased to $170,000 for Q2 and $329,000 for six months, mainly due to higher line-of-credit borrowings. Modified EBITDA is management-defined and is not a GAAP measure.
Cash flow, liquidity, and debt
- Six-month operating cash flow was $(692,000), compared with $(821,000) in 2010; capital expenditures were $229,000. Financing provided $951,000, including $672,000 net proceeds from common-stock issuance and $349,000 net line-of-credit borrowings. Cash increased $30,000 to $1.114 million.
- At June 30, cash was $1.114 million, working capital was $2.297 million, and stockholders’ equity was $4.583 million. Working capital was $467,000 higher than at December 31, 2010.
- The line of credit had $2.387 million outstanding, approximately $180,000 available, and an 18% annual interest rate. It is secured by business assets and renews in November 2011.
- Other reported obligations included a $2.324 million net long-term financing obligation, including its current portion, and $167,000 present value of capital lease payments. Total liabilities were $8.316 million.
- Receivables increased to $2.006 million from $1.295 million at year-end. Management said operating cash use principally reflected higher receivables and inventory prepayments associated with revenue growth.
Changes, outlook, and risks
- Six-month gross margin declined to 30% from 33%. Management cited retail promotions in Q1, increased idle-capacity costs, and ingredient and packaging costs; selective price increases partly offset input-cost pressure. Q2 gross margin remained 31% year over year.
- Idle-capacity expense increased to $493,000 in Q2 and $895,000 for six months, primarily due to payroll, workers’ compensation insurance, and depreciation. Management reported improving plant efficiencies and lower overtime.
- Management expected continued double-digit growth in branded sales in the second half of 2011 and significant private-label growth, concentrated largely in Q4. It believed existing working capital would support operations through 2011 and expected cash flow from operations to be a primary funding source. These are forward-looking expectations, not quantified earnings guidance.
- The company cautioned that sales may not meet expectations, profitability may not be achieved, and additional financing may be needed; acceptable financing may not be available. It also cited potential constraints on growth and operations if funding is insufficient.
- Customer concentration is notable: two customers accounted for approximately 30% and 10% of Q2 sales; one customer represented 26% of receivables at quarter-end. Cash deposits exceeded FDIC-insured limits during the period.
- The filing reclassified 2010 delivery and handling costs from cost of goods sold to operating expenses for comparability. No impairment of trademarks or long-lived assets was identified for the six months. Management reported no material change in internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- Progress toward sustained operating profitability and the assumptions behind expected second-half sales growth.
- Availability and renewal terms of the 18% line of credit in November 2011, given only about $180,000 of reported availability.
- Collection of the concentrated receivable balance and the effect of customer concentration on sales and cash flow.
- Whether plant-efficiency gains and pricing can offset idle-capacity costs, promotional spending, and input-cost pressure.
- Potential dilution: 4,083,916 potentially dilutive securities were excluded from loss-per-share calculations as antidilutive; 10,831,107 common shares were outstanding as of August 2, 2011.
- Subsequent events disclosed: July equipment leases valued at $67,000 with monthly payments through June 2016, and common shares issued for services.