REED’S, INC. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; interim financial statements are unaudited. Reed’s sells branded and private-label beverages. Comparisons are with the three months ended March 31, 2011 unless otherwise noted.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Sales | $6.539 million | $5.140 million; up 27% |
| Gross profit | $1.985 million; approximately 30% margin | $1.417 million; approximately 27% margin |
| Operating income (loss) | $44,000 | ($206,000) |
| Interest expense | $168,000 | $159,000 |
| Net loss | ($124,000) | ($365,000) |
| Net loss attributable to common stockholders | ($133,000); basic and diluted loss per share of $0.01 | ($376,000); basic and diluted loss per share of $0.04 |
| Modified EBITDA (non-GAAP) | $268,000 | $31,000 |
| Operating cash flow | ($363,000) | ($540,000) |
| Cash at period end | $101,000 | $713,000 at December 31, 2011 |
| Working capital | $2.568 million | $2.655 million at December 31, 2011 |
| Total liabilities / stockholders’ equity | $9.135 million / $4.222 million | $9.050 million / $4.305 million at December 31, 2011 |
Investing cash outflow was $110,000, primarily for property and equipment. Financing cash outflow was $139,000, including $74,000 of net line-of-credit repayments and debt and lease principal payments. Cash decreased $612,000 during the quarter. Inventory was $6.212 million, up from $6.099 million at year-end, and accounts receivable was $2.090 million, up from $1.626 million.
At March 31, the revolving credit balance was $3.021 million, with approximately $213,000 available. The line carried a 7% rate and was secured by substantially all company assets. The term loan balance was $692,000 and carried a minimum rate of 14.85%; the net long-term financing obligation was $2.316 million, and capital lease obligations totaled $195,000. On May 11, 2012, the revolving credit line was increased from $3 million to $4 million.
Changes and management commentary
- Sales growth reflected higher branded-product volume, average price increases of about 4%, and private-label sales, which rose to approximately 15% of sales from 7% a year earlier.
- Management attributed improved gross margin to lower unit costs, including approximately 3% lower costs for core 12-ounce beverages, selected price increases, and reduced co-packing and ingredient costs. Production volume rose more than 20%; idle-capacity expense declined to $369,000 from $402,000.
- Delivery and handling expense increased 24% to $479,000. Selling and marketing expense rose to $722,000 from $580,000, and general and administrative expense rose to $740,000 from $655,000.
- Management said inventory buildup occurred primarily in Q4 2011, that finished goods were turning over normally, and that inventory had decreased after March 31, improving working capital. It said the larger credit line and operating cash flow and inventory reductions were expected to support 2012 plans.
Outlook, risks and unusual items
- Management said it expected further margin improvement and believed the company had working capital to support existing operations through 2012. It anticipated gaining profitability in 2012, but cautioned that sales may not meet goals and that profitability is not assured.
- The filing warns that continued losses could leave working capital insufficient; additional financing may be needed, may not be available on acceptable terms, and could require reductions in operations, marketing, personnel, or expansion plans.
- Customer concentration is significant: two customers represented approximately 32% and 14% of Q1 sales; one customer represented 30% of period-end receivables. The filing also notes potential cash exposure above FDIC insurance limits and risks from demand changes, inventory obsolescence, and estimates used in impairment assessments.
- Subsequent events included April stock option grants and repricing, common shares issued for consultant services, and conversion of Series B preferred shares. The May credit-line increase followed quarter-end.
- No material legal proceedings were identified for disclosure; management reported disclosure controls were effective at March 31, 2012.
Items to verify: The MD&A describes the prior-year gross margin as both 27% and 28%; confirm the intended comparison. Interest expense in the statements increased to $168,000 from $159,000, while the MD&A says it “decreased” to $168,000; confirm the narrative and reason. Verify post-quarter inventory and working-capital improvement, borrowing availability and terms after the May credit amendment, customer concentration and receivable collectability, and progress toward management’s 2012 profitability expectation.