Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
REED > SEC Filings for REED > Form 10-Q on 12-Aug-2014All Recent SEC Filings

Show all filings for REED'S, INC.

Form 10-Q for REED'S, INC.


12-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.

Overview

The results for our second quarter of 2014 reflect continuing strong growth in sales generated from our Reed's, Virgil's and Kombucha product lines. From an operational standpoint, our primary challenges are to reduce sales promotions as a percentage of sales, reduce freight & handling costs and to generate efficiencies of scale in our Los Angeles plant while we increase volume.

The challenges to reduce delivery costs and scale our Los Angeles plant are related. As we increase production volume of our branded products in our Los Angeles plant, we will also reduce the cross-country freight that we are currently incurring on those products. Freight rates are increasing and our Kombucha requires more expensive refrigerated freight, so we are also seeking efficient ways to lower costs in how we arrange for shipments.

Sales promotions are a necessary part of the beverage business and can increase the rate of sales growth. When we launched our Kombucha beverage line in 2012, we followed a strategy of higher discounts in order to grow this new business. Since year to date 2014 Kombucha sales are 74% ahead of 2013 results, we are reducing and optimizing our promotions. We believe promotions are an effective and efficient way to increase sales. The promotions are focused and structured toward specific goals to drive further sales growth.

As discussed below, the 2013 second quarter results include a $412,000 write off related to a private label contract. Aside from this one time loss, the Company would have posted positive income from operations during the quarter and positive EBITDA.

As we complete our plant improvements, we are confident that we will be able to reduce our freight costs by producing more products on the west coast. We are looking forward to the continuing solid production increases in our Ginger Brew, Virgil's and Kombucha product lines, while our Kombucha sales growth accelerates.

The results for our second quarter of 2014 reflect continuing strong growth in sales volume among our products. Our 2014 gross sales (see below) increased 11% over 2013 gross sales. Promotional spending declined and was 9% of 2014 gross sales vs. 14% of 2013 gross sales. We believe that promotional spending is producing a good return on investment, in the form of increased market penetration and a higher floor of recurring business. We will continue to evaluate and review our promotional spending programs.

Our direct cost of tangible goods sold decreased to 63% in the second fiscal quarter of 2014, from 66% in the same period in 2013. This is due to operating efficiencies in our Los Angeles plant.

We have a high priority on upgrading our Los Angeles plant equipment in 2014 to increase production. Increased production and stronger efforts to control manufacturing costs are responsible for reducing idle capacity costs by $100,000 over the same six month period last year, down to 5% of net sales in the first half of 2014, from 6% in the same period in 2013. As we increase production volume of our branded products in our Los Angeles plant, we will also reduce the cross country freight we are currently incurring to move products to West Coast customers. As our sales base grows, our excess plant costs become a smaller portion of our overall cost of sales. We anticipate that this cost will continue to decline as plant production increases and production improvements are realized.

We have gained a solid #2 position in sales of Kombucha nationally. We believe that there is a strong opportunity to gain additional market share and expand this product line with both our existing and new customers. As we expand, we will improve our production techniques, add additional flavors, and update our packaging.

Results of Operations



The following table sets forth key statistics for the three months ended June
30, 2014 and 2013, respectively.



                                                 Three Months Ended
                                                      June 30,                    Pct.
                                                2014             2013            Change
Gross sales, net of discounts & returns*    $ 12,324,000     $ 11,125,000               11 %

Less: Promotional and other allowances**       1,137,000        1,606,000              -29 %

Net sales                                     11,187,000        9,519,000               18 %
Cost of tangible goods sold                    7,037,000        6,630,000                6 %
As a percentage of:
Gross sales                                           57 %             60 %
Net sales                                             63 %             70 %
Cost of goods sold - idle capacity               446,000          432,000                3 %
As a percentage of net sales                           4 %              5 %

Gross profit                                $  3,704,000     $  2,457,000               51 %
Gross profit margin as a percentage of
net sales                                             33 %             26 %

* Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company's agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities;
(iii) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.

Three months ended June 30, 2014 Compared to Three months ended June 30, 2013

Sales

Net Sales of $11,187,000 for the three months ended June 30, 2014 represented an increase of 18% from $9,519,000 in the prior year same period. Sales growth was driven primarily by increased sales volume increases of 35% in our Kombucha products, 34% in our Reed's Ginger Brew products and 10% in our Virgil's Root Beer and craft soda products. This sales growth more than offset a 54% decline in private label revenues. Private label sales are estimated to be flat for the year. Kombucha sales began after the 2012 second quarter and have increased to become approximately 13% of our total revenues. Other sales, which includes candy, declined by 2% compared to the second quarter last year.

Cost of Tangible Goods Sold

Cost of tangible goods sold consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Our costs of tangible goods sold of $7,037,000 for the three months ended June 30, 2014 represents an increase of only 6% over the same period in 2013 while sales increased 18%.

In 2013 a $412,000 reserve was recorded to cover a loss on a private label contract that was rejected by the customer. We isolated the issue and offered to immediately remedy the issues raised but the remedy was rejected by the customer.

Per-unit costs of our 12-ounce sodas decreased by approximately 45% in the quarter ended June 30, 2014, as compared to the prior year period due to a 27% reduction in costs and a 31% increase in the number of cases produced.

Cost of Goods Sold - Idle Capacity

Cost of goods sold - idle capacity consists of direct production costs of our Los Angeles plant in excess of charges allocated to our finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Idle capacity expenses increased to $446,000 in the three months ended June 30, 2014, from $432,000 in the same period in 2013. The 3% increase is primarily due to Kombucha production which has become a much higher portion of our Los Angeles plant output. Our Kombucha production runs have become much more efficient recently and we anticipate reductions in our cost of goods sold - idle capacity in the future.

Gross Profit

Our gross profit of $3,704,000 in the three months ended June 30, 2014 represents an increase of $1,247,000, or 51% from 2013 which includes the $412,000 write-off as discussed above. As a percentage of sales, our gross profit increased to 33% in 2014 as compared to 26% in 2013. The 2013 gross profit was negatively impacted by the $412,000 private label contract loss, which decreased our 2013 gross profit percentage by approximately three percentage points from 29% to 26%. Since such costs are a deduction from sales, the gross margin percentage is negatively impacted by increased promotional costs. We have been reducing substantial discounts on our Kombucha, as we expand this product line into new distribution channels and customers. We are also reducing promotions for our other products.

Delivery and Handling Expenses

Delivery and handling expenses consist of delivery costs to customers and warehouse costs incurred for handling our finished goods after production. Delivery and handling costs decreased by 3% to $926,000 in the three months ended June 30, 2014 compared to 2013. The freight cost decreases are primarily due to a decrease in our branded products being manufactured at our co packer in Pennsylvania for west coast customers, requiring less freight costs for delivery.

Selling and marketing expenses

Selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows. Selling and marketing costs increased 9 % to $1,049,000 in the three months ended June 30, 2014 from $960,000 in 2013. The $89,000 increase is primarily due to increased promotional and advertising costs for Kombucha, Reed's Ginger Brew and Virgil's Root Beer. Our sales staff increased to 21 members at June 30, 2014, from 19 at June 30, 2013.

General and Administrative Expenses

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses were essentially flat at $913,000 during the three months ended June 30, 2014 versus $912,000 in the same 2013 period. Professional, legal and investor relations costs decreased by $66,000 while stock option expense increased by $34,000. Salaries, bonuses and hiring fees of $17,000 and utility costs of $15,000 increased versus the prior year comparable period

Income/Loss from Operations

Income from operations was $816,000 in the three months ended June 30, 2014, as compared to a loss of $369,000 in the same period of 2013 primarily due to the 18% sales increase resulting in a gross margin increase. Total Operating Expenses only increased 62,000 (2%). The 2013 loss is primarily due to the $412,000 loss on the private label contract.

Interest Expense

Interest expense increased to $178,000 in the three months ended June 30, 2014, compared to interest expense of $125,000 in the same period of 2013. There was a $50,000 reversal of over accrued interest expense in the second quarter of 2013.

Modified EBITDA

The Company defines modified EBITDA (a non-GAAP measurement) as net income
(loss) before interest, taxes, depreciation and amortization, and non-cash expense for securities. Other companies may calculate modified EBITDA differently. Management believes that the presentation of modified EBITDA provides a measure of performance that approximates cash flow before interest expense, and is meaningful to investors.

                            MODIFIED EBITDA SCHEDULE



                                                 Three Months Ended June 30,
                                                    2014                2013
       Net income (loss)                       $       638,000       $ (494,000 )

       Modified EBITDA adjustments:
       Depreciation and amortization                   153,000          153,000
       Interest expense                                178,000          125,000
       Stock option compensation                       119,000           69,000
       Other stock compensation for services            10,000                -
       Total EBITDA adjustments                        460,000          347,000

       Modified EBITDA income (loss)           $     1,098,000       $ (147,000 )

Six months ended June 30, 2014 Compared to Six months ended June 30, 2013

The following table sets forth key statistics for the six months ended June 30, 2014 and 2013, respectively.

                                                  Six Months Ended
                                                      June 30,                    Pct.
                                                2014             2013            Change
Gross sales, net of discounts & returns*    $ 22,455,000     $ 20,100,000               12 %

Less: Promotional and other allowances**       2,319,000        2,455,000               -6 %

Net sales                                     20,136,000       17,645,000               14 %
Cost of tangible goods sold                   12,606,000       11,629,000                9 %
As a percentage of:
Gross sales                                           56 %             58 %
Net sales                                             63 %             66 %
Cost of goods sold - idle capacity               924,000        1,024,000              -10 %
As a percentage of net sales                           5 %              6 %

Gross profit                                $  6,606,000     $  4,992,000               32 %
Gross profit margin as a percentage of
net sales                                             33 %             28 %

* Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company's distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company's distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company's agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities;
(iii) the Company's agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company's distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company's promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.

Sales

Net sales of $20,136,000 for the six months ended June 30, 2014 represented an increase of 14% from $17,645,000 in the prior year same period. Sales growth was driven primarily by a 74% increase in sales of Kombucha, a 24% increase in Reed's Ginger Brew products, and a 10% increase in Virgil's Root Beer products and craft soda products, which were offset by a 48% decrease in private label product sales. Other product sales declined 2%. Private label sales are estimated to be flat for the year.

Cost of Tangible Goods Sold

Cost of tangible goods sold consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Our costs of tangible goods sold of $12,606,000 for the six months ended June 30, 2014 represents an increase of 8% over the same period in 2013. This increase is attributable to increased sales and price increases from a primary supplier.

Cost of Goods Sold - Idle Capacity

Cost of goods sold - idle capacity consists of direct production costs of our Los Angeles plant in excess of charges allocated to our finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and depreciation. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Idle capacity expenses decreased 10% to $924,000 in the six months ended June 30, 2014, from $1,024,000 in 2013. This improvement is primarily due to increased production in our Los Angeles plant during the first six months of 2014 and our ability to allocate more fixed and variable plant costs to production.

Gross Profit

As a result of our increased sales, our gross profit increased $1,614,000 or 32% over 2013, to $6,606,000 in the six months ended June 30, 2014 from $4,992,000 in 2013. As a percentage of sales, our gross profit in the second fiscal quarter of 2014 increased to 33%, compared to 28% in the same period of 2013. The $412,000 private label loss reduced the 2013 gross profit from 30% to 28%. The Company is also reducing promotions on Kombucha and other products.

Delivery and Handling Expenses

Delivery and handling expenses consist of delivery costs to customers and warehouse costs incurred for handling our finished goods after production. Delivery and handling costs decreased by 2% to $1,821,000 in the six months ended June 30, 2014 compared $1,860,000 over the same period in 2013. This $39,000 decrease is attributable to $4,000 savings in delivery costs and a 35,000 decrease in warehousing costs.

Selling and marketing expenses

Selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows. Selling and marketing costs increased $277,000 overall to $2,117,000 in the six months ended June 30, 2014 from $1,840,000 in 2013. This increase of 15% over last year is primarily due to an increase in advertising and trade show expenses of $303,000 and increased compensation expenses of $87,000, offset by decreased general department administration expenses of $113,000.

General and Administrative Expenses

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased $15,000 (1%) to $1,885,000 during the six months ended June 30, 2014 from $1,900,000 in the same period of 2013. This reduction is primarily due to reductions in administrative management of $77,000 and professional fees of $67,000 partially offset by increases in public relations of $59,000, stock options expense of $49,000 and workers compensation expenses of $24,000.

Income/Loss from Operations

Our income from operations was $783,000 in the six months ended June 30, 2014, as compared to a loss of $(608,000) in the same period of 2013. This $1,391,000 improvement over last year is the result of $1,614,000 higher gross margin reduced by increased operating expenses of approximately $223,000.

Interest Expense

Interest expense increased $76,000 to $365,000 in the six months ended June 30, 2014, compared to interest expense of $289,000 in the same period of 2013. The increase is primarily due to increased borrowing on our revolving line of credit and a $50,000 reversal of over accrued interest expense in the second quarter of 2013.

Modified EBITDA

The Company defines modified EBITDA (a non-GAAP measurement) as net income
(loss) before interest, taxes, depreciation and amortization, and non-cash expense for securities. Other companies may calculate modified EBITDA differently. Management believes that the presentation of modified EBITDA provides a measure of performance that approximates cash flow before interest expense, and is meaningful to investors.

                            MODIFIED EBITDA SCHEDULE



                                              Six Months Ended June 30,
                                                 2014              2013
            Net income (loss)               $      418,000      $ (897,000 )

            Modified EBITDA adjustments:
            Depreciation and amortization          304,000         298,000
            Interest expense                       365,000         289,000
            Stock option compensation              218,000         188,000
            Total EBITDA adjustments               887,000         775,000

            Modified EBITDA income (loss)   $    1,305,000      $ (122,000 )

This $1,427,000 improvement in modified EBITDA for the six months ended June 30, 2014 over the same period last year is primarily due to increased gross profits of $1,614,000 offset by increased operating expenses of $223,000.

Liquidity and Capital Resources

As of June 30, 2014, we had stockholders equity of $4,053,000 and we had working capital of $2,038,000, compared to stockholders equity of $3,387,000 and working capital of $1,347,000 at December 31, 2013. The increase in our working capital of $691,000 was primarily a result of net income for the first half of 2014.

Our cash and cash equivalents at June 30, 2014 were $1,213,000 compared with December 31, 2013, at $1,104,000. Net cash provided by operating activities of $973,000 for the six months ended June 30, 2014, represents an improvement of $2,173,000 compared to the same period last year. This is primarily due to improved net operating income of $1,315,000 and reductions in inventory levels of $794,000.

Our Loan and Security Agreement with PMC Financial Services Group, LLC provides a $4.5 million revolving line of credit and a $750,000 term loan. The revolving line of credit is based on 85% of eligible accounts receivable and 50% of eligible inventory. The interest rate on the revolving line of credit is at the prime rate plus 3.75%. The term loan is for $750,000 and bears interest at the prime rate plus 11.6%, which shall not be below 14.85%, is secured by all of the unencumbered assets of the Company, and is to be repaid in 48 equal installments of principal and interest of $21,000. On May 1, 2013 the term loan was increased back to the original balance of $750,000 under the same terms as the existing term loan. The Company was granted an over advance on its revolving line of credit of $500,000 and a temporary increase in the line amount to $4,800,000, both until September 30, 2014. At June 30, 2014, our term loan balance was $567,000.

We believe that the Company currently has the necessary working capital to support existing operations for at least the next 12 months. Our primary capital source will be positive cash flow from operations. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs and can be managed to maintain positive cash flow from operations. Historically, we have financed our operations primarily through private sales of common stock, preferred stock, convertible debt, a line of credit from a financial institution and cash generated from operations.

We may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion and marketing and product development plans. In addition, our losses may increase in the future as we expand our manufacturing capabilities and fund our marketing plans and product development. These losses, . . .

  Add REED to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for REED - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.