Item 1. Financial Statements
REED’S, INC.
CONDENSED BALANCE SHEETS
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,429,000
|
|
|
$
|
713,000
|
|
Inventory
|
|
|
5,963,000
|
|
|
|
6,099,000
|
|
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $200,000 and $135,000, respectively
|
|
|
2,899,000
|
|
|
|
1,626,000
|
|
Prepaid inventory
|
|
|
314,000
|
|
|
|
168,000
|
|
Prepaid and other current assets
|
|
|
159,000
|
|
|
|
123,000
|
|
Total Current Assets
|
|
|
10,764,000
|
|
|
|
8,729,000
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $2,199,000 and $1,739,000, respectively
|
|
|
3,385,000
|
|
|
|
3,512,000
|
|
Brand names
|
|
|
1,029,000
|
|
|
|
1,029,000
|
|
Deferred financing fees, net of amortization of $78,000 and $50,000, respectively
|
|
|
32,000
|
|
|
|
85,000
|
|
Total assets
|
|
$
|
15,210,000
|
|
|
$
|
13,355,000
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,354,000
|
|
|
$
|
2,310,000
|
|
Accrued expenses
|
|
|
204,000
|
|
|
|
196,000
|
|
Dividends payable
|
|
|
71,000
|
|
|
|
83,000
|
|
Recycling fees payable
|
|
|
21,000
|
|
|
|
111,000
|
|
Line of credit
|
|
|
3,574,000
|
|
|
|
3,095,000
|
|
Current portion of long term financing obligation
|
|
|
85,000
|
|
|
|
71,000
|
|
Current portion of capital leases payable
|
|
|
64,000
|
|
|
|
56,000
|
|
Current portion of term loan
|
|
|
170,000
|
|
|
|
152,000
|
|
Total current liabilities
|
|
|
7,543,000
|
|
|
|
6,074,000
|
|
|
|
|
|
|
|
|
|
|
Long term financing obligation, less current portion, net of discount of $589,000 and $626,000, respectively
|
|
|
2,219,000
|
|
|
|
2,247,000
|
|
Capital leases payable, less current portion
|
|
|
104,000
|
|
|
|
153,000
|
|
Term loan, less current portion
|
|
|
445,000
|
|
|
|
576,000
|
|
Total Liabilities
|
|
|
10,311,000
|
|
|
|
9,050,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 25,411 and 46,621 shares issued and outstanding, respectively
|
|
|
254,000
|
|
|
|
466,000
|
|
Series B Convertible Preferred stock, $10 par value, 500,000 shares authorized, 48,985 and 80,415 shares issued and outstanding, respectively
|
|
|
490,000
|
|
|
|
804,000
|
|
Common stock, $.0001 par value, 19,500,000 shares authorized, 11,821,319 and 10,885,833 shares issued and outstanding, respectively
|
|
|
1,000
|
|
|
|
1,000
|
|
Additional paid in capital
|
|
|
23,741,000
|
|
|
|
22,924,000
|
|
Accumulated deficit
|
|
|
(19,587,000
|
)
|
|
|
(19,890,000
|
)
|
Total stockholders’ equity
|
|
|
4,899,000
|
|
|
|
4,305,000
|
|
Total liabilities and stockholders’ equity
|
|
$
|
15,210,000
|
|
|
$
|
13,355,000
|
|
The accompanying
notes are an integral part of these condensed financial statements
REED’S, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September
30, 2012 and 2011
(Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Sales
|
|
$
|
7,888,000
|
|
|
$
|
6,400,000
|
|
|
$
|
22,258,000
|
|
|
$
|
17,731,000
|
|
Cost of tangible goods sold
|
|
|
4,810,000
|
|
|
|
3,970,000
|
|
|
|
13,691,000
|
|
|
|
11,053,000
|
|
Cost of goods sold – idle capacity
|
|
|
621,000
|
|
|
|
405,000
|
|
|
|
1,428,000
|
|
|
|
1,300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,457,000
|
|
|
|
2,025,000
|
|
|
|
7,139,000
|
|
|
|
5,378,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delivery and handling expenses
|
|
|
763,000
|
|
|
|
587,000
|
|
|
|
1,827,000
|
|
|
|
1,519,000
|
|
Selling and marketing expense
|
|
|
818,000
|
|
|
|
570,000
|
|
|
|
2,239,000
|
|
|
|
1,751,000
|
|
General and administrative expense
|
|
|
693,000
|
|
|
|
867,000
|
|
|
|
2,238,000
|
|
|
|
2,198,000
|
|
Total operating expenses
|
|
|
2,274,000
|
|
|
|
2,024,000
|
|
|
|
6,304,000
|
|
|
|
5,468,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
183,000
|
|
|
|
1,000
|
|
|
|
835,000
|
|
|
|
(90,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(161,000
|
)
|
|
|
(175,000
|
)
|
|
|
(493,000
|
)
|
|
|
(504,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
22,000
|
|
|
|
(174,000
|
)
|
|
|
342,000
|
|
|
|
(594,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends
|
|
|
(8,000
|
)
|
|
|
(11,000
|
)
|
|
|
(39,000
|
)
|
|
|
(55,000
|
)
|
Net income (loss) attributable to common stockholders
|
|
$
|
14,000
|
|
|
$
|
(185,000
|
)
|
|
$
|
303,000
|
|
|
$
|
(649,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share available to common stockholders, basic
|
|
|
–
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.06
|
)
|
Weighted average number of shares outstanding - basic
|
|
|
11,501,152
|
|
|
|
10,835,858
|
|
|
|
11,155,860
|
|
|
|
10,758,529
|
|
Income (loss) per share available to common stockholders, diluted
|
|
|
–
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
(0.06
|
)
|
Weighted average number of shares outstanding - diluted
|
|
|
12,288,503
|
|
|
|
10,835,858
|
|
|
|
11,706,186
|
|
|
|
10,758,529
|
|
The
accompanying notes are an integral part of these condensed financial statements
REED’S, INC.
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’
EQUITY
For the Nine Months Ended September 30, 2012
(unaudited)
|
|
Common Stock
|
|
|
Series A
Preferred Stock
|
|
|
Series B
Preferred Stock
|
|
|
Additional
Paid-In
|
|
|
Accumulated
|
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balance, December 31, 2011
|
|
|
10,885,833
|
|
|
$
|
1,000
|
|
|
|
46,621
|
|
|
$
|
466,000
|
|
|
|
80,415
|
|
|
$
|
804,000
|
|
|
$
|
22,924,000
|
|
|
$
|
(19,890,000
|
)
|
|
$
|
4,305,000
|
|
Fair Value of common stock issued for services
|
|
|
14,965
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
23,000
|
|
|
|
–
|
|
|
|
23,000
|
|
Proceeds from exercise of stock options
|
|
|
206,484
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
30,000
|
|
|
|
–
|
|
|
|
30,000
|
|
Proceeds from exercise of warrants
|
|
|
380,327
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
105,000
|
|
|
|
–
|
|
|
|
105,000
|
|
Common stock issued upon conversion of Series A preferred stock
|
|
|
84,840
|
|
|
|
–
|
|
|
|
(21,210
|
)
|
|
|
(212,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
212,000
|
|
|
|
–
|
|
|
|
–
|
|
Common stock issued upon conversion of Series B preferred stock
|
|
|
220,010
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(31,430
|
)
|
|
|
(314,000
|
)
|
|
|
314,000
|
|
|
|
–
|
|
|
|
–
|
|
Fair value vesting of options issued to employees
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
81,000
|
|
|
|
–
|
|
|
|
81,000
|
|
Common stock paid for Series A preferred stock dividend
|
|
|
4,760
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,000
|
|
|
|
(16,000
|
)
|
|
|
–
|
|
Series B preferred stock dividend
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(23,000
|
)
|
|
|
(23,000
|
)
|
Common stock paid for Series B preferred stock dividend
|
|
|
24,100
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
36,000
|
|
|
|
–
|
|
|
|
36,000
|
|
Net income
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
342,000
|
|
|
|
342,000
|
|
Balance, September 30, 2012
|
|
|
11,821,319
|
|
|
$
|
1,000
|
|
|
|
25,411
|
|
|
$
|
254,000
|
|
|
|
48,985
|
|
|
$
|
490,000
|
|
|
$
|
23,741,000
|
|
|
$
|
(19,587,000
|
)
|
|
$
|
4,899,000
|
|
The accompanying notes are an integral part of these condensed financial statements
REED’S, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2012
and 2011
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
342,000
|
|
|
$
|
(594,000
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
556,000
|
|
|
|
472,000
|
|
Fair value of stock options issued to employees
|
|
|
81,000
|
|
|
|
147,000
|
|
Fair value of warrants issued for services
|
|
|
–
|
|
|
|
42,000
|
|
Fair value of common stock issued for services and bonus
|
|
|
23,000
|
|
|
|
107,000
|
|
Increase in allowance for doubtful accounts
|
|
|
65,000
|
|
|
|
30,000
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,338,000
|
)
|
|
|
(899,000
|
)
|
Inventory
|
|
|
136,000
|
|
|
|
(1,566,000
|
)
|
Prepaid expenses and inventory and other current assets
|
|
|
(182,000
|
)
|
|
|
(253,000
|
)
|
Accounts payable
|
|
|
1,044,000
|
|
|
|
1,156,000
|
|
Accrued expenses
|
|
|
9,000
|
|
|
|
15,000
|
|
Recycling fees payable
|
|
|
(90,000
|
)
|
|
|
(178,000
|
)
|
Net cash provided by (used in) operating activities
|
|
|
646,000
|
|
|
|
(1,521,000
|
)
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(334,000
|
)
|
|
|
(297,000
|
)
|
Net cash used in investing activities
|
|
|
(334,000
|
)
|
|
|
(297,000
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of offering costs
|
|
|
–
|
|
|
|
672,000
|
|
Proceeds from stock option and warrant exercises
|
|
|
135,000
|
|
|
|
25,000
|
|
Principal repayments on long term financing obligation
|
|
|
(52,000
|
)
|
|
|
(39,000
|
)
|
Principal repayments on capital lease obligation
|
|
|
(41,000
|
)
|
|
|
(30,000
|
)
|
Payment of deferred finance fees
|
|
|
(4,000
|
)
|
|
|
(20,000
|
)
|
Principal repayments on notes payable
|
|
|
(113,000
|
)
|
|
|
(71,000
|
)
|
Net (repayment) borrowing on line of credit
|
|
|
479,000
|
|
|
|
751,000
|
|
Net cash (used) provided by financing activities
|
|
|
404,000
|
|
|
|
1,288,000
|
|
Net increase in cash
|
|
|
716,000
|
|
|
|
(530,000
|
)
|
Cash at beginning of period
|
|
|
713,000
|
|
|
|
1,084,000
|
|
Cash at end of period
|
|
$
|
1,429,000
|
|
|
$
|
554,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
493,000
|
|
|
$
|
449,000
|
|
Non cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Series A Preferred stock converted to common stock
|
|
$
|
212,000
|
|
|
|
–
|
|
Series B Preferred stock converted to common stock
|
|
$
|
314,000
|
|
|
$
|
54,000
|
|
Dividends payable in common stock
|
|
$
|
52,000
|
|
|
$
|
55,000
|
|
Common stock issued in settlement of Series A and B preferred stock dividend
|
|
$
|
39,000
|
|
|
$
|
3,000
|
|
Property and equipment acquired through capital lease
|
|
$
|
–
|
|
|
$
|
67,000
|
|
Common stock issued for deferred finance fees
|
|
$
|
–
|
|
|
$
|
15,000
|
|
The accompanying notes are an integral part
of these condensed financial statements
REED’S, INC.
NOTES TO CONDENSED FINANCIAL
STATEMENTS
Three and Nine Months Ended
September 30, 2012 and 2011 (UNAUDITED)
1. Basis of Presentation
The accompanying interim condensed financial statements
are unaudited, but in the opinion of management of Reeds, Inc. (the "Company"), contain all adjustments, which include
normal recurring adjustments necessary to present fairly the financial position at September 30, 2012 and the results of operations
and cash flows for the nine months ended September 30, 2012 and 2011. The balance sheet as of December 31, 2011 is derived from
the Company’s audited financial statements.
Certain information and footnote disclosures normally
included in financial statements that have been prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the
Company believes that the disclosures contained in these condensed financial statements are adequate to make the information presented
herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s
Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 22, 2012.
The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results could differ from those estimates. Those estimates
and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, analysis of impairments of recorded
intangibles, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.
The results of operations for the nine months ended
September 30, 2012 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December
31, 2012.
Income (Loss) per
Common Share
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stock holders
by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by
dividing the net income applicable to common stock holders by the weighted average number of common shares outstanding plus the
number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using
the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.
For the three and nine months ended September 30, 2012
the calculations of diluted earnings per share included stock options and warrants, calculated under the treasury method, and excluded
preferred stock since the effect was antidilutive. For the three and nine months ended September 30, 2011 the calculations of basic
and diluted loss per share are the same. The calculation of weighted average shares outstanding – diluted is as follows:
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
Net income (loss) attributable to common stockholders
|
|
$
|
14,000
|
|
|
$
|
(185,000
|
)
|
|
$
|
303,000
|
|
|
$
|
(649,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic
|
|
|
11,501,152
|
|
|
|
10,835,858
|
|
|
|
11,155,860
|
|
|
|
10,758,529
|
|
Effect of dilutive instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants and options
|
|
|
787,351
|
|
|
|
–
|
|
|
|
550,326
|
|
|
|
–
|
|
Weighted average shares outstanding-diluted
|
|
|
12,288,503
|
|
|
|
10,835,858
|
|
|
|
11,706,186
|
|
|
|
10,758,529
|
|
At September 30, 2012, the Company had potentially
dilutive securities that consisted of:
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Warrants
|
|
|
361,916
|
|
|
|
2,394,370
|
|
Options
|
|
|
778,667
|
|
|
|
895,000
|
|
Series A Preferred Stock
|
|
|
101,644
|
|
|
|
186,484
|
|
Series B Preferred Stock
|
|
|
342,895
|
|
|
|
562,905
|
|
Total
|
|
|
1,585,122
|
|
|
|
4,038,759
|
|
Recent Accounting Pronouncements
In May 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4 does not
require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside
of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company
adopted ASU No. 2011-04 effective January 1, 2012 and it did not affect the Company’s results of operations, financial condition
or liquidity.
In June 2011, the FASB issued
ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components
of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive
presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income
or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after
December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it did not affect the Company’s results
of operations, financial condition or liquidity.
In September 2011, the FASB issued
ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment.
This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the
two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill
impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. We do not believe that the adoption
of this new accounting guidance will have a significant effect on our goodwill impairment assessments in the future.
In December 2011, the FASB issued
ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires
an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand
the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for
annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard
to have a material impact on its results of operations, financial condition, or liquidity.
Other recent accounting
pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission
(the "SEC") did not or are not believed by management to have a material impact on the Company's present or future financial
statements.
Concentrations
The Company’s cash balances on deposit with banks
are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amounts
of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash
balances with high quality financial institutions. The Company had cash balances in excess of the guarantee during the three and
nine months ended September 30, 2012.
During the three months ended September 30, 2012 and
2011, the Company had two customers, which accounted for approximately 30% and 11% of sales in 2012, and 28% and 12% of sales in
2011, respectively. During the nine months ended September 30, 2012 and 2011, the Company had two customers, which accounted for
approximately 31% and 11% of sales in 2012, and 29% and 12% of sales in 2011, respectively. No other customers accounted for more
than 10% of sales in either year. As of September 30, 2012, the Company had accounts receivable due from a customer who comprised
$1,033,000 (33%) of its total accounts receivable and as of December 31, 2011 the Company had accounts receivable due from two
customers who comprised $475,000 (27%), and $264,000 (15%), respectively, of its total accounts receivable.
Advertising
Advertising costs are expensed as incurred. For the
three months ended September 30, 2012 and 2011, advertising costs were $48,000 and $2,000, respectively, and for the nine months
ended September 30, 2012 and 2011, advertising costs were $73,000 and $24,000, respectively
Fair Value of Financial Instruments
The Company uses various inputs in determining the
fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance
sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance
provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to
fair valuation of these financial assets:
Level 1—Quoted prices in active
markets for identical assets or liabilities.
Level 2—Inputs, other than the
quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based
on the Company's assumptions.
The Company had no such assets or liabilities recorded to
be valued on the basis above at September 30, 2012 or December 31, 2011.
2. Inventory
Inventory consists of the following as of:
|
|
September
30,
2012
|
|
|
December
31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
Raw Materials and packaging
|
|
$
|
3,817,000
|
|
|
$
|
3,538,000
|
|
Finished Goods
|
|
|
2,146,000
|
|
|
|
2,561,000
|
|
|
|
$
|
5,963,000
|
|
|
$
|
6,099,000
|
|
3. Property and Equipment
Property and equipment are comprised of the following
as of:
|
|
September
30,
2012
|
|
|
December
31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
Land
|
|
$
|
1,108,000
|
|
|
$
|
1,108,000
|
|
Building
|
|
|
1,737,000
|
|
|
|
1,708,000
|
|
Vehicles
|
|
|
320,000
|
|
|
|
320,000
|
|
Machinery and equipment
|
|
|
1,996,000
|
|
|
|
1,702,000
|
|
Office equipment
|
|
|
423,000
|
|
|
|
413,000
|
|
|
|
|
5,584,000
|
|
|
|
5,251,000
|
|
Accumulated depreciation
|
|
|
(2,199,000
|
)
|
|
|
(1,739,000
|
)
|
|
|
$
|
3,385,000
|
|
|
$
|
3,512,000
|
|
Machinery and equipment at September 30, 2012 and December
31, 2011 includes equipment held under capital leases of $294,000. Accumulated depreciation on equipment held under capital leases
was $138,000 and $104,000 at September 30, 2012 and December 31, 2011, respectively.
4. Line of Credit
On May 11, 2012, the Company’s revolving line
of credit was increased from $3,000,000 to $4,000,000. At September 30, 2012 and December 31, 2011, the aggregate amount outstanding
under the line of credit was $3,574,000 and $3,095,000 respectively, and the Company had approximately $332,000 of availability
on this line of credit at September 30, 2012.
The interest rate on the revolving line of credit is at
the prime rate plus 3.75% (7% at September 30, 2012)
The line of credit is based on 85% of eligible accounts receivable
and 50% of eligible inventory. The line of credit expires on November 7, 2013 and is secured by substantially all of the Company’s
assets.
5. Term Loan
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
Term loan
|
|
$
|
615,000
|
|
|
$
|
728,000
|
|
Less current portion
|
|
|
(170,000
|
)
|
|
|
(152,000
|
)
|
Long term debt
|
|
$
|
445,000
|
|
|
$
|
576,000
|
|
The term loan 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.
6.
Long-term Financing Obligation
In 2009 the Company sold two buildings and its brewery
equipment and concurrently entered into a long-term lease agreement for the same property and equipment. In connection with the
lease the Company has the option to repurchase the buildings and brewery equipment from 12 months after the commencement date to
the end of the lease term at the greater of the fair market value or an agreed upon amount. Since the lease contains a buyback
provision and other related terms, the Company determined it had continuing involvement that did not warrant the recognition of
a sale; therefore, the transaction has been accounted for as a long-term financing. The proceeds from the sale, net of transaction
costs, have been recorded as a financing obligation in the amount of $3,056,000. Monthly payments under the financing agreement
are recorded as interest expense and a reduction in the financing obligation at an implicit rate of 9.9%. The financing obligation
is personally guaranteed up to a limit of $150,000 by the principal shareholder and Chief Executive Officer.
In connection with the financing obligation, the Company
issued an aggregate of 400,000 warrants to purchase its common stock at $1.20 per share for five years. The 400,000 warrants were
valued at $752,000 and reflected as a debt discount, using the Black Scholes option pricing model. The following assumptions were
utilized in valuing the 400,000 warrants: strike price of $2.10 to $2.25; term of 5 years; volatility of 91.36% to 110.9%; expected
dividends 0%; and discount rate of 2.15% to 2.20%. The 400,000 warrants were recorded as valuation discount and are being amortized
over 15 years, the term of the purchase option. Amortization of valuation discount during the nine months ended September 30, 2012
and 2011 was $38,000 and $38,000, respectively.
Long term financing obligation is comprised of the following
as of:
|
|
September 30,
2012
|
|
|
December 31,
2011
|
|
|
|
(unaudited)
|
|
|
|
|
|
Financing obligation
|
|
$
|
2,893,000
|
|
|
$
|
2,944,000
|
|
Valuation discount
|
|
|
(589,000
|
)
|
|
|
(626,000
|
)
|
|
|
|
2,304,000
|
|
|
|
2,318,000
|
|
Less current portion
|
|
|
(85,000
|
)
|
|
|
(71,000
|
)
|
Long term financing obligation
|
|
$
|
2,219,000
|
|
|
$
|
2,247,000
|
|
7. Stockholders’ Equity
Preferred Stock
Dividends on the Series A Preferred stock in
the amount of $16,000 were paid on July 24, 2012 by issuing 4,760 shares of common stock. During the nine months ended September
30, 2012, 21,210 shares of Series A Convertible Preferred Stock were converted into 84,840 shares of common stock, in accordance
with the original certificate of designation
Dividends accrue quarterly on the Series B
Convertible Preferred shares outstanding at the end of the quarter. During the nine months ended September 30, 2012, the Company
accrued dividends of $23,000. Dividends have been paid in common stock at the time of conversion of the Series B Convertible Preferred
Stock into common stock. During the nine months ended September 30, 2012, 31,430 shares of Series B Convertible Preferred Stock
were converted into 220,010 shares of common stock, in accordance with the original certificate of designation, and $36,000 of
accrued dividends were paid on conversion, through the issuance of 24,100 shares of common stock.
Common Stock
During the nine months ended September 30,
2012, the Company issued 14,965 shares of common stock for services at prices ranging from $1.13 to $2.17 per share with a value
of $23,000 for services rendered.
8. Stock Based Compensation
Stock Options
During the nine months ended September 30,
2012, the Company issued 10,000 incentive stock options at the market price of $1.85 per share. Total stock-based compensation
recognized on the Company’s statement of operations for the three and nine months ended September 30, 2012 was $26,000 and
$81,000, respectively, as compared to 2011 expense of $44,000 and $147,000, respectively. As of September 30, 2012, the aggregate
value of unvested options was $127,000, which will vest over an average period of two or three years. There were 241,667 stock
options exercised in the nine months ended September 30, 2012 at exercise prices between $0.75 and $2.43. The Company received
$30,000 for 40,000 of such exercises and allowed cash-less exercise of 201,667 of such options and issued 166,484 shares of common
stock.
Stock options granted under our equity incentive plans generally vest over 2 to 3 years from the date of grant,
1/2 and 1/3 per year, respectively; and expire 5 years from the date of grant. The following table summarizes stock option activity
for the nine months ended September 30, 2012:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2011
|
|
|
1,172,000
|
|
|
$
|
1.55
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
10,000
|
|
|
$
|
1.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(241,667
|
)
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(161,666
|
)
|
|
$
|
3.81
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
778,667
|
|
|
$
|
1.26
|
|
|
|
3.9
|
|
|
$
|
3,821,000
|
|
Exercisable at September 30, 2012
|
|
|
441,999
|
|
|
$
|
1.14
|
|
|
|
4.0
|
|
|
$
|
2,222,000
|
|
The aggregate intrinsic value was calculated as the
difference between the market price and the exercise price of the Company’s common stock, which was $6.17 as of September
30, 2012.
The following table summarizes information about stock
options at September 30, 2012:
|
|
|
Options Outstanding at
September 30, 2012
|
|
|
Options Exercisable at
September 30, 2012
|
|
Range of
Exercise Price
|
|
|
Number
of Shares
Outstanding
|
|
|
Weighted Average
Remaining
Contractual
Life
(years)
|
|
|
Weighted Average
Exercise
Price
|
|
|
Number
of Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01 - $1.99
|
|
|
|
643,667
|
|
|
4.1
|
|
|
$
|
1.09
|
|
|
|
390,333
|
|
|
$
|
1.02
|
|
$2.00 - $4.99
|
|
|
|
135,000
|
|
|
3.2
|
|
|
$
|
2.09
|
|
|
|
51,666
|
|
|
$
|
2.06
|
|
$5.00 - $6.99
|
|
|
|
–
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
$7.00 - $8.50
|
|
|
|
–
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
778,667
|
|
|
|
|
|
|
|
|
|
|
|
441,999
|
|
|
|
|
|
Stock Warrants
During the nine months ended September 30,
2012, 529,959 warrants were exercised at prices from $1.20 to $3.08. The Company received $105,000 in cash and issued 380,327 shares
of common stock. During the same nine month period, 1,114,995 warrants expired bearing exercise prices of $1.35 and $7.50. The
following table summarizes stock warrant activity for the nine months ended September 30, 2012:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2011
|
|
|
2,006,870
|
|
|
$
|
4.32
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(529,959
|
)
|
|
$
|
1.54
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(1,114,995
|
)
|
|
$
|
6.26
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2012
|
|
|
361,916
|
|
|
$
|
2.41
|
|
|
|
2.9
|
|
|
$
|
1,359,000
|
|
Exercisable at September 30, 2012
|
|
|
361,916
|
|
|
$
|
2.41
|
|
|
|
2.9
|
|
|
$
|
1,359,000
|
|
The intrinsic value was calculated as the
difference between the market price and the exercise price of the Company’s common stock, which was $6.17 as of September
30, 2012.
9. Income Taxes
For the three and nine months ended September
30, 2012, net income was $22,000 and $342,000, respectively, and our provision for income taxes was zero. We made no provision
for income taxes due to our utilization of federal net operating loss carryforwards to offset both regular taxable income and
alternative minimum taxable income. For the three and nine months ended September 30, 2011, net loss was ($174,000) and ($594,000),
respectively and no income tax provision was recorded.
In accordance with Accounting Standards Codification (“ASC”)
740-10,
Income Taxes
, the Company evaluates its deferred tax assets to determine if a valuation allowance is required based
on the consideration of all available evidence using a “more likely than not” standard, with significant weight being
given to evidence that can be objectively verified. This assessment considers, among other matters, the nature, frequency and
severity of current and cumulative losses, forecasts of future profitability; the length of statutory carryover periods for operating
losses and tax credit carryovers; and available tax planning alternatives. Our deferred tax assets are composed primarily of U.S.
federal net operating loss carryforwards. Based on available objective evidence, management believes it is more likely than not
that these deferred tax assets are not recognizable and will not be recognizable until its determined that we have sufficient
taxable income. Under ASC 740-10, we may recognize the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.
The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that
has a greater than fifty percent likelihood of being realized upon ultimate settlement. ASC 740-10 also provides guidance on de-recognition,
classification, interest and penalties on income taxes, accounting in interim periods, and disclosures. As of September 30, 2012
or 2011, the Company does not have a liability for unrecognized tax uncertainties.
The following table
reconciles the U.S. statutory rates to the Company's effective tax rate for the:
|
|
Three months ended
September 30
(unaudited)
|
|
|
Nine months ended
September 30
(unaudited)
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
U.S. statutory rate
|
|
|
34%
|
|
|
|
(34)%
|
|
|
|
34%
|
|
|
|
(34)%
|
|
State tax net of federal benefit
|
|
|
5%
|
|
|
|
(5)%
|
|
|
|
5%
|
|
|
|
(5)%
|
|
Benefit of net operating loss carryforward
|
|
|
(39)%
|
|
|
|
–
|
|
|
|
(39)%
|
|
|
|
–
|
|
Valuation allowance
|
|
|
–
|
|
|
|
39%
|
|
|
|
–
|
|
|
|
39%
|
|
Effective tax rate
|
|
|
-%
|
|
|
|
-%
|
|
|
|
-%
|
|
|
|
-%
|
|
10. Subsequent Events
During the period October 1, 2012 and November 6, 2012,
options for the purchase of 156,667 shares of common stock were exercised at prices between $0.75 and $1.34 per share, and 131,936
shares of common stock were issued in cash-less exercise transactions. During the same period, 14,422 shares of common stock were
issued in exercise of the same quantity of warrants at prices of $1.79 per share and $3.075 per share.
During the period October 1, 2012 and November 6, 2012,
1,908 shares of Series B preferred stock were converted into 15,168 shares of common stock, which includes dividends paid of $3,000.
On October 17, 2012, the
Loan and Security Agreement with PMC Financial Services Group was amended to allow additional borrowing of up to $250,000 secured
by additional plant equipment purchases.
The equipment loan bears interest at the prime rate plus 11.6%, which shall not
be below 14.85%, and is secured by the equipment purchased. The Company purchased $48,000 of equipment under this loan facility.
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
Our third quarter
results reflect our continued sales growth in all products and regions. We have begun the rollout of our new kombucha line, which
we feel will become a significant component of our 2013 revenues. Our kombucha rollout has included promotional discounts and,
more importantly, higher plant production costs as we refine our methods of producing this high quality product. Such discounts
and costs will continue in the fourth quarter 2012, however, we believe that the kombucha product line will ultimately produce
higher margins than our other branded products in 2013. We consider this investment to be economical when compared to the costs
that another company would incur to either acquire or develop a similar product.
Overall, we are investing
in promotions at a higher rate than last year and we feel that this has helped lift our sales volumes without margin erosion. Our
promotions have generally been at the grocer level, along with incentives for our dealers to favor our products in their sales
efforts.
We are currently into
our “busy season” with our private label production and sales, and we have several new significant private label products
about to roll-out. Our Los Angeles plant capacity is increasing dramatically as we continue to add key equipment and implement
new processes.
We believe that our
fourth quarter will show favorable trends in all areas of our business and that our fiscal 2012 year will prove to be a turning
point for the Company, as we focus on profitable operations along with investments in revenue enhancement activities that will
accelerate our growth at the same time.
Results of Operations
Three months ended September 30, 2012 Compared
to Three months ended September 30, 2011
Sales
Sales of $7,888,000 for the three months ended September
30, 2012 represented an increase of 23% from $6,400,000 in the prior year same period. Sales growth was driven primarily by continued
increases in sales volume in our branded products as we expand our distribution networks. We have been steadily adding distributors
and expanding our product offerings to existing customers. Increases in private label sales also contributed to our overall sales
increases, with private label revenues contributing approximately 15% of overall sales in the quarter ended September 30, 2012,
as compared to approximately 9% in 2011.
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, as well as certain internal transfer costs.
Our costs of tangible goods sold of $4,810,000
for the three months ended September 30, 2012 represents a slight decrease in per unit costs, as compared to the 2011 same period.
We have reduced certain copack related fees and have negotiated decreases in certain raw ingredients pricing, resulting in an
overall decrease in our per-unit costs of our core 12-ounce beverages of approximately 1% in 2012, as compared to 2011.
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 $621,000 in the three months ended September 30, 2012, from $405,000 in 2011. The increase is primarily due to unabsorbed startup
costs relating to our kombucha roll-out production in our Los Angeles plant. As we refine our production methods, we feel that
these costs will reduce in the future. Our Los Angeles plant production has increased by over 20% in the third quarter, as compared
to 2011.
Gross Profit
Our gross profit
of $2,457,000 in the three months ended September 30, 2012 represents an increase of $432,000, or 21% from 2011. As a percentage
of sales, our gross profit decreased to 31% in 2012 as compared to 32% in 2011. The decrease is primarily due to the negative impact
of our plant idle capacity on our gross profit percentage, mitigated by lower costs of tangible goods sold and sales volume increases.
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 costs increased by 30% in the three months ended September 30, 2012 to $763,000 from $587,000 in 2011. The increase is
generally consistent with our increase in sales volume, along with higher shipping costs for cold storage products sold in 2012,
namely kombucha.
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 overall to $818,000 in the three months ended September 30, 2012 from $570,000 in 2011. The
$248,000 increase is primarily due to increased trade show and advertising costs of $145,000, increased compensation and travel
costs of $119,000; offset by a decrease in delivery and facilities related costs of $27,000. We have provided new promotional incentives
to several of our distributors and have experienced positive results. We are increasing our sales staff in a conservative manner
as our sales territories continue to grow.
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 to $693,000 during the three months ended September 30, 2012 from $867,000
in the same period of 2011. In the 2011 third quarter, we incurred legal costs of approximately $200,000 that did not recur in
the 2012 third quarter. Compensation costs decreased in the 2012 three month period by $58,000. Professional and consulting costs
increased by $29,000 in the 2012 third quarter, facilities costs increased by $45,000, and depreciation costs increased by $9,000.
We believe
that our existing executive and administrative staffing levels are sufficient to allow for moderate growth without the need to
add personnel and related costs for the foreseeable future.
Income/Loss
from Operations
Our
income from operations of $183,000 in the three months ended September 30, 2012 represents an improvement of $182,000 from the
income of $1,000 in the same period of 2011.
Interest
Expense
Interest
expense decreased to $161,000 in the three months ended September 30, 2012, compared to interest expense of $175,000 in the same
period of 2011. The decrease is primarily due to a lower rate of interest charged on our revolving line of credit than in 2011.
Modified
EBITDA
The Company defines modified EBITDA (a non-GAAP measurement) as net 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
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
|
$
|
22,000
|
|
|
$
|
(174,000
|
)
|
|
|
|
|
|
|
|
|
|
Modified EBITDA adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
184,000
|
|
|
|
164,000
|
|
Interest expense
|
|
|
161,000
|
|
|
|
175,000
|
|
Stock option compensation
|
|
|
26,000
|
|
|
|
59,000
|
|
Other stock compensation for services
|
|
|
2,000
|
|
|
|
45,000
|
|
Total EBITDA adjustments
|
|
|
373,000
|
|
|
|
443,000
|
|
|
|
|
|
|
|
|
|
|
Modified EBITDA income from operations
|
|
$
|
395,000
|
|
|
$
|
269,000
|
|
Nine months ended September 30, 2012 Compared
to Nine months ended September 30, 2011
Sales
Sales of $22,258,000 for the nine months ended September
30, 2012 represented an increase of 26% from $17,731,000 in the prior year same period. Sales growth was driven primarily by continued
increases in sales volume in our branded products as we expand our distribution networks. We have been steadily adding distributors
and expanding our product offerings to existing customers. Increases in private label sales also contributed to our overall sales
increases, with private label revenues contributing approximately 14% of overall sales in the quarter ended September 30, 2012,
as compared to approximately 9% in 2011.
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, as well as certain internal transfer costs.
Our costs of tangible goods sold of $13,691,000
for the nine months ended September 30, 2012 represents approximately the same average cost per unit as compared to the 2011 same
period.
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 $1,428,000 in the nine months ended September 30, 2012, from $1,300,000
in 2011. The increase is primarily due to unabsorbed startup costs relating to our kombucha roll-out production during the quarter
ended September 30, 2012 in our Los Angeles plant. As we refine our production methods, we feel that these costs will reduce in
the future.
Gross Profit
Our gross profit
of $7,139,000 in the nine months ended September 30, 2012 represents an increase of 33% from 2011. As a percentage of sales, our
gross profit increased to 32% in 2012 as compared to 30% in 2011. The improved gross profit percentage is primarily due to lower
costs of goods sold, as described above, along with selected price increases. Additionally, the negative impact of our plant idle
capacity on our gross profit percentage is lower as our sales volume increases.
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 costs increased by 20% in the nine months ended September 30, 2012 to $1,827,000 from $1,519,000 in 2011. The increase
is generally consistent with our increase in sales volume.
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 overall to $2,239,000 in the nine months ended September 30, 2012 from $1,751,000 in 2011.
The $488,000 increase is primarily due to increased trade show and advertising costs of $297,000, increased compensation and travel
costs of $138,000, and an increase in delivery and facilities related costs of $53,000.
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 increased to $2,238,000 during the nine months ended September
30, 2012 from $2,198,000 in the same period of 2011. In the 2011 nine month period, we incurred legal costs of approximately $245,000
that did not recur in the 2012 period. Compensation costs decreased in the 2012 nine month period by $118,000. Professional and
consulting costs increased by $116,000 in the 2012 nine month period, facilities costs increased by $116,000, and depreciation
costs increased by $45,000.
We believe
that our existing executive and administrative staffing levels are sufficient to allow for moderate growth without the need to
add personnel and related costs for the foreseeable future.
Income/Loss
from Operations
Our income from operations of $835,000 in the nine
months ended September 30, 2012 represents an improvement of $925,000 from the loss of $90,000 in the same period of 2011.
Interest Expense
Interest expense decreased to $493,000 in the nine
months ended September 30, 2012, compared to interest expense of $504,000 in the same period of 2011. The decrease is primarily
due to lower rate of interest charged on our revolving line of credit in 2012 than in 2011, partially offset by interest charged
on higher borrowings in 2012 than in 2011.
Modified EBITDA
The Company defines modified EBITDA (a non-GAAP measurement)
as net 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
|
|
Nine Months Ended
September 30,
|
|
|
|
2012
|
|
|
2011
|
|
Net income (loss)
|
|
$
|
342,000
|
|
|
$
|
(594,000
|
)
|
|
|
|
|
|
|
|
|
|
Modified EBITDA adjustments:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
556,000
|
|
|
|
472,000
|
|
Interest expense
|
|
|
493,000
|
|
|
|
504,000
|
|
Stock option compensation
|
|
|
81,000
|
|
|
|
189,000
|
|
Other stock compensation for services
|
|
|
23,000
|
|
|
|
123,000
|
|
Total EBITDA adjustments
|
|
|
1,153,000
|
|
|
|
1,288,000
|
|
|
|
|
|
|
|
|
|
|
Modified EBITDA income from operations
|
|
$
|
1,495,000
|
|
|
$
|
694,000
|
|
Liquidity and Capital Resources
As of September 30, 2012, we had stockholders equity
of $4,899,000 and we had working capital of $3,221,000, compared to stockholders equity of $4,305,000 and working capital of $2,655,000
at December 31, 2011. Cash and cash equivalents were $1,429,000 as of September 30, 2012, as compared to $713,000 at December 31,
2011.
Our increase in
cash and cash equivalents to $1,429,000 at September 30, 2012 was primarily a result of profitable operations and decreases in
inventory. During the nine months ended September 30, 2012, we invested $334,000 in plant improvements. We are upgrading the facilities
as well as adding new equipment to our production line that will increase our flexibility in product offerings and increase our
plant performance. We also received $135,000 from the exercise of stock options and warrants.
Our Loan and Security Agreement
with PMC Financial Services Group, LLC provides a $4 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% (7% at September 30, 2012).
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. We feel that this loan
facility is adequate for our current business plans.
We believe that the Company currently has the necessary
working capital to support existing operations through 2012. Our primary capital source will be cash flow from operations. If our
sales goals do not materialize as planned, we believe that the Company can become leaner and our costs can be managed to produce
profitable 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, among other things, have had
and may continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable
to achieve profitability, the market value of our common stock would decline and there would be a material adverse effect on our
financial condition.
Our working capital may be insufficient to support
our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional
financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would
be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses.
These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available
or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities,
develop products or services or otherwise respond to competitive pressures, could be significantly limited.
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, or GAAP. GAAP requires us to make estimates and assumptions
that affect the reported amounts in our financial statements including various allowances and reserves for accounts receivable
and inventories, the estimated lives of long-lived assets and trademarks and trademark licenses, as well as claims and contingencies
arising out of litigation or other transactions that occur in the normal course of business. The following summarize our most significant
accounting and reporting policies and practices:
Revenue Recognition
. Revenue is recognized
on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, and collection
of the receivable is reasonably assured. A product is not shipped without an order from the customer and credit acceptance
procedures performed. The allowance for returns is regularly reviewed and adjusted by management based on historical
trends of returned items. Amounts paid by customers for shipping and handling costs are included in sales. The Company reimburses
its wholesalers and retailers for promotional discounts, samples and certain advertising and promotional activities used in the
promotion of the Company’s products. The accounting treatment for the reimbursements for samples and discounts to wholesalers
results in a reduction in the net revenue line item. Reimbursements to wholesalers and retailers for certain advertising activities
are included in selling and marketing expenses.
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, as well as certain internal transfer costs. Raw materials
account for the largest portion of the cost of sales. Raw materials include cans, bottles, other containers, ingredients and packaging
materials.
Cost of goods sold –
Idle Capacity
-
Cost of goods sold – idle capacity consists of direct production costs
in excess of charges allocated to finished goods. Our charges for labor and overhead allocated to our finished goods are determined
on a cost basis. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Plant
costs in excess of production allocations are expensed in the period incurred.
Long-Lived Assets
. Our management regularly reviews
property, equipment and other long-lived assets, including identifiable amortizing intangibles, for possible impairment. This review
occurs quarterly or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares
an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its
eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write
down the asset to its estimated fair value. The fair value is estimated at the present value of the future cash flows discounted
at a rate commensurate with management’s estimates of the business risks. Quarterly, or earlier, if there is indication of
impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the
carrying amount. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s
best estimate of assumptions concerning expected future conditions. No impairments were identified during the three months ended
September 30, 2012.
Management believes that the accounting estimate related
to impairment of our long lived assets, including our trademark license and trademarks, is a “critical accounting estimate”
because: (1) it could be susceptible to change from period to period because it requires management to estimate fair value,
which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would
have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about
cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and
we expect they will continue to do so.
In estimating future revenues, we use internal budgets.
Internal budgets are developed based on recent revenue data for existing product lines and planned timing of future introductions
of new products and their impact on our future cash flows.
Accounts Receivable
. We evaluate the collectability
of our trade accounts receivable based on a number of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount our management believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding.
Inventories
. Inventories are stated at
the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated
forecast of product demand and/or our ability to sell the product(s) concerned and production requirements. Demand for our products
can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders
placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result
in an understated or overstated provision required for excess and obsolete inventory.
Stock-Based Compensation.
We periodically issue stock
options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The
Company accounts for stock option and warrant grants issued and vesting to employees based on FASB ASC Topic 718 “Compensation
– Stock Compensation”, whereas the award is measured at its fair value at the date of grant and is amortized ratably
over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with
FASB ASC Topic 505 “Equity” whereby the fair value of the stock compensation is based on the measurement date as determined
at either (a) the date at which a performance commitment is reached, or (b) at the date at which the necessary performance to earn
the equity instrument is complete.
We estimate the fair value of stock options using the Black-Scholes
option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and
are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the
underlying stock and the expected life of stock options. Projected data related to the expected volatility of stock options is
based on the historical volatility of the trading prices of the Company’s common stock and the expected life of stock options
is based upon the average term and vesting schedules of the options. Changes in these subjective assumptions can materially affect
the fair value of the estimate, and therefore the existing valuation models do not provide a precise measure of the fair value
of our employee stock options.
We believe there have been no significant changes,
during the three month period ended September 30, 2012, to the items disclosed as critical accounting policies and estimates in
Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form
10-K for the year ended December 31, 2011.
Recent Accounting Pronouncements
In May 2011, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments
to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4 does not
require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside
of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company
adopted ASU No. 2011-04 effective January 1, 2012 and it did not affect the Company’s results of operations, financial condition
or liquidity.
In June 2011, the FASB issued
ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components
of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive
presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income
or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after
December 15, 2011. The Company adopted ASU 2011-05 effective January 1, 2012 and it did not affect the Company’s results
of operations, financial condition or liquidity.
In September 2011, the FASB issued
ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment.
This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the
two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill
impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. The Company adopted ASU 2011-08 effective January 1, 2012. We do not believe that the adoption
of this new accounting guidance will have a significant effect on our goodwill impairment assessments in the future.
In December 2011, the FASB issued
ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU requires
an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand
the effect of those arrangements on its financial position. ASU No. 2011-11 will be applied retrospectively and is effective for
annual and interim reporting periods beginning on or after January 1, 2013. The Company does not expect adoption of this standard
to have a material impact on its results of operations, financial condition, or liquidity.
Other recent accounting pronouncements
issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC")
did not or are not believed by management to have a material impact on the Company's present or future financial statements.