REED's, INC. - 10-Q Filing Summary
Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2010
Business Overview: The Company manufactures and distributes branded and private-label beverages, including ginger ale and natural sodas. The Company is currently upgrading its Los Angeles brewery to gain safety and food handling certifications to support expansion into mainstream grocery chains.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2010 |
Six Months Ended June 30, 2010 |
|---|---|---|
| Net Sales | $4,905,000 | $8,917,000 |
| Gross Profit | $1,169,000 | $2,235,000 |
| Gross Margin | 24% | 25% |
| Net Loss | $(164,000) | $(423,000) |
| Net Loss Attributable to Common Stockholders | $(200,000) | $(473,000) |
| Cash and Cash Equivalents | $1,142,000 (as of June 30, 2010) | |
| Working Capital | $2,406,000 (as of June 30, 2010) | |
| Line of Credit Outstanding | $1,795,000 | |
| Long-Term Financing Obligation | $2,274,000 (net of discount) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% for the three months and 17% for the six months ended June 30, 2010, compared to the prior year. Growth was driven by branded product sales and the introduction of private-label products (approx. 25% of the sales increase).
- Profitability Improvement: The operating loss decreased significantly to $41,000 (three months) and $151,000 (six months) compared to $759,000 and $1,174,000 in the prior year periods. This improvement is largely due to the absence of a $641,000 asset impairment charge recorded in 2009.
- Margin Compression: Gross profit margin decreased from 26% to 24-25% due to increased overhead costs associated with brewery upgrades and higher ingredient costs.
- Expense Management: Selling and marketing expenses decreased by 12% year-over-year for the six-month period, primarily due to reduced stock option expenses.
- Interest Expense: Interest expense increased 38% for the six-month period due to higher long-term debt balances and increased utilization of the line of credit.
Guidance, Outlook, and Risks
- Outlook: Management anticipates continued sales increases for the balance of 2010, with projected growth in private-label products in the third and fourth quarters. The Company expects to achieve profitable contribution from operations (before non-cash expenses) throughout 2010.
- Capital Expenditures: Significant costs related to plant upgrades for safety certifications are impacting current gross margins but are viewed as a long-term investment.
- Liquidity: The Company believes it has sufficient working capital to support operations through June 2011. Primary capital sources include cash flow from operations, a $3,000,000 line of credit (with $206,000 availability), and potential equity raises.
- Risks:
- Profitability: Failure to achieve profitable operations could lead to insufficient working capital and a decline in stock value.
- Customer Concentration: Two customers accounted for approximately 44% of sales in the six months ended June 30, 2010.
- Financing: The line of credit bears a high interest rate (18% per annum) and is secured by business assets and personally guaranteed by the CEO.
Investor Verification Checklist
- Customer Concentration: Verify the stability of the two major customers representing ~44% of sales.
- Debt Service: Assess the impact of the 18% interest rate on the line of credit and the $3.0M long-term financing obligation on future cash flows.
- Margin Recovery: Monitor whether gross margins stabilize after the current period of brewery upgrade expenses.
- Equity Dilution: Review the impact of recent equity offerings (Series B Preferred and Common Stock) and outstanding warrants/options on future earnings per share.
- Working Capital: Confirm the Company's ability to maintain liquidity if sales growth targets are not met, given the reliance on the line of credit.