REED

REED's, INC. - Form 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for REED's, INC., a smaller reporting company incorporated in Delaware. The report covers the three-month period ended March 31, 2011. The company manufactures and distributes all-natural ginger ales and other beverages. As of May 5, 2011, there were 10,819,225 shares of Common Stock outstanding.

Key Financial Metrics

Note: Total Debt includes Line of Credit ($2,035,000), Current portion of long-term financing ($59,000), Capital leases ($41,000 current + $135,000 long-term), and Note payable ($44,000 current).

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 28% to $5.14 million, driven by higher volume of branded 12-ounce soft drinks and expansion into new markets with mainstream distributors.
• Margin Compression: Gross margin declined from 34% to 28%. This was caused by increased promotional spending (national chain promotions, new "ZERO" product line), higher ingredient and packaging costs, and increased idle capacity costs ($402,000 vs. $241,000) due to production downtime for SQF accreditation.
• Operating Expenses: Total operating expenses rose to $1.62 million from $1.49 million. Delivery costs increased 22% consistent with sales volume. Selling and marketing expenses increased due to higher staff compensation and travel.
• Net Loss: Net loss widened to $365,000 from $259,000, primarily due to the margin compression and increased interest expense ($159,000 vs. $149,000).
• Capital Structure: The company raised $672,000 in net proceeds from the sale of common stock and $25,000 from warrant exercises during the quarter.

Guidance, Outlook, and Risks

• Outlook: Management expects market conditions to improve throughout 2011. They anticipate margin improvement in future quarters due to negotiated cost decreases on ingredients/packaging and selected price increases.
• Liquidity: The company believes it has sufficient working capital to support operations through 2011. It has approximately $101,000 of availability remaining on its $3 million line of credit.
• Risks:
  • Profitability: The company has an accumulated deficit of $19.26 million. If sales goals are not met, the company may need to reduce operations or seek additional financing, which may not be available on acceptable terms.
  • Customer Concentration: Two customers accounted for approximately 44% of sales in Q1 2011 (30% and 14%). One customer comprised 30% of total accounts receivable.
  • Debt Covenants: The line of credit is secured by all business assets and personally guaranteed by the CEO. Interest rates are high (18% per annum).
• Unusual Items: The company reclassified delivery and handling expenses from Cost of Goods Sold to Operating Expenses for the 2011 period to align with current presentation standards.

Investor Verification Checklist

• Margin Recovery: Verify if the company successfully implements price increases and cost negotiations to reverse the gross margin decline from 34% to 28%.
• Customer Concentration: Assess the risk associated with the top two customers representing 44% of sales and one customer representing 30% of receivables.
• Debt Service: Confirm the company's ability to service the $2.035 million line of credit at 18% interest and the long-term financing obligation.
• Production Efficiency: Monitor the absorption of plant costs; idle capacity expenses were 66% of total plant costs in Q1 2011, indicating low utilization.
• Cash Burn: Track operating cash flow, which used $540,000 in the quarter, offset only by equity financing.