REED's, INC. - 10-K Filing Summary
Business Context and Reporting Period
Company: REED's, INC.
Reporting Period: Fiscal year ended December 31, 2009
Business Overview: Reed's develops, manufactures, and markets natural non-alcoholic "New Age" beverages, candies, and ice creams. Key brands include Reed's Ginger Brews, Virgil's Root Beer, China Colas, and Sonoma Sparkler. The company sells primarily through natural food stores, supermarket chains, and distributors in the U.S., with limited international presence.
Operational Changes: In 2009, the company acquired the Sonoma Sparkler brand, introduced Energy Elixir, and began a private-label business. The company also executed a sale-leaseback of its Los Angeles brewery and buildings, accounting for it as a long-term financing obligation.
Key Financial Metrics
| Metric | 2009 | 2008 |
|---|---|---|
| Net Sales | $15,178,000 | $15,277,000 |
| Gross Profit | $3,612,000 | $3,386,000 |
| Gross Margin | 24% | 22% |
| Operating Loss | $(2,073,000) | $(3,571,000) |
| Net Loss | $(2,559,000) | $(3,814,000) |
| Cash and Equivalents | $1,306,000 | $229,000 |
| Working Capital | $2,037,000 | $636,000 |
| Total Debt (Current + Long Term) | $5,052,000* | $3,117,000 |
*2009 Total Debt includes Line of Credit ($1.415M), Long-term Financing Obligation ($2.274M), Capital Leases ($0.154M), and Notes Payable ($0.071M).
Material Changes vs. Prior Period
- Revenue: Decreased 1% ($99,000) primarily due to the absence of a 2008 promotional program for 5-liter "party kegs" ($900,000 impact), partially offset by a 2% volume increase in 12-ounce products and $470,000 in revenue from new brands.
- Cost of Goods Sold (COGS): Decreased 3% to $11.566M, consistent with the sales decline.
- Gross Margin: Improved from 22% to 24% due to lower freight and warehouse costs.
- Operating Expenses: Selling and marketing expenses dropped 37% ($1.4M) due to a strategic shift reducing the sales force from 33 to 10 employees and lower travel/advertising costs. General and administrative expenses decreased 16% ($508,000).
- Impairment Loss: A one-time non-cash impairment loss of $641,000 was recognized in 2009 related to the sale-leaseback of the brewery and buildings.
- Liquidity: Cash position improved significantly from $229,000 to $1.306M, driven by $2.75M in financing activities (sale of equity and financing obligation proceeds) despite $1.317M used in operating activities.
Guidance, Outlook, and Risks
Outlook: Management believes the company has sufficient working capital to support operations through 2010. The primary capital source is expected to be cash flow from operations as the company aims to reach profitability in 2010. The company plans to continue focusing on supermarket placements and expanding private-label products.
Risks and Contingencies:
- Liquidity Risk: The company has a history of operating losses and relies on non-banking capital sources which carry higher interest rates (e.g., new line of credit at 18% per annum).
- Concentration Risk: Two customers accounted for 46% of total sales in 2009. The company relies on a single contract packer for the majority of beverage production.
- Legal Proceedings: Potential liability exists regarding shares issued in the 2005-2006 IPO which may have been unregistered. A rescission offer was made in 2006, but liability for remaining shares could equal the value of all shares issued plus interest.
- Market Risks: Competition from larger brands with greater resources, changes in consumer preferences (e.g., low-carb trends), and raw material/packaging price increases.
Investor Verification Checklist
- Debt Service Capacity: Verify the company's ability to service the new $3M line of credit (18% interest) and the $3.04M long-term financing obligation (9.9% implicit rate) given the history of net losses.
- Customer Concentration: Assess the risk associated with two customers representing 46% of sales; loss of either could materially impact revenue.
- Legal Exposure: Review the status of the potential securities law violations regarding the 2005-2006 IPO shares and the adequacy of the 2006 rescission offer as a defense.
- Production Dependency: Confirm the stability of the relationship with the single primary contract packer in Pennsylvania, as a disruption could halt production.
- Equity Dilution: Monitor the impact of outstanding options (690,000), warrants (1.99M), and convertible preferred stock (Series A and B) on future earnings per share.