REED's, INC. - 10-Q Summary (Period Ended September 30, 2009)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for REED's, INC., a smaller reporting company, for the period ended September 30, 2009. The company manufactures and distributes natural sodas and beverages. The report covers the three and nine months ended September 30, 2009, compared to the same periods in 2008. As of November 13, 2009, there were 9,597,877 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 | Balance Sheet (Sep 30, 2009) |
|---|---|---|---|
| Sales | $4,027,000 | $11,658,000 | - |
| Gross Profit | $989,000 (24.6% margin) | $2,936,000 (25.2% margin) | - |
| Net Loss | $(402,000) | $(1,773,000) | - |
| Net Loss to Common | $(402,000) | $(1,796,000) | - |
| Cash & Equivalents | - | - | $76,000 |
| Working Capital | - | - | $1,467,000 |
| Total Debt & Obligations | - | - | $4,513,000 (Current + Long Term) |
| Stockholders' Equity | - | - | $3,598,000 |
Debt Structure: Includes a $1,447,000 line of credit, a $3,048,000 long-term financing obligation (sale-leaseback of brewery assets), and capital leases totaling $159,000.
Material Changes vs. Prior Period
- Revenue: Sales decreased 5% ($206,000) for the quarter and 6% ($710,000) for the nine months compared to 2008. The decline is attributed to adverse economic conditions in the grocery industry and the absence of a one-time promotional program for "party kegs" in 2008.
- Cost of Sales: Increased 3% for the quarter due to higher fixed production costs and freight, despite a 6% decrease for the nine months.
- Operating Expenses: Selling and marketing expenses decreased significantly (21% for the quarter, 38% for nine months) due to reduced compensation, travel, and a shift away from direct store delivery (DSD) to a supermarket-focused strategy. General and administrative expenses increased 12% for the quarter but decreased 26% for the nine months.
- Impairment Loss: A non-cash impairment charge of $641,000 was recorded in the nine-month period related to the sale-leaseback of buildings and brewery equipment.
- Interest Expense: Increased 33% for the quarter and 60% for the nine months due to the new long-term financing obligation and increased line of credit usage.
Guidance, Outlook, and Risks
Management Commentary: Management believes the company is well-positioned for an increasing backlog of private label business and strong sales increases in branded products for 2010. The strategy involves using gross margins from private label business to fund promotion of branded products. The company expects to achieve profitability in 2010.
Liquidity and Capital Resources: Cash on hand is $76,000 with approximately $78,000 available on the existing line of credit. Management believes current working capital is sufficient through 2010 but anticipates a need for additional capital for seasonality and growth.
Recent Financing Activities (Subsequent Events):
- October 2009: Raised approximately $563,000 net proceeds from a public shelf offering of common stock and warrants.
- November 2009: Executed a new $3,000,000 revolver line of credit with GemCap Lending I, LLC to replace the existing facility. The new line bears interest at 18% per annum.
- November 2009: Initiated a rights offering to shareholders for Series B Convertible Preferred Stock to raise additional working capital.
Risks and Contingencies:
- Covenant Compliance: The company was not in compliance with the Fixed Charge Coverage Ratio covenant as of September 30, 2009, though a waiver was obtained on November 11, 2009.
- Internal Controls: Disclosure controls and procedures were deemed ineffective due to material weaknesses, including insufficient disaster recovery and lack of segregation of duties, though remediation efforts are underway.
- Customer Concentration: Two customers accounted for approximately 46% of sales in the nine months ended September 30, 2009.
Investor Verification Checklist
- Debt Covenants: Verify the status of the Fixed Charge Coverage Ratio waiver and the terms of the new 18% interest rate line of credit with GemCap.
- Liquidity Runway: Assess the sufficiency of the $76,000 cash balance and $78,000 credit availability against the $1,322,000 net cash used in operations for the nine-month period.
- Asset Sale-Leaseback: Review the terms of the $3.056 million financing obligation regarding the brewery assets, specifically the buyback option and the 9.9% implicit interest rate.
- Equity Dilution: Monitor the impact of the recent shelf offering, the new rights offering, and the significant number of outstanding warrants (2.2 million) and options (720,000) on future earnings per share.
- Internal Controls: Confirm the progress of remediation efforts regarding the material weaknesses in internal controls over financial reporting.