REED's, INC. - 10-Q Summary (Q1 2010)
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 March 31, 2010. The company manufactures and distributes natural beverages, including ginger ale and sodas. As of May 7, 2010, there were 10,230,184 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Sales (Revenue) | $4,012,000 | $3,417,000 |
| Gross Profit | $1,066,000 | $847,000 |
| Gross Margin | 27% | 25% |
| Operating Loss | $(110,000) | $(415,000) |
| Net Loss | $(259,000) | $(498,000) |
| Net Loss Attributable to Common | $(273,000) | $(498,000) |
| Cash and Equivalents | $235,000 | $108,000 (End of Q1 2009) |
| Working Capital | $2,526,000 | $2,037,000 (Dec 31, 2009) |
| Total Debt (Current + Long Term) | $3,328,000 | $3,813,000 (Dec 31, 2009) |
Note: Total Debt calculated as sum of Lines of credit, Current/Long term financing obligations, Capital leases, and Notes payable.
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 17% ($595,000) driven by new branded products, private label revenues, and expanded distribution in grocery chains.
- Margin Expansion: Gross margin improved from 25% to 27% due to reduced discounting, lower promotional allowances, and better absorption of fixed production costs.
- Operating Efficiency: Operating loss narrowed significantly from $415,000 to $110,000. Selling and marketing expenses decreased 20% ($135,000) due to lower compensation, travel, and stock option expenses.
- Interest Expense: Interest expense increased 79% to $149,000 due to higher long-term debt financing obligations and line of credit utilization.
- Cash Flow: Net cash used in operating activities increased to $973,000 (from $18,000 in 2009) primarily due to increased accounts receivable, inventory, and prepaid expenses in preparation for busier quarters.
Guidance, Outlook, and Risks
Management Commentary: Management believes the adverse economic conditions affecting the grocery industry in 2009 are improving. They anticipate accelerating revenue growth throughout 2010 as they enter busier quarters. The company expects to achieve profitability in 2010 through cash flow from operations.
Liquidity: The company reported $235,000 in cash and $1,082,000 in availability under its $3,000,000 line of credit. Management believes current resources are sufficient to support operations through 2010.
Risks and Contingencies:
- Profitability Risk: If sales goals are not met, the company may lack sufficient working capital to maintain operations or fund expansion.
- Customer Concentration: Two customers accounted for approximately 47% of sales in Q1 2010 (32% and 15%).
- Debt Covenants: The line of credit is secured by business assets and personally guaranteed by the CEO. It bears interest at 18% per annum.
- Forward-Looking Statements: Actual results may differ materially due to risks including market conditions, competition, and the ability to secure additional financing.
Investor Verification Checklist
- Cash Burn Rate: Verify the sustainability of operations given the $973,000 cash outflow from operations despite revenue growth.
- Debt Service: Confirm the ability to service the $3.3M+ debt load, particularly the 18% interest line of credit and the 9.9% implicit rate on the long-term financing obligation.
- Customer Concentration: Assess the risk associated with nearly half of revenue coming from just two customers.
- Inventory Levels: Review the $3.17M inventory balance (up from $2.88M) to ensure it aligns with sales forecasts and does not become obsolete.
- Equity Dilution: Note the recent issuance of common stock and warrants (277,359 shares sold in Feb 2010) and the conversion of Series B Preferred Stock, which impacts share count and ownership.