REED

REED's, INC. - 10-K Summary (Fiscal Year Ended Dec 31, 2010)

Business Context and Reporting Period

This summary covers the Annual Report on Form 10-K for REED's, INC., a Delaware corporation, for the fiscal year ended December 31, 2010. The company develops, manufactures, and markets natural non-alcoholic beverages (including Reed's Ginger Brews and Virgil's Root Beer), candies, and ice creams. Products are sold primarily through natural food stores, supermarket chains, and distributors in the United States, with limited international sales. The company operates a brewery in Los Angeles and utilizes co-packers in Pennsylvania and New York.

Key Financial Metrics

Note: Total Debt includes $2,038,000 line of credit, $2,268,000 long-term financing obligation, and other current/long-term notes.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 34% to $20.4 million. This was driven by a 17% increase in branded product sales and a 1,332% surge in private label sales (from $198,000 to $2.8 million).
• Margin Compression: Gross margin declined from 24% to 21%. Management attributes this to lower margins on initial private label contracts, start-up costs for the private label line, and increased commodity costs (apple juice, ginger, sugar).
• Improved Operating Performance: Operating loss narrowed by 65% to $724,000. This improvement is largely due to the absence of a $641,000 asset impairment charge recorded in 2009 and increased sales volume.
• Expense Management: Selling and marketing expenses decreased 4% due to reduced stock option expense and advertising costs, partially offset by higher compensation. General and administrative expenses increased 4% due to higher compensation and amortization.
• Debt Levels: Interest expense increased 21% to $586,000 due to higher long-term debt and increased borrowing under the line of credit.

Guidance, Outlook, and Risks

Outlook: Management anticipates continued sales increases in 2011. They expect gross margins on branded products to remain constant but anticipate improved margins on private label sales due to better contract terms. The company believes it has sufficient working capital to support operations through 2011, with profitability expected as sales goals materialize.

Risks and Contingencies:

• Liquidity: The company relies on cash flow from operations and a $3 million line of credit (18% interest rate). As of year-end, only $52,000 of availability remained. Continued losses could necessitate additional financing or cost reductions.
• Customer Concentration: Three customers accounted for approximately 50% of total sales in 2010 (29%, 11%, and 10%).
• Supply Chain: The company relies on a single contract packer for the majority of beverage production. A disruption could delay fulfillment.
• Legal: There is a lingering risk regarding the initial public offering (IPO) shares issued between 2005-2006, which may have been issued in violation of securities laws. A rescission offer was made in 2006, but liability for remaining shares remains a potential contingency.
• Regulatory: Subject to evolving food safety laws and California Proposition 65 warning requirements regarding ingredients.

Investor Verification Checklist

• Private Label Sustainability: Verify if the 2011 private label contracts deliver the improved margins management anticipates, given the 2010 margin compression.
• Line of Credit Utilization: Monitor the $3 million line of credit (currently 98% utilized) and the company's ability to refinance or reduce debt given the 18% interest rate.
• Customer Concentration: Assess the risk associated with the top three customers representing half of total revenue.
• Legal Exposure: Review the status of the potential rescission claims related to the 2005-2006 IPO shares.
• Cash Burn Rate: Confirm that operating cash flow improves in 2011 to offset the $811,000 net cash used in operations during 2010.