REED's, INC. - 10-Q Summary (Period Ended June 30, 2009)
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 and six-month periods ended June 30, 2009. The company manufactures and distributes natural beverages, including root beer and ginger ale. As of August 13, 2009, there were 9,215,693 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Sales (Revenue) | $7,631,000 | $8,135,000 |
| Gross Profit | $1,947,000 (25.5% margin) | $1,789,000 (22.0% margin) |
| Net Loss | $(1,371,000) | $(2,481,000) |
| Net Loss Attributable to Common Stockholders | $(1,394,000) | $(2,505,000) |
| Loss Per Share (Basic & Diluted) | $(0.15) | $(0.28) |
| Cash and Cash Equivalents | $421,000 | $743,000 (Beginning of period 2008) |
| Working Capital | $1,824,000 | $636,000 (Dec 31, 2008) |
| Total Debt & Financing Obligations | $4,015,000 | $3,117,000 (Dec 31, 2008) |
Note: Total Debt includes $974,000 in lines of credit and $3,041,000 in long-term financing obligations.
Material Changes vs. Prior Period
- Revenue Decline: Sales decreased 6% year-over-year to $7.63 million. This was primarily due to the absence of a 2008 promotional program for 5-liter "party kegs," which resulted in $815,000 lower sales. However, volume of primary 12-ounce products increased by approximately 12%.
- Improved Margins: Despite lower sales prices due to increased promotional discounts, gross profit increased 9% to $1.95 million. Gross margin improved to 26% from 22% due to a 20% reduction in per-unit costs of goods sold (lower commodity prices and reduced co-packing fees).
- Operating Expense Reduction: Selling and marketing expenses dropped 45% to $1.21 million, and General and Administrative expenses fell 37% to $1.27 million. These reductions were driven by significant cuts in compensation, travel, and professional fees, partially offset by increased stock-based compensation.
- Impairment Charge: A non-cash impairment loss of $641,000 was recorded in Q2 2009 related to the sale and leaseback of buildings and brewery equipment.
- Liquidity Improvement: Working capital increased significantly from $636,000 to $1.82 million, and cash on hand rose from $229,000 to $421,000, largely due to proceeds from a sale-leaseback transaction.
Guidance, Outlook, and Risks
- Outlook: Management expects margins in the second half of the year to be consistent with the first half. The company is aggressively pursuing private label product opportunities to boost Q4 revenues. Management believes operations are running at approximately breakeven after adjusting for non-cash expenses.
- Capital Resources: The company has approximately $563,000 of availability remaining on its line of credit. Management believes current cash and credit lines are sufficient to meet needs through the end of 2009. They prefer to wait for better stock market conditions before raising equity to minimize dilution.
- Strategic Shift: The sales strategy has shifted from a mix of supermarkets and direct store delivery (DSD) to a focused effort on product placement in approximately 10,500 supermarkets nationwide, resulting in a reduction of 16 sales personnel.
- Risks and Contingencies:
- Internal Controls: Disclosure controls and procedures were deemed not effective as of June 30, 2009, due to material weaknesses identified in the prior year (e.g., lack of segregation of duties, insufficient disaster recovery). Remediation efforts are underway.
- Customer Concentration: Two customers accounted for approximately 30% and 13% of sales in the first six months of 2009.
- Financing Structure: A significant portion of the company's assets (buildings and equipment) were sold and leased back, creating a long-term financing obligation of $3.06 million with a 9.9% implicit interest rate, personally guaranteed by the CEO.
Investor Verification Checklist
- Impairment Validity: Verify the fair market value assessment used to justify the $641,000 impairment charge on the sale-leaseback transaction.
- Debt Covenants: Confirm continued compliance with financial covenants on the line of credit and the new long-term financing obligation, especially given the operating losses.
- Internal Control Remediation: Monitor the progress of remediation efforts regarding material weaknesses in internal controls over financial reporting.
- Customer Concentration: Assess the risk associated with the top two customers representing over 40% of sales volume.
- Stock-Based Compensation: Review the impact of recent option repricing and warrant issuances on future dilution and expense recognition.