REED's, INC. - 10-Q Filing Summary
Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company develops, manufactures, and markets natural non-alcoholic beverages, candies, and ice creams under brands including Reed's Ginger Brews, Virgil's Root Beer, and China Colas. Products are sold through natural food stores, supermarkets, and distributors in the U.S. and Canada.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $4,233,186 | $12,368,102 |
| Gross Profit | $1,295,499 (30.7% Margin) | $3,084,642 (24.9% Margin) |
| Operating Loss | $(81,957) | $(2,457,692) |
| Net Loss | $(174,158) | $(2,655,346) |
| Cash and Equivalents | $83,091 (as of Sep 30, 2008) | |
| Working Capital | $1,656,096 (as of Sep 30, 2008) | |
| Total Debt (Current + Long Term) | $3,057,184 | |
| Line of Credit Outstanding | $1,290,082 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.0% for the quarter and 19.3% for the nine-month period compared to 2007, driven by growth in the Virgil's and Reed's Ginger Brews product lines and expansion into mainstream distributors.
- Margin Improvement: Gross margin improved significantly to 30.7% for the quarter (from 20.6% in 2007) due to a 20% price increase on the Reed's Ginger Brew line in April 2008, partially offset by rising fuel and commodity costs.
- Expense Reduction: Operating expenses decreased 40.7% for the quarter compared to 2007. This was primarily due to a workforce reduction of 17 employees (mostly sales staff) in March 2008 and the elimination of costly Costco roadshows.
- Debt Structure: The Company refinanced its land and building debt in March 2008 with a new $1.77 million note and established a $3 million revolving line of credit, of which $1.29 million was drawn as of September 30, 2008.
Outlook, Risks, and Management Commentary
- Liquidity Position: Cash reserves declined to $83,091. Management believes current cash and line of credit availability (~$273,000 remaining) are sufficient to meet needs through the end of 2008, noting operations are running at approximately breakeven after adjusting for non-cash expenses.
- Cost Pressures: Rising fuel and raw material prices continue to pressure margins. Management is renegotiating production costs with co-packers, with a new contract effective November 1, 2008, expected to improve gross margins by 5-6%.
- Strategic Shift: The Company has shifted focus from Direct Store Delivery (DSD) to strengthening product placement in approximately 10,500 supermarkets nationwide.
- Risks: Key risks include the slowing economy affecting demand for premium natural foods, continued inflation in packaging and freight costs, and the need for additional capital if profitability is not achieved. The Company was in default of a financial covenant in June 2008 but amended the agreement in September 2008 to cure the breach.
Investor Verification Checklist
- Covenant Compliance: Verify the terms of the amended credit agreement with First Capital and ensure ongoing compliance with financial covenants (minimum net income, debt service coverage, tangible net worth).
- Inventory Levels: Confirm the valuation of excess inventory (estimated at $500,000 - $1,000,000 above normal levels) and potential write-down risks.
- Debt Service: Assess the ability to service the new $1.77 million long-term debt and the $3 million line of credit given the history of operating losses.
- Customer Concentration: Review the impact of the top two customers, who accounted for approximately 45% of sales in the nine-month period.
- Stock-Based Compensation: Monitor the impact of unvested options (approx. $751,000 remaining compensation cost) on future operating expenses.