Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: Reed's develops, manufactures, and markets natural non-alcoholic "New Age" beverages (ginger brews, root beer, cream sodas, colas), candies, and ice creams. The company sells primarily through natural food stores, supermarket chains, and distributors in the U.S., with limited international sales. Key brands include Reed's Ginger Brews and Virgil's Root Beer.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Sales | $15,277,000 | $13,059,000 |
| Gross Profit | $3,386,000 | $2,019,000 |
| Gross Margin | 22% | 15% |
| Operating Loss | $(3,571,000) | $(5,489,000) |
| Net Loss | $(3,814,000) | $(5,551,000) |
| Net Loss Per Share (Basic/Diluted) | $(0.43) | $(0.70) |
| Cash and Cash Equivalents | $229,000 | $743,000 |
| Working Capital | $636,000 | $2,943,000 |
| Total Debt (Current + Long Term) | $3,117,000 | $793,000 |
| Accumulated Deficit | $(14,919,000) | $(11,081,000) |
Material Changes vs. Prior Period
- Revenue Growth: Sales increased 17% to $15.3 million, driven by volume increases in the Virgil's line and price increases (approx. 20%) on Reed's Ginger Brews.
- Margin Expansion: Gross margin improved significantly from 15% to 22% due to price hikes and better management of promotions/discounting.
- Cost Reductions: Selling and marketing expenses decreased 17% ($770,000) primarily due to a reduction in sales staff (from 33 to 10 employees) and lower travel/trade show costs. General and administrative expenses increased 20% due to higher professional fees for SEC compliance and a one-time non-cash stock expense for consulting services.
- Debt Structure: The company refinanced its real estate debt in March 2008, borrowing $1.77 million to pay off prior loans and fund working capital. Total debt increased substantially, with a new line of credit utilized to $1.35 million.
- Liquidity Decline: Cash on hand dropped from $743,000 to $229,000, and working capital decreased by over $2.3 million, primarily due to the net loss for the year.
Guidance, Outlook, Risks, and Contingencies
- Outlook: Management anticipates profitability in 2009 based on current sales run rates, improved gross margins (projected 5% increase), and over $2 million in operating cost reductions. The company expects to operate at a breakeven level after adjusting for non-cash expenses.
- Capital Needs: The company is borrowing near the maximum on its line of credit. While management believes current cash and credit lines are sufficient through the end of 2009, they may need to raise additional equity or debt to fund growth plans if sales goals are not met.
- Key Risks:
- Liquidity: History of losses and dependence on non-banking capital sources.
- Production: Reliance on a single co-packer for the majority of production; flavor issues at the company-owned Los Angeles facility have forced reliance on the East Coast co-packer, increasing freight costs.
- Competition: Highly competitive market with larger brands having superior financial and marketing resources.
- Regulatory: Potential for California Proposition 65 warnings on products containing listed substances.
- Contingencies:
- Legal Proceedings: Potential liability regarding shares issued in the 2005-2006 IPO that may have been unregistered. A rescission offer was made in 2006; while the company believes it has defenses, regulators could impose fines.
- Covenant Violations: As of December 31, 2008, the company was in violation of Fixed Charge Coverage and Net Worth covenants on its line of credit. A waiver was obtained on March 27, 2009.
- Internal Controls: Management identified material weaknesses in internal controls, including lack of segregation of duties and insufficient disaster recovery, though they concluded disclosure controls were effective.
Investor Verification Checklist
- Cash Runway: Verify if the $229,000 cash balance and $33,000 remaining line of credit availability are sufficient to cover operations through 2009 without additional financing.
- Debt Covenants: Confirm the status of the March 2009 covenant waiver and the terms of the renegotiated financial covenants.
- Production Capacity: Assess the resolution of flavor issues at the Los Angeles Brewery and the impact of continued reliance on the East Coast co-packer on gross margins.
- Legal Exposure: Review the status of the potential securities law violations regarding the 2005-2006 IPO shares and any ongoing regulatory inquiries.
- Customer Concentration: Note that two customers accounted for 46% of sales in 2008; verify the stability of these relationships.