REED's, INC. - 10-Q Summary (Q1 2009)
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, 2009. The company manufactures and distributes natural sodas, primarily under the Reed's Ginger Brew and Virgil's brands. As of May 12, 2009, there were 9,111,177 shares of Common Stock outstanding.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Sales | $3,417,000 | $3,564,000 |
| Gross Profit | $847,000 | $520,000 |
| Gross Margin | 24.8% | 14.6% |
| Operating Loss | $(415,000) | $(1,934,000) |
| Net Loss | $(498,000) | $(1,990,000) |
| Loss Per Share (Basic/Diluted) | $(0.06) | $(0.23) |
| Cash and Equivalents | $108,000 | $229,000 (Dec 31, 2008) |
| Working Capital | $515,000 | $636,000 (Dec 31, 2008) |
| Total Debt (Current + Long Term) | $3,033,000 | $3,117,000 (Dec 31, 2008) |
| Line of Credit Availability | $90,000 | N/A |
Material Changes vs. Prior Period
- Revenue: Sales decreased 4% year-over-year, attributed to the absence of special promotions that occurred in 2008 and general economic conditions, despite growth in new accounts.
- Cost of Sales: Decreased 16% to $2,570,000 due to lower fuel costs, reduced commodity prices, and renegotiated co-packing fees.
- Gross Margin: Improved significantly from 15% to 25% (an increase of $327,000), driven by price increases implemented in Q2 2008 and better management of discounts.
- Operating Expenses: Total operating expenses dropped 49% to $1,262,000. Selling and marketing expenses fell 41% due to a reduction in sales staff and travel costs. General and administrative expenses fell 55%, largely due to a one-time non-cash stock expense in 2008 that did not recur.
- Liquidity: Cash decreased by $121,000 during the quarter. Net cash used in operating activities improved dramatically to $(18,000) from $(1,496,000) in the prior year.
Outlook, Risks, and Unusual Items
- Management Outlook: Management believes the company is operating at approximately breakeven after adjusting for non-cash expenses. They anticipate profitability during the busy summer season and throughout fiscal year 2009 based on current sales run rates and improved margins.
- Capital Strategy: The company is borrowing near the maximum on its line of credit. While they prefer to wait for better stock valuation before raising equity, they may pursue a combination of equity and debt if necessary. They are also investigating improved working capital loans.
- Subsequent Event (Real Estate): In May 2009, the company entered escrow to sell two buildings in Los Angeles and simultaneously entered a 15-year leaseback agreement. Proceeds are intended to pay off the mortgage and the revolving line of credit.
- Risks: The company has an accumulated deficit of $15.4 million. Continued operating losses could negatively impact liquidity and the ability to fund expansion. There is no assurance that additional financing will be available on acceptable terms.
- Stock-Based Compensation: The company issued 127,836 shares for services ($143,000 value) and repriced 420,000 employee options to $0.75, resulting in an additional $81,000 compensation expense (with $23,000 recognized in Q1).
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the line of credit covenants, as the company is borrowing near the maximum limit ($1.27M outstanding).
- Real Estate Transaction: Confirm the closing of the building sale and leaseback in May 2009 to ensure the payoff of the mortgage and line of credit as planned.
- Seasonality: Monitor Q2 and Q3 results to validate management's claim of profitability during the "busy summer season."
- Customer Concentration: Note that two customers accounted for 55% of sales in Q1 2009; monitor for any loss of these key accounts.
- Stock Dilution: Review the impact of the recent option repricing and potential future equity raises on shareholder value.