Reed’s Inc. Announces Second Quarter Results

LOS ANGELES, Aug. 14, 2017 (GLOBE NEWSWIRE) — Reed’s, Inc. (NYSE American:REED), owner of the nation’s leading portfolio of handcrafted, all-natural beverages, today announced the financial results for its fiscal second quarter ended June 30, 2017.

Select Financial Information for Second Quarter 2017 versus Second Quarter 2016

  • Second quarter net sales revenue decreased 19% to $8.9 million from $11.0 million.
  • Net sales revenue of ‘Core Brands’ defined as Reed’s, Virgil’s and branded sparkling beverages decreased 9%.
  • Gross margin of all products decreased to 19% from 24%.
  • Total operating expenses decreased 3%.  Sales and marketing expenses decreased 24% which outpaced the decline in net sales. Delivery and handling expenses decreased 18% which were in line with the decline in volume.  General and administrative expenses increased 35%, driven primarily by employee transition costs of $183,000 and additional legal and filing costs of $117,000.
  • Interest expense and bank related charges increased to $995,000 from $416,000. The increase is primarily due to the cost of the April 21 convertible note accrued interest and debt discount amortization of $501,000.
  • Non-Cash warrant and financing costs totaled $2,321,000. This amount consists of the $978,000 cost of warrant modification and financing costs related to the convertible note, offset by a derivative gain in the second quarter of $3,299,000.

Operational and Marketing Highlights

  • Val Stalowir announced as Chief Executive Officer in July 2017.
  • Stefan Freeman announced as Chief Operating Officer in July 2017.
  • Management’s corrective operational initiatives in 2017 drove continued improvement in gross margins which were 13% in Q1, 19% in Q2 and in July reached 23%.
  • Renewed focus on core brands Reed’s and Virgil’s has reversed recent sales declines and in July posted double digit net sales growth.
  • Company believes it has regained its previously lost shelf space in the conventional channel and anticipates closing the small gap remaining in the natural channel by year end.
  • Successful Rite Aid test launch of Reed’s Extra Ginger Brew, Virgil’s Root Beer & Virgil’s Cream in 1,000+ stores results in brand’s expansion to 4,000 locations.
  • Reed’s expands its UK presence with launch of Virgil’s Root Beer, Cream and Black Cherry at 400+ Tesco locations. Tesco is the 3rd largest retailer in the world by profit.
  • Reed’s begins its renewed focus on the ‘on-premise’ channel through securing a partnership with MS Walker Fine Wine & Spirits Distributors in Massachusetts and Rhode Island.
  • Reed’s Stronger, Extra and Original authorized in planograms of 300+ stores in the Albertson’s Southwest Division including Safeway and VONS.
  • Reed’s Stronger, Extra and Premium, and Virgil’s Root Beer, Cream and Orange Cream authorized in 150+ Shaw’s stores in the Northeast.
  • Reed’s Stronger and Original Ginger Brews authorized at all 50 Vallarta Supermarkets in Southern California.
  • Reed’s Extra Ginger Brew and Virgil’s Root Beer 12 packs are now authorized at 200+ Smart and Final stores in the states of California, Nevada, Arizona, Idaho, Oregon and Washington.

Val Stalowir, CEO of Reed’s, Inc. stated, “Our second quarter 2017 results continue to reflect the Company’s operational challenges and the prior lack of focus on the core brands.  The current management team has initiated a multi-pronged turnaround plan that we believe will continue to deliver improved results in the coming quarters.  Management has successfully eliminated over 70 SKU’s since the start of 2017 which reduces the Company’s working capital needs and will allow the Company to focus all available resources on reaccelerating growth of the core product line.  A total of 71% of the volume loss during the second quarter was driven by what is now defined as ‘Non-Core’ products such as Kombucha, private label and candy. We have ramped up the Los Angeles plant to run 2 shifts 6 days a week which is significantly reducing idle plant charges and increasing core product shipments to our West Coast customers.  In July, we announced Stefan Freeman as our new Chief Operating Officer.  Stefan is evaluating our entire supply chain line by line and vendor by vendor and is developing a plan to increase efficiency and improve our margins and overall profitability.  The Company is also exploring strategies to move to a simpler, asset light operating model that would direct more resources towards sales and marketing.  Reed’s and Virgil’s are leading brands in growing categories and our plan is to capture more than our fair share of growth moving forward by bringing innovation to our iconic brands.  These initiatives include a complete brand refresh and bottle upgrade for both brands, the launch of 12oz slim cans to more effectively pursue underdeveloped channels, the renewed focus on Reed’s Ginger Brew in the bar and restaurant channel and the launch of a new and greatly improved No Sugar line of Virgil’s all-natural handcrafted sodas.  Chris Reed and his team have done an incredible job developing what I call the 2.0 of all-natural sweeteners that deliver the bold taste of full sugar with only 5 calories.  There is tremendous upside in the Reed’s and Virgil’s brands and I am confident we have the team and plans in place to begin to realize their true potential and drive improved shareholder value,” Mr. Stalowir concluded.

The Company will conduct a conference call at 5:00 PM EDT today, August 14th, to discuss its 2017 fiscal second quarter results. To participate in the call, please dial the following number 5 to 10 minutes prior to the scheduled call time:

Domestic callers should dial (888) 224-7957
International callers should dial +1 (303) 223-2697
A replay of the call will be available by the following day in the investor relations section of the Company’s website at: http://www.reedsinc.com/investors/.

   
REED’S INC.  
CONDENSED BALANCE SHEETS  
   
    June 30, 2017     December 31, 2016  
    (Unaudited)        
ASSETS                
Current assets:                
Cash   $ 251,000     $ 451,000  
Trade accounts receivable, net of allowance for doubtful accounts, returns and discounts of $282,000 and $256,000, respectively       2,730,000       2,485,000  
Inventory, net of reserve for obsolescence of $180,000 and $115,000, respectively     7,917,000       6,885,000  
Prepaid and other current assets     283,000       500,000  
Total Current Assets     11,181,000       10,321,000  
Property and equipment, net of accumulated depreciation of $5,122,000 and $4,863,000, respectively     8,250,000       7,726,000  
Brand names     805,000       805,000  
Total assets   $ 20,236,000     $ 18,852,000  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                
Current liabilities:                
Accounts payable   $ 6,690,000     $ 5,959,000  
Accrued expenses     345,000       215,000  
Advances from officers     277,000        
Line of credit     4,589,000       4,384,000  
Current portion of long term financing obligations     197,000       190,000  
Current portion of capital leases payable     171,000       183,000  
Current portion of bank notes     953,000       953,000  
Total current liabilities     13,222,000       11,884,000  
                 
Other long term liabilities                
Other liabilities     123,000       130,000  
Long term financing obligation, less current portion, net of discount of $774,000 and $825,000, respectively     1,317,000       1,363,000  
Capital leases payable, less current portion     360,000       438,000  
Bank notes, net of discount $0 and $78,000, respectively     6,365,000       5,919,000  
Convertible note, net of discount $2,975,000 and $0, respectively     501,000        
Warrant liability     1,527,000       775,000  
Total Liabilities     23,415,000       20,509,000  
                 
Stockholders’ Deficiency                
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding     94,000       94,000  
Common stock, $.0001 par value, 19,500,000 shares authorized, 14,013,378 and 13,982,230 shares outstanding     1,000       1,000  
Additional paid in capital     30,294,000       29,971,000  
Accumulated deficit          (33,568,000 )     (31,723,000 )
Total stockholders’ deficiency     (3,179,000 )     (1,657,000 )
Total liabilities and stockholders’ deficiency   $ 20,236,000     $ 18,852,000  
                 

   
REED’S, INC.  
CONDENSED STATEMENTS OF OPERATIONS  
For the Six Months Ended June 30, 2017 and 2016  
(Unaudited)  
   
    Three months ended     Six months ended  
    2017     2016     2017     2016  
Net sales   $ 8,864,000     $ 10,992,000     $ 17,159,000     $ 20,996,000  
Cost of goods sold     7,181,000       8,390,000       14,391,000       16,501,000  
Gross profit     1,683,000       2,602,000       2,768,000       4,495,000  
                                 
Operating expenses:                                
Delivery and handling expenses     869,000       1,064,000       1,612,000       1,913,000  
Selling and marketing expense     728,000       954,000       1,516,000       1,995,000  
General and administrative expense     1,259,000       931,000       2,297,000       2,136,000  
Total operating expenses     2,856,000       2,949,000       5,425,000       6,044,000  
                                 
Loss from operations   $ (1,173,000 )   $ (347,000 )   $ (2,657,000 )   $ (1,549,000 )
                                 
Interest expense     (995,000 )     (416,000 )     (1,513,000 )     (794,000 )
Financing costs and warrant modification     (978,000 )           (978,000 )      
Change in fair value of warrant liability     3,299,000             3,308,000        
Net income (loss) basic and diluted     153,000       (763,000 )     (1,840,000 )     (2,343,000 )
                                 
Preferred stock dividends     (5,000 )     (5,000 )     (5,000 )     (5,000 )
Net income (loss) attributable to common stockholders     $ 148,000     $ (768,000 )   $ (1,845,000 )   $ (2,348,000 )
                                 
Weighted average number of shares outstanding – basic     14,013,378       13,184,000       13,982,230       13,184,000  
Income (loss) per share – basic and diluted   $ 0.01     $ (0.06 )   $ (0.13 )   $ (0.18 )
                                 

   
REED’S, INC.  
CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ DEFICIENCY  
For the Six Months Ended June 30, 2017  
(Unaudited)  
   
    Common Stock     Preferred Stock     Additional
Paid
    Accumulated     Total
Shareholder
 
    Shares     Amount     Shares     Amount     In Capital     Deficit     Deficiency  
Balance, December 31, 2016     13,982,230     $   1,000         9,411     $   94,000     $ 29,971,000     $  (31,723,000 )   $ (1,657,000 )
                                                         
Fair value of vesting of options to employees and directors                                       228,000               228,000  
Fair value of common shares issued for services     29,508                               90,000               90,000  
Preferred dividends paid in common stock     1,640                               5,000       (5,000 )      
Net loss                                             (1,840,000 )     (1,840,000 )
Balance, June 30, 2017     14,013,378     $ 1,000       9,411     $ 94,000     $ 30,294,000     $ (33,568,000 )   $ (3,179,000 )
                                                         

   
REED’S, INC.  
CONDENSED STATEMENTS OF CASH FLOWS  
For the Six Months Ended June 30, 2017 and 2016  
(Unaudited)  
   
    6/30/2017     6/30/2016  
Cash flows from operating activities:                
Net loss   $  (1,840,000 )   $  (2,343,000 )
Adjustments to reconcile net loss to net cash used in operating activities:                  
Depreciation and amortization     813,000       477,000  
Increase (decrease) in allowance for doubtful accounts     26,000       (50,000 )
Fair value of vested stock options issued to employees and directors     228,000       302,000  
Fair value of common stock issued for services     90,000        
Fair value of warrants recorded as financing costs     978,000        
Change in fair value of warrant liability     (3,308,000 )      
Changes in operating assets and liabilities:                
Accounts receivable     (271,000 )     (600,000 )
Inventory     (1,032,000 )     204,000  
Prepaid Inventory     217,000       (529,000 )
Prepaid expenses and other assets           196,000  
Accounts payable     731,000       (1,785,000 )
Accrued expenses     159,000       24,000  
Accrued interest on convertible note     76,000        
Payment of other long term obligations     (37,000 )      
Net cash provided (used) by operating activities     (3,170,000 )     (4,104,000 )
Cash flows from investing activities:                
Purchase of property and equipment     (60,000 )     (78,000 )
Net cash used in investing activities     (60,000 )     (78,000 )
Cash flows from financing activities:                
Advances from officers     500,000        
Repayment of amounts due to officers     (223,000 )      
Proceeds from sale of common stock           2,239,000  
Proceeds from issuance of convertible note     3,083,000        
Proceeds from stock option and warrant exercises           45,000  
Principal payments on capital expansion loan     (355,000 )      
Principal repayments on long term financial obligation     (90,000 )     (76,000 )
Principal repayments on capital lease obligation     (90,000 )     (87,000 )
Net repayments on existing line of credit     205,000       1,214,000  
Net cash used in financing activities     3,030,000       3,335,000  
Net decrease in cash     (200,000 )     (847,000 )
Cash at beginning of period     451,000       1,816,000  
Cash at end of period   $ 251,000     $ 969,000  
                 
Supplemental disclosures of cash flow information:                
Cash paid during the period for:                
Interest   $ 861,000     $ 843,000  
Non Cash Investing and Financing Activities                
Property and equipment acquired through capital expansion loan   $ 723,000     $ 1,307,000  
Property and equipment acquired through capital lease obligations         $ 86,000  
Fair value of warrants granted as debt discount           $ 54,000  
Dividends payable in common stock   $ 5,000     $ 5,000  
Debt discount on note recognized as warrant liability   $ 3,083,000        
                 

   
MODIFIED EBITDA SCHEDULE  
   
    Three months ended
June 30,
 
    2017     2016  
    (unaudited)     (unaudited)  
Net income (loss)   $ 153,000     $     (763,000 )
                 
Modified EBITDA adjustments:                
Depreciation and amortization     194,000       219,000  
Interest expense     995,000       416,000  
Stock option and warrant compensation       178,000       133,000  
Financing costs     978,000        
Change in fair value of warrant liability      (3,299,000 )      
Total EBITDA adjustments   $ (954,000 )   $ 768,000  
                 
Modified EBITDA   $ (801,000 )   $ 5,000  
                 

About Reed’s, Inc.
Established in 1989, Reed’s has sold over 500 million bottles of its category winning hand-brewed craft beverages. Reed’s is America’s #1 selling Ginger Beer brand and has been the leader and innovator in the ginger beer category for decades. The company is the maker of some of the best-selling all-natural, handcrafted beverages in the natural and specialty foods channel. Reed’s portfolio is sold in well over 20,000 natural, specialty, mainstream and independent supermarkets nationwide. Additionally, Reed’s products are sold through accounts within the drug, club, mass, and convenience store channels as well as on-premise accounts that include bars and restaurants nationwide. The Reed’s and Virgil’s brands can also be found in a growing number of international markets. Its seven award-winning non-alcoholic Ginger Brews are unique in the beverage industry. Reed’s Ginger Brews are hand brewed, not formulated and use more than a million pounds of fresh ginger combined with spices and fruit juices every year. Reed’s Ginger Brews deliver a delicious and intense ginger bite and burn that can only come from fresh ginger root. The company applied its same handcrafted brewed approach and focus on high quality ingredients to its award-winning Virgil’s Root Beer. The Virgil’s line of all-natural, handcrafted beverages is the top-selling craft soda in the natural food channel and is one of the leading brands within the fast-growing craft soda category.

For more information about Reed’s, please visit the Company’s website at: http://www.reedsinc.com or call 800-99-REEDS.

Follow Reed’s on Twitter at http://twitter.com/reedsgingerbrew

Reed’s Facebook Fan Page at https://www.facebook.com/ReedsGingerBrew

SAFE HARBOR STATEMENT

Some portions of this press release, particularly those describing Reed’s goals and strategies, contain “forward-looking statements.” These forward-looking statements can generally be identified as such because the context of the statement will include words, such as “expects,” “should,” “believes,” “anticipates” or words of similar import. Similarly, statements that describe future plans, objectives or goals are also forward-looking statements. While Reed’s is working to achieve those goals and strategies, actual results could differ materially from those projected in the forward-looking statements as a result of a number of risks and uncertainties. These risks and uncertainties include difficulty in marketing its products and services, maintaining and protecting brand recognition, the need for significant capital, dependence on third party distributors, dependence on third party brewers, increasing costs of fuel and freight, protection of intellectual property, competition and other factors, any of which could have an adverse effect on the business plans of Reed’s, its reputation in the industry or its expected financial return from operations and results of operations. In light of significant risks and uncertainties inherent in forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by Reed’s that they will achieve such forward-looking statements. For further details and a discussion of these and other risks and uncertainties, please see our most recent reports on Form 10-K and Form 10-Q, as filed with the Securities and Exchange Commission, as they may be amended from time to time. Reed’s undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.

CONTACT: Reed's, Inc. Investor Relations (310) 217-9400 ext. 6 Email: ir@reedsinc.com www.reedsinc.com