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First quarter gross profit doubled as gross margin more than doubled to 27.8%
Continued progress on Transformation and Value Creation Plan
Launch of Virgil’s Zero Sugar line underway, shipping to distributors and retailers
LOS ANGELES, May 14, 2018 (GLOBE NEWSWIRE) -- Reed’s Inc. (NYSE American:REED), owner of the nation’s leading portfolio of handcrafted, all-natural beverages, today announced financial results for the fiscal first quarter 2018 ended March 31, 2018.
Financial Highlights for the First Quarter of 2018
“We are pleased with our ability to hold net revenue despite our SKU rationalization and reduced marketing and promotional support during the quarter. We also continue to make progress on our transformation and value creation plan,” stated Val Stalowir CEO of Reed’s, Inc. “The benefits of our plan were clearly evident in the significant gross margin expansion during the first quarter. Our new glass contract with Owen-Illinois drove a majority of the incremental 650 basis points of improvement in gross margin from the fourth quarter of 2017 and contributed to a more than doubling of gross margin year-over-year, delivering 1510 basis points of improvement. We continue to see opportunities to improve gross margin as our business model is further optimized and transitioned to an asset-light sales and marketing model. We are making good progress on the sale of our Los Angeles manufacturing facility and are in the late stages of finalizing a new credit agreement with much improved terms and lower interest rates.”
“We have officially launched the Virgil’s Zero Sugar line and have started shipping product to distributors and retailers. We are very encouraged by the initial response from retailers and we are in the process of increasing our level of sales and promotional spend to support the launch. Phase 2 of our transformation plan will be investing in sales and marketing programs to drive revenue growth and brand value. We are well into the development phase of these initiatives and should start to see benefits from their implementation by the end of Q2. We will continue to execute against our transformation plan and are pleased with the results we are delivering,” Stalowir concluded.
Financial Overview for the First Quarter of 2018 Compared to the First Quarter of 2017
During the first quarter of 2018, net sales of $8.3 million were consistent with the same period in 2017, as increased average selling prices as a result of a price increase in the third quarter of 2017 were offset by lower volumes that resulted from reductions in promotional spending versus the prior year.
Gross profit during the first quarter of 2018 more than doubled to $2.3 million compared to the same period in 2017. Gross margin was 27.8% of net sales during the first quarter of 2018 compared to 12.7% of net sales in the same period in 2017, and up from 21.3% the fourth quarter of 2017. The 650 basis point improvement in gross margin as a percentage of revenue compared to the fourth quarter of 2017 was primarily driven by the benefits of the new glass supplier contract with Owens-Illinois. On a year over year basis, lower glass costs contributed to roughly 900 basis points of the improvement in gross margin, with the remainder primarily reflecting the impact of higher average selling prices and SKU rationalization.
Delivery and handling costs increased 28.7% to $1.0 million during the first quarter of 2018 driven by one-time transition charges to a new warehouse and logistics partner and a general increase in freight rates. Selling and marketing costs increased 28.6% to $1.0 million during the first quarter of 2018 due to investments related to the development of a marketing function with agency support resources. General and administrative expenses increased 31.3% to $1.5 million during the first quarter of 2018 from $1.1 million in the prior year period, primarily as a result of non-cash equity compensation and shareholder related activities.
Operating loss narrowed to $1.1 million during the first quarter of 2018 from $1.6 million in the prior year period, or a net $0.5 million improvement.
Interest expense increased to $0.5 million during the first quarter of 2018 from $0.4 million during the first quarter of 2017.
Net loss narrowed to $1.6 million, or $0.06 per share in the first quarter of 2018, from a loss of $2.0 million, or $0.14 per share in the first quarter of 2017.
Modified EBITDA loss narrowed to $0.7 million in the first quarter of 2018 from $1.3 million in the first quarter of 2017.
Liquidity and Cash Flow
During the first quarter, the Company used $4.6 million of cash in operating activities compared to $0.5 million of cash generated from operating activities in the prior year period. The cash outlay was primarily used to pay stretched payables and pay down the high interest rate working capital line as described in the rights offering that funded on December 28, 2017. As of March 31, 2018, the Company had cash and cash equivalents of $3.4 million and $4.4 million of undrawn availability on its working capital line of credit.
First Quarter 2018 Earnings Call Details
The Company will conduct a conference call at 1:30 pm Pacific Time (4:30 pm Eastern Time) today, May 14, 2018 to discuss its first quarter 2018 results. To participate in the call, please dial 1-(800) 754-1336 (U.S.); or 1-(212) 231-2928 (International). Please dial in at least five minutes before the start of the conference call. A replay of the conference call will be available the following day on the Company’s website by logging on via the “Investors” section at www.reedsinc.com.
About Reed’s, Inc.
Established in 1989, Reed’s has sold over 500 million bottles of its category leading natural, handcrafted 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. Virgil’s is America’s #1 selling independent, full line of natural craft sodas. The Reed’s Inc. portfolio is sold in over 30,000 retail doors across the natural, specialty, grocery, drug, club and mass channels nationwide. Reed’s Ginger Beers are unique to the category because of the proprietary process of hand brewing its award-winning products using fresh organic ginger combined with natural spices and fruit juices. Reed’s Ginger Beers come in three levels of increasing ginger intensity that deliver a delicious and powerful ginger bite and burn that only comes from fresh ginger root. The Company uses this same handcrafted approach and dedication to the highest quality ingredients in its award-winning Virgil’s line of great tasting, bold flavored craft sodas.
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, 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.
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/drinkreeds
Reed’s Facebook Fan Page at https://www.facebook.com/reedsgingerbrew
Scott Van Winkle, ICR
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2018 and 2017
|Cost of goods sold||5,985,000||7,239,000|
|Delivery and handling expense||956,000||743,000|
|Selling and marketing expense||1,013,000||788,000|
|General and administrative expense||1,459,000||1,111,000|
|Total operating expenses||3,428,000||2,642,000|
|Loss from operations||(1,125,000||)||(1,586,000||)|
|Change in fair value of warrant liability||(5,000||)||9,000|
|Net loss attributable to common stockholders||$||(1,615,000||)||$||(1,993,000||)|
|Loss per share – basic and diluted||$||(0.06||)||$||(0.14||)|
|Weighted average number of shares outstanding – basic and diluted||24,989,863||13,982,230|
As of March 31, 2018 and December 31, 2017
|March 31, 2018||December 31, 2017|
|Accounts receivable, net of allowance for doubtful accounts and returns and discounts of $569,000 and $601,000, respectively||2,464,000||2,691,000|
|Inventory, net of reserve for obsolescence of $451,000 and $509,000, respectively||6,835,000||5,931,000|
|Prepaid expenses and other current assets||316,000||199,000|
|Total Current Assets||12,991,000||20,948,000|
|Property and equipment, net of accumulated depreciation and impairment reserves of $9,506,000 and $9,339,000, respectively||203,000||353,000|
|Equipment held for sale||2,184,000||2,370,000|
|LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)|
|Advances from officers||-||277,000|
|Line of credit||-||3,301,000|
|Current portion of capital leases payable||186,000||198,000|
|Current portion of long term financing obligation||231,000||222,000|
|Total current liabilities||11,607,000||18,645,000|
|Capital leases payable, less current portion||243,000||236,000|
|Long term financing obligation, less current portion, net of discount of $687,000 and $714,000, respectively||1,219,000||1,250,000|
|Convertible note to a related party||3,802,000||3,690,000|
|Other long term liabilities||104,000||111,000|
|Stockholders’ equity (deficit):|
|Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding||94,000||94,000|
|Common stock, $.0001 par value, 40,000,000 shares authorized, 25,036,043 and 24,619,591 shares issued and outstanding, respectively||2,000||2,000|
|Common stock issuable, 838,140 and 400,000 shares, respectively||84,000||680,000|
|Additional paid in capital||50,703,000||49,833,000|
|Total stockholders’ equity (deficit)||(833,000||)||508,000|
|Total liabilities and stockholders’ equity (deficit)||$||16,183,000||$||24,476,000|
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2018 and 2017
|Cash flows from operating activities:|
|Adjustments to reconcile net loss to net cash used in operating activities:|
|Amortization of debt discount||28,000||73,000|
|Loss on sale of property and equipment||26,000||-|
|Fair value of vested stock options issued to employees||161,000||140,000|
|Fair value of common stock issuable for services||113,000||-|
|(Decrease) increase in allowance for doubtful accounts||(32,000||)||26,000|
|(Decrease) increase in inventory reserve||(58,000||)||50,000|
|(Decrease) increase in fair value of warrant liability||5,000||(9,000||)|
|Accrual of interest on Convertible Note Payable||112,000||-|
|Changes in operating assets and liabilities:|
|Prepaid expenses and other assets||(117,000||)||124,000|
|Other long term obligations||(7,000||)||(31,000||)|
|Net cash used in operating activities||(4,636,000||)||527,000|
|Cash flows from investing activities:|
|Proceeds from sale of property and equipment||69,000||0|
|Purchase of property and equipment||-||(41,000||)|
|Net cash provided by (used in) investing activities||69,000||(41,000||)|
|Cash flows from financing activities:|
|Repayments on line of credit||(3,301,000||)||(854,000||)|
|Principal repayments on capital expansion loan||(507,000||)||(177,000||)|
|Principal repayments on long term financial obligation||(50,000||)||(44,000||)|
|Net borrowings (repayments) on advances||(277,000||)||380,000|
|Principal repayments on capital lease obligation||(49,000||)||(45,000||)|
|Net cash used in financing activities||(4,184,000||)||(740,000||)|
|Net decrease in cash||(8,751,000||)||(254,000||)|
|Cash at beginning of period||12,127,000||451,000|
|Cash at end of period||$||3,376,000||$||197,000|
|Supplemental disclosures of cash flow information:|
|Cash paid during the period for:|
|Non Cash Investing and Financing Activities|
|Property and equipment acquired through capital expansion loan||$||-||$||288,000|
|Property and equipment acquired through capital lease||$||44,000||$||-|
|Vendor credits issued for fixed asset purchases||$||108,000||$||-|
|Assets sold to third parties at cost||$||69,000||$||-|
NON-GAAP FINANCIAL MEASURE
Modified EBITDA is used as a supplemental measure of the Company’s performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP or as an alternative to cash flow from operating activities as a measure of liquidity. The Company defines Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, impairments and changes in fair value of warrant expenses. Set forth below is a reconciliation of Modified EBITDA to net income (loss) for the three month periods ended March 31, 2018 and 2017:
|Modified EBITDA adjustments:|
|Depreciation and amortization||177,000||121,000|
|Stock option and warrant compensation||274,000||140,000|
|Change in fair value of warrant liability||(5,000||)||(9,000||)|
|Total EBITDA adjustments||$||931,000||$||668,000|