REED - Reed's Inc. Announces Fourth Quarter and Full Year 2018 Financial Results

Key transformation initiatives completed during 2018 with investments in sales and marketing accelerating in 2019

Net sales grew 1% during 2018 driven by core brand gross sales growth of 8%, including over 30% growth of the Virgil’s brand in the fourth quarter

Gross profit increased 55% during 2018 with gross margin of 28%

Significant new product innovation rolling out in the second quarter of 2019

NORWALK, Conn., March 28, 2019 (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 fourth quarter and full year ended December 31, 2018.

Highlights for the Fourth Quarter of 2018

• Net Sales were $9.6 million in the fourth quarter and consistent with the prior year, while core brand gross sales increased 10% driven by strong growth of the Virgil’s brand, which increased 33%;
• Gross profit increased 29% to $2.7 million from $2.1 million in the prior year period. Gross margin increased 620 basis points to 28% from 21% in the prior year period;
• Operating loss narrowed to $2.1 million from $6.1 million in the fourth quarter of 2017, which included a $3.9 million asset impairment charge in anticipation of plant sale. Fourth quarter 2018 operating loss included $0.6 million of incremental investment in sales and marketing to support new product launches and future sales growth;
• Net loss was $2.7 million or $0.10 per share compared to $10.9 million or $0.68 per share in the prior year period; and
• Completed sale of manufacturing facility and private label business, transitioning to asset-light sales and marketing model.

Highlights for the Full Year of 2018

• Net Sales grew 1% to $38.1 million from $37.7 million in the prior year, reflecting an 8% increase in gross sales of core brands, partially offset by expected declines in non-core brands and discontinued items. Favorable pricing along with Virgil’s zero sugar can innovation were key drivers of core brand sales growth;
• Gross profit increased 55% to $10.7 million from $6.9 million in the prior year period. Gross margin increased 975 basis points to 28% from 18% in the prior year period;
• Operating loss narrowed to $8.1 million from $11.7 million in the prior year period; and
• Net loss was $10.3 million or $0.41 per share compared to $18.4 million or $1.24 per share in the prior year period.

Management Commentary

“2018 was a significant year for Reed’s as we completed the key components of our transformation plan, transitioned to an asset-light sales and marketing model, accelerated innovation and laid the groundwork to increase investment behind our brands and drive sales growth,” stated Val Stalowir CEO of Reed’s, Inc. “The introduction of Virgil’s Zero Sugar in cans has returned the brand to strong double-digit growth, including 33% gross sales growth during the fourth quarter. Additionally, we have completed the refresh of the Reed’s brand with significantly enhanced package designs, an updated website and social media platforms. We completed the development and preparation for the launch of Reed’s in cans and our newest innovation of Reed’s Zero Sugar, both of which have begun to ship in the first quarter. We are looking forward to the launch of our first ever 360 degree consumer marketing campaign in five key markets on May 1^st. In the second quarter, we will begin testing Reed’s ready-to-drink Mules and Reed’s Wellness Ginger Beer with Hemp Extract. We anticipate accelerated growth for the Reed’s brand and forecast 20% to 30% growth of our core brands during 2019. We generated a nearly 1,000 basis point increase in our gross margins during 2018 and anticipate further improvement as 2019 progresses as we capture scale efficiencies in cans and the elimination of idle plant costs as we have exited our Los Angeles production facility. As a result of our very successful recent follow-on offering, where we raised $16.2 million of gross proceeds, we are well capitalized to support our growth initiatives.”

Mr. Stalowir continued, “We are confident we now have the necessary elements in place—the right team, partners, innovative products and capital—to drive significant volume growth and shareholder value in 2019 and beyond.”

Financial Overview for the Fourth Quarter of 2018 Compared to the Fourth Quarter of 2017

During the fourth quarter of 2018, net sales were consistent with the prior year at $9.6 million, while core brand gross sales increased 10% compared to the same period in 2017. The core brand growth was driven by 33% growth of the Virgil’s brand, including continued momentum of the Virgil’s Zero Sugar offering. The core brand growth was offset by lower sales of exited and non-core products.

Gross profit during the fourth quarter of 2018 increased 29% to $2.7 million compared to the same period in 2017. Gross margin was 28% of net sales during the fourth quarter of 2018 compared to 21% of net sales in the same period in 2017. The 620 basis point year over year improvement in gross margin was primarily driven by benefits of a new glass supplier contract with Owens-Illinois, higher average selling prices and SKU rationalization.

Delivery and handling costs increased 56% to $1.9 million during the fourth quarter of 2018 compared to the same period in 2017. As a percentage of net sales, delivery and handling costs increased 710 basis points compared to the prior year, primarily as a result of an industry wide increase in freight rates, transition charges from and to new warehouse partners, sole sourced can production on the East Coast and higher inventory levels.

Selling and marketing costs increased 89% to $1.3 million during the fourth quarter of 2018. As a percentage of net sales, selling and marketing costs increased 630 basis points to 13%. The increase was driven by the establishment of an internal marketing department, the development of outside creative, public relations and support agencies, and significant investment in new product initiatives. The sales and marketing is consistent with the Company’s strategy to refresh the brands, launch new products and packaging into the market, and lay the ground work to re-accelerate growth of the core brands.

General and administrative expenses decreased to $1.5 million during the fourth quarter of 2018 compared to $2.4 million in the prior year period. General and administrative expenses in the prior year period included $0.8 million related to increased share-based compensation associated with the restructuring of the Board of Directors and $0.2 million of bad debt expense associated with an exit from a co-packer.

Operating loss during the fourth quarter of 2018 narrowed to $2.1 million from $6.1 million in the prior year period.

Interest expense decreased to $0.7 million during the fourth quarter of 2018 from $1.2 million during the fourth quarter of 2017. During the fourth quarter of 2018, the Company recorded a benefit of $0.1 million related to the change in fair value of warrant liability, compared to $0 in the prior year. Additionally, in the fourth quarter of 2017, the Company incurred approximately $3.6 million related to costs associated with the extinguishment of a convertible note.

Net loss during the fourth quarter of 2018 was $2.7 million, or $0.10 per share, compared to $10.9 million, or $0.68 per share in the fourth quarter of 2017. The net loss in 2017 included a $3.9 million impairment in anticipation of the sale of the Los Angeles production facility.

Financial Overview for the Full Year of 2018 Compared to the Full Year of 2017

During the full year of 2018, net sales increased 1% to $38.1 million, while core brand gross sales increased 8% compared to the same period in 2017. The core brand growth was driven by 19% growth of Virgil’s brand in volume and favorable pricing.

Gross profit during the full year of 2018 increased 55% to $10.7 million compared to the same period in 2017. Gross margin was 28% of net sales during the full year of 2018 compared to 18% of net sales in the same period in 2017. The 975 basis point improvement was primarily driven by the benefits of a new glass supplier contract with Owens-Illinois, higher average selling prices and SKU rationalization.

Delivery and handling costs increased 39% to $5.5 million during the full year of 2018 compared to the same period in 2017. As a percentage of net sales, delivery and handling costs increased 395 basis points compared to the prior year, primarily as a result of an industry wide increase in freight rates, transition charges from and to new warehouse partners, sole sourced can production on the East Coast and higher inventory levels.

Selling and marketing costs increased 62% to $4.9 million during the full year of 2018. As a percentage of net sales, selling and marketing costs increased 480 basis points to 13%. The increase was driven by the establishment of an internal marketing department and the development of outside creative, public relations and support agencies, and significant investment in new product initiatives. The increased investment in sales and marketing is consistent with the Company’s strategy to refresh the brands, launch new products and packaging into the market, and lay the ground work to re-accelerate growth of the core brands.

General and administrative expenses increased to $8.4 million during the full year of 2018 compared to $5.8 million in the prior year period, primarily as a result of additional non-cash stock option expense ($1.1 million), transition and severance expenses associated with upgrading the Company’s human resources capabilities and the corporate relocation to Norwalk, CT ($0.9 million) and bonus accruals ($0.5 million).

Operating loss during the full year of 2018 narrowed to $8.1 million from $11.7 million in the prior year period.

Interest expense decreased to $2.2 million during the full year of 2018 from $3.5 million during the prior year period.

Net loss during the full year of 2018 was $10.3 million, or $0.41 per share, compared to $18.4 million, or $1.24 per share in the fourth quarter of 2017.

Liquidity and Cash Flow

During the full year of 2018, the Company used $9.3 million of cash in operating activities compared to $3.4 million of cash used in operating activities in the prior year period. The increase in cash used in operating activities includes cash used to pay down stretched payables during the first quarter of 2018 as well as higher inventory levels to support the LA plant exit and expected growth. On October 9, 2018, the Company announced it had successfully refinanced its outstanding credit facilities. The refinancing, led by Rosenthal & Rosenthal, strengthens the Company’s financial profile, significantly reduces debt service and lowers borrowing costs. The $13.0 million asset based loan replaced the Company’s existing credit agreements with PMC.

Follow-on Offering

On February 20, 2019, the Company closed an underwritten public offering of 7.7 million shares of common stock, including 1.0 million shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering price of $2.10 per share. The gross proceeds to the Company from this offering were approximately $16.2 million, before deducting underwriting discounts and commissions and other offering expenses. The company intends to use the net proceeds from the offering to fund accelerated growth of its business, support new product launches, invest in sales and marketing programs, working capital, and for general corporate purposes.

Sale of Los Angeles Facility

On December 31, 2018, the Company completed the sale of its Los Angeles beverage manufacturing operations, equipment and private label business. After an extensive sale process led by Gordon Brothers, Reed’s sold the beverage manufacturing equipment and private label beverage business for a purchase price of $1.25 million in cash pursuant to an asset purchase agreement with California Custom Beverage, an entity owned by Chris Reed, founder, CIO and board member of Reed’s. In conjunction with the sale, the buyer assumed the Company’s lease obligation, relieving the Company of annual lease payments of $0.4 million. This sale marked the completion of the final major initiative in optimizing the company’s operating model.  

Full Year 2019 Guidance

The Company is reiterating the annual guidance previously stated in the prospectus supplement released in conjunction with the Company’s secondary offering filed on February 19, 2019. The Company expects to generate revenue in the range of $42 million to $44 million for the full year 2019 and anticipates year-over-year core brand growth of 20% to 30%. The Company anticipates a gross margin of between 28% to 32% for the first half of 2019 and a gross margin of 32% or greater for the second half of 2019.

Fourth Quarter and Full Year 2018 Earnings Call Details

The Company will conduct a conference call at 4:30 pm Eastern Time today, March 28, 2019 to discuss its fourth quarter and full year 2018 results. This conference call can be accessed via a link on Reed's investor website at http://investor.reedsinc.com/ under the "Events & Presentations" section or directly at http://public.viavid.com/index.php?id=133576. To listen to the live call over the Internet, please go to Reed's website at least fifteen minutes early to register, download and install any necessary audio software. Additionally, the call may be accessed with the toll-free dial-in number, 1-(877) 425-9470 (U.S.); or 1-(201) 389-0878 (International). Please dial in at least five minutes before the start of the conference call.

A replay of the webcast will be archived on the Company’s website under the “Investors” section at www.reedsinc.com for approximately 90 days.

About Reed’s, Inc.:

Established in 1989, Reed's is America's best-selling Ginger Beer brand and has been the leader and innovator in the ginger beer category for decades. Virgil's is America's best-selling independent, full line of natural craft sodas. The Reed's Inc. portfolio is sold in over 30,000 retail doors nationwide. Reed's Ginger Beers are unique due to the proprietary process of using fresh ginger root combined with a Jamaican inspired recipe of natural spices and fruit juices. The Company uses this same handcrafted approach in its award-winning Virgil's line of great tasting, bold flavored craft sodas.

For more information about Reed’s, please visit the Company’s website at: http://www.drinkreeds.com or call 800-99-REEDS. Follow Reed’s on Twitter, Instagram, and Facebook @drinkreeds.

For more information about Virgil’s please visit Virgil’s website at: http://www.virgils.com. Follow Virgil’s on Twitter and Instagram @drinkvirgils and on Facebook @drinkvirgilssoda.

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.

CONTACTS:

Investor Relations
Scott Van Winkle, ICR
(800) 997-3337 Ext 6
Or (617) 956-6736
Email: ir@reedsinc.com
www.reedsinc.com

Public Relations and Media
Carina Troy, 360PR+
(347) 763-6555
Email: ctroy@360pr.plus