GlobeNewswire Inc | Aug 10, 2020 04:06PM EDT

August 10, 2020

Net sales increased 14%

Gross Margin increased 350 basis points

Maintains fiscal 2020 outlook

NORWALK, Conn., Aug. 10, 2020 (GLOBE NEWSWIRE) -- Reeds Inc. (Nasdaq:REED), owner of the nations leading portfolio of handcrafted, all-natural beverages, today announced financial results for the fiscal second quarter ended June 30, 2020.

Highlights for the Second Quarter of 2020

-- Net sales increased 14% to $10.9 million in the second quarter compared to $9.5 million in the prior year. The increase compared to the prior year reflects increased sales of both the Reeds and Virgils brands, including impact from recent launches of new product innovation. -- Core brand gross sales increased 14% versus prior year period primarily driven by strong 19% volume growth of the Reeds brand; -- Gross profit increased 31% to $3.0 million compared to $2.3 million in the prior year period. Gross margin increased 350 basis points to 27.5%; -- Operating loss narrowed to $1.4 million compared to $4.1 million in the second quarter of 2019; -- Net loss improved to $1.8 million, or $0.03 per share, compared to $4.5 million, or $0.13 per share, in the prior year period; and -- Non-GAAP Modified EBITDA loss improved to $1.4 million in the second quarter of 2020 compared to a Modified EBITDA loss of $3.4 million in the prior year.

Management Commentary

We are pleased with our results in the second quarter driving 14% net sales growth, further building on momentum from the beginning of the year despite the inherent operating challenges we continue to face from the COVID-19 global pandemic. We saw strong demand and growth of our core brand products increasing 14% in the second quarter as a result of increased demand of all SKUs as well as positive impact from new product launches. We continue to see a positive response to our Reeds Real Ginger Ale, Reeds Extra Zero Sugar, and Reeds Wellness Ginger Shots as well as an encouraging initial response to our new Ultimate Ready-to-Drink Mule With A Real Ginger Kick, which launched late in the quarter. COVID-19 has impacted the pace of new distribution for new products as retailers have delayed resets as they focus on keeping up with increased demand and we expect to be in a position to fulfill our new product distribution opportunities as the retail environment normalizes, stated Norman E. Snyder, Chief Executive Officer of Reeds, Inc. Our efforts to build out our supply chain and co-packer network was a vital aspect of our success during the second quarter as the entire industry is facing increased demand for supplies with a reduced work force as a result of social distancing measures impacting capacity across the industry. Further, supply of cans and bottles, and some ingredients, has tightened given these industry dynamics impacting the pace of our gross margin expansion. However, we continued to thrive in the challenging environment. Additionally, we worked hard this quarter to moderate spending as we navigated these unchartered waters of the pandemic, improving our cash flow profile and improving financial flexibility. We remain confident with our brands and are so proud of the Reeds team and our partners who are working diligently to make sure we can deliver on the significant opportunity ahead of us despite the challenges of operating during COVID-19.

Financial Overview for the Second Quarter of 2020 Compared to the Second Quarter of 2019

During the second quarter of 2020, net sales increased 14% to $10.9 million compared with $9.5 million in the prior year. Core brand gross sales increased 14% compared to the same period in 2019, driven by 19% volume growth of the Reeds brand, with growth across all products and building contribution from recent launches of new product innovation.

Gross profit during the second quarter of 2020 increased 31% to $3.0 million compared to the same period in 2019. The increase in gross profit reflects increased revenue during the quarter driven by strong volume growth of the Reeds brand. Gross margin increased 350 basis points to 27.5% from 24.0% in the prior year period.

Delivery and handling costs increased 3% to $1.5 million during the second quarter of 2020 compared to the same period in 2019. As a percentage of net sales, delivery and handling costs decreased 150 basis points compared to the prior year, reflecting improved logistical staging of inventory partially offset by elevated costs due to market forces impacted by COVID-19.

Selling and marketing costs decreased 50% to $1.6 million during the second quarter of 2020. As a percentage of net sales, selling and marketing costs decreased to 14.6% from 33.7% in the prior year period. The decrease was primarily a result of programs offered in the second quarter of 2019 that were not implemented in the second quarter of 2020.

General and administrative expenses (G&A) decreased 23% to $1.3 million during the second quarter of 2020 compared to $1.7 million in the prior year period. The decrease in general and administrative expenses compared to the prior year period was primarily related to reduced non-cash stock-based compensation including the impact of the exit of the Los Angeles facility and reduction of temporary staff.

Operating loss during the second quarter of 2020 narrowed to $1.4 million from $4.1 million in the prior year period.

Interest expense of $0.3 million during the second quarter of 2020 was consistent with the second quarter of 2019.

Net loss during the second quarter of 2020 was $1.8 million, or $0.03 per share, compared to $4.5 million, or $0.13 per share in the second quarter of 2019.

Modified EBITDA loss was $1.4 million in the second quarter of 2020 compared to a loss of $3.4 million in the second quarter of 2019.

Liquidity and Cash Flow

During the second three months of 2020, the Company used $5.0 million of cash in operating activities compared to $11.5 million of cash used in operating activities in the prior year period. The decrease in cash used in operating activities during the second quarter of 2020 relates primarily to a lower net loss and reduced spending in the quarter. As of June 30, 2020, the Company had $6.7 million of available borrowing capacity on its revolving line of credit.

Full Year 2020 Guidance

The Company is maintaining its fiscal 2020 outlook. The Company continues to expect to generate core brand growth of approximately 10% and continues to anticipate a gross margin of 32% or greater for the full year 2020. The primary risk to gross margin guidance is the level of ingredient, packaging and production costs, which are difficult to forecast given the impact to industry-wide costs as a result of COVID-19. Fiscal 2020 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19. The COVID-19 pandemic and its related impacts create many incremental potential business risks, including potential impacts to the Companys ability to access raw materials, production, transportation and/or other logistics needs, as well as potential inflation related to all aspects of supply chain and logistics, which cannot be reasonably estimated and are not factored into current fiscal 2020 guidance.

Second Quarter 2020 Earnings Call Details

The Company will conduct a conference call at 4:30 pm Eastern Time today, August 10, 2020 to discuss its second quarter 2020 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=140757. 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 fifteen minutes before the start of the conference call due to increased demand for conference calls.

A replay of the webcast will be archived on the Companys website at http://investor.reedsinc.com under the "Events & Presentations" section for approximately 90 days.

About Reeds, 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 35,000 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 Reeds, please visit the Companys website at: http://www.drinkreeds.com or call 800-99-REEDS. Follow Reeds on Twitter, Instagram, and Facebook @drinkreeds.

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

Safe Harbor Statement

Some portions of this press release, particularly those describing Reeds 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 Reeds 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 Reeds, 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 Reeds 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. Reeds undertakes no obligation to publicly update any forward-looking statement, whether as a result of new information, future events, or otherwise.

CONTACTS:

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

REEDS, INC.CONDENSED STATEMENTS OF OPERATIONSFor the Three and Six Months Ended June 30, 2020 and 2019(Unaudited)(Amounts in thousands, except share and per share amounts)

Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net Sales $ 10,853 $ 9,480 $ 20,376 $ 17,929 Cost of goods 7,865 7,207 14,518 13,152 soldGross profit 2,988 2,273 5,858 4,777 Operating expenses:Delivery andhandling 1,480 1,436 2,743 2,466 expenseSelling andmarketing 1,585 3,194 3,510 5,208 expenseGeneral andadministrative 1,348 1,749 3,295 4,120 expenseGain on sale 9 - (6 ) (30 )of assetsTotaloperating 4,422 6,379 9,542 11,764 expenses Loss from (1,434 ) (4,106 ) (3,684 ) (6,987 )operations Interest (303 ) (294 ) (639 ) (629 )expenseChange in fairvalue of (13 ) (60 ) (7 ) (108 )warrantliability Net loss (1,750 ) (4,460 ) (4,330 ) (7,724 ) Dividends onSeries AConvertible (5 ) (5 ) (5 ) (5 )PreferredStock Net LossAttributable $ (1,755 ) $ (4,465 ) $ (4,335 ) $ (7,729 )to CommonStockholders Loss per share? basic and $ (0.03 ) $ (0.13 ) $ (0.08 ) $ (0.25 )diluted Weightedaverage numberof shares 59,514,620 33,666,664 53,554,913 31,397,760 outstanding ?basic anddiluted

REEDS INC.CONDENSED BALANCE SHEETS(Amounts in thousands, except share amounts)

June 30, December 2020 31, 2019 (Unaudited) ASSETS Current assets: Cash $ 1,112 $ 913 Accounts receivable, net of allowance fordoubtful accounts and returns and discounts of 5,295 2,099 $259 and $375, respectivelyReceivable from related party 230 356 Inventory, net of reserve for obsolescence of 8,411 10,508 $437 and $646, respectivelyPrepaid expenses and other current assets 939 420 Total current assets 15,987 14,296 Property and equipment, net of accumulated 1,023 1,053 depreciation of $501 and $482, respectivelyEquipment held for sale, net of impairment 67 67 reserves of $96 and $96, respectivelyIntangible assets 590 576 Total assets $ 17,667 $ 15,992 LIABILITIES AND STOCKHOLDERS? EQUITY Current liabilities: Accounts payable $ 5,129 $ 5,539 Accrued expenses 555 646 Revolving line of credit 2,638 3,177 Current portion of note payable 342 - Convertible note to a related party 4,977 - Current portion of leases payable 89 49 Total current liabilities 13,730 9,411 Leases payable, less current portion 628 737 Convertible note to a related party - 4,689 Note payable 428 - Warrant liability 15 8 Total liabilities 14,801 14,845 Stockholders? equity: Series A Convertible Preferred stock, $10 parvalue, 500,000 shares authorized, 9,411 shares 94 94 issued and outstandingCommon stock, $.0001 par value, 100,000,000 and100,000,000 shares authorized, respectively; 6 5 62,928,540 and 47,595,206 shares issued andoutstanding, respectivelyCommon stock issuable, 350,000 shares at June 30, 285 - 2020Additional paid in capital 83,364 77,596 Accumulated deficit (80,883 ) (76,548 )Total stockholders? equity 2,866 1,147 Total liabilities and stockholders? equity $ 17,667 $ 15,992

REEDS, INC.CONDENSED STATEMENTS OF CASH FLOWSFor the Six months Ended June 30, 2020 and 2019(Unaudited)(Amounts in thousands)

June 30, June 30, 2020 2019Cash flows from operating activities: Net loss $ (4,330 ) $ (7,724 )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation 24 25 (Gain)/loss on sale of property & equipment - (30 )(Gain)/loss on termination of leases (6 ) 7 Amortization of debt discount 193 150 Amortization of right of use assets 62 45 Fair value of vested options 459 854 Fair value of vested restricted shares 285 - granted to officersCommon stock issued for services - 375 Decrease in allowance for doubtful accounts (116 ) (189 )Decrease (increase) in inventory reserve (209 ) 205 Change in fair value of warrant liability 7 108 Accrual of interest on convertible note to a 288 256 related partyLease liability (13 ) (10 )Changes in operating assets and liabilities: Accounts receivable (3,080 ) (668 )Inventory 2,306 (2,106 )Prepaid expenses and other assets (393 ) (267 )Accounts payable (410 ) (1,816 )Accrued expenses (95 ) (735 )Net cash used in operating activities (5,028 ) (11,520 )Cash flows from investing activities: Trademark costs (14 ) - Proceeds from sale of property and equipment - 30 Purchase of property and equipment (102 ) (121 )Net cash used in investing activities (116 ) (91 )Cash flows from financing activities: Borrowings on line of credit 21,780 31,228 Repayments of line of credit (22,512 ) (34,030 )Proceeds from note payable 770 - Repayment of amounts due to/from officers - 195 Principal repayments on capital lease (5 ) (33 )obligationExercise of warrants - 364 Proceeds from sale of common stock 5,310 14,867 Net cash provided by financing activities 5,343 12,591 Net increase in cash 199 980 Cash at beginning of period 913 624 Cash at end of period $ 1,112 $ 1,604 Supplemental disclosures of cash flow information:Cash paid for interest $ 157 $ 222 Non Cash Investing and Financing Activities Dividends on Series A Convertible Preferred $ 5 $ 5 Stock

Modified EBITDA

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our 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. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended June 30, 2020 and 2019 (unaudited; in thousands):

Three Months Ended June 30, 2020 2019 Net loss $ (1,750 ) $ (4,460 ) Modified EBITDA adjustments: Depreciation and amortization 37 34 Interest expense 303 294 Stock option and other noncash compensation (36 ) 623 Change in fair value of warrant liability 13 60 Severance - 6 Total EBITDA adjustments $ 317 $ 1,017 Modified EBITDA $ (1,433 ) $ (3,443 )

We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

? Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; ? Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs; Modified EBITDA does not reflect future interest expense, or the cash ? requirements necessary to service interest or principal payments, on our debts; and Although depreciation and amortization are non-cash charges, the assets ? being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

Set forth below is a reconciliation of net loss to Modified EBITDA for the six months ended June 30, 2020 and 2019 (unaudited; in thousands):

Six Months Ended June 30, 2020 2019 Net loss $ (4,330 ) $ (7,724 ) Modified EBITDA adjustments: Depreciation and amortization 86 70 Interest expense 639 629 Stock option and other noncash compensation 744 1,229 Change in fair value of warrant liability 7 108 Severance - 39 Total EBITDA adjustments $ 1,476 $ 2,075 Modified EBITDA $ (2,854 ) $ (5,649 )