Reed's (NASDAQ: REED) reported Q3 EPS of ($0.14), $0.03 worse than the analyst estimate of ($0.11). Revenue for the quarter came in at $8.7 million versus the consensus estimate of $9.04 million.

Highlights for the Third Quarter of 2019

• Consistent with the preliminary net sales results released on September 30, 2019, third quarter net sales were $8.7 million, a 19% decrease compared with the prior year due to the sale of the private label business at the end of 2018 and the discontinuation of non-core products, which collectively contributed $2.3 million of net sales in the prior year period;
• Core brand gross sales increased 5%, driven by 22% volume growth of the Virgil’s brand;
• Gross margin increased 380 basis points to 29% from 25% in the prior year period, reflecting the discontinuation of lower margin non-core products and the elimination of idle plant costs as a result of the Company’s transition to an asset-light sales and marketing business model;
• New leadership has identified numerous opportunities across the supply chain to improve margins and other areas of savings to significantly improve the cash flow profile while supporting continued investment in core brands and innovation. These margin improvements should be realized as new copackers are qualified and begin production by early 2020;
• Operating loss was $4.4 million compared with $2.1 million in the third quarter of 2018. Third quarter 2019 operating loss included $1.1 million of incremental investment in sales and marketing compared to the prior year, increased delivering and handling as a result of short-term supply chain deficiencies as well as severance-related G&A costs as a result of recent organizational changes;
• Net loss was $4.6 million or $0.14 per share compared to $2.7 million or $0.10 per share in the prior year period; and
• Modified EBITDA was a loss of $3.3 million compared to a loss of $1.5 million in the prior year period.

Management Commentary

“Third quarter net sales of $8.7 million and core brand gross sales growth of 5% each came in modestly above the preliminary third quarter results we issued at the end of September. However, third quarter results were significantly inhibited by supply chain deficiencies, which negatively impacted sales by approximately $1.2 million as a result of orders that were unshipped and not recovered. In addition, a lack of production capacity led to the delay of planned innovation launched for Reed’s Mules and Ginger Shots, which led to additional unrealized sales. Despite these challenges, we continued to generate strong volume growth of the Virgil’s brand following last year’s launch of Virgil’s Zero Sugar and brand refresh efforts. Production issues delayed the broad market introduction of our Reed’s Zero Sugar offering, which had a negative impact on planned growth during the third quarter. However, we are pleased to report that we saw improved fulfillment rates as the quarter progressed, successfully expanded our contract manufacturing relationships and are progressing with each of our initiatives to broaden production and support for our planned product innovation efforts. We have now identified numerous opportunities in the supply chain to improve margins and other areas of savings to reduce cash burn while still investing in our core brands and innovation initiatives. These savings will be realized as new packers are qualified and in production as we enter 2020,” stated John Bello, Chairman and Interim Chief Executive Officer of Reed’s, Inc.

“We are in the process of enhancing the leadership team with the skills and experience to successfully execute our growth strategies, including the recent addition of Norm Snyder as Chief Operating Officer. Additionally, in late October, we completed a successful public equity offering, raising $8.1 million of gross proceeds that provides the capital to effectively execute our strategic growth plans. We have the brands, the innovation pipeline, and the enhanced sales and marketing capabilities to drive growth and expand our sales opportunities across categories and channels. We remain focused on the continued expansion of our supply chain capabilities to increase our production flexibility and redundancy. The recent announcement of our partnership with Full Sail Brewing for the launch of ready-to-drink Reed’s Craft Ginger Mules is a reflection of our supply chain initiatives and provides us a highly efficient model to rapidly develop a promising brand extension opportunity into a rapidly growing category. In addition, we have just introduced a line of ginger and ginger-based energy shots to compete in the in the large and growing energy category, including broadening our distribution opportunity into the convenience store channel. We are very pleased with the strong initial reception to our launch of ginger shots,” continued Mr. Bello.

“We remain highly confident with our positioning and brand portfolio, are driving costs savings and margin improvements across the supply chain and are committed to effectively and efficiently growing our business and delivering shareholder value,” concluded Mr. Bello.

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