Reed's Inc. Announces Q2 2008 Results; Net Sales Increase 32%

Los Angeles, Aug 20 - Reed today announced its financial results for the three and six months ended June 30, 2008.

Second Quarter 2008 Highlights:

* Net sales increased 32% to $4.6 million from $3.5 million in the same period last year
* Gross profit increased 87% to $1.3 million from $0.7 million in the same period last year
* Gross margin expanded 820 basis points to 27.8% from 19.6% in the second quarter of 2007
* Operating expenses decreased 110 basis points to 37.4% of net sales from 38.5% of net sales in the second quarter of 2007
* Net loss attributable to common stockholders decreased to $515,000 compared to loss of $721,000 in the prior year period
* Increased its available borrowing capacity up to $3.0 million. The amount available under the credit facility is based on accounts receivable and inventory levels.

“We are very pleased with our second quarter results which mark another quarter of strong revenue growth and demonstrate a measurable improvement in profitability,” commented Chris Reed, Founder and Chief Executive Officer.

“During the second quarter, we achieved year-over-year sales growth of approximately 32%, continued to expand our presence and shelf space within mainstream grocery store accounts and continued to build international awareness of Reed’s brands. We are especially pleased to deliver this strong top-line growth, without compromising profitability.

"During the second quarter our 2008 strategic initiatives aimed at increasing our presence in national grocery chains, improving gross margins and rationalizing expenses began to take hold. This is evidenced by the expansion of our sales, the improvement in our gross margin to 27.8% and the sequential reduction in operating expenses by approximately $700,000 from the first quarter of 2008, the combination of which resulted in a large decrease in our net loss to approximately $0.5 million. We expect this trend to continue as we reduce operating expense by an additional $300,000 to $400,000 in the third quarter of 2008.”

Mr. Reed continued, “We attribute our strong performance to the continued demand for the Reed’s and Virgil’s product lines as well as the success of our refocused sales strategy on strengthening our presence in the estimated 10,500 supermarkets nationwide. During the second quarter we entered into enhanced partnerships with several nationwide grocery store accounts including Kroger, Ralph’s, Sprouts, Haggen’s, Earth Fare, among others, demonstrating Reed’s commitment and success in expanding our presence within the mainstream marketplace. With these enhanced partnerships, we will look to drive awareness of the Reed’s brand through development of full year ‘partner-with-purpose’ marketing plans, in-store sampling campaigns, weekly Ad/Circular participation and additional promotional efforts.”

Mr. Reed concluded, “We are pleased with our strong start to the first half of 2008 and we expect our positive momentum to carry into the back half of the year. In addition to driving top-line sales growth, we will continue to evaluate methods to improve gross margin and enhance efficiencies in our operations. Specifically, because of the strong growth we have experienced in the last year we are better positioned to negotiate alternative co-pack production agreements, which we expect will result in further gross margin improvement. As a result, we expect to report improved bottom line results in the back half of 2008 compared to the first six-months of 2008.”

Second Quarter 2008 Results

For the quarter ended June 30, 2008, net sales increased 31.6% to $4,570,816 from $3,472,360 for the prior year period. Sales growth was primarily driven by increases in the Company’s Virgil’s and Reed’s Ginger Brews product lines. Growth within the Virgil’s product line was primarily due to an increase in sales of Virgil’s Root Beer, Virgil’s Cream Soda and Black Cherry Cream Soda, the Virgil’s 5 liter party keg and the introduction of Virgil’s diet soda line.

The increase in sales was also attributable to additional sales from newly introduced mainstream distributors and increased sales from existing natural food distributors and retailers.

Gross profit for the quarter ended June 30, 2008, increased 86.5% to $1,269,330, or 27.8% of sales, from $680,428, or 19.6% of sales for the prior year period. The improvement in gross margin was primarily due to pricing increases of the Company’s Reed’s Ginger Brew line by approximately 20%, inline with competitors in natural soda category, and better management of the use of promotional discounting by the sales force. This was partially offset by increased costs of production, packaging and ingredients at the Company’s main co-pack production facility and increased delivery costs resulting from rising fuel prices. The Company is currently evaluating alternative co-pack production facilities to reduce its co-pack production costs, its largest expense, and expects to reach arrangements with alternative co-pack facilities in the near future.

Operating expenses for the second quarter of 2008 increased 27.8% to $1,710,604, or 37.4% of net sales, from $1,338,252, or 38.5% of net sales, in the second quarter of 2007. The increase in general, administrative and selling expenses was primarily due to increased promotional and advertising expenses and increased general and administrative expense resulting from higher legal, accounting and professional fees associated with being a public company and an increase in salaries expense associated with the hiring of the Company’s Chief Operating Officer, and costs of additional support in the form of personnel and computer systems. This was partially offset by a reduction in selling expenses as the Company reduced its sales force from 33 to 17 people.

For the quarter ended June 30, 2008, interest expense was $49,990 compared to interest expense of $64,330 in the three months ended June 30, 2007. Interest expense decreased in the second quarter of 2008 principally due to the pay down of the Company’s lines of credit and certain long-term debt.

The net loss attributable to common stockholders for the quarter ended June 30, 2008, improved to $514,680 from a net loss attributable to common stockholders of $720,815 for the quarter ended June 30, 2007. The net loss per share attributable to common stockholders - basic and fully diluted was $0.06 for the quarter ended June 30, 2008 and $0.10 for the quarter ended June 30, 2007.

For the quarter ended June 30, 2008, cash and cash equivalents were $39,963, working capital was $1,702,206, total debt (including long-term debt and obligations on lines of credit) was $2,650,140, stockholders’ equity was $5,032,680 and the accumulated deficit was $13,585,890.

The Company recently entered into a new $3.0 million, two year secured credit facility with First Capital. The amount available under the credit facility is based on accounts receivable and inventory levels. Reed’s believes that its new facility will provide sufficient liquidity and cash flows needed to fund operations through the end of 2008 without raising additional equity. If the overall market improves the company will consider an equity raise to accelerate its expansion plans.

First Half 2008 Results

For the first six months ended June 30, 2008, net sales increased 25.4% to $8,134,916 from $6,485,050 for the prior year period. Sales growth was primarily driven by increases in the Company’s Virgil’s and Reed’s Ginger Brews product lines. The increase in sales was also attributable to additional sales from newly introduced mainstream distributors and increased sales from existing natural food distributors and retailers.

Gross profit for the first six months of 2008 increased 46.6% to $1,789,143, or 22.0% of sales, from $1,220,150, or 18.8% of sales for the prior year period. The improvement in gross margin was primarily due to pricing increases of the Company’s Reed’s Ginger Brew line by approximately 20%, inline with competitors in natural soda category, and better management of the use of promotional discounting by the sales force. This was partially offset by increased costs of production, packaging and ingredients at the Company’s main co-pack production facility and increased delivery costs resulting from rising fuel prices.

Operating expenses for the first six months of 2008 increased 77.9% to $4,164,878, or 51.2% of net sales, from $2,341,760, or 36.1% of net sales in the first six months of 2007. The increase in general, administrative and selling expenses was primarily due to increased promotional and advertising expenses and increased general and administrative expense resulting from higher legal, accounting and professional fees associated with being a public company and an increase in salaries expense associated with the hiring of the Company’s Chief Operating Officer, and costs of additional support in the form of personnel and computer systems. This was partially offset by a reduction in selling expenses as the Company reduced its sales force from 33 to 17 people.

For the six months ended June 30, 2008, interest expense was $106,428 compared to interest expense of $111,883 in the six months ended June 30, 2007.

The net loss attributable to common stockholders for the six ended June 30, 2008 was $2,504,749 compared to a net loss attributable to common stockholders of $1,208,763 for the quarter ended June 30, 2007. The net loss per share attributable to common stockholders - basic and fully diluted was $0.28 for the quarter ended June 30, 2008 and $0.17 for the quarter ended June 30, 2007.

2008 Strategic Initiatives Expected to Increase Revenue and Improve Margins in the Second Half of 2008

--     Increase sales in our existing 10,500 supermarket accounts 
--   Add approximately 3,500 additional supermarket accounts
 
--   Expanded line of offerings including Virgil's Real Cola, draft versions of our Virgil's Root Beer, and our other sodas. 
--   Improve gross margin by:  
-- Increase prices of Reed's Ginger Brew line by approximately 20%, inline with competitors in natural soda category 
--  Manage the use of promotional discounting by the sales force 

-- Leverage our increased volume to re-negotiate production co-packing fees allowing for larger, more efficient production plants to produce Reed's 
 --   Decrease general and administrative expenses on an absolute basis as compared to 2007 
--   Target additional regional mainstream beverage distributors to deliver our product 
--   The new direction of sales focused on supermarkets has allowed us to reduce our sales force from 33 to 17 people. This reduction is expected to generate approximately $2.0 million in direct annualized expense savings.
 

Outlook

The Company is initiating its third quarter guidance and updating its full year 2008 guidance as follows:

Sales for fiscal 2008 are expected to increase approximately 20% to 30% over fiscal 2007  The Company expects an annualized reduction in operating expenses of approximately $4 million  The Company expects a sequential decrease in its operating expenses of approximately $300,000 to $400,000 in the third quarter of 2008 from the second quarter of 2008

CONDENSED STATEMENTS OF OPERATIONS For the Three and Six Months Ended June 30, 2008 and 2007 (Unaudited)
		Three months ended								Six months ended
		June 30,				June 30,				June 30,				June 30,
		2008				2007				2008				2007
SALES		$	4,570,816			$	3,472,360			$	8,134,916			$		6,485,050
COST OF SALES			3,301,486				2,791,932				6,345,773					5,265,000
GROSS PROFIT			1,269,330				680,428				1,789,143					1,220,050
OPERATING EXPENSES
Selling			1,051,008				888,104				2,175,136					1,442,269
General and Administrative			659,596				450,148				1,989,742					899,,491
Total Operating Expenses			1,710,604				1,338,252				4,164,878					2,341,760
LOSS FROM OPERATIONS			(441,274	)			(657,824	)			(2,375,735	)				(1,121,710	)
OTHER INCOME (EXPENSE)
Interest Income			145				29,109				975					52,600
Interest Expense			(49,990	)			(64,330	)			(106,428	)				(111,883	)
Total Other Income (Expense)			(49,845	)			(35,221	)			(105,453	)				59,283
NET LOSS			(491,119	)			(693,045	)			(2,481,188	)				(1,180,993	)
Preferred stock dividend			(23,561	)			(27,770	)			(23,561	)				(27,770	)
Net loss attributable to common stockholders		$	(514,680	)		$	(720,815	)		$	(2,504,749	)		$		(1,208,763	)
LOSS PER SHARE- Available to Common Stockholders Basic and Diluted		$	(0.06	)		$	(0.10	)		$	(0.28	)		$		(0.17	)
WEIGHTED AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED			8,911,327				7,403,777				8,837,956					7,274,201

CONDENSED BALANCE SHEETS
ASSETS			June 30, 2008 (Unaudited)				December 31, 2007
CURRENT ASSETS
Cash		$	39,963			$		742,719
Inventory			3,739,678					3,028,450
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $150,000 as of June 30, 2008 and $407,480 as of December 31, 2007			1,543,839					1,160,940
Other receivables			250					16,288
Prepaid Expenses			135,634					76,604
Total Current Assets			5,459,364					5,025,001
Property and equipment, net of accumulated depreciation of $1,019,087 as of June 30, 2008 and $867,769 as of December 31, 2007			4,255,365					4,248,702
OTHER ASSETS
Brand names			800,201					800,201
Other intangibles, net of accumulated amortization of $295 as of June 30, 2008 and $5,212 as of December 31, 2007			35,105					13,402
Total Other Assets			835,306					813,603
TOTAL ASSETS		$	10,550,035				$	10,087,306
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts payable		$	2,770,797					1,996,849
Lines of credit			879,205					--
Current portion of long term debt			10,738					27,331
Accrued interest			20,267					3,548
Accrued expenses			76,151					54,364
Total Current Liabilities			3,757,158					2,082,092
Long term debt, less current portion			1,760,197					765,753
Total Liabilities			5,517,355					2,847,845
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY
Preferred stock, $10 par value, 500,000 shares authorized, 47,121 shares outstanding at June 30, 2008 and 48,121 shares at December 31, 2007			471,212					481,212
Common stock, $.0001 par value, 19,500,000 shares authorized, 8,928,591 shares issued and outstanding at June 30, 2008 and 8,751,721 at December 31, 2007			892					874
Additional paid in capital			18,146,466					17,838,516
Accumulated deficit			(13,585,890	)				(11,081,141	)
Total stockholders’ equity			5,032,680					7,239,461
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	10,550,035				$	10,087,306