Reed’s Reports Record Q3 Sales Amid Board Restructuring

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Reed’s Inc. reported a record $12.3 million in net sales for the third quarter during an earnings call on Friday. The earnings were positive news for the company even as an ongoing tussle between CEO Chris Reed and a group of disgruntled investors over the company’s Board of Directors looms in the background.

The Los Angeles-based company reported a $2.3 million increase in operating profit, as compared to an operating loss of $2.1 million for the same quarter last year, during which the company said it experienced “significant out-of-stock production issues” that affected earnings in the first and second quarters.

“Last year we experienced a significant out of stock situation that severely impacted our business. We believe that those events are now behind us as we focus on growth and profitability going forward,” said Dan Miles, CFO, in a press release.

Yet changes in management structure were also discussed, as Reed announced he was bringing on a new, fully independent board featuring “some very exciting industry winners.” “It’s going to be people who have individual expertise that I think will really complement this significant management improvement that I brought on line in the last year with my CFO and COO,” he said.

This is significant as in August, an investor group led by Edwin Lozano announced the formation of The Committee to Rescue Reed’s and delivered a letter to Reed and the Board of Directors expressing frustration at “shortcomings in the Company’s operational strategy and financial performance, as well as its weak governance oversight and practices.” The letter stated the need for the Board to add “members who have greater industry expertise and proven business acumen.”

On Oct. 11,, the Committee issued a press release stating its good-faith efforts to work with Reed to select new Board members had failed and it was preparing for a proxy contest at the 2016 Annual Meeting. The release said both Reed and the Committee were to recommend five nominees that would be interviewed and vetted by a panel of independent mediators, but Reed failed to provide a list of candidates.

In an interview with BevNET last month, Reed said John Bello, founder of SoBe, was to be one of two or three potential strategic additions to the board. Citing the article, the release said Bello refused to be vetted. Finally, it states that the mediators submitted a seven-member Board recommendation that included the Committee’s candidates along with Reed and Bruce Nierenberg, a longtime broker, investor and entrepreneur in the natural product business. Nierenberg is, for now, the only nominee submitted by Reed who was successfully contacted and vetted by the independent panel. According to the Committee, that recommendation was ignored.

Speaking with BevNET after the earnings call, Reed said that four independent board members with expertise in marketing, supply chain, governance and finance, respectively, would be announced in about a week and a half. Reed would also have a seat on the board. He declined to comment if Bello or Nierenberg were involved.

In response to the statement from the Committee to Rescue Reed’s, he said: “They were very proud that they slapped a board together in two weeks. I have a problem with slapping together things. I don’t have a timeline, I just have a goal of getting the best I can.” With regards to the Committee’s nominees, Reed said: “I think it fell apart with references. They claimed a big background but didn’t want to share any of that with us. We weren’t able to verify their background in the beverage industry.”

Elaborating further on the process, Reed said, “We haven’t been able to verify Ed Lozano is who he says he is. Period. That was one of the criteria moving forward. He wasn’t willing to share anything in that regard.”

“For us to get comfortable with this, we need to be able to verify his background, because he claims a big background at Miller and at Pepsi,” Reed continued. “So we’d like to know that those positions he held are real. You need to sign an authorization to talk to HR at those companies, and he’s refused to do that.”

Reed concluded, “Why would they withhold that information unless they have something to hide?”

During the call, Reed said the supply chain issues of last year resulted in the company losing somewhere between 15 to 20 percent of their distribution in the marketplace, of which it has since recovered about a quarter.

High performing SKUs included the non-alcoholic Flying Cauldron Butterscotch Beer, with gross revenues up 170 percent to $595,000, and Reed’s Stronger Ginger Brew, which grew 293 percent. Overall Reed’s branded product gross sales increased 14 percent.

On the other end of the spectrum, Reed said kombucha sales were down about 50 percent compared to last year, due to the product being out-of-stock for six months.

New retail placement for Reed’s Ginger Brews at 1,300 Target stores and at 1,135 CVS stores for Reed’s and Virgil’s SKUs were also announced. The company also announced a new partnership with Reno, Nev.-based Barone Distribution and an expanded distribution footprint in Southern California through John Lenore & Company.

Miles said the company was remaining focused on controlling costs and operating more efficiently. He highlighted a 27 percent decrease in total non-production costs compared to the same period in 2015. Reed added that the company’s new Los Angeles plant, set to go on line in December, would decrease delivery costs by $70,000 per month and run three times faster with the same number of employees.

Looking to the future, Reed said the brand was invited by a large fast-casual restaurant chain to develop a natural Bag-In-Box fountain soda system to replace Coke and Pepsi products in thousands of accounts. Reed said the partnership could potentially generate $8 million to $10 million in gross profit annually.

While discussing innovation of the brand’s existing products, Reed also hinted at a new product line coming out of fountain soda that the company will be pitching to “one of the largest retailers in the U.S. to be exclusive for the national launch.”