Good afternoon. Welcome to the Reed's fourth quarter and full year 2022 earnings conference call for the period ending December 31st, 2022. My name is MJ. I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer, and Tom Spisak, Reed's Chief Financial Officer. Following their remarks, they will take your questions. I would like to remind listeners that this conference call will include forward-looking statements. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause actual results, levels or activity, performance, or achievements to be materially different from those anticipated by such statements.
These factors include, but are not limited to, Reed's ability to manage growth, manage debt, and meet development goals, Reed's ability to protect its supply chain in light of disruption caused by elevated freight costs and other impediments, the availability and cost of capital to finance our working capital needs and growth plans, reduction in demand for products, dependence on third-party manufacturers and distributors, changes in the competitive environment, future business outlook, including the economic impact of COVID-19 and the war in Ukraine, and other information detailed from time to time in Reed's filings with the United States Securities and Exchange Commission. These statements, including financial guidance, involve risk and uncertainties that may cause actual results or trends to differ materially from the company's forecast.
The achievement or success of the matters covered by such forward-looking statements, including future financial guidance, involves risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond Reed's control. Reed's 2023 guidance reflects year-to-date and expected future business trends and includes continuing impacts of COVID-19 on the supply chain and logistics as of the date hereof. New supply chain challenges that may develop, the impact of the war in Ukraine, and further potential inflation cannot be reasonably estimated and are not factored into current fiscal 2022 guidance. These risks could materially impact our ability to access raw materials, production, transportation, and/or other logistic needs. Gross margin guidance assumes our known pricing for ingredients, packaging, and production costs, each of which has been and could continue to be impacted.
Financial guidance should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. For more information, please refer to the risk factors discussed in Reed's annual report on Form 10-K to be filed with the SEC. Although management believes that the expectations reflected in forward-looking statements are reasonable, management cannot guarantee future results, level of activity, performance, or achievements. In addition, any projections as to the company's future performance represent management's estimates as of today, March 29th, 2023. Reed's assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. Additionally, please note non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on Reed's investor website at investors.reedsinc.com.
Modified EBITDAs presented because management believes 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 core operating performance. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute or superior to financial information prepared and presented in accordance with GAAP. Reed's non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definition of each measure and their limitations and our rationale for using them can be found in this afternoon's press release and in Reed's SEC filings. With that, I will now turn the call over to Mr. Snyder. Please go ahead.
Thank you. Good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2022 results. 2022 was a year of progress for Reed's as we contended with near record inflation and supply chain challenges for much of the year. Despite these challenges, we had several significant accomplishments in 2022. A major focus has been to transition more retailers from glass to cans given the improved margin profile. Our can product mix at year-end 2022 was 35% and it's projected to grow to approximately 45% in 2023. We introduced 12 new SKUs with Sprouts as well as our new limited edition Harvest Spiced Apple Cider swing-lid bottle.
We made significant progress with our ready-to-drink alcohol line, including the rollout of our new Zero Sugar Stormy Mule across our key West Coast markets in California, Arizona, Oregon, and Washington. Our ready-to-drink Hard Ginger Ale also hit retail shelves in the second half of 2022. We introduced our ready-to-drink Zero Sugar Classic Mules in over 50 Trader Joe's locations in the Northeastern United States. We now have distribution in over 300 stores throughout New York, New England, California, Minnesota, and Wisconsin. Across our alcohol product portfolio, we expanded distribution with our most important channel partners, including Whole Foods-Sprouts, Total Wine, Ralphs, Roundy's, and Trader Joe's, ultimately gaining more shelf space. We also introduced our swing lids to 630 new Cracker Barrel stores. In the aggregate, we increased product authorizations in over 10,000 points of distribution across all product lines.
We also added 16 new DSD distributors across our network, bringing our total to 80 throughout the U.S. Several of these distributors cover multiple territories. Finally, we increased pricing across all SKUs approximately 6% on a net sales basis in 2022 to offset the inflationary impacts to our business. Looking below the top line, we continue to focus and deliver on the supply chain, transportation, and cost savings programs we instituted in 2021, which helped us slash our operating expenses 12% year-over-year. In 2022, we were able to reduce the increases we previously experienced in cost of goods with renegotiated contracts for various inputs, including cans, ingredients, labels, packaging, and co-pack fees. We reduced transportation costs by increasing freight throughput and reducing out-of-network shipments. We also significantly reduced marketing spend and general and administrative expenses.
While there's still more benefits to come in 2023 from our cost savings initiatives in cost of goods sold, transportation, and sales, selling, general, and administrative costs. I am proud of our team's ability to execute in 2022 while contending with the macroeconomic challenges throughout the year, including supply chain bottlenecks and inflationary pressure on both consumers and businesses alike. We are well-positioned to realize additional cost savings in 2023. Turning to the fourth quarter results, our Ginger Ale and swing-lid program saw more than 50% year-over-year growth and were key drivers behind our record net sales for the quarter. This momentum, coupled with our supply chain and cost-saving initiatives, helped us deliver a near 36% year-over-year improvement in Modified EBITDA. In fact, operating costs were down 10% year-over-year, despite 18% net sales growth.
The decrease is driven by lower ingredient, label, fuel, and delivery and handling costs. The decline in our delivery and handling costs was due to renegotiated freight rates, improved throughput, and initial streamlining of our distribution orbit model. We also began to realize savings from our new pricing agreement for cans, which we expect to drive further cost savings in 2023 as we increase our mix of cans relative to bottles. These savings did not happen overnight. They reflect the results of our work over the past year to uncover efficiencies and right-size our operating structure. We continue to believe in the $7 billion market for ready-to-drink alcohol as a strong opportunity for growth.
Our focus is on five key markets and our strongest retail partnerships, including specific Kroger banners, Trader Joe's, Whole Foods, Sprouts, and Total Wine across the Pacific Northwest, Southern California, Phoenix, New England, and the New York City metro area. We expect to see more promotional activity in these stores, such as tastings and displays, as we work to increase shelf space and presence. During the fourth quarter, we had a very productive holiday season. After an overwhelmingly positive response from consumers to our Reed's REAL Cranberry Ginger Ale launch in 2021 in Costco, we expanded distribution to three new regions encompassing 26 states just in time for the holidays. We expect to see an even wider set of distribution for our holiday season cranberry ginger ale later this year.
Turning to the first quarter of 2023, where we continue to make progress towards our stated objectives. In February, we appointed Chris Burleson to head our sales organization as the new Chief Commercial Officer. Chris brings over 15 years of sales leadership experience to Reed's. He comes to us from Fever-Tree, where he grew the company's account base by over 100,000 new points of distribution and increased velocity per outlet in new and existing retailers. Chris will lead the sales organization as well as partner with our operations department to further streamline supply chain and cost reduction initiatives. He will also focus on strategic partnerships and bring a fresh set of eyes for new growth opportunities for Reed's. We are excited to have him on board.
Earlier this month, we expanded our product offerings with Whole Foods by adding seven new Reed's products to its shelves, including our Virgil's Zero Sugar Root Beer, vanilla cream, and black cherry cans. Virgil's is now in every Whole Foods location across the country. We're also authorized in Loblaws, Canada's largest retailer, to begin distributing products to more than 500 retail stores across Canada, which will anchor their new craft soda department. Lastly, we migrated to a concentrate model for Euro-European exports. We are no longer utilizing capital to support export sales. Instead, we are shipping margin accretive concentrate, and we have a local manufacturing partners producing finished goods at a significantly lower landed cost.
We believe the momentum in our business will begin to take hold as we move through 2023 as some of the challenges we have faced across the supply chain begin to ease. We also continue to believe our challenger positions in ginger ale and the ready-to-drink alcohol present a compelling growth opportunity for Reed's, given the larger total accessible market and growth of the categories. Looking out to the remainder of 2023, I believe we are in solid position to deliver our previously stated goals. We continue to implement additional reductions in our cost of goods, lower our delivery and handling charges, both of which will drive margin expansion. We have also right-sized our cost structure to drive lower operating deficits and ultimately reach cash flow breakeven during the second half of the year.
We are reiterating our guidance for the year as we continue to expect double-digit net sales growth, gross margin expansion to over 30%, an additional $6 million of operating savings. The culmination of these results will enable us to turn Modified EBITDA profitable as we exit the second quarter with a full quarter of Modified EBITDA profitability in Q3 and positive cash flow from operations to follow. The key driver of our net sales growth this year will be to further penetrate our current retail network of 45,000+ stores. To gain additional placements and drive velocity, we are intently focused on increasing shelf space between our Reed's Ginger Ale, Reed's Ginger Beer cans, adding to the mixer sets, Virgil's Zero Sugar, and Reed's Mule and Hard Ginger Ale.
Further down the income statement, we are implementing several initiatives to drive $6 million of additional cost reductions this year. Gross margin will benefit from the use of new labels, reduced packaging costs, reduced co-pack fees, lower ginger costs, continued formula optimization, and lower can pricing. In addition, we are reducing transportation costs through a realignment of our distribution centers in a freight orbit, as well as improved pricing on our high volume freight lanes. Selling general and administrative costs will also improve by across-the-board reductions, including pricing renegotiations and the elimination of low return on investment sales and marketing programs. Before I pass the call to Tom to walk through our financial results, you may have seen that we announced his planned resignation. I'd like to personally thank Tom for his commitment and dedication to our business over the past 3 years.
He has played an important role in bringing more financial discipline, establishing key banking relationships, and guiding the company through a challenging macro inflationary environment. He will truly be missed, but we wish him the best on his next journey. Joann Tinnelly, our current Vice President and Corporate Controller, who joined us in 2018, will be appointed Interim Chief Financial Officer. Tom, over to you.
Thanks, Norm. I'm truly appreciative for the opportunity that you and the board gave me to serve as Reed's CFO over the past 3 years. I'm proud to have worked for a company that has continued to keep shareholder interest top of mind throughout a challenging backdrop and look forward to remaining a long-time shareholder as Reed's delivers on its profitability goals. Jumping into our results, all variances referenced are on a year-over-year basis, unless otherwise noted. Net sales for Q4 increased 18% to $15 million, compared to $12.8 million in the prior year. The increase was primarily driven by strong demand for Reed's Ginger Ale, as well as our swing-lid program. Gross profit for the fourth quarter of 2022 increased 32% to $3.5 million, compared to $2.6 million in the same period in 2021.
Gross margin increased 250 basis points to 22.9%, compared to 20.4% in the year ago quarter. The increase was driven by higher net sales as well as lower supply chain and improve input costs as a result of these initiatives that we've put in place to improve margin. Delivery and handling costs were reduced by 11% to $2.7 million during the fourth quarter of 2022, compared to $3.1 million in the fourth quarter of 2021. As Norm mentioned, the decline was due to renegotiated freight rates, improved throughput, and initial streamlining of our distribution orbit model.
Delivery and handling costs decreased 18%, decreased to 18% of net sales or $3.44 per case, compared to 24% of net sales or $3.95 per case during the same prior period last year. Selling general and administrative costs decreased 9% to $3.6 million during the fourth quarter of 2022, compared to $3.9 million in the year-ago quarter. As a percentage of net sales, selling general and administrative costs were reduced to 24% compared to 31%. Taking all of these together, operating expenses improved 10% to $6.3 million or 42% of net sales, compared to $7 million or 54% of net sales in the year-ago period.
Operating loss during the fourth quarter of 2022 improved to $2.8 million or a loss of $1.19 per share, compared to operating loss of $4.4 million or $2.33 per share in the fourth quarter of 2021. Modified EBITDA loss improved 36% to $2.5 million in the fourth quarter of 2022, compared to a loss of $3.9 million in the fourth quarter of 2021. For the fourth quarter of 2022, we generated approximately $1.1 million of cash from operating activities compared to $2.3 million of cash used for the same period in 2021. The increase was driven primarily by a $5 million reduction in inventory.
As of December 31st, 2022, we had approximately half a million dollars of cash and $21.5 million of total debt net of capitalized financing costs. This includes $10 million from a convertible note and $11 million from our revolving line of credit, which has $1.7 million of additional borrowing capacity.
I'd also like to mention that we have filed an extension for our 10-K, and we anticipate it will be released next week. The extension is not triggered by any regulatory penalties or covenant violations and is purely timing related. Subsequent to year-end, in February, we closed a $2.5 million bridge financing, which carries a 10% coupon and matures on June 30, 2023, with no prepayment penalties or amortization. As Norm mentioned, we believe Reed's is better positioned now than at any point over the last two years. I look forward to watching the company execute on its growth and profitability objectives in 2023 and thereafter. I'll now turn the call back to Norm for closing remarks.
Thanks, Tom. I'm pleased with the hard work from our team to increase distribution and cut costs in 2022 despite the unprecedented inflation and supply chain challenges. The environment began to improve in the back half of 2022. We have several operational initiatives in place to drive further cost savings and increase shelf space throughout our retail network. I'm confident we have the right team in place to execute and achieve our goals of turning Reed's Modified EBITDA and cash flow positive later this year. Operator, we will now open the call for questions and answers.
Thank you very much. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then two. At this time, we will pause momentarily to assemble our roster.
Thanks, MJ. While we're waiting for the questions to pull in, we want to address a few questions that came in via email over the past week. Norm, starting with this one, from an individual investor named Jerry. What's the plan to increase sales, and further build out the channel development in 2023?
Well, as I previously stated, there's really four pillars that we're focusing on for sales growth. G inger ale, ginger beer in cans, Virgil's Zero Sugar cans, and our alcohol portfolio. What we're doing is we're gonna stay more focused with our current network of retailers and distributors and gain additional shelf space and gain additional velocity through more discipline and focused promotional activity. You know, you heard the old saying, rather than going a mile wide and an inch deep, we're gonna try to stay real focused and penetrate existing channels with those 4 product platforms.
Got it. Any plans to reduce interest expenses over the next couple of years?
Yeah, that's actually gonna happen organically as we pay down on the debt and it's amortized. You know, obviously, as we gain cash flow breakeven, it's gonna put less pressure on our line of credit. That'll also generate lower interest charges and savings on both fronts.
Understood. Do you have any plans to raise capital in 2023?
One of our primary objectives is to avoid or minimize shareholder dilution. We constantly evaluate our cash needs and in light of, you know, the impact of dilution. It's something that we've been very focused on and something we'll continue to stay focused on, and we wanna stay balanced where we are able to take advantage of opportunities and grow the company. At the same time, like I said up front, we really wanna minimize or avoid any additional shareholder dilution.
Makes sense. MJ, that concludes the questions that came in via email. We can turn back to the live Q&A.
Thank you very much. Our first question today comes from Gary Getz, private investor. Please go ahead.
Hi. Good afternoon. First of all, I wanted to congratulate you on your progress and comment on the products. They're wonderful. The ginger and root beers are like having a party in your mouth. They're really that great. My question concerns the interest expense. I realize you have a total of $twenty-one and a half million of debt, all told, outstanding, but the interest expense in the fourth quarter was $3 million. Now, annualized, that's about a 60% interest rate. Could you comment on that? Also, how is the interest being repaid?
Gary, nice to finally talk to you. I've seen a lot of emails that you've sent into our investor relations department. I'm glad that we now have a chance to actually talk. Fourth quarter is not a good indication of, you shouldn't really annualize that. We did some borrowing during the latter part of the year that resulted in some extra interest expenses and other charges that we won't repeat and that won't go forward. You'll see in the first quarter that number comes down significantly. There was some, you know, obviously some non-recurring borrowings and other things that happened in the fourth quarter. The other part of that is interest. 5% of it's cash and 5% of it is PIK, so it adds on to the balance of the note. We'll pay off 5% is really truly is an additional principal and 5% that is current, we have the option of paying either in cash or in shares.
Okay. That's at the time that the note matures?
No. The interest is current, but the PIK portion, the 5% is due when the note matures.
Gotcha. Okay. Also it's, I'm very pleased to hear that you're trying to, minimize shareholder dilution.
Yeah.
Yeah. No, that's really good to hear. My daughter's family lives in Wilton.
Really?
Yes.
Did you know that I live there as well?
No.
Your daughter's family could be my neighbor.
She's Spring Road.
Close.
Okay, good. Well. It's great speaking with you.
Yeah. Thank you for your comments and, you know, again, really believe, you know, in the quality of our products as well. Not to disparage any of our competitors, but we really believe our products are the highest quality and have the best and the finest ingredients that are available.
They really are exceptional. Again, looking forward to the future.
Thank you.
Thank you.
At this time, we have no further questions in the queue. I would like to turn the conference back over to Norm Snyder for closing remarks.
I wanna thank everyone for participating in today's call, as well as our employees, customers, and of course, our shareholders. We appreciate everyone's support and hope you all have a wonderful day. Thank you.
The conference has now concluded. Thank you for your participation. You may now disconnect.