All;
I sent an email to Konared’s PR asking about the latest Q revenue and COGS. The CFO responded. Below is the questions and the answer.
Here are my questions
1) Net Sales. For the June 2014 quarter, net sales is $474,650 vs year ago June quarter of 484,462. Why is the net sales lower than a year ago considering KonaRed has signed up a number of distributors and expended into a number of retail chains? Are those new retail outlets signed up since last June not contributing to the revenue?
2) Gross Margin Percent. For Q2 2014, gross margin also dropped to 14% from year ago 44.8%. What is the reason for the dramatic drop? Can you give some color on that? What level of gross margin should we expect going forward?
Here are the Answers.
Answer from the CFO:
Please see below the highlighted sections from the QII-14 Form 10Q Management Discussion and Analysis section. Also, (a) we have just been introduced to a variety of new customers and expect the impact of this will be seen within the next two quarters. It takes time for consumer demand to build once a product is introduced to a store; (b) standard gross margin in the beverage industry fluctuates between 25% to 30% and we are working to achieve this range.
Paul Knopick
Product Sales
During the three and six month periods ended June 30, 2014 we recorded product sales of $436,674 and $842,962 respectively, compared with product sales of $476,978 and $677,796 for the three and six month periods ended June 30, 2013. Prior to adjustment, this represents a decrease of 8% in three month comparative product sales, and an increase of 24% in comparative six months product sales.
We note a change of product mix occurred in early fiscal 2014 which makes the period over period product sales data not entirely comparable.
Previously, in addition to our mainline beverage and wellness product sales, we also operated a division which sold wholesale ingredients to other beverage manufacturers. A phase-out of wholesale ingredients sales was a component of our patent settlement agreement with VDF and this phase-out began in early fiscal 2014. Sales of wholesale ingredients comprised $39,667 and $60,042 for the three and six month periods ended June 30, 2014, versus $194,951 and $200,369 for the three and six month periods ended June 30, 2013.
When sales of wholesale ingredients are excluded, adjusted product sales for the three and six month periods ended June 30, 2014 are $397,007 and $782,920 respectively, compared with adjusted product sales of $282,027 and $477,427 for the three and six month periods ended June 30, 2013. This represents product sales increases of 41% and 64% for comparative three and six month periods, respectively.
We attribute our increases in sales to many initiatives undertaken in fiscal 2014, including our strategic alliance with Splash Beverage Group Inc. to expand our distribution network; and our introduction into national chain stores including Walmart and Vitamin Shoppe.
Shipping and delivery fees
During the three and six month periods ended June 30, 2014 we recorded shipping and delivery fees of $37,976 and $76,630 respectively, compared with shipping and delivery fees of $7,484 and $11,736 for the three and six month periods ended June 30, 2013. This represents increases of 407% and 553% respectively for the three and six month comparative periods.
Cost of Goods Sold
As referenced in our Description of Business above, our production is based on an outsourcing business model which utilizes third parties for the bulk of our non-core business operations, such as manufacturing and coffee fruit extraction. The main component of our cost of goods sold (‘COGS’) relates to costing the finished goods which are drawn from our inventory when sold. These finished goods primarily include bottles of our coffee beverages in various container and lot sizes which have been manufactured in a staged process for us by third parties and delivered to our warehouse, or to SBG, for distribution. Costing is done on applying specific unit sales to unit product costs based on the costs per unit recorded in our inventory system. Costs per unit in the inventory system include per unit manufacturing charges from outsource manufacturers.
Along with the current period cost of inventory which has been used for product sales, COGS also includes expensing of inventory which has: (i) been disposed of because it has expired and/or become obsolete; and (ii) been subject to a write-down reserve because the inventory has been deemed to be potentially useful, but has been slow moving for a significant period of time. During the period ended June 30, 2014, we completed an extensive assessment of inventory stocks and disposed of $48,854 of obsolete current inventory, and $18,732 of inventory which previously had previously been reserved. Obsolete inventory was comprised both of raw materials which had expired, old labels which included outdated information, and remaining inventory of a discontinued product.
During the three and six month periods ended June 30, 2014 COGS were $407,723 and $743,910, or 86% and 81% of sales, compared with $267,196 and $379,099, or 55% and 55% of sales for the three and six month periods ended June 30, 2013. This corresponds to gross margin percentages of 14% and 19% versus 45% and 45% for the comparative three and six month periods ended June 30, 2014 versus June 30, 2013. We project COGS will decrease over the balance of fiscal 2013 and gross margin will improve.
We attribute the relative increase in COGS for the current period to rush processing fees which were required to meet high demand from new major clients such as Walmart. During July 2014 we have completed negotiations for new manufacturing and delivery arrangements at lower rates.
Additionally, a significant contributing factor in the relative period over period decrease in gross margin is that during fiscal 2013, in addition to our mainline beverage and wellness product sales, we also operated a division which sold wholesale ingredients to other beverage manufacturers. A phase-out of wholesale ingredients sales was a component of our patent settlement agreement with VDF and this began in early fiscal 2014. Sales of wholesale ingredients earned higher gross margin than our mainline consumer products and the elimination of these sales has impacted our comparative period over period gross margins.
The primary cost of goods sold components for the three and six month periods ended June 30, 2014 versus the three and six month periods ended March 31,2013 were as follows: (i) manufacturing costs, which include both in-house and outsourced manufacturing costs, totaled $255,492 and $522,628 versus $271,020 and $357,802, respectively; (ii) packaging which totaled $14,829 and $20,619 versus $896 and $1,820, respectively; (iii) customer shipping which totaled $106,85 and $108,327 versus $21,380 and $47,340, respectively; and (iv) inventory delivery which totaled $11,382 and $30,802 versus $8,903 and $17,473, respectively.
I will hold all the shares I have.
Regards.
-M