Chris Reed - Founder & CEO Dan Miles - CFO.

Mitch Pinheiro - Wunderlich Securities Anthony Vendetti - Maxim Group.

Good afternoon and welcome to the Reed's Second Quarter Earnings Conference Call for the period ending June 30, 2016. My name is Denado and I will be your conference call operator today. Participating in today's call, we have Chris Reed, the CEO and Founder of Reed's Inc.; Dan Miles, Reed's Chief Financial Officer.

Following management's remarks, they will take your questions. [Operator Instructions] Before we begin today's call, I have a Safe Harbor statement to read to our listeners.

I would like to remind our listeners that during this call, management's remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks, but not limited to risks relating to demand for the company's products, dependence on third-party manufacturers and distributors, changes in the competitive environment, access to capital and other information detailed from time-to-time in the company's filings with the United States Securities and Exchange Commission.

In addition, any projections as to the company's future performance represent management's estimates as of today, August 4, 2016. Reed's Inc. assumes no obligations to update these projections in the future as market conditions change. And now I will now turn the call over to Mr. Miles, who will begin with his prepared remarks. Please go ahead, sir..

Thank you, Denado, and good afternoon. Thank you for your interest in Reed's Inc., and thank you for joining us today for Reed's Inc. first quarter 2016 earnings call. My name is Daniel Miles, CFO of Reed's Inc. In addition to the press release issued today, we filed our 10-Q for the 2016 second quarter fiscal year with the regulatory agencies.

As in the past, I will start with a recap of our results, highlight the financial activity and then turn the call over to Chris Reed, the CEO and Founder of Reed's. Let's start with the second quarter 2016 operational results. The company continues to be fully engaged in regaining the growth of Reed's products.

We believe that the company has corrected the supply chain troubles from Q3 2015 as Reed's Ginger Baked products and the Virgil brand products have begun growing sequentially month over month. Our brands have not recovered enough to grow year-over-year, which is the customary measure of success.

Gross sales, 8-ounce volume, fell by 8.3%, while net sales decreased 9.7% over the same quarter in 2015. Specifically, Reed's Ginger brand products decreased 13%; Virgil's brand products decreased 6%, and Reeds's Kombucha products 61%.

Other Reed's branded products -- that includes our Flying Cauldron Non-Alcoholic Butterscotch Beer -- increased 42% and the private label brands manufactured by Reed's increased an additional 33%. In Q2 2016, gross sales discounts per 8-ounce decreased 1.6%, reflecting a decrease in volume over a stable promotional spending base.

Non-beverage products such as candy, glassware and mail order are not included in the volume metric discussion. These items as a group totaled $575,000 in gross sales, a decrease of $200,000 over 2015 in the quarter. The company began shipping all S candy SKUs late in the quarter, after a settlement was reached with the California Attorney General.

And new supplier products began shipping. We believe the candy volume will return to past levels by year end. Our total cost of goods sold will decrease 1.7% to $8.39 million in the quarter, a decrease of approximately $148,000 in the same quarter, 2015. The decrease was due to lower volume of 8%.

Gross margin as a percentage of sales decreased to 23.7% from 29.9% in the same quarter of 2015. For a year-to-year comparison, 2016 had additional margin dilution of 1.3, resulting from increased sales of discontinued SKUs. After adjusting for this, the net quarter margin in 2016 is 25%.

The transfer cost allocation correction discussed in the Q1 call earlier this year resulting in an overstatement of the prior year margin of 2.2%. After adjusting for this, the second quarter margin of 2015 was 27.7%; therefore, the net gross margin change on an 8-ounce basis from 2015 to 2016 was a decrease of 2.7%.

The gross margin difference of 2.7% is made up of a price decrease of 2% and a cost increase of 1.7%. The cost increase is comprised of a labor increase in mix, based on where the production occurred. Idle plant costs increased 1.3% in Los Angeles, while the other plant cost increased 1.9%.

This quarter's idle plant cost increase reflects the improved operations over the same quarter in 2015, which was the first quarter under new leadership. We believe idle plant costs to remain in line with the prior year's results for the remainder of the year.

Our company's gross profit of $2.6 million in the quarter represents a decrease of $1 million or 29% from 2015. In response to the lower sales volume, the company initiated cost reduction initiatives.

During the quarter, the company experienced a profit loss by -- exceeded the profit loss by cutting total nonproduction costs 29%, or $1.84 million in the same quarter from the prior year. The net was a narrowing of the operating loss between the years.

Delivery and handling expenses decreased by 26%, to $1.06 million for the three months ended June 30, 2016, compared to $1.429 million in the same period in 2015, or a decrease in the expense of $365,000. The decrease is due to lower sales volume of 8% in combination with a rate and utilization mix reduction of 17%.

As the percentage of net sales, the decrease to 10% in the second quarter of 2016 is comparable to our historic rates. Selling and marketing expenses decreased 29% to $954,000 in the three months ended June 30, 2016, compared to $1.335 million over the same period in 2015, or a decrease of $381,000.

This decrease over the last year is primarily due to reductions in compensation-related expenses of $173,000, $88,000 in trade show-, advertising-, and public relations-related expense, and another $106,000 in travel-related expenses, while $14,000 was reduced in the operations of the sales group.

General and administrative expenses decreased by 30% to $931,000 in the three months ended June 30, 2016, compared to $1.369 million in the same period 2015, or a decrease in the expenses of $438,000.

The decrease over last year is primarily due to reduction in compensation-related expenses of $326,000, net bad debt activity of $73,000, and the general administrative and operations of $12,000. These decreases were partially offset by increases in consulting and legal expenses, specifically the California lawsuit of $35,000.

Therefore, the net profit and expense changes narrowed the operational loss by $146,000 or 30%, to $349,000 in the three months ended June 30, 2016, compared to a loss of $493,000 in the same quarter 2015.

The loss was comprised of a decrease in net sales of $1.186 million that was offset by lower costs of goods sold of $148,000 and lower expenses of $1.184 million, as discussed above in detail.

Interest expenses and bank related charges increased $223,000 to $416,000 in the three months ended June 30, compared to expenses of $251,000 in the same period 2015.

The increase was primarily due to our increased borrowing on our line of credit, an additional term loan increase and existing capital expansion with intended higher rates from negotiated terms from 2015. EBITDA remained positive for the quarter. EBITDA decreased $99 -- $89,000 from the prior year that resulted in adjustments totaling $12,000.

Plus the $77,000 increase in the net loss for the year. The $21,000 decrease in depreciation and amortization was due to the raised asset base, less retirements of older equipment. The increase in the interest expense was $223,000 was due to the increased loan balances and the rate increases.

Stock option compensation expense decrease was due to only 2,500 shares being issued year-to-date and the non-recurrence of immediate investing for key employees. Second quarter 2016 financial year-to-date highlights; I emphasize year-to-date as opposed to the quarter because for financial, we are projecting versus the year-end balance sheet.

As of June 30, 2016, we had a stockholder's equity of $1.082 million and working capital of $1.216 million, compared to shareholders equity of $785,000 and working capital of $730,000 at December 31, 2015. Our cash and cash equivalents decreased by $969,000 compared to $1.816 million at December 31.

Net cash used in operations increased $2.260 million to $4.104 million over the same six months from the previous year. This was a result of an increase in payments to vendors of $3.429 million. Net cash used in investing activities was $78,000, as most of the additional equipment acquired during the quarter was financed by our primary lender, PMC.

During the quarter, the company successfully completed an equity transaction that raised net proceeds of $2.239 million to provide the working capital to pay the vendors highlighted earlier.

In conjunction with the additional capital from the equity sources, the company reached an agreement with our primary lender PMC to extend the loan maturity dates for all of our loans until Q4 2017. The company believes that we've turned the page from last year's supply chain interruption.

We believe that, with the additional equity, the improving margins, decreasing operating expenses, your company is in a better position to achieve the success this year we all anticipate. It's now my pleasure to turn over the call to Chris Reed, the Founder and CEO of Reed's, Inc. Thank you..

significant new business coming in. So I think that we'd like our shareholders to know that we obviously have always been a very enthusiastic and optimistic person, but I don't believe that our optimism is poorly placed.

Anyway, without further ado, I'd like to open the lines to any questions the people may have regarding our second quarter financial results..

Thank you. [Operator Instructions] Our first question comes from the line of Mitch Pinheiro with Wunderlich Securities. Please go ahead, sir..

Hey, good afternoon. Looking at third quarter, I just want to get a feel for what we should be expecting. So I hear loud and clear that last year was obviously the trough in the whole -- in the -year, so you're going to see a pickup.

But how far back are you? Like, of the -- you said, I think, of some of the smaller, less core SKUs, you're 50% of the way back, and that was maybe 20% of your business, so you pick up 10% there.

What about Virgil's and Reed's? How far back are you?.

Well, let me clarify that. Our lesser SKUs, which represent somewhere around 20% of the business, are down 50%. And we're in a recovery mode on that. And it's -- there are not only national chain calls that we have to do to try to give the reassurance that we're back in stock and we're not going to mess up their shelves with big out of stocks.

Which isn't that easy to do, but we're having success. Not complete success. There's just a lot of lesser -- with large, independent accounts in natural foods, they're supermarkets but one-off, five-off type smaller chains. And we have -- we pay for data so we can see exactly when and what happens. Raspberry Ginger Brew was in, now not in.

So there's a call going out, talking about these SKUs, and there's a big effort going on. We'll know more by the end of the third quarter. It's not instantaneous recovery, there were some products -- obviously products went on the shelf, other competitors probably, and we may or may not get back in instantly.

But we are seeing that there's a lot of simple recovery that is going on. Can we get 70% of that 50% drop so that we are only down 20% after a while? That's a question we will be able to answer better after we continue this effort here..

I should have asked a better question but I guess what I'm looking for is you're going to see revenue growth next quarter, correct?.

Right..

Year-over-year revenue growth, is it -- are we going to see the same thing -- are we going to see a similar type of gross margin improvement as well, sequentially.

Is it going to stop you there?.

Yes, we're going to continue to see gross profit margin. I think it's just going to keep ratcheting up. The reasons are, there are going to be bigger gross profit margin improvements when the West Coast facility comes onboard.

There's going to be significant improvements when the simpler Ginger Brew process where we bring in something that allows the production plant to treat this more like our soda line, the Virgils. And we'll get more Virgil-type pricing we'll see significantly there.

There's just been an inefficiency, especially during the cash crunch that we experienced from the reduced sales and the reduction in working capital and there was a bit of hey, don't go ordering a normal run of that packaging, just order what we need to get through this next run, even if it costs a bit more to run short runs of that packaging.

So there is efficiency getting back in there that will ratchet up, too. So I think that there's going to be big leaps from the production shift in the West Coast facility, improvement in the way we bring our products to the production plant, particularly on the East Coast. And that'll happen later in the year.

Let's speak of 1% to 2% improvements and then some chunkier stuff happening as the facilities come back on line more efficiently..

Is that why Virgil's is down? The gross profit margin in Virgil's year-over-year? Is that down because of the inefficiencies on the East Coast, or I mean --.

Well, yes. The answer is yes. Right now, what was happening during the time we were trying to get back into product fulfillment of orders, we were producing some of the product in plants that were significantly far from the market, just to get it done. So we spent a bit more on freight and handling and also more expensive plants to run it at.

So now we're dialing in the better deals and negotiating, playing off the plants against each other a little bit to kind of leverage the new position we find ourselves in..

Okay. And then just two more questions. One regarding the LA plant.

When do you intend to close it, shut it down, how many weeks is it going to be shut down for, when do you start building inventory around, to -- for a cushion inventory, and when does it come back up?.

Well, it's two weeks, two different times. And the buildup will happen around November, late November. So it'll be -- I think the first -- beginning of late November, we'll do the first shift out and probably late December, the second one. So I know our guy keeps telling us by the end of the year, we'll be up and running here.

Well, we'll be up and running, actually, at the end of the first two-week shift.

It'll be -- so I have the real question, will it be completed by that time? You know, with all the extra production capability and the fact that December's slower than the summer months for soft drink sales, it won't be really that difficult, it's not like it's a super large challenge for us to build up inventory.

More probable will be we'll shift production to the East Coast during the West Coast shutdown and we'll incur some additional freight cost. But we're talking $30,000 - $40, 000 of additional freight during that period of time. So it's not -- we're not envisioning a big deal about this..

And so in terms of like dollars, what do you think the dollar -- the pressure on your working capital is? Is there a dollar amount you're -- are you building four weeks of inventory, like 100,000 cases of Reed's? What are you looking like there?.

Well, okay, I'm giving you a parameter here. Last year we were running somewhere around 220,000 cases, or approximately a whole month ahead of sales on the floor. And I think we got as high as 370,000 cases at the time we were raising money.

So it's -- inventory -- as we go through the summer months, we're unwinding that and we'll get back to a couple hundred thousand cases. So in terms of working capital, the 150,000 cases in addition works out to approximately $10/case or $1.5 million. So it's a significant buffer.

There's a relatively lax situation when you're -- how many days you're paying suppliers and how much inventory you have. It doesn't look like we're sitting on a ton of cash but, we have a significant buffer in effect that we are running cash flow positive at this time. I mean, that's a -- yes, we're watching it closely.

The plants come on board, we start generating capital. We get to 32% and $13 million, you start to throw off $1.5 million of cash. So it's -- we're looking forward in a short period of time, those are our goals, to get there quickly. And that's a modest goal, considering what's going on..

Okay. And just a final question, on the fountain.

Is it -- how many stores of tests is this going to be? What area of the country is it going to be tested in? And are you giving this particular chain an exclusive on the product for a period of time?.

Well, it's the Midwest. It's currently one store. And we haven't negotiated that..

Okay, thank you. I'll get back in the queue..

Nice to talk to you, Mitch. Thanks for covering us..

Thank you for your question. [Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group. Your line is open, please proceed..

Sure, thank you, just a couple quick questions. Gross margin came back a little bit this quarter, actually a lot, versus the first quarter of 2016.

How should we look at that going forward, or Dan, is that tough to predict because of whether or not the product mix in any particular quarter is private label versus branded?.

Thanks, Anthony. Anthony, the number that I'm forecasting for the remainder of the year is north of 25. And that's with our current operations as we stay now. Come towards the very last end of the fourth quarter, we typically sell more higher-margin items, but we've got some of the things, the headwinds, that Chris just alluded to, to push.

So would I say we'd be closer to 28, 29, fourth quarter? No, but I know we will be north of 25 as our base from here to go up for the remainder of the year..

Okay. And then, maybe Chris, if you could talk a little bit about Kombucha because I know that was down a lot.

Maybe some of that, like you said, there's a lot more competition in the space, but now that things are back on track, can you give us a little bit of flavor for what the chances are of that starting to pick up traction and win back customers, or is that going to be a long recovery period, do you think?.

Well, yes. The last year's SKUs were off 50%, Kombucha was off 60%. So it's a -- relatively they're similar, yet Kombucha seems like it got hit harder. Kombucha had a four-month or five- or six-month window, depending on the distributor, where it was just out of stock. You know, nobody waits around that long.

So we're back to -- we have 40% of the sales we had before. The fact is, on some level, we shouldn't have -- that's a big recovery, not small. So it was really a detrimental thing. Now we know that we have the best Kombucha in the marketplace. Now that's obviously a little bit subjective and it's our own very biased opinion about it.

In terms of flavor, that's where we stand. We have a low-cost production because we own our facilities. We have exclusive glass company with a Chinese glass supplier. We have a lot of benefits to many of the players out in the marketplace.

One of the largest benefits is that, once you have another -- a company that's already covering its own nickel, and is not exclusively a Kombucha company, we can play harder with this brand.

Especially when we are in recovery with margins, we're up in $13 million, $14 million in sales, we've got 30-plus margins and we're throwing off an extra million a quarter. A modest spend of $100,000 a month would let just about every consumer in the natural food industry, or a large percentage of them, know that this Kombucha's back in stock.

Hand them a coupon for a free trial. Tout it as the number one Kombucha, the best-tasting Kombucha in the world. We have significant relaunch ideas for the Kombucha, but right now, later today, tomorrow, we're going over the big Kombucha relaunch.

So we're going to give it legs, we're going to reach out to every retailer we have the data on -- we know exactly where we lost it, so by end of the third quarter, we're going to know how easy or hard it is to get back into the accounts that used to have it. But we're confident.

We're confident in the product, we're confident in -- we've come up with some tricks with Kombucha that are going to produce Kombucha 2.0, that we think are going to play very well with the customers. So we have a high degree of enthusiasm about it, we're a long-term player with things we do in general.

We don't need it to cover our nickel, especially moving forward. And we can get very aggressive. So if they think there's an aggressive player out there, then wait until they see Reed's with a bit of recovery here.

So, especially if you look at us if we get a big fat casual chain and all of a sudden, we've added another $8 million in sales for the quarter, we've already recovered it to $13 million to $15 million, you drop another $8 million on that, start throwing off a couple million dollars a quarter, what kind of resources can we put behind our Kombucha? So, they'll make us a formidable player, we're competitive, we don't like losing.

We're aggressive people by nature, so we don't like being in the situation we're in. So we're going to be a significant player in Kombucha. Mainly because we're the best and we think that is an important point.

If you can absolutely wheel in customers and have the power and management and money and resources behind this, there's no reason we shouldn't have a significant win..

Okay, and then on the stores that you just were a strong Ginger Brew, so you're in 1,600-plus Kroger stores.

When did that rollout start and same thing for the 350-plus Shopco locations?.

I saw a press release during the quarter. I don't know if it was announced as something that happened and then it was rolling out, or if it was rolling out -- I actually would have to ask my sales manager how that rollout is going. Again, there's not a lot of resources going towards it. We're staying within our means.

We're generating cash, we don't want to do another raise, and we feel like very shortly -- we're doing what we can without a big spend. But get us to a budget, get us to an additional $1 million a quarter to play with, and the kind of marketing -- this place has zero marketing on some level.

I mean, obviously it doesn't; we go to trade shows, and we get press, we have people out on the street, we go to events, there's some marketing going on but the kind of accelerator that we anticipate having will be significant.

And I think Stronger, one of the things going on with Stronger is we are looking for a significant large liquor company partner to step up. We're dancing with a few but we'd like to see 2017 to have some very aggressive and very big marketing/co-marketing programs around our brands and the Moscow Mule.

I don't want to say too much more than that, but that also is in the works. And we think that we will be able to drive that, with someone who will want to be onboard as an equal partner with that..

And then just lastly on the store trial; you're starting with one store for the bag in a box fountain sodas.

Is it -- has that particular vendor indicated if it'll go from one store to multiple stores or is it possible after one store it would roll out nationally, and then the second part of that question is, once you finish the install in your headquarter office in LA, will you be able to meet that demand if they decide to go forward starting beginning of 2017?.

All right. The trial is to vett us as a potential soda supplier for their current chain. And their chain is a significant national fast casual chain. The one we've been talking about through most of the earnings call. But we're talking about -- what did we say? -- triple-digit number of accounts..

Yes, I know, but I guess my question is, have they given you a little bit of a blueprint of ok, we'll go -- if we select you, we're going to go from one to a certain number of --.

It's not really clear. It seems like their national contract is due up in 2017 and somewhere, I don't think the big deal is our ability to keep up with the rollout. I think we've given them 60 days to get up to a national level - 0 to 60 - to supply.

And they're going to give us a lot more time, probably six months, I think the equipment is probably -- the equipment is new equipment, its sexy new equipment, and they're vetting that right now along with us. And I think that will probably be the slow piece in the rollout chain. And my sense is over six months, but I don't doubt..

Okay, no, that's good update. Thanks. I appreciate it..

You know, the customer would love to see this -- they want to get behind this newfangled thing because it's a marketing opportunity for them to flaunt being the first in the world to put out this system, this product, this quality, these new drinks, the equipment.

So there's going to be a lot of pressure for them -- I mean, we did a calculation that they -- you know, some estimates of $1 per share earnings for this company. So the management has been on a roll and this would just be -- this is something they're not going to want to sit around; this is a very high profile thing at the corporate level..

Okay, great. Thank you very much..

Thank you for your question. It does appear we no longer have any questions. Mr. Reed, I'll turn it back to you for your closing remarks..

Well, I appreciate your time, look forward to getting through this third quarter and showing some results. So far third quarter is looking very good. Keep our fingers crossed that all this nice recovery and growth is continuing here. And we'll be sitting here in a few more months -- three months to talk about it.

And thank you for your patience with us and we're excited as ever. And thank you for participating today and taking your time..

Ladies and gentlemen, that does conclude the conference call for today. We do thank you for your participation, and we ask that you please disconnect your lines..