Daniel Miles - CFO Val Stalowir - CEO & Director.

Anthony Vendetti - Maxima Group Gerry Khermouch - Beverage Business Insights..

Good afternoon, and welcome to the Reed's Third Quarter 2017 Earnings Conference Call for the period ending September 30, 2017. My name is Scott, and I will be your conference call operator today.

Today's call is limited to 1 hour, and we'll have the prepared remarks with Val Stalowir, Reed's Chief Executive Officer; and also by Dan Miles, Reed's Chief Financial Officer. Following management's remarks, they will take your question. 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 take additional forward-looking statements in response to your questions.

Additionally, please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and the supplemental materials filed with the SEC.

Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely for informational and comparative purposes. The company believes that the presentation of non-GAAP financial measures provides useful information to investors regarding the company's financial condition and results of operations.

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, November 13, 2017. Reed's, Inc. assumes no obligation to update these projections in the future as market conditions change. I will now turn the call over to Dan Miles, who will begin with his prepared remarks. Please go ahead..

Thank you, Scott. And thank you investors for your continued interest in Reed’s Inc. My name is Daniel Miles, and I’m the CFO of Reed's. I will discuss the third quarter results and then turn the call over to Val for important information about Reed’s Inc. new initiatives. At the completion of these remarks, both Val and I will take your questions.

In the prior quarter, the company announced the installation of a new Chief Executive Officer, a new Chief Operating Officer and created a new position of Chief Innovation Officer. These newly installed leadership team has been conducted a thorough review of the business including its current performance and core strategies.

The company is now in the process of executing very significant changes to the company strategy that includes a prioritization on the Reed’s core and Virgil brands, a discontinuing of SKUs and potentially repositioning the company operationally for further to further outsource the manufacturing of its products.

We anticipate by the coming weeks of announcements regarding the details of these initiatives, we believe that these major initiatives will provide needed capital to complete the transition from a manufacturing entity to a brand focused, sales organization.

In the prior quarter call, we announced the new sales focus, here are the very initial results. Since 19, since 2016, the company has had sales and production of 111 separate SKUs. We will now focus on two brands, Reed’s and Virgil’s with 28 SKUs. We define these as our core.

Our third quarter 2017 results reflect the first price increase in seven years, which compressed the volume but led to a core product increase in gross revenue as measured by 12 ounce cases of SKUs by $0.43 in the quarter just completed.

Our total portfolio volume, the rate has declined slowed to 12.7% in the quarter from a decrease of 16% in the year before. Our total gross revenue rate of decline slowed to 10.8% in the third quarter over the same quarter in the prior year as compared to 13.8% in the nine months ended September 30th.

Our core brands represent 80% of the volume and also increased the selling price of 43% of $0.43 per case, while the cards decreased $0.11 per 12 ounce case. Total discounts as a percentage of revenue increase 9/10 of a percent versus the same quarter in the prior year, and increased 2.2% versus year-to-date period in the prior year.

It should be noted that discounts are not tracked by SKU, but by customer and therefore are not reported on the core non-core classification. Cost of goods sold for all products declined in the quarter 12.3% while non-core products cost of goods sold decline 52% versus the same quarter in the prior year.

Year-to-date cost of goods sold for products declined in the third quarter 14 8% and non-core products cost of goods sold decline 54%. Cost of goods sold for core products decline 5.4% in the third quarter and 7% to-date over the same period in the prior year.

Once again, it should be noted that idle plant is not calculated by SKU, and that therefore not reported on the core, non-core classification. Net margin declined 4.4% and 4.9% over the same quarter and year-to-date periods versus the prior year which was driven primarily by idle plant charges.

Overall expenses during the third quarter increased 88% due to the impairment charge in the quarter. Delivery expenses were up 24% versus the same year prior period, which were due to a higher number of transport from East to West coast, during the quarter.

General and administrative expenses are up 257%, which really reflect the $2 million impairment charge, higher filing fees for the increased warrants in stock and the timing of the shareholder meeting that last year was in the fourth quarter and this year is in the third quarter.

Sales expenses decreased 9.8% and 19.5% over the same periods in the primary prime prior year primarily driven by lower employee cost and third-party broker fees. Interest and warrant liability expenses grew 347% over the same time in the prior year, reflecting the change in fair value of warrant liabilities.

And finally it should be noted here that essentially all warrant derivative liabilities have been extinguished and therefore fluctuation in our financials from activity on the warrant equities should be minimal moving forward.

Therefore the operating loss increase 600% in the third quarter, 168% year-to-date reflecting the impairments and the warrant related costs. We believe that focusing on the core brands and illuminating the risks associated with our own productions, capabilities will lead the company to faster sales growth and better margin.

We look forward to updating you on our progress as the situation is evaluated by third-party experts. I will now turn you over to Val Stalowir, our Chief Executive Officer..

Hi, thanks Dan. I’d like to report that management continues to make progress to improve the company’s overall performance and some of the initiatives underway have begun to deliver some positive impact on the business.

The current priority really is very clear, it’s to significantly improve our current net in gross margins and to re-accelerate growth on the core brands.

To that end as Dan pointed out, we’ve reduced the companies SKUs down to 28 versus four times that similar period prior year, so that you can really focus on our capital and our sales resources on getting that shot placement focusing volume growth on those core items.

This renewed focus on Reed’s and Virgil brands has not only slowed the core of sales decline we saw earlier in the year, but we actually saw volume growth year-on-year for the core brands in July, September and that same trend continued in October.

The quarter would’ve been out there if we didn’t have a price increase that hit us in August, and it was really a necessary price increase, though the company has not taken a price increase in over seven years while there were significant increases in input cost.

So and what we feel good about that, given the volume increases in September/October we feel that the market has fully absorbed this needed price increase to improve our margins.

I will continue looking at the availability to continue taking more pricing as we move forward into next year and the year hereafter to narrow the gap on the cost of good increases that we experienced earlier in the years. We have a number of initiatives underway that will continue to drive material improvements in our gross margins.

That’s the big story here. We need to improve margins, to improve profitability and thus reinvest in the brand and development and accelerated growth programs that we need to build large successful brands.

One of the major initiatives we are about to conclude and announce is the company’s shift from brokered purchase glass supply, which comprises a single largest input expense through our cost of goods to new and direct glass supply contract with the leading glass manufacturer which we believe will drive between four and six gross margin points of improvement.

Gross margin will further be improved by taking advantage of a newly negotiated contract for third-party logistics, which we believe will drive also between four and six gross margin points of improvement. The signing of the details of both of these new contracts will be announced shortly.

And that’s the general theme of this call, there’s a lot of work the team has put in and now we’re about to be concluding a number of relationships and contracts that will improve the performance of the company, which we’ll be announcing over the over the coming few weeks.

The company continues to explore additional improvements with net margin and explore, potentially reposition the company operationally to further outsource to manufacturing this product.

As such the company is in the process of evaluating the current production capabilities of the company which may allow us to invest greater portion of our capital into sales and marketing investments.

We feel there is significant upside in margin improvement related to our current production model and we are currently negotiating engagement over professional services company with deep experience in the beverage space to lead the evaluation of the company strategies and options and recommend the best path forward.

Again, this relationship and the details will be announced shortly.

We believe that the combination of all these efforts in terms of the glass, the improved logistics and looking at our overall self production model, I will drive significant improvements to the company’s net margins, improve company’s profitability and will generate the additional funding needed to reinvest in building the brands and re-accelerating the brand growth.

Now moving from a focus of our operational improvements to our major initiatives that we believe will drive and accelerate growth for the core brands. A major opportunity is distribution; we are in over 20, some are between 20 and 25,000 retail doors and we know there well over hundreds of thousands of doors were not currently in.

To that end, we are currently negotiating two new broker relationships that will drive significant customer relationships and feet on the street to open new doors and also improve our in-store performance in the doors we’re currently in. Again, those two new broker partnerships will be announced shortly.

We’re also moving forward with penetrating our licensed accounts. This is an area that our competition has spent a lot of time in focus on and that's where we have to ramp up our focus in terms of on-premise.

There are 40,000 liquor stores, 60,000 bars and hundreds of thousands of restaurants that should be selling our Reed’s, our best-in-class Reed’s Ginger Beer and be the part of every Moscow mule that poured should be using a Reed’s product.

So that is a – we’re currently negotiating with a number of new licensed accounts and again those relationships will be announce in the coming weeks and months.

In terms of new product launches, I’m happy to report they were on track to launch our new Virgil's refreshed branding on all glass packaging in January, as well as our new 2.0 all-natural zero sugar, zero calorie lines of Virgil's products. They come in six flavors; root beer, black cherry, cream, cola, orange and lemon lime.

We’ll also be in a position to launch the zero sugar line in February in 12 ounce cans and that came directly from retail accounts. We've sampled handful of large leading retail channel distributors and retailers and so far to the reviews have been really strong.

They can't believe sort of the competitive set when they take competitive set versus ours. They have been very well received and strong interest has been shown to bring those – this new product line and there is absolutely an interest in having it come in the can form.

The brand refresh on Reed’s line along with a zero or lower sugar Ginger Beer product is also on track to be available sometime in Q2 of 2018. And we’ll also be launching a can version of our Reed’s line to target on-premise channel and certain convenience store placements. Quick update on a natural fountain test, that test continues to do well.

We just had a recent meeting with our fast casual partner. They’ve express some interest to expand to increase the level of marketing support for the brand given that the product is now performed and surpass over all the product and consumer acceptance hurdles that they had set out for.

So, there’ll be more report as this relationship continues to develop. And so, so I've thrown a lot out there.

In order to really complete this turnaround plan, to continue driving improvements in the company's net margin probability and to really ensure we’re going to drive accelerated growth on the core brands the company will require additional capital successfully execute all of these improvements.

The company recently announced this plan to conduct the rights offering in order to raise the required capital to strengthen the balance sheet and support company’s sales and marketing efforts. The specifics of the rights offering along with the investment banking resources that will lead the process will be announced this week.

So, in summary there is a lot of progress to be announced in the coming weeks and our plan is to keep everyone informed to press release and developments and then actually set up and host the business update calls so that we can field your questions as these developments occur. And I think that’s it for now and we’ll be happy to take some questions..

Scott, we’ll turn it back to you..

Thank you. [Operator Instructions] Our first question is from Anthony Vendetti with Maxima Group. Please proceed..

Thanks. Good afternoon. So I just wanted to follow-up on the plans for the LA plant.

Are you planning on closing that and going to -- go to the just the co-packer model? Or -- and if so what’s the timing of that?.

So, we’ve been really focused on improving our margins. And one of the driving factors of depressing our gross margins is our significant idle plant costs.

So, at this point we have internally developed some improvement options, but we’re also about to engage a professional services company that has done this for decades, knows the beverage space and we’re going to bring them in to help us evaluate what is going to be the best use of this, all of the operational assets we've invested here, the plants, the new equipment that we purchase to put into the plants, as well as some of our non-core businesses.

So, too early to tell exactly what the future is. I think obviously the best use would be for continuation of production here, potentially as a co-packing relationship for us, but at this point I think it just too early to say where – what the future is until we've done a thorough analysis with this expert group..

Sure. That’s fair. And then, just a little more detail on the $2 million impairment charge.

What does that entail?.

Sure. Anthony, the $2 million charge was as we go through the process of looking at our assets and what is the core and what wasn’t. We were concerned that expanding the plant at this time would probably not be in the best interest, it might not be in the long term vision.

Therefore when we made that decision we knew we had to look at the value of the assets that have not yet been installed. So we did our best estimate on to what would be the resale value of brand new equipment and we took a 2 million out of a – about a 40% impairment charge against that equipment.

Will we use that equipment in the future? How we will use it. Will somebody else use it? We don't know. But we didn't know that at the time we were making the decisions on how we move forward, expanding the plant to a triple the speed here was probably not a good allocation of future capital..

Yes. When look at this, if we could they we’re doing it for sure, which right now we’re not sure. We want to go through the process of seeing with the best uses will be. What the future is going to be based on all of the options that potentially exist to us. If we couldn’t answer yes, we’re definitely installing that.

We took the conservative position of, well, then we can't say we are, and thus we need to recognize an impairment. At the end of the day there could be a scenario where that equipment is purchased and is not impaired and is install here or elsewhere, but we want to be conservative from this standpoint and take impairment now..

Okay. Understood.

And then lastly, is there going to be accrued interest in amortization of about 275,000 every quarter? Should we model that?.

Yes. Yes, there is. The interest would be unpaid relative to the note. It is in the sources of uses on the S-1 to retire most of the other debt and replace it with more market-based rates..

Okay, great. Thanks. I’ll jump back in the queue. Appreciate it..

Thanks..

[Operator Instructions] Our next question is from Gerry Khermouch with Beverage Business Insights. Please proceed..

Hi, Val. Thanks for very informative call. Much appreciated..

Hey, Gerry. Thanks..

And I was wondering when you talk that you getting things down to a very compact 28 SKUs.

Does that mean that you have formally discontinued any brands whether they’d be Culture Club Kombucha or China Cola or they just kind of on holds for now?.

Yes, absolutely. We are not putting any focus or efforts on those brand that at this point. We’re selling out whatever inventories left and we don't plan on producing any additional inventory of those brands..

Okay, great. Thanks..

[Operator Instructions].

Scott, I think that’s it for us..

Okay. Very good. There’s no further questions. Now, I’ll turn it back to you for closing remarks..

Thank you very much investors and interested parties for listening to our quarterly announcement. As Val reiterated here, the future is going to have a lot of very, very interesting and helpful information for you in the next few weeks.

We are completing up some very, very significant and positive changes for the company and we believe that we will return to the top of the craft soda business in a very, very short time both from a financial perspective and a continued volume beverage. Thank you again very much. Look forward to talking to you very soon..

Ladies and gentlemen, that does conclude your conference call for today. We thank you for participating, and ask that you please disconnect your line..