Good afternoon and welcome to Reed's First Quarter 2019 Earnings Conference Call for the period ending on March 31, 2019. My name is Jesse and I will be your conference call operator today.

Today's call is limited to one hour and we'll have prepared remarks from Val Stalowir, Reed's Chief Executive Officer; and Iris Snyder, Reed's Chief Financial Officer. Following management's remarks, they will take your questions. 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 and that management may make additional forward-looking statements in response to your questions.

Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, level of activity, performance, or achievements to be materially different from those anticipated by such statements.

These factors include, but are not limited to, the company's ability to manage growth, manage debt, and meet development goals, reduction in demand for our 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 our filings with the United States Securities and Exchange Commission.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements.

In addition, any projections as for the company's future performance represent management's estimates as of today, May 14, 2019; we assume no obligation to update these projections in the future as market conditions change.

Additionally, please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on our website at investor.reedsinc.com.

Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for informational and comparative purposes.

We present modified EBITDA because we believe 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 our core operating performance. I will now turn the call over to Mr. Stalowir. Please go-ahead, sir..

Southeast; Midwest; South Central, Canada, and some international markets. We also continue to replace competing ginger beer offerings in on premise locations with REED’s. Across the Greater Chicago, Southern California, Northern California, Pacific Northwest markets.

Our on-premise channel efforts are ramping up and delivered more than 500 new restaurant bar and nightclub doors year-to-date. As I noted, Friday was an exciting day for the entire REED’s family as we began trading on NASDAQ. This accomplishment is a reflection of the enhancements to our capital structure and business model.

We’re also appreciative of the rising investor interest and support reflecting confidence in our brands and business plan. Since our last conference call just 7 weeks ago, the number of analysts publishing research on our stock has doubled to 4.

We have a compelling investor story to tell with these recent developments, we’re confident we’ll be able to increase the company's visibility and expand our investor reach. We remain committed to driving shareholder value and establishing long-term relationships with all of our investors.

We are confident in our plans and are pushing hard to build our brands. Thank you for joining us on this endeavor. Now, let me turn the call over to Iris to run through the first quarter results.

Iris?.

Thank you very much Val and good morning afternoon everyone. As Val mentioned, we are starting to benefit from our asset like sales and marketing business model and continue to position the company to accelerate growth in 2019. Let me run through the financial results.

First quarter net sales increased 2% to $8.4 million, compared with $8.3 million in the prior year. While core brand growth sales increased 15%, compared to the prior year. The strong performance of our core brand includes 14% volume growth and a 1% increase in price per case.

The volume growth was driven by 46% growth of the Virgil’s brand, including continued momentum of the Virgil's Zero Sugar offering. As anticipated, the core brand growth was partially offset by lower sales of exited and non-core products, including the sale of the private-label business in conjunction with the plant sale at the end of 2018.

For the first quarter, gross profit increased by 9%, and gross margin as a percent of net sales increased 185 basis points over the prior year to 30%. The year-over-year improvement in gross margin was primarily driven by price restructuring SKU rationalization and the reduction of idle plant cost as a result of the plant sale.

Delivering handling costs increased 8% to $1 million, largely driven by volume increases.

The 65 basis points increases as a percentage of net sales during the quarter, compared to the prior-year reflects a prebuild of innovation inventory and the positioning of that inventory to appropriate distribution centers to prepare for the sale of launch of new products in the second quarter.

Selling and marketing costs increased 99% to $2 million during the quarter. The 1,165-basis point increase as a percentage of net sales versus prior year reflects the investments in sales and marketing infrastructure and growth initiatives.

These increases in sales and marketing were expected and are consistent with our strategy to refresh the brand, launch new products and packaging into the market, open new retail outlets and channels, and lay the ground work to reaccelerate growth of the core brands.

General and administrative expenses increased 65% to $2.4 million in the first quarter, compared to $1.4 million in the prior year period. The year-over-year increase was largely driven by non-cash performance-based equity awards and bonus accruals, along with final transition costs relating to our plant sale.

The first quarter operating loss increased $2.9 million from $1.1 million in the prior year. Interest and other expense decreased to $0.4 million in the first quarter, compared to $0.5 million last year. Net loss was $3.3 million or $0.11 per share in the first quarter of 2019.

This is compared to $1.6 million or $0.06 per share in the same period last year. Moving to the balance sheet and cash flow, we entered the first quarter of 2019 with $2.7 million in cash and $2.6 million in revolving line of credit with $6.8 million of availability.

As previously announced, on February 20, we completed an underwritten public offering of 7.7 million shares of common stock, including 1 million shares still pursuant to the over-allotment at a public offering price of $2.10 per share. The net proceeds to the company from this offering were approximately $14.9 million.

The proceeds were utilized to reduce our borrowings on our credit facility and provide significant capital availability to execute our growth plans for 2019 and beyond. During the first quarter of 2019, we use cash in operating activities of $8.8 million, compared to $4.6 million in the prior year period.

The increase in cash used primarily relates to significant investments in inventory in preparation for product launches in the second quarter of 2019, as well as increased investments in sales and marketing we’ve already discussed.

Turning to guidance, we are confident in the outlook for 2019 and are reiterating the guidance we initially provided in the prospective supplement filed on February 14. We expect to generate net sales in the range of $42 million to $44 million for the full-year 2019 and anticipate year-over-year core brand growth of 20% to 30%.

Note that in Association with the sale of our Los Angeles plant, we also sold our private label business. While we will receive a small royalty associated with these private label sales in the future, reported net sales growth will reflect the elimination of approximately $6 million of private label and discontinued brand revenue in 2018.

Additionally, we anticipate a gross margin between 28% to 32% for the first half of 2019 and a gross margin of 32% or greater for the second half of 2019. As our guidance reflects, we are confident in the growth opportunities that lie ahead in 2019 and the potential for incremental growth.

We remain excited about the potential to drive incremental sales and margin mix improvements via our upcoming pilots of REED's Ready to Drink Mules and Wellness Ginger Beer with Hemp Extract, but we have not included these positive impacts in a material way in our 2019 guidance.

Now, let me turn the call back to the operator to begin the question-and-answer session.

Operator?.

Thank you. [Operator Instructions] Our first question comes from the line of David Bain with ROTH Capital Partners. Please proceed with your question..

Great. Thank you and nice quarter.

I was hoping – in your prepared remarks, you mentioned the initial Walmart order over 800 stores, I just want to confirm that order impacts 2Q and the initial order itself is much stronger than we anticipated, was that expected in your internal plan?.

On the Walmart?.

Yes..

Yes. That was more than we expected..

Okay.

And that impacts 2Q, correct?.

Yes..

Okay. And then, I’m hoping to get a little bit more color around the acceleration at Virgil's in terms of, you know the quarter-over-quarter kind of growth rate result on a year-over-year basis if that makes sense.

I understand, Zero Sugar is leading the way, but could you speak to any acceleration in terms of potential increase in sales from new brokers, channels, pull through data you're now able to use or is this just a true combination of everything ahead of marketing impact?.

Yes. The news is working on both the full and the zeros.

Yes, mostly the incremental growth is coming from the zeros, but the baseline was up – what was the base, the glass piece of…?.

It was up double digits as well..

Yes. That was up double digits as well. So, it’s a combination of new doors as well as cycling now, not only the current base of doors that we had before, but in new doors that we’ve added. The marketing piece really has not been, you know, the investment there really hasn't been significant to date.

So, really is, the pull through, the increasing, the IRI data on the velocities continue to show continued increases of velocity from month-to-month and so from that perspective it’s kind of working across multiple opportunities..

Okay, great. And just last one if I could.

Just wondering if you could speak to category growth in craft soda, perhaps even diet craft or sugar-free and ginger beer as well and then speak to anything new from competitors in terms of pricing or extensions or new entrants that your sales has been seeing in the field just broad-based? That would be helpful..

Yes. In terms of IRI, the category, I don't have the figures in front of me, but the category on craft continues to grow low-single-digits. The zero naturals are growing healthy double digits.

There’s not a lot of movement in pricing, pricing in both the ginger beer and the craft soda space is kind of holding pretty steady without a lot of major changes. You know, some of the brands like Fever-Tree and Bundaberg continue to invest significantly in new distribution doors.

So, that we’ve definitely seen impacted in the category, but from a pricing standpoint, not a lot of movement in terms of the ginger beer category. That’s still growing at high single digits. And then ginger ale as we pointed out has been really taking advantage of this perception that it’s actually a healthier beverage because it has ginger in it.

When we did a thousand consumer survey, over 60% of consumers were saying that ginger ale is healthier than mainstream soda and that because of having real ginger in it. So, that ginger ale is still up, significantly that multiples over, where the soda category is, which is about flat.

And I think soda would even be down without the innovation that Coke has brought to the category with diet Coke and some of the extension. So, from that perspective, both categories are healthy more so on the Zero Sugar on the craft soda side and ginger in general. Anything with ginger is doing well..

Okay. Great. Thanks again..

Thanks David..

Thank you. Our next question comes from the line of Roger Duan with R.F. Lafferty & Co. proceed with your question..

Hi, Val, hi Iris, how are you doing?.

All well..

Great. Thanks Roger..

Hi. First of all, a quick question.

How much of the $1 million increase in the G&A was related to a plant sale?.

There was one-time final charges of 220,000..

Okay, 220,000, great..

Our stock option equity incremental is 330 and then bonus accruals was about 100. So, there were three pieces of about 70% of the increase of the G&A year-on-year..

Okay. So, my first question is going to be on REED Zero and cans. From the orders and maybe some discussions with distributors, can you give us a sense on whether REED’s Zero and cans will have a stronger launch compared to Virgil’s.

Obviously, Virgil has been growing impressively, I’m just trying to get a sense of the gross trajectory here for the REED’s zero and can..

Yes, it’s too early to say. We had a lot of time on the Virgil Zero Sugar launches. We started selling that in probably end of 2017, beginning of 2018, and then we launched the whole platform in the end of May.

So, we had a lot of just given the cycle time, we had a lot of pre-orders and so from a comparison standpoint, I think that Virgil’s probably had a stronger launch in terms of new customers that we were able to land because it was really new news to Virgil’s, coming out in cans and the six flavors.

On REED’s, we have a similar sort of launch in terms of cans and Zeros, but it’s little too early to tell exactly what trajectory REED’s will be on versus Virgil’s. We’ve just started taking orders now, there is a lot of sort of prep work and then you’ve got wait until the actual Pos come in.

And so far, we’re pretty happy with what we are starting to see in May, but really May is really the first official month that we’ve started shipping any Zero REED’s related bottles or cans.

We need a couple of more months of those POs and then the actual doors that we have secured and the PO’s coming in to be able to say what trajectory Reed’s is going to be following versus Virgil’s.

Okay great.

I know its super early, you guys just launched your marketing campaign, is there any data points surrounding that that you can share with us at this point, or it is too early also?.

Yes, it is kind of officially launched last Friday. So, four days is not enough.

We’ve done a pre and a post, so we’ve already done the pre in terms of national and heavy up in the top five markets to measure awareness, purchase intent, liking, favorabilities, criteria of all the sort of ginger beer competitors and REED’s, and so we are going to be measuring after we have run this campaign for several months, we will be able to actually measure how this has moved.

And there are other ways in terms of digital feedback and engagement, so we will be measuring that, but we’re going to definitely need another month or two to really be able to measure the impact of our launch of the campaign..

Okay understood. My last question, can you maybe talk a little bit more about your expansion in the drug channel.

Do you guys have any plans to sign on additional channel brokers to target that segment?.

Hi Neal, do you want to handle that?.

Yes, we are actively calling the big 3, we'll call them, drug chains. I don’t want to give any leading information, but we’ve had some good discussions with one of the biggest and we’re talking to them about a couple of different programs with these guys. So, there’s more to come on that.

We’re hoping to hear something sooner than later, but they’re very interested in what we’re doing..

Perfect. Okay, that’s all from me, thank you guys. Congrats on the quarter..

Thanks..

Thank you..

[Operator Instructions] Our next question comes from the line of Chris Krueger with Lake Street Capital Markets. Please proceed with your question..

Hi, good afternoon. Thanks for taking my call..

Hi, Chris..

Hi, Chris..

Most of my questions have been answered, but can you repeat how many SKUs are at Walmart and how many are at Costco?.

Yes. At Walmart we have 7 SKUs, we have the Extra and Zero Extra, then we have the Root Beer and Black Cherry Full Sugar Virgil’s and then we have three of the Zero cans. Costco is actually an interesting mix. We have got Reed’s in 12-ounce cans REED’s extra. We have Virgil’s Full Sugar Root Beer.

We have road shows now in multiple regions that are launching on both the REED’s and Virgil’s, so we are actually getting interest on both sides of the brand..

Good.

And then, I know it’s pretty early right now, but looking ahead to next year in product development and potential product launches next year that kind of tracking the plant right now, do you expect to have even the bigger year next year?.

I think we did five years’ worth of product development in 2018 and it’s really a matter of executing against what we’ve developed and we have got the Zero Sugars on Virgil’s still growing and expanding and we are probably in 6,000 and 7,000 and maybe 8,000 doors and we’ve got a footprint of 35, so we have more work to do on the Virgil zero cans, as well as starting to communicate with consumers there.

So, that works still. There’s a lot of opportunity and work that needs to be done.

REED’s, the innovation is on the core, it just started this month and so the new can lines going into new channel, the zero sugars going hopefully everywhere in both bottles and cans, that’s going to require lot of focus and effort and support over the next 12 months to 18 months to really take full advantage of the opportunity there.

And then, we are launching three new categories this year. One in the flavored malt beverage with the Ready to Drink Mule. That’s a pilot, but obviously if that does well, we plan to expand that at the end of this year into next year. So, that will take focus and support. The Hemp, we've gotten rave reviews from distributors and now from retailers.

So, that is a pilot, but again that has a lot of upside in an incremental functional category. And then later in this year, we will be launching the shot business with daily ginger dose, plus other functions.

I mean that is plenty, I think of innovation to really, we’re going to have to focus and communicate and execute from the sales force standpoint and invest in POS and consumer pull support to really fully take advantage of these new opportunities. So, 2020 I just don’t see, let’s say new category entries at this point.

I think all of these are significant categories. Each could be tens of millions of dollars if not more if properly supported moving forward. So, from that perspective I think the focus really is execution as opposed to new news.

I mean, we’ve got a lot of new news where we’re currently executing against and I think that yes new products will play a significant role in driving incremental growth and hopefully improve margin mix in 2020, and I’d say the majority of the growth is going to come from what you know now is in the market and is entering the market..

Alright, that was helpful. Thanks a lot..

Thanks, Chris..

Thank you. Our next question comes from the line of Aaron Grey with Alliance Global Partners. Please proceed with your question..

Thanks for the question. So, just taking a little bit deeper on hemp. While I appreciate its still early day, just any color you can provide in terms of what initial markets you might look to enter it in.

And then some color in terms of what retailers you might look to work because well I know you might need to ask him this question there, just given the regulator grey area there on the ingestibles, any color there will be helpful. Thank you..

Yes. This is an emerging category with a lot of moving parts. We’re really, I think waiting to see what the new FDA commissioner comes out and gives guardrails or guidance on, but in the meantime, we know that CBD and hemp are now federally legal, and we are starting. The only way to learn to swim is to jump in the water and start swimming.

So, from that perspective, we are discussing with distributors those are willing to take it on now and like you said, let’s say, forward-looking retailers who probably are smaller in scale, but more, I would say aggressive in terms of trying to move innovation into their stores.

So, there’s not much inside I can give you except that this is a pretty fluid category. We’ve got great products that have gotten very good feedback and we’re starting to see those now.

And we’re just going to have to wait and see what the reaction is from regulators whether they are state regulation or FDA, and see what the consumer and retailer reaction is with our offerings. So, that’s why we haven’t put a lot of volume in 2019 against this effort because of a lot of the uncertainties.

And I would just say that once the FDA starts actually making a commitment in terms of their view of their role and what they would like to see happen in this category, that’s going to tell us a lot because currently we have a sort of a cutting edge legal firm that watches this and I get daily updates on activity and rules and regulations and legal actions and, you know two or three are saying there is support on it, a couple more kind of slide back.

I mean it really is from day-to-day. It is still a moving target where there it seems more doors are opening in certain regions and then some are closing in other regions. So, it really is, it is going to be week-to-week month-to-month in terms of how this category develops..

Okay, great. Thanks for the color. That’s all from me..

Alright. Thanks Aaron..

Thank you. It appears we have no additional questions at this time. So, I’d like to turn the floor back over to management for any additional or concluding comments..

Thank you for your continued support and for participating on today’s call. 2019 is off to a solid start and we hope you’ve had a chance to see our bold new marketing campaign.

Our mission is to materially disrupt the multi-billion-dollar mainstream soft drink and ginger ale categories with our superior product and package offerings and compelling consumer communication efforts, which are now starting to roll-out.

We are well-positioned to drive significant revenue growth and shareholder value this year, and I look forward to updating you on our progress. Thanks again and have a great day..

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time..