Good afternoon and welcome to Reed’s Third Quarter 2019 Earnings Conference Call for the period ending on September 30, 2019. My name is Hector and I will be your conference call operator today.

Today’s call is limited to one hour and we will have prepared remarks from John Bello, Reed’s Interim Chief Executive Officer; Norm Snyder, Reed’s Chief Operating 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 developmental goals, reduction in demand of our products - 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 forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 13, 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 as 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 core operating performance. I will now turn the call over to Mr. Bello. Please go ahead, sir..

Thank you Hector, and good afternoon everyone. Today I am joined by Norm Snyder, our new Chief Operating Officer, our CFO Iris Snyder and Joann Tinnelly who later this month will take the role of Interim Financial Officer following Iris’ departure.

We have been busy over the past few months executing organizational changes, expanding our co-packer partnership, enhancing our entire supply chain operations and raising the capital to support our growth.

We've made excellent progress to-date with both our existing East and West co-packers, who are once again fully operational and fulfilling strong consumer demand.

However, during the third quarter we short shipped 1.2 million in booked orders that were not recovered and lost an additional $300,000 in plan but delayed innovation due to production issues.

Despite these near term challenges to supply, we were able to generate 5% core brand gross sales growth during the third quarter and continue to see strong retailer demand for both broader distribution and new product innovation. We continue to grow distribution with new accounts and - expansion in existing accounts.

As we build incremental co-packing capabilities and redundancies, we expect to accelerate our growth over the coming quarters.

To support this growth, we added Norm Snyder who brings the operational experience and leadership to build a world class supply chain to support our growing opportunity across our core brands, and a strong innovation pipeline we have in place.

Norm joined us at the end of September, and brings over 23 years of leadership and operational experience, as well as a deep knowledge of the beverage industry. I have known Norm since our days together at the NFL where we killed it. At SoBe, he was with me from day one where together we built a $275 million brand in five years.

I have an exceptionally high level of confidence in his ability to effectively and efficiently drive our business to new levels.

Beyond SoBe Norm’s beverage experience includes serving as President and Chief Executive Officer of Avitae and emerging premium new age beverage company marketing ready-to-drink caffeinated waters and as President and Chief Executive Officer of High Falls Brewing Company and Chief Operating Officer of Rheingold Brewing Company.

At SoBe he was Chief Financial Officer and later Chief Operating Officer, where he oversaw the qualification of 17 co-packing facilities that made up the SoBe network. Norm is a well connected in the beverage business and is the consummate consumer professional.

We have great success together I'm excited about being reunited with SoBe and as we build our brands and capitalize on the significant opportunity we have here at Reed’s. In a moment, I will turn the call over to Norm to walk through our supply chain progress and discuss our operational plans in the near term.

I'd also like to introduce you to Joann Tinnelly who joined Reed last year as Vice President and Corporate Controller and will be taking on the Interim Financial Officer role later this month. Joann has almost 30 years of Finance and Accounting experience in global public and private equity company environment.

Prior to joining Reed’s, she served as Assistant Controller of Steel Excel a subsidiary of Steel Partners Holdings, a global diversified holding company was Vice President Financial Planning & Analysis and as Assistant Corporate Controller at USI Insurance Services, and Assistant Vice President of Royal Bank of Scotland and served in multiple financial roles at Momentive Performance Materials and financial auditing at PriceWaterhouseCoopers.

Joann will provide a seamless financial leadership transition as we conduct a search for permanent Chief Financial Officer Joann is also a CPA. Finally, as you are aware, we changed CEOs at the end of the third quarter, whereby I took on the Interim CEO role while we focus on enhancing our supply chain and complete a search for a permanent CEO.

This change reflected the stage of our business today and our need to quickly enhance our operational capabilities. We have already completed the early aspect of our business transformation.

We focused our organization on core brands, built an effective sales and marketing organization, created a significant pipe pipeline of innovation and have driven increased distribution and consumer demand of both the Reed’s and Virgil’s brands.

However, as our supply chain was not sufficient to support the increased demand or pace of innovation, it was very evident that we needed to change direction and bring in the operational talent to support this important stage of our business.

I am highly confident that we have the team to execute these plans under Norm’s leadership, and we will continue to enhance our team to support our brands. We effectively navigated the supply challenges during the third quarter servicing our customers with key products and driving incremental demand.

We have recently expanded distribution of our new Reed’s Zero Sugar into multiple chain outlets throughout the United States, including but not limited to several Albertsons Southwest Division, H-E-B, Harris Teeter, Trader Joe, Winn-Dixie, among others. Target introduced Reed’s Zero Sugar into approximately 1,200 stores.

And in the third quarter, Reed's kicked off a true sponsorship partnership with the Rose Bowl Stadium. New Reed's cans and Reed’s craft Moscow mules will be highlighted as the official ginger beer at all games, concerts and events throughout the season.

The Reed’s Green Machine sampling truck is now in Los Angeles supporting the Rose Bowl and our new Zero Sugar launch we are well positioned to continue to drive growth and now have the necessary supply to execute on this growth. We're also committed to extending our opportunities across new categories and channels.

We recently entered into a partnership with Full Sail Brewing to launch our ready-to-drink Reed’s Craft Ginger Mules in early 2020. This licensing partnership allows us to leverage Full Sail’s production and sales capabilities quickly and effectively building this promising incremental opportunity.

With this agreement, we are building brand profile and a breakout segment without investment and working capital, and with our partners funding development and marketing. This allows us to free up resources and use free cash flow from loyalties to drive our core brands and incremental opportunities.

We introduced the delayed Reed’s Ginger Shop in late October with great reception. Competing with 5-hour ENERGY Reed’s shops will give Reed’s its initial exposure into the vast convenience store channel, as well as drugstores and the broader market. A big opportunity for us is currently in the development stage.

The plan launch of a Reed’s really Real Ginger Ale to participate in the $1.2 billion ginger ale market which last year grew by 14% at Walmart. We hope to capture a slice of this market with a lighter, more refreshing ginger ale that has real ginger in it as opposed to believing ginger ale that have virtually none.

We see really real ginger ale as we - from Reed’s along with a broader available Reed’s Zero Sugar extra as invigorating the entire Reed’s platform. Ginger Ale ready-to-drink mules ginger shots and broader distribution for both Reed’s and Virgil’s will drive growth for Reed’s into 2020. We look forward to an exciting year ahead.

Let me now turn the call over to Norm to discuss our supply chain and operations..

Thanks, John, and good afternoon, everyone. I'm excited to have joined Reed’s and reunite with John to build this business. Together we executed the same operational playbook at SoBe and are quickly executing a similar plan to expand and enhance our supply chain.

We have a significant opportunity with strong brands and large beverage categories, and a proven ability to drive consumer and retailer interest. We will now focus on building a world class operational infrastructure to support years of significant growth. I will run through our progress today and the status of several additional initiatives.

As John noted, our existing East to West co-packers were again fully operational and late in the third quarter and we were seeing improved fulfillment rates and building inventory to support demand.

We're able to keep key item stock at our major retailers without any loss of shelf space and even enjoying commitments for further expansion with key customers over the coming months.

We are currently at various stages of onboarding additional co-packers with the attention of adding three to four additional partnerships with a national footprint to reduce freight and better serve each of our customers. These additions include having to anchor plants on each coast to allow for redundancy and additional capacity.

The definition of anchor is the ability to produce all core SKUs and to bring online co-packers on each coast to support innovation and to better align focus. In addition to broadening our co-packer capabilities, we are utilizing one, and more robust demand driven production planning process.

Two, we are leveraging co-packer capabilities including migration to a concentrated model that we have begun implementing in phases and have made significant progress. Three, we have better defined freight orbits and enhanced logistics planning to reverse the trend of increased freight costs on a per case basis.

And four, we are upgrading our QC protocols. These efforts have allowed us to launch Reed Zero Sugars and bottles and cans, complete the label changes over the pressure sensitive labels for Reed’s in Virgil’s bottles. Bring a new anchor co-packer online and to begin production on Reed shots.

The entire leadership and supply chain is working diligently to add capabilities to support accelerated growth while reducing costs and expanding margins. We see considerable opportunity to drive efficiencies throughout the organization. Now let me turn the call over to Iris Snyder to discuss the third quarter results.

Iris?.

Thank you very much Norm and good afternoon everyone. Let me run through our third quarter financials. Third quarter net sales decreased 19% to $8.7 million, compared with $10.8 million in the prior year. However, this entire decline reflects the exits of non-core products and private label over the last year.

With core brand growth sales increased 5% year-over-year. The performance of our core brands was driven by 8% case growth, including 22% volume growth at Virgil's, offset by 5% volume decline of Reed’s, which did not benefit from planned innovation as a result of supply chain inefficiencies.

As noted the core brand growth was offset by lower sales of exited in non-core products, including the sale of the private label business in conjunction with the plant sale at the end of 2018. Sales of these discontinued non-core and private label products represented $2.3 million of gross sales in the third quarter of 2018.

Gross profit dollars decreased 4% as a result of the exit of non-core and private label products, while gross margin as a percentage of net sales increased to 29% from 25% in the prior year. We continue to see opportunity to drive improvements in gross margin in both the short and medium term, reflecting our supply chain efforts and innovation.

Delivery and handling costs increased 36% to $1.9 million and increased 880 basis points as a percentage of net sales during the quarter compared to the prior year.

This increase was over $1 per case and reflected our short-term supply challenges, including additional freight required to rebalance inventory as a needed warehouse locations, shipping innovation products produced in limited locations, and higher portion of less than truckload shipments to support new retailer launches.

Is non-discuss transportation and handling costs are expected to decline with the addition of new co-packers and the building of finished goods inventory. Selling and marketing costs increased 82% to $2.5 million during the quarter, and as a percentage of net sales increased to 29%.

The increase reflects the investment in sales and marketing infrastructure and growth initiatives.

These increases in sales and marketing were expected in our consistent with our strategy to refresh the brand, increase brand awareness, support the launch of new products and packaging into the market, open new retail outlets and channels and lay the groundwork to accelerate growth of our core brands.

General and administrative expenses increased 24% to $2.5 million in the third quarter, compared to $2 million in the prior year period. The year-over-year increase largely reflects severance accruals related to recent management changes.

The third quarter operating loss increased to $4.4 million from $2.1 million in the prior year, reflecting these near-term cost challenges Interest expense decrease to $0.3 million in the third quarter, compared to $0.6 million last year. Net loss was $4.6 million or $0.14 per share in the third quarter of 2019.

This compares to a loss of $2.7 million or $0.10 per share in the same period last year. Moving to the balance sheet and cash flows, we ended the third quarter of 2019 with $1 million in cash and $1 million of availability on a revolving line of credit.

Subsequent to the end of the quarter, we completed an underwritten public equity offering raising growth proceeds of $8.1 million, providing the capital to fund our growth, new product launches, sales and marketing efforts and working capital means.

We were pleased with a strong investor demand and significant participation among our leadership team and board of directors. During the third quarter, we use $3.1 million of cash and operating activities, compared to $0.1 million in the prior year period. The increase primarily reflects a higher net loss in the third quarter of 2019.

Going forward, we expect to narrow the cash used in from operating activities as we reduce the near-term inefficiencies created by recent supply chain challenges. Turning to guidance we are adjusting our annual guidance to reflect the third quarter results and revised sales and gross margin expectations for the balance of 2019.

We expect to generate revenue in the range of $34.5 million to $35.5 million for the full year 2019. And anticipate year-over-year core brand growth of 7.5 to 10.6%. We anticipate a gross margin of 30% or greater for the fourth quarter of 2019.

For 2020, we expect to generate revenue in the range of $38 million to $42.6 million and anticipate year-over-year core brand growth of 10% to 20%. We anticipate a gross margin of 32% or greater to the full year of 2020. Now let me turn the call back to John for concluding remarks..

Thank you, Iris. We're going to miss you. To wrap, let me summarize and reason Virgil's we have strong, powerful and growing brands that are on trend at a time when health and wellness are driving consumer interest demand and consumption. Ginger is growing and awareness, acceptance and popularity as the ultimate super food.

Reeds is the first name in ginger and our strategic focus is to be everything ginger. We will build on that positioning. We have the brand, the team, the resources, the plan and the motivation to be the leader and healthy refreshment.

We now have the efficient, flexible and reliable operations and production plan in place and all that remains is execution. It's always about execution. We will sell and save our way to success. Thank you very much..

Congratulation on the progress today and Iris thank you for all your help. Best of luck going forward. John, you gave us some insight into I think some pretty significant new product launch with ginger ale.

Can you give us any idea on early customer response to date if you have any development or other CapEx we should be aware of for this kind of launch and the timing of the launch? And then finally, when you look at 2020 in your revenue estimate, we look at this as, maybe some potential upside to that or getting you to the upper end of guide or is that just fully baked into sort of the mid-range?.

Yes, I’ll give you some perspective. This past year, our strategic focus was really on ginger beers. And we recognize that category was relatively limited, so we decided to go fishing in a abroad pond recognizing that the ginger ale category is really the star of the carbonated soft drink industry and we have a ginger ale that has ginger.

So we're in the process of developing a couple of ginger ale products including a sugar free that are lighter, more refreshing. As I mentioned, we have presented it to a number of accounts, all with great receptivity.

Our hope is that we can break out of the natural specialty set into a broader category, and appeal to those users in the ginger ale category right now who are really looking for ginger in their product. We think it's a logical extension for who we are in terms of being everything in ginger, along with our ginger new and our shots and our choose.

We think that this is just a natural growth segment for us and it will simplify our lives, which I think will help consumers and help retailers in terms of how we're set on the shelf..

And, I guess, Norm - on the supply chain to kind of simplify it.

If you were to have, concurrent downtime in two or even three locations, do you feel there's enough supply capacity coming on by the end of the year to reach or exceed what you put out as your 2020 goals?.

Yes, I feel really good about our capacity for reaching our 2020 goals. In addition, I think we've really structured our co-packers to better focus on innovation and things like this. So I'm confident that we're going to be able to deliver everything that 2020 we've outlined for..

And then just last one from me, if you can give us a sense as to how the breadth of distribution points, and how that's expanding with existing products, particularly kind of interested in C-stores with the larger can form factor club on premise and places where the penetration seems like there's a lot of opportunity..

You want to get it? Yes. Neal Cohane, our Head Sales guy will respond.

So, I will tell you right now C-stores, we do have a can package that we're focusing on. We're getting some early hits more regional and local hits throughout the country. So more to come on that as we start talking with the longer national chains. Club stores, we've done a couple of road shows recently with Costco. Great success.

We had great success in Texas. Northern Cal, we were in the Northern Cal region also, more to come on Costco roadshows, there is a lot involved, but it does generate a lot of sampling and a lot of opportunity. So we have it in our focus plans for 2020..

Great..

Yes, just right on the convenience store situation that's 40% of the beverage consumption. And that's why people go and discover exciting new and different brands. In some ways, we had time to do that earlier on this year and frankly our production issues inhibit us from doing that.

That being said, I think that we like to go to those accounts with our ginger ale rather than our ginger beer per se including our Root Beer. So there's some thoughts with that. And there is some upside in terms of on-premise in the liquor channel with the Ready-to-Drink Moscow Mule and [indiscernible]..

And if I can just follow- just a follow up on the first question I asked, since the ginger ale is brought up again, is there a timing for the launch and then when you contemplated 2020 guidance at the midpoint, was this something that you've factored in any significant way that ginger ale launch?.

Can you ask that question again, please?.

So, I guess, you know, first the timing of the ginger ale launch and then the second one is when you contemplated your 2020 guidance, did you in any significant manner think about the ginger ale launch.

I mean, where you factoring in, a certain number of any significance?.

We are being very conservative relative to ginger ale, ginger ale will be in some cases replacing some of the original ginger beer SKUs. So we don't want to lose face. We anticipate they'll be more velocity around that and hopefully we'll get some broader distribution.

And some of the accounts that we've already called out it will be incremental to what we already have, but will be in really conservative this year. Want to hit our numbers and that's why I'm here to make sure that that happens and it's going to happen. But the ginger ale will definitely have it ready for Q2.

So that's when new products are launched when we did our Brazil zero sugar, we launched it, March April for the set, and had great success with that. So this year, that's what our plan is relative to that. That's our primary innovation for this year.

Given that we have I want to hand it off with have licensed off our Ginger Mule, which I think will be accessing another channel..

Your next question comes from line of Anthony Vendetti with Maxim Group. Please proceed with your question..

Yes, thanks. Just wanted to talk Johnny mentioned moving - being into in more stores and more forefront and also you talked a little bit about Walmart and the potential to increase the agreement that you currently have at Walmart.

Can you just talk about how the new distribution plan is going and what progress you've made so far, is it too early to tell?.

Well, I'd like to let Neil address that, but we just recently expanded into 1000 more targets. And we're meeting with them again to expand our space in that little stores because we've done very well. Walmart, we are still in a test phase relative to their all natural set. We think we will expand our SKUs in there, too expensive competition.

And we have a lot going on relative to new accounts. In GB, Food Lion, others that we're talking to that we think, will expand either our current distribution base or in fact new distribution. We're currently owning in 25% on the ACV. We can get that 20 to 30, 35 to 40 that will significantly enhance our business, working hard to do that..

What do you think, you know, based on the plan you have in place, how should we look at that cadence and when is it reasonable to be at 40% ACVs instead at 25%.

Is that by the end of next year? Is that a two year plan or?.

Yes, Anthony its Neal. Just to understand the ACV that we're going off against is called MULO multi outlets that includes - that's a measure of well in excess of 100,000 doors that includes drug stores by the thousands, that includes Club stores, that includes mass market stores.

If you look at supermarkets and you just measure the supermarket arena, we're probably in a good 60%, 70% of the supermarkets across the country in the doors, you know more to come when it comes to drug stores and those types of channels..

Yes. In terms of timing, we are now making calls virtually every week with buyers, we will make decisions and to the degree we get new distribution or expand our distribution with our - and that’s all we're presenting the ginger ale frankly, that stuff will go in typically March, April, into the spring set..

And then I don't know if I missed this because I missed a couple of minutes of the beginning of the call. But John, you also talked about expanding your co-packing network and having a couple more co-packers online by the end of this year.

Have you signed up any yet or are you close and do you still expect to have a couple more co-packers by the end of the year?.

Yes, we've signed up one that is operational. We're working with two to become operational and onboard and with various degrees of progress once a little bit ahead. And I'm talking to two more later this month.

So, we've made great progress in that and as I stated, we're going to have two anchor bottlers on each coast and that definition again is a co-packer that can handle all our core SKUs. So feel really good like we've made a lot of progress in a very short period of time and coming January 1, we'll have five to six of them operational..

And that should alleviate any ongoing concerns starting January 1 of not being able to meet customer demand if you have all of these co-packers online by January 1, correct?.

Yes, I mean, in addition to that, it's just going to drive some more efficiencies to help improve margins, just to become more efficient. So it's not just about capacity and redundancy. It's really operating more efficiently, which translates into a better margin..

Your next question comes from line of Chris Krueger with Lake Street Capital Markets. Please proceed with your question..

Couple of questioners ago asked about the Reeds really real ginger ale. I think he asked about the timing and the guidance.

I didn't quite catch if you gave a rough goal for this timing launch?.

By second quarter..

By second quarter? Okay..

Right..

And then I don't think you guys updated us on the hemp infused product that has been testing in a couple of markets.

Any update there?.

Yes. We have some - there is a lot of regulatory uncertainty around CBD. We have a great product. We have in a couple markets, it's selling through. We actually have a new packer that will produce it in the quantities if in fact there is demand. We had one retailer this year, who was extremely interested, a broad based retailer in the drug area.

Basically came back and said until it settles out relative to the regulatory environment. We're not going to move ahead. And the same is true with most of our big distributors and do one offs at this point in time to the degree that we can do it and they just come across trends will do that.

We're set to take advantage of any breakthrough once the regulatory environment is settled out..

And I know back in - about the month of May, you did a pretty heavy marketing launch a lot of social media efforts.

Now you’d had about six or seven months of that in place can you update us on how you think that's doing?.

Yes. We had some experience this year with marketing. We really didn't spend that much money on it, unfortunately, and we are marketing into an environment where we are having difficulty delivering the product, not a great scenario that will not happen again. But we found out some great stuff.

We did a pre and post-tracking study attitude uses study in the marketing that we did both on a national and on a heavier basis, increased awareness for our brand by five or six points and increased purchase intent in both areas.

And on a national basis, it didn't elevate actual purchase because people had a difficult time finding the product, which told us that those people that we brought into the franchise were new people and didn't really understand where to go and buy the product, and our heavy up market, we complemented by marketing with who drives to make sure that our distribution was broader, and in those markets, we went up six to seven points in terms of purchase.

And I think our focus is going to be on social and digital media that worked very, very well for us. And sampling, which has worked very, very well for us.

We need to generate excitement around our brand and the personality around our brand, and those are the kinds of things that new users really relate and respond to and we've had good luck with all of that, and hope to expand on that this year..

All right, one last question.

What is a good fully diluted share count to use for the fourth quarter and for 2020?.

Fully diluted share count, so in the 10-Q, we have the diluted shares. So currently, we have about $47.5 million common shares and then $13.7 million of additional potentially dilutive it's about 61 million..

Your next question is a follow-up from Anthony Vendetti with Maxim Group. Please proceed with your question..

Yes hi, I just wanted to see if there is an update on the permanent CEO search and or on replacement fast?.

We got the best CEO in the planet sitting in the chair right now. I don't like being on the stage coach as I'm driving through the past okay. That being said, we are interviewing a number of different people. We think we have some good prospects. And I think in due course, we'll find a CEO that will help take us through the next level..

Your next question is a follow-up from David Bain with ROTH Capital Management. Please proceed with your question..

I have just two quickies one, just to follow-up on the marketing question. So are we looking more at localized marketing based off of the results that you did with your initial marketing campaign, relative to national.

And then second – just to clarify on the share count a lot of those shares that you're speaking to are just well out of the money correct, but those are ones that we typically look at from standpoint?.

Correct..

Okay.

That's right. I mean, options and warrants are mostly out of the money and that's $11 million out of that you know, almost $14 million is dilutive correct..

Got it, okay..

Yes, from a marketing perspective, we're going to look at our hard category developing markets, East and West Coast. I think the focus this year is going to be on really real Ginger ale to point out that the big guys really don't have any ginger in the product and we do.

So if you're really into health and wellness and want great flavor and taste, that's what it's going to be. We're still working on somatic right now and the positioning, feel really good about that and really haven't come.

And on the Virgil side, we're just going to do more of the same now it’s a verbal that's up like 25% just by virtue having done the product launch and the Zero Sugar which is wide on trend..

Ladies, gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Mr. Bello for closing remarks..

Well thank you very much for your continued support and for participating on today's call. We remain highly confident with our positioning, brands and opportunity and I've made the organizational changes to leadership that we believe will drive growth and improved operational performance.

We look forward to sharing our progress over the coming months and years. Have a Reed’s and Virgil's great day..

This concludes today's conference you may disconnect your lines at this time. Thank you for your participation..