Good afternoon and welcome to Reed’s Fourth Quarter and Fiscal 2019 Earnings Conference Call for the period ending on December 31, 2019. My name is Rob 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 Chairman; Norm Snyder, Reed’s Chief Executive Officer; and Tom Spisak, 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 Reed's 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, levels 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 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 represents management’s estimates as of today, March 12, 2020.

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 and good afternoon everyone. It is a pleasure to join you today as the former Interim CEO of Reed's. I will turn the call over to Norm in a moment to discuss our recent business activities and plans for 2020. But I wanted to begin today with a few thoughts. 2019 was a tumultuous year for Reed's. It is now in the rearview mirror.

We now feel that the train is back on the tracks with momentum building through the first quarter and a solid growth year expected in 2020. I've always believed you win with people. And I feel we now have a tight, cohesive and experienced team at Reed's. I'm excited about the new leadership with Norm and Tom.

Both have moved quickly since their appointments as CEO and CFO having immersed themselves in the business rectifying nearly all the issues that plagued us in 2019. As importantly, they have realized that the team in place at Reed has the talent, skill and capability that was underutilized especially in the area of production and supply chain.

It is clear that Norm is the right guy for the CEO position given his broad based beverage experience, and a successful efforts in fixing our production issues in his time as our COO. Tom who joined us in December as CFO has been just as productive with our financials, our systems and controls.

I intend to stay actively involved in the business working as I have in past life, with Norm at the NFL, and so we inherent Reed's to build success and value for our shareholders.

Sale, save and simplify, is our mantra as we develop and execute our plans and look towards cash flow visibility, breakeven visibility in the out years with timely innovation, broaden distribution, and significant margin improvement and above all, with flawless execution.

As you will hear we are in the process of introducing and delivering on all new product innovations, including Reed's Wellness Shots, restage and repackage Ginger Chew and Crystallized Ginger and canned meals via a licensing arrangement with full sale.

We believe Reed's mills will compete effectively in the large and growing alcoholic seltzer space, dominated by Truly, and White Cloth. And most significantly, we are producing our new Reed's Really Real Ginger Ale in regular and Zero Sugar varieties as we speak with new packers that promise on time delivering and significantly improved margin.

Really Real Ginger Ale has met with enthusiastic distributor and retailer reception. We are supporting Real Ginger Ale with efficient and effective targeted retail specific programs to build awareness and drive trial, repeat and consumer adoption.

Healthy refreshment is the corporate brand umbrella for Reed's and Virgil's our clear objective is to rise above the competitive clutter within everything ginger health and wellness positioning as our key growth driver. Ginger is the ultimate superfood with substantial and real health benefits.

With a full line of Ginger Beers and Ginger Ale, with our Reed's Ginger Mules, with our Wellness Ginger Shots and package chews Reed's is the first name in ginger. We plan to build on that as we continue a steady stream of exciting ginger based innovation so necessary to success in beverages.

And innovation futures will also focus on Zero Sugars as a strategic direction and a priority. We have received an incredibly positive consumer response to our special blend Zero Sugars. Virgil's Zero Sugar has propelled double digit growth for the entire Virgil's line in 2019.

Reed's extra Zero Sugar, which experienced delayed distribution due to production issues last year, as shown it can spur growth for our entire Reed's platform as we have seen at our largest single retail partner and other retailers around the US. Zero Sugar Ginger Ale will also accelerate growth.

We are rapidly and aggressively expanding distribution for both our Virgil's and Reed's Zero Sugars and expect to have broad based distribution across our distribution footprint by second quarter. Despite heightened competition in the ginger ale category in the specialty category we expect substantial growth and improve results this year.

We have the on trend products, a strong and leading brand portfolio and a dedicated and talented team to build success for our shareholders in 2020 and beyond. Stay tuned. Before handing over to Norm. I will briefly address the impact of the corona virus on Reed's. So far, we have not experienced any delays or interruptions in production.

We do not, at this point anticipate a disruption in supply chain as virtually all our materials are sourced in the US. That may change. From a sales perspective, we have had cancellations in face to face meetings with retailers that have been converted to phone conversations and sales pitches.

This man in fact was better as long as we can get samples in front of our buyers. All that said, the future impact is unknown, especially from a consumer perspective, especially as we approach the Memorial Day and summer high consumption periods. We will monitor and keep everyone apprised. But for now it's pedal to the metal in business as usual.

With that norm and Tom will elaborate. Norm, takeover..

Thanks John. We accomplished a lot during the fourth quarter, much of which is not reflected in the financial statements yet. We put together a robust and challenging agenda over the last several months of 2019. And I am very pleased with how far we've come. We have made significant improvements in a very short period of time.

We have solidified the copacker network, increasing both throughput and quality. We now have five copackers operational including redundancies for each of our packaging types and by coastal production.

Today, our copacker network has the capacity to handle three times our current volume, and we plan an additional copacker on the West Coast in the near term. As John noted, we have completed four consecutive months of uninterrupted service to our customers, illustrating the improvement since last summer's production and shortfall.

We have also recently signed an agreement with our ginger supplier in Peru to ensure that we have a protected supply and have instituted new quality control protocols along with broad supply chain enhancements. I can confidently say they are now in a better place position than anytime in Reed's history.

We're also tighten our belt on cost making strides on reducing croft across the organization. And have had several achievements during the fourth quarter, identify new opportunities to reduce costs across the organization and supply chain.

From a gross margin perspective, we achieve savings ingredient and packaging costs through formula optimization and leveraging purchasing power with our production partners.

In addition, we have restructured functional roles within any organization to improve efficiency without headcount addition, while at the same time reducing our reliance on third party providers. We have also modified our marketing focus to be more retail driven resulting in an improved ROI while reducing the overall spent.

We will remain focused on cost as we further enhance our daily execution. During the fourth quarter, core brand gross sales were flat for the prior year reflecting 6% volume growth at Virgil's offset by a decline in Reed's volume. With our copacking network delivering we're positioned to accelerate growth over the coming quarters.

We now have the capacity to support broader distribution of Reed’s Zero Sugar, both bottles and cans, which is reflected in our broadening distribution. We are now shipping Reed's Zero Sugar into Albertsons, Northern California and Pacific Northwest locations. H-E-B, Vadmo, Winn Dixie, Harris Teeter and Hy-Vee.

We continue to see strong retailer demand for both broader distribution and our new product innovation. We're also in a position to launch Reed's Real Ginger Ale, and I'm happy to announce that production began today, without any glitches on land.

We have also seen a very strong retailer response to the Ginger Ale offering with an exhaustive list of retailers agreeing to take new product.

Retailers that are on track to take Ginger Ale over the coming months include Food Line, Stop and Shop, Albertsons Northwest and Southwest Walmart, Shaw's, Giant Eagle, Next Com, which is a navy exchange, Deca, the defense commissary, Meijer, Sprouts, Hagen, Winco and Rallies.

We expect to see our first shipments by the end of the first quarter and building further over the coming quarters. We have promised you an opportunity to capture a slice of the $1.2 billion Ginger Ale market with a great tasty and more refreshing ginger ale that has real ginger as opposed to the leading ginger ales that have virtually none.

During the fourth quarter we also introduced Reed's Wellness Shot, Ginger Shots, which are now adding retailers. Sprouts was the first retailer to take the Shots. We are seeing interest across independent natural retailers.

Our Wellness Shots are also well positioned to provide a significant opportunity with convenience stores as well as being a promising e commerce opportunity. We have also begun to reuse an e commerce platform to fill our Wellness Shot and line up Ginger Chews and we'll follow up offering our beverages and cans.

These products are available through our website and will shortly be available on Amazon. This channel surprisingly has shown strength for competitive brands and we believe we will enhance demand and awareness as the market trends to online for all food and beverages categories.

I'm also pleased to announce that our partner Full Sail Brewing is now testing our ready-to-drink Craft Ginger Mules in the Pacific Northwest, with most notably at Whole Foods, Albertsons Safeway, Plant Pantry, Jackson Foods Stores, Natural Grocer, Hagen and in Rayless, which is a northern California and H-E-B in Texas.

We are rolling out some significant innovation early in 2020, including the Craft Mules, Ginger Ale and Wellness Shots. Let me note, that our innovation is targeted and methodical allowing us to better execute in both supply chain and at retail. Turning to our marketing efforts.

We will be utilizing more retail based programs to target consumers and we will be focusing on grassroots marketing campaign as opposed to our past broad advertising campaign. We anticipate generating a higher ROI by continuing to support our brands.

We will also continue to enhance packaging across our portfolio, most recently with our candy products. Now let me turn the call over to Tom Spisak to discuss the fourth quarter financial results.

Tom?.

Thank you very much, Norm. It's a pleasure to speak with everyone today on my first conference call. I'm excited to be here at Reed’s and see considerable opportunities not only to grow our brands, but to take costs out of the system and drive sustainable gains and profitability. Let me run through our fourth quarter financials.

Fourth quarter net sales decreased 26% to $7.2 million compared with $9.6 million in the prior year. As I know you are all aware, we exited non-core products and our private label business at the end of last year, which collectively contributed $2.2 million of gross sales in the prior year and other primary drivers of the reported net sales decline.

Core brand gross sales were flat with the prior year as a result of 6% case growth for the Virgil's brand offset by a decline on Reed's case shipments. Gross profit dollars decreased to $600,000 from $2.7 million in the prior period, with the gross margin falling to 8% from 28% in the prior year.

However, there are several discrete items affecting the gross margin during the fourth quarter and the year-over-year comparison. First, during the fourth quarter, we wrote down $800,000 of inventory and increased our pool for inventory obsolescence by $400,000.

Each effort was to clean up our inventory accounts, and position ourselves for a better reflection of our true margin trajectory in the future. Note, that the inventory obsolescence accrual reflects a reversal over the prior year reflecting a change in estimate.

Excluding these items, the gross margin would have been approximately 26% during the fourth quarter and for the full year. Delivery and handling cost decreased 14% to $1.6 million, while increasing 305 basis points as a percentage of net sales.

The increase was a result of additional freight required to rebalance inventory, shipping innovation products produced in limited locations, and a higher proportion of less than full truckload shipments to support new retail distribution.

We expanded co-packer production capabilities on both coast is expected to favorably impact transportation costs going forward. Selling and marketing costs increased 15% to $1.5 million during the fourth quarter, and as a percentage of net sales increased 21%.

The increase reflects the investment of sales and marketing infrastructure and growth initiatives. These increases in sales and marketing were expected and are consistent with our strategy to refresh the brands, drive awareness, support the launch of new products and packaging, open new retail outlets and drive growth of our core brands.

General and administrative expenses decreased 34% to $1 million in the fourth quarter, compared to $1.5 million in the prior period. The year-over-year decrease largely reflects last year's sale of the Los Angeles facility and reduction of other office expenses.

The fourth quarter operating loss increased to $3.5 million from $2.1 million in the prior year. Interest expense decreased to $300,000 from $700,000 last year. And the net loss was $3.8 million or $0.09 per share in the fourth quarter of 2019 compared to a loss of $2.7 million or $0.10 per share in the time same period last year.

Moving to the balance sheet and cash flows. We ended fiscal 2019 with $900,000 in cash and $3.2 million of availability on a revolving line of credit. During fiscal 2019, we used $18.2 million of cash in operating activities and invested $300,000 in capital expenditures.

Turning to our 2020 outlook, we anticipate generating 10 plus core brand growth over fiscal 2019. We also anticipate a gross margin of 32% or greater for the full year. While we sourced the vast majority of our raw materials domestically, and organic ginger from Peru, we do source a couple of small ingredients from Asia.

While we are well positioned with our supply chain with ample supply availability, and we currently do not anticipate challenges as a result of coronavirus. Our guidance does not assume a material impact from the current global pandemic, which is clearly difficult to forecast. Now let me turn the call back to John for some concluding remarks..

Thanks, Tom. As you can see, we made significant progress during the fourth quarter. We have assembled a leadership team over the last several months that is experienced operationally focused and committed to driving continued improvement.

Once again, I am pleased that Norm has taken on the CEO role and have significant confidence in his leadership abilities. 2020 will be an exciting year as we roll out Reed's Real Ginger Ale, expand our Reed's Mule, drive retail and online growth of our Ginger Wellness Shots and focus on driving improved operational performance.

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 in awareness acceptance and popularity as the ultimate super food. Reed's is the first name in ginger and our strategic focus is to be everything ginger.

We will go about that positioning. We have the brand, the team resources the plan, and the motivation to be the leader in healthy refreshment. Thank you and I will now turn the call back to the operator to begin the question-and-answer session. Thank you very much.

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from David Bain with ROTH Capital Partners. Please proceed with your question..

Great, thank you. I guess first, John, you mentioned some initial - or Norm, some initial large acceptance of Ginger Ale, congratulations, by the way, including Walmart.

Can you give us a deeper sense as to the depth within those distribution plan? And is that like a jurisdictional thing a regional thing or is there visibility towards a national? Is there a pathway there that you have visibility in? And then also with going back to depth, you mentioned multiple flavors in the Ginger Ale, I mean are customers already accepting of those offerings?.

Well, ultimately, we think we'll be in multiple flavors. We are going out initially with our distrait Ginger Ale and our Zero Sugar formulation of that ginger ale so we have two skews going into the marketplace.

Hopefully, we anticipate that this will Ginger Ales will get us into a broader category of ginger ale consumption much, much larger space to play in and our traditional ginger beers beer offerings with the recognition from a consumer perspective that hey, there's really no ginger ale and in candy dry and other large ginger ale brands.

We have seen that some of our placement has been in the broader ginger ale set. But we're still, hopefully and with our marketing efforts to generate awareness among consumers that this is a new ginger ale. And hopefully we can migrate from our specialty set into multiple sets in the location. We've had an experience here recently with Safeway.

We're actually going to put us into the mixer set. So we're going to start playing with the bigger players. Hopefully as time goes on, and awareness is generated for the product and consumption, we’ll get more space in those areas..

Go ahead. I’m sorry..

Let me just add also, the distribution is fairly broad across the country. When we initially launched Zero Extra, we started with approximately 1000 accounts. And from a pre-sale perspective, and we are launching Ginger Ale with about 6000 accounts, so a big step forward in terms of the initial reception..

That's great. Okay, great. And just two quick ones, if I could.

If you could bifurcate 2020 expected core brand growth of 10% plus? I assume that, given what you just spoke to kind of Reed’s led with the introduction of Ginger Ale or is it more evenly split?.

Well, I think because of the focus and the reception on the Zero Sugar, our products are driving it, I think you're going see the evenly split between both Reed’s and Virgil's..

Okay, great. And then just lastly, I know you've made the reduction in supply chain SG&A costs, and that'll be reflected in 2020.

But could you give us a sense as to the cadence of when we see that in a model? And what significant items were pruned or will be to sort of see that change in the numbers?.

Well, from an operating cost perspective, we've started in the first quarter, and that's across the board. And there's nothing one area to point to and say while you're going to see a big reduction there, it was - we did a very methodical account by account look at our how we've been spending and what sort of ROI we're getting.

So we've already commenced that and you'll see that immediately. From a margin standpoint, obviously, there'll be some products that were produced in 2019 rolling into 2020 and some other commitments. So that'll be staged with each quarter, you'll see increased margin growth. And obviously part of it, it's been through better purchasing.

And we will have to use up existing materials before we see the benefits of that, but also through formula optimization that I mentioned earlier in the same thing too. So we have migrated some products to that, obviously, Ginger Ale will be the first one where we’re starting with a clean slate and have some very strong margins.

And then we're just rolling through the remaining portfolio. So that'll be a more staged, and every quarter, you'll see a little bit of a bump..

Great. All right, looking forward to 2020. Thank you..

Thank you..

Our next question comes from Chris Krueger with Lake Street Capital Markets. Please proceed with your question..

Hi, good afternoon..

Good afternoon, Chris..

To get the new co-packers in the supply chain, would you say they're up to full speed now?.

I would say we're 80% to 90% there and we have some more room to do through this quarter and in the second quarter to complete it. But I don't anticipate any adverse impact because of that. And what you will see is continued margin improvement as we continue to face that in..

Okay.

And during the fourth quarter were you able to fill all sales orders that you had in hand or did you have to have some cancellations?.

We've had four consecutive months of delivering 100% of all of our orders, and I'm really pleased with that. And we've set the bar high and we're going to keep it high..

And then on the Reed's Really Real Ginger Ale, today - you said a tariff [ph] production today.

Did I hear you correctly that it's going to begin shipping by the end of the month?.

Yeah. Actually, we'll start shipping some next week. But - and only starting to pick up towards the end of March for the balance of the orders..

Okay. All right. That's all I got. Thank you..

Thank you..

Thank you..

Our next question comes from Anthony Vendetti with Maxim Group. Please proceed with your question..

Thanks. Yes. So I just wanted to start, I know you touched on the coronavirus, COVID-19. You're not seeing any impact now but obviously things could be affected going forward. You mentioned I guess some ingredients but not a lot are sourced from Asia.

Can you talk a little bit though, from the sales perspective? I know that the guidance you're providing right now is on the brands, correct? It's just 10% plus on the brand, but it looks like the overall guidance for the year, you're not reiterating or mentioning at this point.

Is that solely due to the uncertainty around COVID-19 or is that just at this point not something you want to collaborate on?.

More of the latter. I'll say this we and all of our forecasts and all of our planning, obviously, this is a recent development. And we haven't had the time to absorb the full impact. And obviously, it's a fluid situation with circumstances changing every day. So I think it'd be remiss for me to make any sort of comments on that.

We obviously are trying to do the best to stay on top of it. But like anybody else, we don't really have any visibility to the future. So I would prefer not to comment on that..

Okay.

But you feel confident enough to - on the brand side, to talk about brand growth in 2020 of 10% plus, correct?.

Yes..

And then as you look at your product portfolio, where are you seeing specifically the most growth in the newer products? I know obviously Reed's, your core product and Virgil's are 2 of your core brands.

But on some of the new things that you've talked about the Ginger Energy, Shots or Reed's Mules or Ginger Chews? And also, I was wondering if you could just talk a little bit about CBD, where that's at this point?.

Well, let me work backwards. CBD we're in the process of reformulating and obviously keeping a very keen eye on the regulatory environment. So we're going to be very - take a very methodical process of reintroducing that. And don't want to rush into things until we feel confident that a lot of the issues have been adequately resolved.

So that's the positioning on CBD. Now, with respect to the Chews and the crystallized ginger. Obviously, we've had that in the marketplace for a while and there's been positive reaction. That not dissimilar to our beverage brands have had some supply issues. We believe we've worked through those.

And in the process, we've made product improvements and packaging changes that we think are more relevant to today's consumer. So we're just going to - we're working back to - and also online we're working back obviously to get those products into broader distribution and are confident that we'll be able to do that.

The Wellness Shots are a brand new product. Obviously, John mentioned about our approach being everything ginger and are focused. So, that fits into who we are. And the Shots are packed with 3000 milligrams of organic ginger. So obviously for the consumer that wants that product and understands the efficacy of ginger, that's a great product.

We're going to start again online and through the natural channel and then expand there into convenience stores where we can get the growth..

Yeah, let me just elaborate on the Shots and the Candy. Those are allied brands, they're very profitable. They go to market differently than what we do with our beverage products. That said, we're reinstituting and we're opening up an e commerce business, and expect to be up with Amazon.

And we think those products will do very, very well and in that channel. And hopefully contribute to the bottom line. And give us some money to invest back into our beverage platform, particularly the ginger beer and the ginger ale products, because that's our pathway to the future and that's our pathway to huge success.

We think ginger is the wave of the future for this brand. And Virgil's has done very, very well for us and nicely particularly with the Zeros. And we are looking at other opportunities as we go forward. As I said earlier, a steady stream of innovation is key to growth and success in the beverage category.

But we think ginger is our key to success and will get us to the bank ultimately. So that's our focus. These other brands are just reinforces. We are as the number one brand and deliver products that are made of ginger. This reinforces our brand imagery..

Sure. So John or Norm maybe talk a little bit about, John, when you first kind of took over as Interim CEO, you said one of the things you need to do is increase the brand awareness. And you were taking steps and spending money to do that and advertising and sampling and so forth.

Can you talk about where that program is at and what you intend to do or how much you intend to spend in 2020 to build the brand?.

Well, not much. We intend to spend in a targeted way with retailers, for example, that have taken on our Ginger Ale. We're doing consumer programs within those channels or within those retailers, drive awareness so we can really create some excitement around Ginger Ale. Our posture in the first quarter was not only to sell more, but to save more.

And we found last year, we spent a lot of money on marketing that really fell on empty shelves, people couldn't find our products, et cetera.

So as time goes on, and there's more flexibility and once we have the basics done in terms of driving distribution and availability, we will ramp up advertising, promotional and marketing support in very selective ways that really focus on sampling and social media, which is where all the action is these days.

And we'll continue to do that and evaluate that over time. But over, we need to build awareness for our products and for the Reed’s brand name. And that we're now something exciting, new and different. We've been around a long time, kind of musty and dusty. And we're trying to brush the brand off and create some excitement with consumers.

And we think we're going to do that with Ginger Ale..

Yeah, just to add….

The time will tell. We'll spend more money over time. Go ahead, Norm..

Just to add to what John said, it's going to be a targeted - three buckets, targeted paid social media, retail marketing to really drive trial consumption. And then our sampling bus where we tour and we attend major events and sample products and have been very successful. And that really ties in well with our whole social media program.

So we get a lot of trial and a lot of exposure there..

Okay, great. All right, thanks. I'll hop back in the queue..

Okay, thank you..

We have reached the end of the question-and-answer session. At this time, I'd like to turn the call back over to Norm Snyder for closing comments..

Thank you for your continued support and participating on today's call. We remain highly confident with our positioning brands and opportunity and are seeing strong operational execution. We look forward to sharing our progress over the coming months and years. Have a wonderful day. Thank you..

Thank you all..

This concludes today's conference. You may disconnect your lines at this time and we thank you for your participation..