Good afternoon, and welcome to Reed's Second Quarter Fiscal 2020 Earnings Conference Call for the period ending on June 30, 2020. My name is Laura, and I will be your conference call operator today. Today's call is limited to 1 hour and will have prepared remarks from Mr. Norm Snyder, Reed's Chief Executive Officer; and Mr.

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 read to our listeners.

I would like to remind our listeners that 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 development goals; reduction in demand for our products; dependence on third-party manufacturers and distributors; changes in 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 estimate as of today, August 10, 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 would now like to turn the call over to Mr. Snyder. Please go ahead, sir..

Thank you, and good afternoon, everyone. We appreciate you joining us today. We hope that you are well and safe and adjusting to this unprecedented time in our history. I'm very pleased to discuss our second quarter results, and we'll begin with 4 key messages.

First, we are seeing strong demand across each of our core brands and all of our product lines.

Second, the enhancements we have made over the last 9 months to our supply chain, especially the build-out of our co-packer network and production redundancies, are the real driver of our ability to operate effectively amid the challenges of the COVID-19 pandemic.

Third, we continue to have significant distribution opportunities across our portfolio, and the recent new product launches have only commenced rollout to retail. Finally, we are tightly controlling spending by removing significant costs from our system, improving our cash flow profile and remaining focused on driving enhanced profitability.

I am proud of the entire team's effort to build and optimize Reed's while quickly adapting to broader challenges from the global pandemic. Now I will discuss our second quarter.

We had a strong quarter, delivering 14% net sales growth, driven by 19% volume growth of the Reed's brand, reflecting strong demand across all Reed's SKUS, including the incremental growth from recent launches of new innovation as well as 4% volume growth of the Virgil's brand.

We are seeing strong demand at retail, which is evident in the most recent syndicated data. For the most recent 4 weeks ended July 12, Reed's was up 37.5% in dollar sales, and Virgil's was up 25.2%. This was partially offset by lower nonmeasured channel sales, which are running down over 20% this year, directly related to the impacts of COVID-19.

We made improvements on margins, with gross margin increasing 350 basis points versus the prior year, reflecting our strong growth and supply chain initiatives.

Our supply chain and co-packer redundancy has proved to be invaluable as the industry faced increased production demands, while supply capacities across the industry have been negatively impacted by COVID-19 challenges.

Additionally, our efforts to build out co-packer network has allowed us not only to overcome the challenges of the environment, but to ensure that we have the right products in the right place with improved staging of inventories to help combat elevated shipping and handling costs, also a result of COVID-19.

In the quarter, we saw a positive response to new product launches, including Reed's Really Ginger Ale, Reed's Extra Zero Sugar and Reed's Wellness Ginger Shots as well as an encouraging initial response to our new ultimate ready-to-drink Mule with a real ginger kick, which launched late in the second quarter.

Most notably was the launch of Reed's Real Ginger Ale, providing entry into a $1.2 billion category with an 8% compound annual growth rate over the last 4 years. The challenges presented by COVID-19 delayed many retailers' plans to execute resets, which has impacted the pace of filling new distribution.

But we saw solid demand from retailers and significant authorizations for new retail space that will materialize as the retail environment begins to normalize. Our enhanced focus on the e-commerce channel is also performing very well, including both sales on our branded websites as well as significant growth on Amazon.

We launched with a select product offering that included canned beverages; Flying Cauldron, a butterscotch cream soda; Reed's Ginger Shots and Reed's ginger candies. We saw a positive response and accelerated growth throughout the quarter.

As I touched on briefly a moment ago, as we continue to grow volumes, redundancies in our supply chain and co-packer network become increasingly more valuable. This was certainly the case in this quarter, especially as the industry faced increased demand and labor constraints due to the pandemic.

We are in the process of bringing our 6th co-packer on line in the third quarter and aim to bring one more on line by the end of the year. The network we have built that is proven to have ample capacity and flexibility contributed to the higher order fulfillment rates and the ability to keep up with demand and overcome COVID-19 challenges.

Our robust network also helps with strategic placement of products, allowing us to have products in the right place at the right time, reducing delivery and handling expenses as well as allowing us enhanced ability to plan and forecast.

In addition, we continue to have ample ingredient supply as we secured a long-term supply agreement earlier this year. Before I turn the call over to Tom to run through the financial results, let me comment on the impacts of COVID-19.

First, I want to thank all of our employees and partners for their quick action and continued support as we work towards the new normal with this pandemic. Safety remains our top priority as we navigate the constantly changing environment and continue to comply with all regulatory mandates.

Our supply chain remains secure and is operating with social distancing measures in place.

We continue to see positive impact on our volume given the strong grocery, mass and natural segment sales trends, partially offset by retailer reductions to in-store merchandising and trade promotion and delays in resetting stores as retailers work diligently to keep up with demand.

As a result, many of our new distribution authorizations are awaiting the start of reset activity. We will continue to monitor the environment and will be nimble as this situation evolves. With that, let me turn the call over to Tom Spisak to discuss our financial results in more detail.

Tom?.

Thank you very much, Norm, and it's a pleasure to speak with everybody today. As Norm discussed, we're very pleased with our progress in the second quarter. We have continued to build our momentum, led by new innovation as well as growth from all of our core brand SKUs and a very effective response to the COVID-19 pandemic.

We are executing on our strategy of sell, save, simplify, and are seeing the results in our financials. Second quarter net sales increased 14% to $10.9 million compared with $9.5 million in the prior year.

Core brand gross sales increased 14% over the prior year, including 12% core volume growth, driven by 19% case growth for the Reed's brand and 4% case growth for the Virgil's brand. Gross profit dollars increased 31% to $3 million compared to $2.3 million in the prior year, and gross margin increased 350 basis points to 30 -- 27.5%.

Gross margin was negatively impacted by mix, as our most advanced margin enhancement efforts were on the Virgil's brand, and the higher cost Reed's brand drove significant growth in the quarter.

Delivery and handling costs increased 3% to $1.5 million during the second quarter of 2020 compared to the prior year, driven by the volume growth and short-term market forces associated with COVID-19.

However, costs fell 150 basis points year-over-year as a result of improved staging of inventory, partially offset by the elevated costs to market forces impacted by COVID-19. Selling and marketing costs decreased 50% to $1.6 million during the second quarter and as a percentage of net sales decreased to 14.6% from 33.7% in the prior year.

The decrease reflects our ongoing cost control and marketing programs that were executed in the second quarter of 2019 but not in 2020. General and administrative expenses decreased 23% to $1.4 million in the second quarter compared to $1.7 million in the prior year period.

The year-over-year decrease largely reflects reduced noncash stock-based compensation, the exit of the Los Angeles facility and the reduction of temporary staffing as well as reduction of spending on travel related to expenses in the quarter. The second quarter operating loss narrowed to $1.4 million from $4.1 million in the prior year.

Interest expense was consistent with the prior year at $300,000, and the net loss improved to $1.8 million or $0.03 per share in the second quarter of 2020 compared to a loss of $4.5 million or $0.13 per share in the same period last year. Modified EBITDA loss improved to $1.4 million compared to a loss of $3.4 million in the prior year.

Moving to the balance sheet and cash flows. We ended the second quarter with $6.7 million of availability on our revolving line of credit. During the second quarter, we used $5 million of cash in operating activities compared to using $11.5 million in the prior year period.

The decrease in cash used in operating activities during the second quarter of 2020 relates primarily to a lower net loss and a reduction in the spending in the quarter. Turning to guidance.

We maintain our 2020 outlook as we continue to anticipate generating 10% core brand net sales growth over fiscal year -- fiscal 2019 or approximately $37.2 million. We also continue to anticipate a gross margin of approximately 32% for the full year compared to 23.3% in the prior year.

Our gross margin guidance assumes a normalized pricing environment for ingredients, packaging and production costs, each of which has been and could continue to be impacted by COVID-19 and, thus, impact the pace of our gross margin enhancement. Now let me turn the call back to Norm for some concluding remarks.

Norm?.

Thanks, Tom. Before I turn the call back to the operator for questions, I want to reiterate my confidence in our business as we continue to position the company for long-term growth. We are focused on controlling costs, improving gross margins, leveraging our valued brands and building momentum with our recent innovations.

We have yet to see the true impact of our entry into the large ginger ale market and will build distribution of Really Real Ginger Ale over the coming months and quarters.

We remain flexible and prudent as we navigate the current environment, and we will continue to make any necessary changes to keep our employees and partners safe and our inventory on shelf.

We have improved our financial flexibility, significantly enhanced our supply chain and co-packer network and have an amazing team in place to take on the current challenges while driving the company forward. I will now hand the call over to the operator to begin the question-and-answer session..

[Operator Instructions] Our first question comes from the line of David Bain with ROTH Capital..

Congratulations on basically consistently strong product momentum and the structure that you guys are doing that with. First, I guess I'm hoping we can delve a little bit more deeply into top line guidance.

It certainly indicates stronger than maybe the stock multiple gives it credit for, but it also seems somewhat conservative just given the first 2 quarters and our checks for continued momentum.

Can you delve a little bit more deeply and give us a little sense as to what were some of the factors when you used to net out year-end top line guidance, given that your margin guidance is a little higher than we expected? And can you also let us know if that includes anything in terms of like new products or categories?.

Dave, it's Norm here. Good question. I ask myself the same question. So I think I've got an answer for you here. So when you look at our business, you really need to look into the various components and then the dynamics of what's going on.

So what I did was I said, okay, if you look at the most recent IRI data in the MULO category, and it's showing like a 32% dollar growth. So I went back and I said, "Well, I was going to ask, why aren't you taking your guidance up? And why is the IRI number so high, but your numbers aren't as high?" And there's a few things going on here.

One, I break our sales into measured sales and unmeasured sales. And then the measured sales, obviously, I can break down into further components to get a little bit more granular. And our measured sales are all up very strong.

Unfortunately, our nonmeasured, which really services the segment of the business which was really significantly impacted by COVID-19, it's down almost 24%. So that's like a drag on our earnings.

And you would expect the independent markets, the delis, quick-serve restaurants, on-premise accounts have all been significantly impacted by what's going on. And obviously, that's going to translate into a reduced amount of sales for us.

So when I look at the measured data, which is up very strongly, one of the things that we said last quarter was because of retailers' focus on keeping stocks, their shelves well-stocked, there's been very little price promotion going on and very little any sort of promotional activity. They just couldn't handle it.

So their dollar sales have been incredibly strong and much more stronger than ours. So I went back and looked at and match us up at case volume, and we're tracking on case volume. Obviously, we've had stronger pricing, too. So our pricing is up. But at retail, it's been magnified even greater.

So when we look at that, they're going to come in higher than we did because, obviously, we budget for this type of activity that didn't occur. So their pricing has been a lot stronger. And then you weigh in the negative impact on the nonmeasured channel, it really gets down to where we're growing.

So the growth rates, while stronger than what we predicted, are still not enough to say, "Let's take the numbers up." We want to -- we feel good about what we've put out there. We're still not out of this yet. I mean, I don't know what's going to happen in the second half of the year to the U.S. economy, which hasn't impacted us.

So there's still a lot of uncertainty, but we've reconciled from scan data down to our numbers to feel comfortable with the results and the reason it makes sense to us. So for that reason, I think we're just going to stay in the current guidance. Obviously, we're going to do our best to outperform that.

But I think it would be premature and a bit foolish to really take it up at this point because I think we're just hitting another phase that we're going to have to navigate through..

Got it. Okay. Fair enough.

And then if I look at just Reed's ginger ale and bifurcating that as a percentage of overall Reed's volume growth, can you help us kind of understand how big a driver that is at this point? And any sort of thoughts around the category in general?.

It's pretty -- it's smaller than what we had anticipated, and that's largely because of delayed resets. The second quarter, it accounted for a little more than 3% of our overall activity. Obviously, we see that number going back. We're starting to see resets being scheduled and picking up pace.

So we think we're going to end the year on a very strong note. The consumer reaction has been huge. The commentary that we're receiving back from folks have been really positive. So we're still confident.

But it's -- again, when -- if you've been in a grocery store and you see the aisles are just as crowded with store workers restocking shelves as consumers, it's tough to ask for resets to occur and for other promotional programs. So it's just been slowed down a little bit. We're starting to see it pick back up.

We think in the third quarter, it'll be a much more significant piece. But the fourth quarter, which is probably the strongest for the ginger ale market, we think we'll even do better. So we're not -- we remain highly confident in it. But if there's an impact on what the pandemic had, it was a delayed reset at ginger ale..

Okay. And then just final one, if I could. And Tom, I don't know if you mentioned this.

But was there an augmentation of the credit line? Or is there expected to be one, just given the well-known receivable credits kind of going up higher and the momentum continuing? And then if I could also, Norm, I think you kind of skated on my question on another new category perhaps before the end of the year or a product launch that we should be eyeing at this stage?.

Oh, yes, you did. I was doing that to see if you were paying attention. We -- I don't think by the end of this year. We're obviously keeping our eyes open for a lot of things. We've made it clear that we want to expand into additional channels and segments, particularly the convenience channel.

So we're working on something there that's friendly into that channel, so that we are working on. What we've -- if you've noticed, David, one of the things that we have done intentionally is trying to -- we're trying not to take on too much. I'd rather be good at 1 or 2 things than bad at 5. So we've really slowed down.

And rather than juggling on multiple balls, we're focused on one thing at a time. So I think the real focus is going to be entry into the convenience channel..

And I'm sorry, I meant category like a category or a few. I apologize for my same question for Tom, meaning new flavor..

You mean new flavor?.

Yes. I mean -- it's my bad..

Okay. Well, we're doing -- we're looking at a combination of bringing back some old, which is new, and bringing in some new, which is new. So part of that entry into that segment is going to be some augmentation there, and we're testing things right now..

And Dave, the answer to your -- I think you asked a question about the expanded volume capacity.

Is that your question?.

Yes..

So we've done a lot of work on internal processes and improved our inventory reconciliation process. So we've gained additional borrowing capacity from that off of our inventory asset base..

Okay.

And what is that now? What's the borrowing capacity?.

$6.7 million. |.

[Operator Instructions] Our next question comes from the line of [Matt Zukowsky]..

First, I wanted to thank John Bello and Neal and Lisa Cohane for their support of me as a passive investor here. And I've been trying the Real Ginger Ale, the Wellness Ginger Shot, the Craft Ginger Mule, just a few sips, and then the Flying Cauldron butterscotch beer, and I'm really enjoying them.

So without further ado, my question is about the pathway to profitability and when you expect to have a net profit on a regular basis..

Well, this year, we've done better than what we planned. So we're pleased about that. And with that said, the strategy doesn't change. It's continuing to drive top line growth, improving margins and spending much more strategically. I think we're going to continue to narrow the gap into 2021, and we're working on a new 3-year strategic plan.

Obviously, this year has not been what anybody expected, and we've gained some new insight as to our consumers and our brands and behaviors. So the goal is really by 2022 to be at that point. But obviously, I think we're better than what we expected today, and I think we'll be moving even closer next year.

We've really brought down the cash burn, but we really want to go through the exercise of planning our strategy in a little bit more detail because we're not going to go back to what we all called was normal, in my opinion. It's going to be a new world, and we want to be in the best position to take advantage of that.

And I'm confident we'll come up with a very, very sound plan. But fundamentally, we're not going to stray from sell and save and simplify, top line growth, margin enhancement and really managing our expenses. And I think that's going to get us there quicker than what we thought earlier..

Ladies and gentlemen, this concludes today's question-and-answer session. I would like to turn it back to Mr. Norm Snyder for closing remarks..

Thank you again for your continued support and participating on today's call. We remain 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 great day..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day..