Good afternoon and welcome to Reed’s Third Quarter Fiscal 2021 Earnings Conference Call for the period ending on September 30, 2021. My name is Antony, and I will be your conference call operator for today.

Today’s call is limited to one hour, and will have prepared remarks from Norman Snyder, Reed’s Chief Executive Officer; and Tom Spisak, Reed’s Chief Financial Officer. Following management 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 also like to remind you that this conference call will include forward-looking statements.

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 or activity, performance, or achievements to be materially different from those anticipated by such statements.

These factors include but are not limited to Reed’s ability to protect its supply chain in light of disruption caused by elevated freight costs and other impediments, the availability and cost of capital to finance our working capital needs and growth plans, reduction in demand for products, dependence on third party manufacturers, and distributors changes in the competitive environment, future business outlook, including the potential impact of COVID-19 on Reed’s business and results of operation and other information detailed from time to time in Reed’s filings with the United States Securities and Exchange Commission.

These statements including financial guidance involve risks and uncertainties that may cause actual results or trends to differ materially from the company’s forecast.

The achievement or success of the matters covered by such forward-looking statements, including future financial guidance, involves risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond Reed’s control.

Fiscal 2021 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19.

The COVID-19 pandemic and its related impacts continue to create many incremental potential business risks, including potential impacts to Reed’s ability to access raw materials, production, transportation and/or other logistics needs, as well as potential inflation related to all aspects of supply chain and logistics, which cannot be reasonably estimated and are not factored into current fiscal 2021 guidance.

Gross margin guidance assumes unknown pricing for ingredient, packaging and production costs. Each of which has been and could continue to be impacted by factors related COVID-19. Financial guidance should not be viewed as a substitute for full financial statements prepared in accordance with GAAP.

For more information, please refer to the risk factors discussed in Reed’s most recent filed annual report on Form 10-K and the Form 10-Q to be filed with the SEC today.

Although management believes that the expectations reflected in the forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. In addition any projections as the company’s future performance represent management’s estimate as of today, November 9, 2021.

Reed’s assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates.

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 Reed’s investor website at investor.reedsinc.com.

Modified EBITDA is presented because management 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.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or is a substitute for or superior to the financial information prepared and presented in accordance with GAAP and Reed’s non-GAAP measures maybe different from non-GAAP measures used by other companies.

Reconciliation of non-GAAP measures to GAAP measures as well as a definition of each measures, their limitation and our rational for using them can be found in this afternoon’s press release and in Reed’s SEC filings. I will now turn the call over to Mr. Snyder..

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter 2021 results. Before I begin, I would like to thank Scott Grossman for serving on our board for the past four years. He has been a valued advisor and I wish him the best. I’m also pleased of Rhonda Kallman’s nomination to the Reed’s board.

I have known her for close to two decades and admire her knowledge of the industry or tenacity and the success that she has experienced throughout her career. Her beverage experience in council will be invaluable in joining the Reed’s board.

We are in an exciting time as we continue to expand our presence in the RTD alcohol segment with our Reed’s ginger mule. I’ll now highlight the key takeaways from the third quarter and then move on to a more detailed discussion although results before turning the call over to Tom to cover our financials.

For the seventh consecutive quarter, we delivered growth in net sales, reflecting continued consumer poll as a result of on-trend innovation and distribution expansion. Third quarter sales of $13.4 million were the highest in the company history with our second highest quarter being the first quarter of this year.

During the third quarter, net sales increased to 27% compared with the prior year period, as we continue to capitalize on strong demand for our products and we’re able to recover most of the orders from the second quarter that were pushed out due to supplier delays related to labor, aluminum cans, and swing-lid glass.

The recognition and authenticity of our brands and strong position relative better for you offering, consumers taste and natural ingredient preferences is clear based on our recent growth as well as other sales category data.

Supply chain challenges remain a factor, and while we are taking steps to mitigate the impact, there are many elements that remain and will likely pressure margins for the next several quarters.

We are pleased with the initial progress on cost savings and operational improvement initiatives set forth earlier in the year that have partially offset these inflationary pressures in the market.

Transportation costs remain elevated, both drive-in and ocean freight costs continued above 2020 levels impacting gross margin and delivering and handling costs. We have retained a top tier distribution called consulting firm and hired an additional logistics executive to conducting network optimization review.

We expect to see the benefit of these efforts in the first quarter of 2022. We are increasing our 2021 financial guidance for net sales growth to 20%. We continue to experience strong demand across our portfolio, reflecting the power of our brands, coupled with expanding distribution and ongoing innovation.

Multichannel IRI scan data for the year-to-date period is up 11% overall, 14% in the natural enhanced channel, including an 18% increase in the Reed’s brand. Overall category growth at 7% in MULO and 9% in natural enhanced channels. Ginger Ale continue to grow at strong rates, increasing 336% on a year-to-date basis.

Reed’s Extra and Zero Extra cans are up 139% and our Reed’s Zero Extra bottles are up 40% over that same period. Our Virgil’s Zero line continues to perform well if scanned data reflects increases of 5%, 48% in the natural enhanced category year-to-date. Velocity was up 12% on a year-to-day basis and ACV grew approximately 5%..

In addition to Costco, we recently added a 100 ShopRite stores and an increased our presence in the swamps chain by adding nine Virgil Zero Sugar skews. Ingles, where we now have 22 skews and Stop and Shop adding Reed’s Real Ginger Ale and the mocktail line.

In addition, we also expanded our existing distribution at Smart and Final, Raley’s Hy-Vee, Hannaford, Wegmans, Big Y in the fresh market. We also have double sales in our seasonal swing lid program and added Flying Cauldron as an offering.

We continue to secure alcohol distribution licensing by state to capitalize on new Reed’s RTD Zero Classic Mule retail distribution opportunities. We are securing new mule placements at Costco Southeast region, along with Whole Food and Sprouts Stores.

I’m excited to announce the expansion of our lineup Reed’s Real Ginger Ale mocktails to include lemonade spreads and blood orange. In addition to our Shirley Tempting & Transfusion varieties.

Also during 2022, we will introduce our rebranded Virgil Zero Sugar line in a 12 ounce sleek can with a new improved proprietary sweetener blend and a more contemporary look. We are proud of the new look, feel and taste of this line and believe this will generate significant sales growth in a higher growth category.

Further, we will be introducing Reed’s Hard Ginger Ale and RTD product that contains 5% alcohol by volume, 100 calories, two grams of carbohydrates and no added sugar. We will launch with four flavors, mango, strawberry watermelon, pineapple coconut, and cherry lime, plus a variety of back.

These products will compete in the flavored malt beverage category, a $4 billion plus market in 2020. The expansion of our DST network with a top tier beer distributors will be a crucial component in the introduction and growth of our RTG mule and Hard Ginger Ale product lines. I will now address third quarter results.

Net sales increased 27% to $13.4 million reflecting volume gains in both brand portfolios. We are pleased with this acceleration from the second quarter, but still encountered supply chain headwinds that impacted our ability to fulfill orders at an optimal level.

We’re able to recover most of the shortfall experience during the second quarter, putting off ahead of our full year 2021 guidance. The position of our brands has never been stronger. Consumers continue to be drawn to the quality, authenticity and on trend attributes of reason Virgil and are responding favorably to our new marketing campaign.

We’ll look always better. Our strong consumer demand expanding network of distributors and retailers, increased product offerings and increased availability of our products on the shelf we’ll continue to drive growth. Core brand gross sales increased 22% in the third quarter, on a year-over-year basis, driven by a 25% increase in volume.

Reed’s case volume increased 34% and Virgil’s volume was up 16%. New launches remain a key factor in our volume growth. When an emphasis on Reed’s Real Ginger Ale, zero sugar formulations and canned versions of new and existing products. Gross margin declined by 320 basis points over the same period last year to 29%.

The driver of this decline was a result of price increases and most of our raw material inputs, including or get paperboard, crowns, cans, honey, pineapple juice and Stevia. In addition to these elevated costs, our successful swing-lid seasonal program experienced a 10x increase in ocean freight that put further downward pressure on margins.

While a favorable package mix and lower promotional discounts help partially offset these increases. We continue to aggressively pursue cost savings as these margin positive items were not sufficient to offset the impact of inflation cost, raw materials, packaging and transportation costs.

Modified adjusted EBITDA loss was $3.1 million in the third quarter, compared to a loss of $2 million in the third quarter of 2020. The significant driver of this increase was transportation costs. We continue to seek an implement cost saving measures to mitigate the impact of inflation and our cost of goods.

We have implemented core stocking programs for our labels and flavors, driving down costs while protecting our supply chain. We are also introducing a new and improved proprietary sweetener blend for our Zero Sugar Line that will maintain the bold taste or consumers demand while reducing costs and reducing the use of harder to source materials.

We are also implementing the use of alternate materials that protect us from shortages while providing pricing advantages. We’re exploring a consolidation of our core get to use in an effort to implement a core stock program, similar to what we have in place for labels in flavors.

These are examples of many of the initiatives we have implemented and or are pursuing to reduce costs and improve gross margin. We also implemented a price increase to our retail and distribution partners that will absorb a portion of these raw material and transportation increases.

To reduce delivery and handling costs, as I mentioned earlier, we have retained a logistics consulting firm that has worked extensively in the beverage industry with several multinational beverage companies to conduct a network optimization study.

We have also hired an experienced logistics executive to partner with the consultants to assist with their review and to implement its findings. We believe there are several significant opportunities and several areas of our logistics operations.

At the time of our last call, we believe that transportation costs would return to prior’s levels and supply chain disruptions would abate. As such we expected to have plenty of capacity on our line of credit to make it through 2021 and even through a majority of 2022.

Contrary to expectations, our assessment has changed and we expect that freight cost will remain elevated and supply chain impediments will continue to cause disruption into 2022. Our strategy of protecting our supply chain will not only provide a path to meet our projected growth, but we’ll create additional opportunities.

There will be opportunity – we will be opportunistic to ensure that we can continue to operate from a position of strength. This position will allow us to take advantage of sales opportunities when others cannot meet the demand. As resolved, we will continue to build inventory and invest in our operating infrastructure.

In summary, demand for our products remain very strong across our entire portfolio and we are excited about our current and future innovation that resulted in a strategic pivot from a company selling full sugar beverages in glass packaging, to a limited number of sales channels to a more diverse portfolio that is meeting the needs of today’s consumers in terms of natural and healthy attributes rate tasting, convenient more environmentally sustainable packages and multi-channel retail outlets.

Our focus on platform optimization to deliver improved profitability as we scale has also continued to show solid progress. And as we expected, we have picked up the pace from last quarter shipment delays. 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 everyone today. As Norm discussed during the third quarter, we continue to see strong demand for consumer – from consumers and retailers across both the Reed’s and Virgil’s portfolios.

We continue to seek and implement cost savings initiatives to offset the rising raw material costs and high freight costs, which put pressure on our margins and net income. Third quarter net sales increased 27% to $13.4 million compared with $10.6 million in the prior year period.

As Norm mentioned, core brand sales were up 22%, including a 25% increase in volume, reflecting 34% case growth for the Reed’s brand and 16% case growth for the Virgil’s brands. Gross profit increased 14% to $3.9 million compared to $3.4 million in the prior year due to increased sales, as well as lower discounts.

Gross margin was 29% in the third quarter of 2021, a decrease of 320 basis points versus the prior year period. Supply chain pressures with a primary factor affecting Q3 gross margin.

Delivery and handling costs totaled $3.1 million in the second quarter, an increase of 40% compared to last year due to volume growth, e-commerce fulfillment costs and higher freight rates. Delivery and handling costs were 23% of net sales, and $3.89 per case compared to 21% of net sales and $3.46 per case during the same period last year.

As Norm mentioned earlier, we have retained a distribution consulting firm that works with several of the large multinational beverage companies to perform a freight study to optimize freight costs.

Selling and marketing costs were $2.6 million during the third quarter, compared to the $1.9 million in the last quarter – last year’s third quarter, the increase was primarily driven by headcount growth and our sales force and higher stock compensation.

As a percentage of net sales, sales and marketing costs were 20% in the third quarter of 2021 versus 18% in the prior year period.

General and administrative expenses were $1.8 million in the third quarter compared to the $1.6 million in the prior year period, as a percentage of sales general and administrative expenses with 13% in the third quarter of 2021 versus 15% in the prior year period.

The year-over-year decrease was attributable to higher sales and lower professional costs. The third quarter operating loss was $3.7 million compared to an operating loss of $2.3 million in the prior year. Interest expense was $200,000 down $100,000 versus the same period last year.

On a per share basis, we reported EPS of negative $0.04 flat with a year ago. Our weighted average share count was $93.6 million in the third quarter of 2021 compared to $62.9 million a year ago, reflecting capital raises over the past year. Modified EBITDA loss was $3.1 million compared to a loss of $2 million in the prior year period.

Moving to the balance sheet and cash flows, we ended the third quarter with 900,000 of cash and $8.3 million of outstanding borrowing. The total facility has $13 million of borrowing capacity or an incremental $4.7 million, including the $1.3 million of availability on our revolving line of credit.

Cash used in operating activities on a year-to-date basis was $15.3 million compared to $6.8 million during the first nine months of 2020. Higher inventory to support our growth as well as efforts to mitigate supply chain issues drove higher use of cash year-to-date, along with the increase in our net loss.

Turning to guidance, we are raising our full year guidance for net sales growth to 20% from the prior range of 14% to 16%.

While our margin enhancement initiatives have become the take-home rising input costs, freight, and the need to supplement our can supplies have us lowering our fiscal year 2021 gross margin guidance to approximately 30% from the prior range of 31% to 32%.

Our gross margin guidance assumes are known pricing for ingredients, packaging, and production costs. Each of which has been and could continue to be impacted by factors led to the COVID-19. 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’d like to reiterate that we believe there’ll be constant challenges throughout the balance of this year and during 2022, but we are continuing and will continue to show strong sales growth and we will successfully offset the pressure on gross margin and transportation costs are entering into the larger ginger ale category with our Reed’s Real Ginger Ale, that’s contributing to our growth and we still have considerable opportunity to fill up distribution.

We are excited about our new and rebranded products that will enter the market during 2022. We have built an extensive national co-packer network to support our growth and have significant opportunity to improve margin. We were focused on controlling costs, improving gross margin and enhancing our supply chain.

We remain flexible and prudent as we navigate the current environment and we will continue to adapt and keep our employees and partners safe and our inventory on the shelf and available for our valued customers. Moving forward, we were focused on advancing our growth opportunity and defending our margins and are excited for the path that lies ahead.

I will now hand the call over to the operator to begin the question-and-answer session..

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Chris Wakowski [ph] a Private Investor. You may go ahead..

Hello and congratulations on the great results..

Thank you..

Yes, sure.

So, I’ve been asking you, or trying to get you to commit to not issuing any more shares, and I have to congratulate you also not issuing any shares throughout this last couple of quarters as well, it growing sales and inventory, but do you think you’ll be able to hold on because while results are great, the share price isn’t going up and it will be really painful to issue shares such low prices..

Yes. Thank you, Chris. Yes, we believe our share price is not appropriately reflect the value of this company if we do there. Obviously our goal is to maintain shareholder value and we will do the best we can to preserve and increase that value. And however, we’re going to remain flexible and keep as many options open.

But right now there are no plans to board in that direction. Yes, one of the things to point out is we still, there is approximately $5 million, lots of availability to tap into, what are our line of credit. So, there’s still some flexibility that remains.

Well, that’s good to hear.

And regarding supply chain concerns do you – can you give us any kind of like directional guidance? Are they getting better or is still as bad or they’re getting worse?.

It depends on the category. I think we’re ahead of it. It does remain challenging, but we believe it’s going to remain a challenge, but we are trying to work and mitigate as many things as possible. So there’ll be less disruption..

Okay. That’s good to hear. And I also want to ask about seasonality, when your sales grow so fast remain not able to rely on part seasonality.

So now that it’s getting colder, do you see yourselves continuing at a strong pace? So, are you becoming kind of like a summer drink?.

No. One of the, I think benefits that we have with our portfolios, we are not a seasonal traditional beverage company. We tend to have a little bit of a decline in the first quarter after the holidays, but we rebound pretty quickly. So for three of the four quarters, our sales remained pretty strong and historically they’ve been that way.

And I think the products that we have really helped mitigate that seasonality..

Okay. That’s good to hear. And it’s good to hear that that’s continuing that even at your higher sales levels. Well, that’s it for me. Good luck..

Thank you..

Our next question comes from Anthony Vendetti with Maxim Group. You may go ahead..

Thank you. Yes. So, as you and others are dealing with the supply chain Norm issues and higher prices for shipping and freight and so forth warehouse and distribution.

Can you talk about your ability to take some price increases? Have you tried to do that? If so has there been any resistance from your customer base?.

Anthony, we just implemented a price increase and the good news is the whole world did, so we didn’t really get a lot of pushback.

We’ll continue to look at that, look at, I’m a firm believer and I was, as I was reading off our ingredients, the quality ingredients that we use and where they come from and the painstaking process we do in preparation of our products at our products are undervalued. So, I think over time, there’s probably more room there.

But I think, we’ve, we put out a great quality product, and unfortunately when you do that and you use the ingredients that we use, we’re going to be subject to it.

But I think we’ve been really quick to make adjustments, to negotiate with our vendors and do the things that we have to do to offset those inflationary practice, but also maintain the quality of our product..

Sure. That makes sense. And then on the distribution side, I know you’ve been trying to increase your DST.

How’s that been progressing and any updates on that?.

Our sales team has done an excellent job and not just increase in our DST coverage, but the quality of it, and what they’ve been able to accomplish. Well, unfortunately I can’t put up a screen for everybody to see, but if you saw a distribution map, we called that the space that’s not being covered white space.

And the white space on the map of the United States is really starting to shrink. So, we’re real excited. Particularly, as we get into that alcohol sector, we’ve got a great number of top tier Anheuser-Busch and Miller, Coors distributors that are really excited about our product entries, and we really think can take us to the next level..

Yes. Particularly I think you’re, spot on right with you’re talking about Reed’s Hard Ginger Ale that’s a very large category, so that’s 5% alcohol, what’s the exact, can you get a little more detail in when you exactly expect to launch it.

Have you circled the date yet? And when you launch it? How do you intend to roll that out?.

We’re going to launch it at the end of the first quarter, so to really start rolling in and have an impact in Q2. We’re going to we’ve several geographic areas and we have a couple that we’re going to really focus on that has executed well, and then move on from there.

So, we don’t want to – and you hear this a lot with companies about going out what’s it – a mile wide and an inch deep, we’re going to go a mile deep and an inch wide, and really go from geographic to geographic territory, but where we’ve had success already with our RTD mule and some other distribution opportunities..

Sure. That makes sense.

And then just, can you talk about the different channels the progress you’re making in the convenience channel, any update on 7/11 or any of the other channels that you’re trying to increase penetration?.

Well, obviously we’ve done really well at Walmart, Target, and then adding Costco, which was a big pickup for us. We’re excited. We’re focusing on on-premise. We’re focusing in liquor stores. We’re focusing drug.

Right now our team is meeting with convenience store buyers, and the reaction has actually been a lot more favorable than I thought in terms of the variety of products that we have and the interest.

So, it’s a multi-pronged approach going through several channels that initially we’ve been really excited about both authorizations, but also our products have performed in market. So, I think there’s more coming Q1 of next year..

Okay, great.

And then just on the gross margin side, for example, Reed’s Real Ginger Ale some of the new products that you’re launching the Virgil’s new product, are these going to be higher margin products, then your current corporate gross margin or in line with your current corporate gross margin?.

Higher. I have a – I made a secret pact with Tom that we have a certain threshold that we’re above. We’re not going to go ahead and do it. So, we’re motivated to make it work. And these are all accretive in terms of gross margin. And in fact, all of our new product entries from ginger ale till the mocktails have all been margin accretive.

So, we looked at that’s going to really propel that number higher..

Okay, excellent. That’s it for me right now. I’ll hop back in the queue. Appreciate it..

[Operator Instructions] Our next question comes from Jack Kaya, Retail [ph]. You may not go ahead..

Hey, how are you doing guys? Wanted to touch on Rhonda’s nomination to the Board and kind of maybe doing a little bit of a reading between the lines here is, are there any sort of plans to have a possible strategic shift to focus on skews that might perform better in particular kind of in the line of alcoholic beverages? I think, in recent months we’ve seen, that’s kind of like the hot topic in consumer beverages is who is putting out things that contain alcohol in them.

I know you just announced the new Hard Ginger Ale, but can we expect maybe more stuff in the pipeline related to alcohol specific drinks?.

Well, I think we have to get the Hard Ginger Ale first before we really entertain any additional items. We’re excited about that. We’re excited about assuming a majority of the distribution for our mule this year.

So really want to get those things off the ground and going before, we think about other items downstream, obviously, we’re trying to really leverage. I think the key is, we’re trying to leverage everything ginger, right? And that’s been our mantra.

And if you look what we’ve done is, we’ve graduated from the $100 million ginger beer category to the $1.3 billion ginger ale category to the over $4 billion flavored malt beverage category. And there’s no real big players. And there that has a ginger ale base drink, and who represents ginger better than Reed’s.

So, I think we’re going to start there and we believe we can drive significant growth, obviously, Rhonda has great beverage experience in it, and it’s not just related to the alcohol beverage category or the beer distribution network. I mean, she knows the business well. She knows the landscape.

So, we’re going to leverage her beverage experience across all portfolios, but obviously lean on her as we grow that distribution. And I think we’ll start there first before we decide what other opportunities.

But I think the key thing that’s consistent here is that we’re leveraging our strengths, ginger, what we do well and what we’re known for and feel really comfortable about it. And we’re not going into new territory that we don’t have any experience in..

Sure, sure. I think that’s a pretty logical and I appreciate the insights and kind of break down on it. And the only other question I was kind of curious about is, I’d be remiss if I didn’t ask. But as you see compliance and with our stock price where it’s at I think, primarily most people was called so no, and wish it was higher.

But are there any lingering concerns with maintaining compliance going forward? I know it’s pretty much asked every time we have one of these calls and we’re blow bucks, but I figured I’d throw it out there..

Yes. I mean, if you go back in time, we were as low as $0.375, and we were able to get it over the dollar threshold. We were trading around $0.70 before this call. I’m optimistic with the progress that we’ve made. I mean, look, seven consecutive quarters of really sustained growth. Right.

And we’re feeling good about the future and about our opportunities, obviously the impacts of COVID has had some downward pressure on our margin, but we bought back we are addressing transportation and one of the things I didn’t talk about is a lot of these new products, including our Hard Ginger Ale are migrating to cans.

We can get more cans on a truck that you can bottle, so that will bring those costs down on a per case basis. So, we believe, if we continue to execute and grow this business, the way we are that the stock price will move up. And as I said earlier, I think it’s incredibly undervalued and a great opportunity to come in and buy restock..

Cool. Thanks. I appreciate it as always keep up the good work and, hang in there. I think it’s going to get better..

Thanks, Jack..

This concludes our question-and-answer session. I’d like to turn the conference back over to Norm Snyder for any closing remarks..

Thank you. Thank you again for your continued support and participating in today’s call. A replay of the webcast will be archived other company’s website under the investor section at drinkreeds.com for approximately 90 days. We look forward to sharing our progress over the coming quarters and years. Have a great day. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..