Reeds Inc

Good afternoon, and welcome to Reed's first quarter 2022 earnings conference call for the period ending March 31st, 2022. My name is Gary, and I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer, and Tom Spisak, Reed's Chief Financial Officer. Following their remarks, they will take your questions. I would like to remind listeners 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 actual results, levels, or activity, performance, or achievements to be materially different from those anticipated by such statements. Those factors include, but are not limited to, Reeve's ability to manage growth, manage debt, and meet development goals, 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 REIT'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 2022 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19. The COVID-19 pandemic and its related impacts could 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 may not be completely factored into current fiscal 2022 guidance. Growth margin guidance assumes our known pricing for ingredients, packaging, and production costs, each of which has been and could continue to be impacted by factors related to 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 recently 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 forward-looking statements are reasonable, management 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, May 16, 2022. Reeds assumes no obligation to update any forward-looking statements or information which speaks of their respective dates. Additionally, please note non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on Reeds Investor website at investor.reedsinc.com. Modified EBITDA is presented because management believes 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 as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. and Reed's non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures, as well as the definition of each measure, their limitations and our rationale for using them, can be found in this afternoon's press release and in Reed's SEC filings. Please note, this event is being recorded. I will now turn the call over to Mr. Snyder. Please go ahead.

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter 2022 results. Since our last corporate update was about six weeks ago, we will keep our comments relatively brief and focused on recent updates. As we discussed on our March 31st conference call, our Q1 results were impacted by residual supply chain headwinds at the start of the year. Order volumes were up approximately 20% in Q1, but we simply couldn't satisfy the demand in a cost-efficient manner. Those supply chain challenges have since been resolved, and our sales in April were up approximately 45% year over year, with order volume up 23% over the prior year. As mentioned on our last earnings call, we have two primary goals to drive our growth, which we will continue to focus on throughout the balance of the year. Distribution expansion and brand launches as a result of innovation, with an emphasis on new, larger, and faster-growing categories. Regarding our distribution, we increased our retail coverage footprint by 5% over the prior year with Reed's products sold in approximately 45,000 locations nationwide. At quarter end, MULO measured retail sales were up approximately 14% year-to-date and up 16% over the last four weeks, with corresponding volume up 14% year-to-date and 20% the last four weeks. while the natural and enhanced category measured retail sales grew by 52% year-to-date, 53% over the last four weeks, with volume up 38% year-to-date and 36% the last four weeks. More low retail growth was noted for REIT's Ginger Beer, Ginger Ale, Virgil's Full Sugar, and Flying Cauldron. Virgil's Zero Sugar experienced a decline as a result of resets in converting from standard to sleek cans. For the natural and enhanced category, retail growth was visible in all product lines. Moving on to our DSD network. We have added approximately 12 new DSD distributors as we continue to build out our network. All of these additional distributors will sell products from both our non-alcohol and alcohol portfolios. We are also in discussions with several more distributors and expect to have executed contracts completed in the second quarter. Moving on to our various brand and product initiatives, starting with ginger ale. We continue to see strong momentum for our ginger ale line. At quarter end, Moolo measured retail sales for full sugar ginger ale were up 66%, with velocity up 14%. Moolo sales for zero sugar ginger ale were up 57%, with velocity up 21%. And in the natural and enhanced channel, full sugar was up 88%, with velocity up 6%, Zero sugar was up 97%, with a velocity up 23%. All of this to say, our ginger ale is clearly taking market share. Up next are RTD alcohol beverages. For classic ginger mule, we added seven distributors on the East Coast and seven on the West Coast, with eight additional distributors pending. Shortly, we will be launching our stormy mule, our RTD version of the classic dark and stormy. We continue to anticipate increasing doors that carry our RTD alcohol lines to approximately 5,000 outlets by the end of 2022. For hard ginger ale, we have recently completed our initial production run and are extremely pleased with the results. Additional production is scheduled for next week and we start shipping product June 1st. To date, we have authorizations from 20 retailers, totaling over 2,000 stores, and anticipate rolling out products to our first retailer during Q2. New Virgil 0 sugar sleek 12 ounce cans. We rolled out this new package and branding in sprouts in April, followed by HEB, and initial reports indicate consumer acceptance with increasing velocity that exceeds prior trends with the old packaging. We expect to have our new sleep cans available in all stores that sell Virgil's by year end. Moving on to our supply chain initiatives. The benefits for our various supply chain initiatives are taking hold. Q1 transportation and warehouse costs were down 14% year over year as a result of eliminating out-of-network shipments and focused on direct shipments to eliminate multiple touchpoints. In addition, we focused on increasing payloads and organically increasing the sale of cans over bottles. As we mentioned last quarter, we have our entire can supply secured for 2022. Freight costs have also begun to improve from peak levels experienced last year. We have locked in rates with heavily traveled lanes and are more disciplined in how we are handling our freight. For example, we could have driven more volume in Q1, but it would have been at very high freight rate. to push these orders into Q2. Managing our cash burn is just as important to us as revenue and volume growth. In addition, we have begun to see the benefits of our purchasing efficiencies, ingredient and label optimization initiatives, reduced towing fees, and inbound freight as a result of taking advantage of economies of scale. Our recent price increase, which has been communicated and accepted by our retail partners, will result in an anticipated 8% lift in gross revenue but will not be reflected in our financial results until late Q2 or early Q3. We are expecting a 4% to 5% margin benefit in 2022 as a result. Despite our price increase, most of our products are still priced in the middle of pack relative to competition on a cost per ounce basis. So we feel good about where we stand with the consumer and our competitiveness for wallet share especially at a time when inflation is impacting the consumer wallet more than it has in a very long time. While we continue to face supply chain issues in the first quarter that it lingered from last year, our business is in a much better place today. The sustained demand for our products is robust, and with our supply chain constraints easing, we expect our results to materially improve each quarter from here on out. Before passing it to Tom, I'd like to touch on the financing we announced last week where we closed on an 11.25 million private placement with White Box Advisors. Tom will provide more details on the terms of the financing, but the most important takeaway from my perspective is what this financing represents. For the first time, I now believe we have the capital we need to execute on our growth objectives and turn cash flow positive in the second half of 2023. As most of you are aware, The capital markets have been under severe pressure this year, so our ability to take down the largest financing to date since I was appointed CEO at a time when the markets have been closed to most operators, and all while doing so in the least dilutive way we could to our shareholders, makes me incredibly pleased with the outcome. With that, I'll pass the call to Tom to walk through our financial results before returning for Q&A and closing remarks.

Thanks, Norm. Turning to our results, all variances referenced are on a year-on-year basis unless otherwise noted. Net revenue for Q1 increased to $12.2 million compared to $12.1 million in the year-ago quarter. As Norm mentioned, our growth would have been stronger as reflected by the 20% increase in order volume for the quarter. However, we did not fulfill the order demand due to supply chain challenges at the start of the quarter. In addition, we adopted a more disciplined approach to manage our order of fulfillment to eliminate incremental freight costs that would adversely impact cash burn. Gross profit during the first quarter of 2022 was $2.9 million compared to $3.9 million. Gross margin was 24.1% compared to 31.7% in the first quarter of 2021, reflecting the increased supply chain input and inflationary costs. Sequentially, we grew 370 basis points from 20.4 in Q4 of 2021. Delivery and handling fees in Q1 decreased 14% to 2.8 million from 3.3 million, driven by the implementation of lower contracted freight lanes and a more disciplined approach to shipment scheduling by reducing out-of-network shipments. Delivery and handling expenses were approximately 23% of net sales, or $3.90 per case, compared to 27% of net sales, or $4.43 per case in the year-ago quarter. Selling and marketing costs were $2.2 million, which remain in line with the first quarter of 2021. As a percentage of revenue, selling and marketing costs remain flat at 18%. Our general administrative expenses reduced 19% year-over-year to $2.1 million from $2.6 million, driven by lower stock compensation and legal settlements recorded in the prior year. Total operating costs were reduced by approximately $1 million or 12% from the prior year. As Norm stated earlier, we believe this trend will continue for the balance of the year. Operating loss during the quarter was $4.2 million or $0.04 per share, compared to operating loss of $4.3 million or $0.05 per share. Modified EBITDA in Q1 was $3.8 million compared to $3.4 million in the year-ago quarter. Turning to our balance sheet and liquidity, cash used in operating activities was approximately $2.2 million for the first quarter of 2022 compared to $5.1 million for the same period in 2021. As of March 31st, we had approximately $122,000 of cash and $5.1 million available on our revolving line of credit. The total facility has a borrowing capacity of $13 million with $7.9 million outstanding. As Nora mentioned, we recently closed the private placement of convertible notes for aggregate proceeds of $11.25 million. The principal amount of the notes carries a 10% coupon, of which 5% is payable in cash, and 5% is payable in kind. The notes are convertible into shares of common stock at a price of approximately $0.24 per share, reflecting a 10% premium from the closing price. And the notes will mature in May of 2025. The purchasers have the exclusive option to buy up to an additional $12 million of notes on the same terms that expire at 180 days, 270 days, and 300 days. 60 day intervals. Looking to our guidance for 2022, we continue to expect net sales to range between approximately 59 and 62 million, reflecting growth of approximately 20 to 25% from 2021. We also continue to expect gross margins for 2022 to be approximately 30% compared to 27.4 in 2021. And finally, we expect modified EBITDA to improve in 2022 as a result of our revenue growth, margin expansion, and cost savings initiatives. I will now turn the call back to Norm for closing remarks. Thanks, Tom.