Reeds Inc

Good afternoon, and welcome to the READS Second Quarter 2022 Earnings Conference Call for the period ending June 30, 2022. My name is Sarah, and I will be your conference call operator for today. We will have prepared remarks from Norman Schneider, READS Chief Executive Officer, and Tom Cizak, READS 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 and 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. These factors include but are not limited to Reed's ability to manage growth, manage debt, and meet development goals. Reed's ability to protect the supply chain and light up destruction caused by elevated freight costs and other impediments. The ability 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 competitive environment, future business outlook, including the potential impact of COVID-19 on READ's business and results of operation, and other information detailed from time to time in READ's filings with the United States Securities and Exchange Commission. These statements, including financial guidance, involve risks and uncertainties that may cause actual results and trends to differ materially from the company's forecast. The achievement or success of the matters covered by such forward-looking statements includes future financial guidance, involves risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond READ's control. Fiscal 2022 guidance reflects the 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 READ's ability to access raw materials, production, transportation, and or other logistics needed, 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. Gross 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 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 forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance, or achievement. In addition, any projections as to the company's future performance represents management's estimates as of today, August 11, 2022. READS 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 the comparable GAAP measures. financial measures, and the press release and supplemental materials filed with the SEC and is posted on Reed's 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 of core operating performance. The performance 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. 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 second quarter 2022 results. During the second quarter, we returned to more than 20% revenue growth driven by strong demand across our product portfolio, specifically Reed's Ginger Beer, Reed's Ginger Ale, Reed's Classic Mule, and our Virgil Zero Sugar line. While net sales were generally in line with our expectations, the effects of various unprecedented supply chain headwinds that began during the latter half of 2021 and continued into 2022 resulted in one-time elevated cost of goods sold and transportation expenses, offsetting the benefit of our cost-saving initiatives implemented earlier this year. We believe that we have strategically navigated through these turbulent times, and during the second half of 2022, we anticipate lower costs of goods, resulting in improved gross margin and lower freight expenditures. We will also continue to tightly control sales and marketing and general and administrative costs, resulting in improved operating results and positive cash flow. We'll have more to discuss on the supply chain and the key factors driving margin and cash flow for the second half of the year, but let's first take a closer look at our product portfolio. Core ginger beer sales continued to perform well during the quarter and were up nearly 15% year over year, led by 113% growth in ginger beer cans as contained in year-to-date multi-outlet and convenience, or MULO, retail scan data. MULO contains the following channels, food grocery, drug, mass, Walmart, club, dollar stores, and military. Our relatively new ginger ale business was also up as sales increased 60% from the year-ago quarter. In addition, as reflected in MULO scan data, Our ginger ale is up 57% year-to-date and 48% in the four weeks ending at the close of Q2, reflecting the consistently growing demand for this new product line. As a reminder, the ginger ale category in measured sales is approximately $1.2 billion and growing, which represents a significant opportunity for REITs to capture additional market share. We have also made significant headway in our RTD alcohol portfolio. both from a sales and product development perspective. I'm happy to share that as of last month, we are now registered to sell our alcohol portfolio in 46 states, with the remaining four states coming online shortly. During the second quarter, our classic mule sales were up 5x compared to the prior year and up more than 60% sequentially from Q1 2022. Over the last eight months, we added an estimated 3,300 doors that purchased Reed's Classic Mule and, more recently, Stormy Mule. We are currently identifying the doors that are generating the highest velocity per week, and we are developing more localized marketing plans with our distributors to broaden our reach through retail post-ops, sales incentives, and in-store consumer demos. Some chains where you will find our new mules include Whole Foods, Total Wine, Sprouts, Smart & Final, Food City, Raley's, and Natural Grocers, just to name a few, with many more to follow. We are currently meeting jointly with our distributors with many national and retail chains, and we head into category review season in the fall. The RTD cocktail and hard seltzer categories in measured sales is approximately $7 billion plus and growing, which also represents a significant opportunity for Reeves. At the end of the second quarter, as planned, we launched our new hard ginger ale with several of our distribution partners in California, Florida, New York, Massachusetts, and many other states. Although shipments were minimal, as expected, we plan to further increase distribution in the second half of the year as our Reed's Hard Ginger Ale gains entry into national and regional chains. Our consumer research indicates that Reed's Hard Ginger Ale has high purchase intent with both RTD Seltzer and current ginger ale drinkers that use it as a mixer. and the early sell-through data for July is very encouraging. In addition to our hard ginger ale, we also released our new Stormy Mule and issued a press release earlier today, which is our take on the iconic dark and stormy cocktail. The initial launch included over 180 Safeway Albertsons and Sprouts locations across the West Coast. As with our hard ginger ale, sales for the quarter were also minimal. We plan to expand distribution of the Stormy Mule with our regional partners into new regions throughout, with our channel partners, into new regions throughout the second half of 2022. Moving on to Virgil. Our sales were up more than 20% on both a year-over-year and quarter-over-quarter basis, in large part due to the launch of our new zero-sugar sleek cans that were rolled out in sprouts in April. SPIN's natural and enhanced category scan data reflects a year-to-date increase of 140% and nearly 150% increase during the forward period ending at the close of Q2. The natural and enhanced category covers U.S. supermarkets with at least 2 million in annual sales and at least 50% of sales from natural organic products, excluding whole foods. We look forward to more shelf space for the rebranded sea cans with our various channel partners in the coming months that presently include, in addition to sprouts, HEB, Stop and Shop, and Ingles, among others. We are excited about the new look as we conducted extensive research on positioning and consumer purchasing tests. The success we have had with our sleek ginger ale cans and the initial pull we are experiencing at Sprouts. Subsequent to the quarter, we announced the launch of Virgil's Bavarian Nutmeg Root Beer and our Flying Caldron Butterscotch Beer in swing-lit bottles in all 667 Cracker Barrel corporate-owned locations, which spans across 42 states. These Swing Lit bottles are margin-accretive to our overall portfolio, so we are thrilled to be serving these beverages year-round at Cracker Barrel. In addition to the Cracker Barrel relationship, we have grown our seasonal Swing Lit program from 20,000 cases in 2020 to over 200,000 forecasted cases this year. During the second half of the year, we plan to launch a Virgil's Variety Pack on e-commerce, an additional Swing Lit flavor, Harvest Spice Apple Cider, and our popular cranberry ginger ale just in time for the holidays. Returning to our supply chain. As I mentioned earlier, we experienced heightened fuel and transportation costs during the second quarter, which offset our cost-saving initiatives implemented earlier this year. Transportation fuel costs. Although our team has done exceptional work to implement lower contracted freight lanes and reduce out-of-network shipment, There was simply no way to avoid the rising fuel costs during the second quarter, which we have all seen firsthand at the gas pump this year. On a positive note, we have seen fuel costs come down over the past two months, which makes us optimistic that we can get our overall transportation costs back down to lower levels in Q3 and Q4. We have also recently negotiated lower contracted rates for many of our freight lanes. Given the strong ordered demand we experienced earlier this year, our supply chain is encountering fewer delays and more available line time at COPEX. We made the strategic decision to build up our inventory of finished goods so that we can effectively satisfy that demand moving forward. This was also a large... we were not positioned to fulfill the retail demand in a cost-effective manner. Now that we're flush with inventory, we can ship more product in Q3 and Q4 without incurring those delivery and handling costs again, which will improve operating margin and enable us to generate positive cash flow over the next two quarters. Outside of transportation and fuel, we have continued to see benefits of our purchasing efficiencies, ingredient and label optimization, reduced tolling fees in inbound freight as a result of better economies of scale. However, to meet tight deadlines with our various new product launches, we produced and utilized sleeved and digitally printed cans in our initial production runs, which are more expensive than painted cans and consequently impact the gross margins. That will no longer be repeated as we now have cycled through the majority of that inventory and have an ample supply of lower-cost painted cans and are presently using them. We also used an alternative supplier to supplement our inventory needs during the second quarter, which resulted in higher cost and incremental delivery charges. We have also cycled through that higher cost inventory, which will result in lower cost of goods through the balance of the year. We are also starting to see better rates with co-packers, and various surcharges are being reduced and or eliminated. Further, the price increase we implemented earlier this year will also take effect in the coming quarter as planned, which will provide an additional sales and market lift going forward. In summary, we continue to face residual turbulence from the supply chain headwinds in the second quarter and really the first half of the year. However, input costs and product availability appear to be normalizing, and we are optimistic that the worst is behind us. Demand for our products remains strong, and we are finally stockpiled with enough finished goods to fulfill that demand in a much higher margin. We look forward to delivering on our growth and profitability objectives in the second half of the year while generating meaningful cash from operations. With that, I'll pass the call to Tom to walk through our financial results before returning for closing remarks.

Thanks, Norm. Turning to our results, all variances referenced are on a year-over-year basis unless otherwise noted. Net revenue for Q2 increased 22% to $13.7 million compared to $11.3 million in the year-ago quarter. The double-digit increase was due to strong demand across our Reed branded products. More specifically, Reed's Ginger Beer, Reed's Ginger Ale, Reed's Classic Mule, as well as our Virgil Zero Sugar Lines. Gross profit during the second quarter of 2022 remained flat at $3.3 million. Gross margin was 24% compared to 29% in the second quarter of 2021. As Norm mentioned, our second quarter margin was impacted by higher costs related to one-time material sourcing and production. When excluding these one-time costs, Q2 gross margin would have been approximately 32% for the quarter. Delivery and handling fees in Q2 were $3.8 million compared to $2.5 million in the year-ago period, driven by higher volume, freight rates, and fuel costs, and increased finished goods production. Delivery and handling expenses were approximately 28% of net sales, or $5 per case, compared to 22% of net sales, or $3.53 per case in the second quarter last year. As Norm mentioned, the second quarter included additional expenses to building up inventory, an extra $325,000 or 45 cents per case. Since these costs were recognized in Q2, we will save on delivery and handling in the back half of the year. Outside of delivery and handling, the rest of our operating costs were managed very well. Selling and marketing costs were reduced by 16% to $2.2 million, compared to 2.6 million in the second quarter of 2021. As a percentage of revenue, selling and marketing costs were 16% compared to 23% in the year-ago period. Our general administrative expenses during the second quarter were also slightly lower at 1.8 million compared to the prior year. Total operating expenses were 7.8 million or 57% of net sales compared to 7 million or 62% of net sales in the year-ago quarter. Operating costs, excluding freight, were $4 million, which is approximately half a million dollars lower than prior year. Operating loss during the quarter was $4.5 million, or 4 cents per share, compared to $3.7 million, or 4 cents per share. And modified EBITDA in Q2 was $4.4 million, compared to 3.1 million in the year-ago quarter. Turning to our balance sheet and liquidity, cash used in operating activities was approximately 14.1 million for the second quarter of 2022, compared to 5.3 million for the same period in 2021. As of June 30th, we had approximately $280,000 of cash and $969,000 worth of current availability. The total facility, has a borrowing capacity of 13 million with 11.5 outstanding on June 30th. You may recall from our Q1 conference call that we closed a private placement of convertible notes that resulted in approximately $10 million of net proceeds. Nearly all of these proceeds were used to pay down our revolver, which we drew down again to help us stockpile the inventory as previously discussed. With ample finished goods in place, we expect to generate meaningful cash flow over the next two quarters and strengthen our cash position once again. Looking to our guidance for 2022, we continue to expect net sales to range between approximately $59 million and $62 million, reflecting growth of approximately 20% to 25% from 2021. We also continue to expect those 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. During the first half of the year, we continue to face unprecedented inflation and supply chain bottlenecks. Despite these challenges, we continue to drive top line growth, implement a price increase, hold the line on promotional costs, and reduce non-transportation related operating costs. Looking ahead, we have several key initiatives on track to hit our growth and profitability targets, including the nationwide launch of our swing lid bottles at Cracker Barrel, continued growth of our overall swing lid program, ramping up of our newly released RTD alcohol products, our relaunched Virgil Zero Sugar portfolio, and the continued growth of our flagship Reed's Ginger Beer and Virgil's Root Beer. We anticipate meaningful gross margin growth and lower transportation costs, both areas that significantly impacted our results during the first half of the year. Additionally, we will deplete a significant amount of finished goods inventory on our balance sheet and convert this asset into cash. We remain steadfast with our continued cost-saving initiatives and look forward to delivering on our goals in 2022. Operator, we will now open the calls for Q&A.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two.

At this time, we will pause momentarily to assemble our roster. Our first question comes from Sean McGowan with Ross Capital Partners.

Please go ahead.

Hi, guys. How are you? Good, Sean. How are you?

You can hear me okay? I've got a couple calls going on, so I'm on a headphone. Yeah. Okay. I want to get a little bit more color on the inventory because I thought this would be the quarter where we might see that come down. How much of the inventory is in not only finished goods but of, like, new products that wouldn't have even been there last year, like some of these new product launches that you got in just at the end of the quarter? How much inventory is that? And, you know, kind of more specifically, should we expect it to be down at the end of Q3?

Well, I'm going to answer those questions in reverse order, Sean. Yes, we expect it to be down. And for our new products, the bulk is really going to be in Virgil's sleek cans for the rebranded zero sugar. Our, you know, the... The hard ginger ale is minimal. The procurement of raw materials is really by our co-packers, so we don't really hold any non-finished good inventory that we purchase. But the bulk was really Virgil Zero Sugar, as I said. And what really, I think, created the growth in inventory was, as you recall, during the year, beginning of the year, Ball instituted a minimum five truckload per SKU order requirement. And we looked closely at our forecast and believed that we could cycle through those cans. However, we had to make a commitment early on or we risk losing those cans. So the big commitment and the jump on non-finished good inventory is going to be primarily due to the Virgil Zero Sugar. But obviously, we're producing finished goods, so we're using that up, and then we're selling off finished goods. So, you know, across the board, we'll see both finished goods and non-finished good inventory come down in both the third and fourth quarter.

Okay. Well, I'm glad you brought up Ball because... I think last week they said they were seeing some slackening demand and they were closing a couple of plants and commenting on how maybe some pricing action taken by some customers was leading to lower demand. Have you seen any indication from them that they might kind of ease up on either the higher prices or on this minimum quantity commitment?

Well, I've heard the minimum quality commitment is coming down now. So that's something that obviously we want to take advantage in the future. And I am hearing rumblings across the board about can prices coming down as well. Waiting to see that. I think RDAW is taking some pricing down. And I think Ball has been talking about it. We also buy cans from Crown. And we've had conversations there. So Ball's pricing and minimum quantities are you know, the demand that everybody forecasted obviously didn't come to fruition. Now, I can't comment on why it falls, you know, closing facilities, but, you know, obviously the demand has not panned out as everyone has suspected. And, you know, like I'm seeing across the board, we're feeling much better about our overall supply chain and our ability to get items. And then, not that I want to jinx myself, but I haven't had a price increase on any components in a while, and it seems like they were popping up every week. So it does seem like things appear to be normalizing a bit. Now, the good news is we've kind of hedged ourselves against inflation because we do have so much inventory. So we feel good from that perspective.

Okay. Well, I'm glad you – that's a good segue into my next question. when you put the price increases into place or at least announce them and we're thinking about them, you must have had some expectations about where you would see costs over the course of the balance of the year. And it sounds like in some cases maybe they're higher, but based on more recently, do you think that the price increases that you can count on, A, can you count on them, and B, will they kind of match up with what your expectations were of these other cost increases?

You mean from a – Us purchasing raw materials and ingredients?

Yeah, yeah. I mean, you're kind of guessing at the point you put in a price increase or an ounce of it.

Yeah.

You know, how much is going to cover those cost increases. How has that played out versus your expectation?

I think it's played out as we thought. But I don't have a crystal ball, and I don't know what's going to happen down the road. I know that we're continuing to... look to take out costs and, you know, we never stop because you can't stop and you don't know what the future is going to bring. But, you know, one of the things that we're looking forward to next year is we've developed with one of our suppliers some new technology to bring down costs of our ginger, for example. So that's, you know, that's an area where, you know, we – continually seek, without sacrificing quality, the ability to bring costs down. So, you know, we try to do both things. One was continually look to bring costs down, you know, to build in where we thought costs were going to be when we took our pricing, right? Yeah. And it seems like we were there in certain circumstances, and actually... Other things have subsided, so that's a benefit to us. But look, like I said, I don't have a crystal ball, and there's many geopolitical issues out there that have impacted the whole world, not just reads, but us as individuals. And I'm not going to give an attempt to try to predict that or quantify what's going to happen. I'm hoping for the best, and we continue to look to improve things the best we can.

Okay, that's helpful. And then the last question I had was, yeah, I think the math works out that you would see significantly higher gross margins in the second half, of course, reiterating that guidance. Are we going to see that in the third quarter, or do we have to wait until the fourth quarter to see a big increase from the gross margin?

You'll see it in both quarters.

Okay. And do you think you can get back to where you were like two years ago, or could it even be higher?

Oh, it's going to be higher. It has to be higher. Than two years ago, I mean. Yes. Remember, we were in the low 30s, and we need to exceed that. Like I said, that's why I made that reference earlier about working with partners on new technology to bring costs down. And that's going to be, you know, for us, the highest price products we have are our ginger line, and to be able to work on that to bring a pretty significant cost on like that is going to really pay off. And so, you know, like I said, we're looking at everything that we can do and we never stop and we never give up looking for opportunities to bring costs back in line.

Great.

Thanks a lot. You know, the goal is to be at 40%. I mean, that's really what we're working towards. So, We're not going to stop in the low 30s or mid 30s, but continue to drive that number.

That'd be great.

Thank you. You're welcome. Our next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Thank you. Yeah, I guess first on the revenue line, and then I have a question on the cost to deliver per case. So on revenues, obviously your core brands drive the bulk of your revenues. Out of some of the new products you've announced, which ones do you think either for the rest of this year or as we move into 23, which ones do you believe will be able to contribute the most in terms of absolute dollars to the top line?

Well, Ginger Ale obviously continues to grow. And it is really working itself to the top of the top of the heap so I Think that's going to be a big piece I'm really optimistic on the on the hard line as well You know the the profit and the dollar per case in terms of revenue is higher and I the velocities are also higher. We are truly trying to establish this thing and go a mile deep and an inch wide as opposed to saying that and going a mile wide and an inch deep and really focus on some key areas to drive velocity, gain market understanding, and you know, initially what we're seeing has been really positive. So that's the approach we're going to take. I believe those are going to be big contributors in the latter half of this year, but more importantly in 2023. And, you know, our Swing Lib program that I've mentioned, you know, it's gone, in three years it's grown 10x. And those are high-ring, high-margin products that, you know, can... continue to contribute. When I saw, just to give you a little back story how that came back, there were so many consumer inquiries like, where did this go? I can't get it. It was my favorite. I'll tell you, the best part about it is we're sold out before we're done making it. That's a big contributor. That's always the second half of the year. Granted, there'll be some contribution from Cracker Barrel because it's going to be a full year program, but the bulk of it second half we also had success with our cranberry ginger ale around the holidays so those that you know that's obviously part of the the ginger ale category but you know we're waiting for our for the relaunch Virgil zero sugar it also kick into high gear as well so I mean I think there's you know three or four platforms were kind of ginger ale are hard our spring lid, and then our Virgil Zero Sugar. And, you know, ironically, our flagship brands keep growing, our root beer and our ginger beer. You know, our ginger beer we put in the cans, both the extra and the zero extra, and cans have become a very popular package and are growing strongly. So those are the four pillars that, Anthony, I think you're going to continue to see They're in big categories that are growing. One of the things that I really like is that reeds have strong brand recognition. Particularly when we get into categories like hard ginger ale or the mule or the classic or the stormy mule, these are synonymous with our name and what we represent. so there's not like a whole new consumer education. People are using our ginger beer to make their darkened stormies and make their mules. I did. And now I have the option of taking them in a ready-to-drink format, but I think those are the pillars that you'll see. The other thing, too, is and I should have incorporated this into my remarks, but I was waiting for the question, is, you know, reeds and flying cauldron are both, you know, outpacing, you know, the growth that we're seeing in the CSD category. You know, virgils will catch up as a result of both the swing lift program, but also as, you know, as we get the virgil zero sugar out more. So, you know, we have three brand portfolios that are that are hitting on all eight cylinders. But, you know, the four pillars that I talked about, I think you'll see really strong growth into the future.

Okay, great. And then the last question has to do with costs. You know, obviously inflation is big across ingredients and shipping, handling, transportation. I was a little bit stunned by how much it was per case, so up over 40%. Last year it was $3.53 per case to deliver. Now it's $5 a case. Hopefully that's the high watermark. I think you did mention that that should start to go down. Where do you think that could normalize at, and how soon do you think that will start to go down?

Well, as we said earlier, that $5 is really artificially high because there's at least 45 cents in what I'll call prepaid freight. Generally, we're making it, we're shipping it to our distribution center, shipping it out to our customers, so it kind of flows through in that current period. Because we've built up inventory, we've shipped a lot into our distribution center. In my mind, I call that... prepaid freight. So we're really at 455 a case, not five. Yes, I think it's the high watermark. We're seeing rates come down. We just recently renegotiated contracted rates and expect to see a pretty big savings there. Plus, as I talked about last quarter, we're in the process of restructuring our distribution centers to eliminate a lot of that transfer freight. which is what we need to do. So I think both, obviously, there's things that are not in our control. Petroleum prices go back through the roof. I mean, look, we're all seeing it now when we go to the gas station that we're paying less for gas, and we're seeing the same thing. It seems like because volumes are down across the board in a lot of goods, there are more trucks available, and it's the old supply versus demand. So We're seeing organically both fuel prices coming down and supply and demand, you know, also forcing pricing naturally down. And then we're going to get better in terms of, you know, where our mix of cans to bottles is increasing, so payloads are getting bigger. We do have inventory where we need it, so we're not shipping out of network, so we're being more efficient. We're going to restructure those distribution centers in the second half of the year, so we'll take a lot of savings out of that. So it's just not relying on market forces. We want to take advantage of that, but we're doing a lot more behind the scenes to really drive those costs down. And I do hope that this is the high-water mark. I mean, I'm seeing the last two months that it's definitely moving in the right direction and that we will continue to see it head downwards.

Okay, great. Thanks for that, Kala. I'll hop back in the queue. Appreciate it. Thanks, Anthony. Our next question comes from Wally Jamal, private investor. Please go ahead. Hello, gentlemen. How are you doing? Good, Wally. How are you?

I'm doing well. Just have three questions for you. One is about the Virgil Zero Sugar Slim Cans. Do you feel, or is there an opportunity coming up to see those in C-stores as offered as one-off customers? Do we have the ability to ship the 24 or 36 can cases to C-stores, or are we working on something like that?

It's funny you ask that. Yes and yes. You know, there seems to be some interest in the sleek cans, and yes, we can do that. In fact, I would welcome that because that's a much cheaper package than what we could presently have, but yes, we can satisfy sea stores with those cans.

Oh, yeah, because especially the lemon, lime, and the grapefruit, I feel like it's a far superior product than what the sparkling Perrier flavored water is offering right now. I feel like we have an opportunity to capture sales there. Also, do you know if any of the large grocery stores are asking for end caps or have they asked for end caps of Virgil Zero Sugar Slim Cans to offer in the in the one-off offerings?

You mean single-serve? Well, I think you're going to find that mostly in coolers where you'll find single-serve. Yeah, and we're working on that at several retailers to not just – it's not really an end cap. It's to get into the single-serve cooler, and we're working on getting that done as well, yes, because obviously that's a great sampling opportunity and – and a great way to expand your presence in retail locations.

Okay, thank you. And second question, in regards to the REITs hard launch, of that guidance for the year, of the $59 million to $65 million, is any REITs hard ginger baked into those numbers? Very little.

Very little. If you have to approximate that, what would you put that at?

It's single-digit percent. I mean, it's not enough to make a difference, and that's why we're optimistic about its contribution going forward. When you come out with a new product, you never really know until you get it out and you get it done. So we didn't really put a lot of that into our numbers.

Okay. And my third question is, is we haven't seen any type of changes or updates in regarding to the NASDAQ listing compliance date. Can you provide some insights to what's happening regarding that date?

We are in the process of organizing a shareholder meeting, and we'll provide updates and information at that point.

I see. Have you heard back from the NASDAQ regarding compliance date? No. No. Okay, I'm just noting that. Okay, I appreciate it, gentlemen. Thanks for all the hard work. Keep up the good work. It looks like we're going to have a killer year. Thanks, Wally. Thank you.

Our next question comes from Jack Hire Retail. Please go ahead.

Hey, guys.

How you doing?

Good. How are you?

Not bad. Question for you about the cash flow. So going cash flow positive in Q3 and 4, is that going to be something that we can expect to stick around thereafter or is it just anticipated for these upcoming two quarters?

Well, you know, obviously our, you know, we've been talking about heading cash flow positive in 2023. So, you know, we don't really provide guidance on cash flow, but I'll say this, you know, this is really, you know, driven by the fact that we don't have to spend a lot of money on inventory and COGS. So it's, you know, I'm using this term prepaid again, kind of like we've already paid for it. So as it flows through, we don't have to, you know, produce and buy those goods. But I'll just go back to what, you know, we've been talking about in our plan is to get to cash flow positives in 2023.

Sure. So, and then, you know, along the lines of having all of that prepaid inventory, we've got the couple hundred K of cash on hand. You guys aren't foreseeing like you know, any need for surplus cash, like within the next two quarters, we have enough, you know, to get in terms of inventory to get us throughout the rest of the year.

I'm sorry, could you repeat that?

So in terms of cash itself, like the couple hundred K we have on hand, that, you know, in sort of concert with the prepaid inventory that we've already got, like we're kind of set for the next two quarters.

Yes.

Okay. And then my last thing, one-off, and I'm sure that there will be more sort of coming down the road in terms of the NASDAQ stuff, but just for maybe the uninitiated on the call, we have had two extensions issued via NASDAQ at this point. Is that correct?

Yes.

And so, like, with the upcoming date, do you guys know, not asking to say, you know, not necessarily what will happen, but in terms of the options, you know, can you go back to NASDAQ and, you know, ask for a hearing? I've kind of looked at their website and tried to do some reading about it. You know, I think we're a little bit of an interesting sort of case given, you know, how many companies are growing 20%, you know, year over year and having the sort of share price issues that we are. But in terms of what your options are with NASDAQ, let's ignore the reverse stock split. Let's ignore delisting. What are the options with actually interacting with NASDAQ itself?

We're working with our corporate counsel and NASDAQ, and I think you've illuminated on one of the options. So we're going to explore and be as proactive as possible working with through our council with them to, because I think you make a great point, to be proactive in managing this.

Okay. I guess, you know. Sorry, Jack. Go ahead. I'm sorry. I didn't mean to cut you off. No, no. You take the floor. No, go ahead. You were, you had another question.

I was just going to say, I mean, I'll just, Look for more, you know, information as it becomes available. I'm not going to, you know, press you guys too much for it other than, you know, I guess to say, you know, don't be afraid to tell the boys over in legal to misprint the zip code. So if any delisting notices come our way, they get lost in the mail. But appreciate all y'all's hard work. I know you're doing a great job. Thanks, Jack.

Now we're going to do everything we can do to do what's best for the company and our shareholders. and work through our legal counsel with NASDAQ to try to get the best outcome possible. And I'm with you. I'm very subjective on this, and I agree with the comments that you made, but we're not sitting idly and waiting for that loss bail to show up. We are actually being proactive. And, again, that's why we're organizing our shareholder media and more – More information is forthcoming.

Okay. Great to hear. All right. Appreciate it. You're welcome. Good talking to you. Our next question comes from Gary Greenberg, private investor.

Please go ahead.

Hi, gentlemen. How you doing? How's everybody doing?

Good, Gary.

How are you? Good, good. I have some questions on the new drink. Now, how are you going to distribute that? You mentioned it, but are you going to just go in the stores? Are you going to try to get in, you know, a distributor to get it in the bars or get it into liquor stores?

Are you referring to the alcohol drinks? Yeah.

Yeah, of course.

Yeah, so by law, we have to use a three-tier distribution network, so we have to go through a distributor to go to any retailer. We cannot go directly to any retailer. And it has to be a licensed distributor. And we're using both alcohol and beer distributors to fill that capacity.

Okay. All right. So it wouldn't be like a national distributor. You're more going to go into the states and look for distributors in those states.

Yeah. Look, I say this tongue-in-cheek. For this great country we live in, We operate like 50 countries when it comes to alcohol.

Right, I know. They all have their own boards and different regulations, so it's not easy. I had a few questions on the stock. Of course, as a long-term investor, I'm disappointed in the price of it. It's $0.20, and I know that you keep saying in these quarterly meetings that you have a... You know, you have what you want to do and, you know, the way you want to do it. Now you're saying you're going to have a meeting, but what specifics are you going to do to get this stock up? I mean, I'm a firm believer in sometimes getting a fresh start, and that's not to criticize anybody on this currently working, but, you know, REITs in the past, you know, has... I believe that's the reason the stock is down. Wall Street has been disappointed so many times even before you guys got there. Have you looked at changing the name now that you're going into a new line of product away from the soda? You're going to keep the soda more in alcohol, maybe possibly a name change to more fit the company, something to really get away from the past failures. and a fresh start. That's what I wanted to ask you.

I think you raised some good points. We believe we're significantly undervalued. Obviously, the markets have been hit hard. The micro-cap markets have been hit even harder. If you look at most of our peers, We're all facing a similar thing. I think the only thing we can do is continue to deliver results that are positive. We'll evaluate some of the suggestions that you have mentioned. I can't make any commitments, obviously, but we're very optimistic. I mean, look, we believe we're poised to turn the corner. I mean, We're a small company. This economic storm that we just endured is like literally driving down the thruway and having a torrential rainstorm you can't see in front of you. And, you know, you slow down, you turn on your windshield wipers on high, and you get through it. And I think we've come through it. And now the sun is out. And, you know, we're focused on cash flow break-even. And we think we continue to drive top line growth and get the cash flow break even, that's the story to tell. And that's really going to be, I think, what really turns us around. And that's what we're focused on. We're focused on bringing down transportation, getting up margin, and continue to drive the top line. And now that a lot of this pain and noise is behind us, we can continue to implement the things that we've been doing over the last year and a half. And I'm confident that those are going to turn, you know, turn the corner. And, you know, as we've said, our goal is to get the cash flow break even in 2023. And despite all the headwinds that we've endured, we're confident we're going to get there. I mean, we've, you know, if you look at, I mean, you know, if you look at historically, like, go back and look what Celsius has gone through, you know, way back when they were losing money and they looked a lot like what we look like today and look where they are today. So I think that's really what we want to do. We want, you know, it's not smoke and mirrors, but it's drive the top line and get this profitable.

Okay. You have a great product and that's why, you know, I've owned the stock. It's been up and down. I stayed with it and that's why I stayed with it. And now, you said you're going to have a shareholders meeting. Is that going to be the regular meeting in December?

The annual meeting is getting moved up, which I think everyone will welcome.

Yes, it's hard to get interested in a meeting in late December. So I'm glad you're doing that. That's a good move. All right, you answered all my questions. I appreciate it, and I look forward to following your story, and I hope you, one of the things I always thought that could be done better is to sell the story to the Wall Street crowd, investors, and I hope you take it on the road and sell your story.

All right, we appreciate it. Thank you, Gary.

Okay, sure. Take care.

Bye.

All right, that's it for questions. I want to thank everybody for participating in today's call. Again, I want to reiterate our confidence for the balance of the year and into 2023, and we appreciate everyone's support and wish you have a good day.

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