Reeds Inc

Good afternoon and welcome to Reed's second quarter 2023 earnings conference call for the three months ending June 30th, 2023. My name's Colin and I'll be your conference operator for today. We have prepared remarks from Norman Snyder, Reed's chief executive officer, and Joanne Tinley, Reed's interim chief financial officer. Following the remarks, they'll take your questions and 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 risk, 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, the company's ability to manage growth, manage debt, and meet development goals, the company's ability to protect its supply chain in light of disruption caused by elevated freight costs and other implements, the ability and cost of capital to finance working capital needs and growth plans, The company's dependence on third-party manufacturers and distributors, changes in the competitive environment, the economic impact of the war in Ukraine, and other information detailed from time to time and reads filings with the United States Securities and Exchange Commission. These statements include finance guidance, involve risk and uncertainties that may cause actual results or trends to differ materially from the company's forecasts, The achievement or success of the materials covered by such forward-looking statements, including future finance guidance, involves risk, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond the company's control. REITs 2023 guidance reflects your year to date and our expectation that inflation trends and supply chain pressure will continue throughout 2023. However, new supply chain challenges that may develop and factors that could exasperate inflation cannot be necessarily estimated and are not factored into current fiscal 2023 guidance. These risks could materially impact our ability to access raw materials, production, transportation, and or other logistic needs. Gross margin guidance assumes our knowledge pricing of ingredients, packaging, and production costs, each of which has and could continue to be impacted. 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 accordance with GAAP. WithGAP, for more information, please refer to the risk factors discussed in Reid's annual report on Form 10-K, which was filed with the SEC on May 15, 2023. 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 represent management's estimates as of today, August 10, 2023. READS assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. Modified Adibida is represented because management believes it assessed 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 morning's press release in REED's SEC filings and posted on REEDS. 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 second quarter 2023 results. We continue to execute on our cost cutting and optimization initiatives in Q2, which led to our fourth consecutive quarter of year over year operating expense and modified EBITDA improvements. We experienced another quarter of strong order volume across all retail channels. In fact, we recently surpassed our previous single-week order record with $2.2 million in orders. We, however, were unable to fulfill all the demand during the quarter due to lower inventory levels and an inflated rate of short-order shipments. We estimate this offset net sales by approximately $1.6 million in Q2 and $3.2 million year-to-date. To mitigate further impact on net sales and reduce short order shipments, we utilized the funds from our recent strategic financing to build back our inventory levels beginning in June and expect normalized shipping volumes to return later this month. Early signs have been encouraging, with July and the first part of August showing a decline in short shipments, and we have experienced a 25% increase in quarter-to-date order volumes compared to the same period last year. Turning to a few updates on our key product categories based on MULO scan and VIP data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, club, dollar stores, and military channels. Ginger ale sales have increased 29% year-to-date through July 9th compared to the same period last year. Ginger beer cans grew 43% through July 9th, while zero extra cans grew 63%. Year-to-date, our ready-to-drink portfolio grew 111% compared to the same period last year, mostly driven by our classic mule and hard ginger ale. The ready-to-drink category continues to present an exciting opportunity for Reed's, given our strong brand recognition, consistent growth of the segment, and larger total accessible market. Swing lid bottles are now authorized for sale at outlets across the country, including Kroger, Sprouts, Wegmans, Food Lion, Woodmints, and Cracker Barrel. Year-to-date, through July 9th, Swinglit bottles were up nearly 20%. Turning to Virgil's craft soda. We experienced a higher rate of short-order shipments for Virgil's compared to our other product categories, and as a result of the aforementioned lower inventory levels. However, short-order shipments are declining, and we expect to return to normal levels by mid-August. As I briefly mentioned before, we have progressed on our various cost-cutting and optimization initiatives, during the second quarter as reflected by a 46% year-over-year reduction in operating costs in our fourth consecutive period of year-over-year operating expense improvement. In the second quarter, we reduced delivery and handling costs by more than 50% down to $3.04 per case, which was driven by renegotiated freight contracts, improved throughput, and our streamlined distribution orbit model. Although transportation costs have appeared to have peaked and are trending downward, we will continue to emphasize lean practices with freight and transportation as we drive further cost savings going forward. We also cut our selling and marketing expenses by almost 50% during the quarter as we focused on cost-effective marketing campaigns to efficiently drive sales. Looking ahead, we will maintain our prudent approach to marketing spend and expect to recognize additional savings in the back half of the year. Turning to our second quarter and recent sales and operational highlights, On the last call, we mentioned security national secondary distribution in August on our classic cereal sugar mule and hard ginger ale variety pack in Whole Foods, which is now active. Additionally, we have also gained traction across our non-alcohol portfolio, having secured secondary placement in the majority of Whole Foods stores nationally. We expanded distribution of our ready-to-drink beverage line during the quarter with Roundy's and Meyers. We have gained access to over 280 doors across Wisconsin, Kentucky, Ohio, and Indiana. We are excited to launch our brand into new markets to deliver our fan-favorite reeds, classic craft mule, stormy mule, and hard ginger ale, alongside additional products in the future. We have successfully transitioned our route to market with Publix, migrating from our DSC network to a direct model. This change will benefit our gross margin, improve service levels, and reduce transportation costs while lowering prices for our consumers. We also recently completed our realignment of our pricing structure across all of our retail channels. This will create more consistent frontline pricing for retails and more favorable pricing to consumers. In addition, it will positively impact revenue and enable us to leverage trade spend more efficiently. We recently entered into a joint sales and marketing program with an ultra-premium U.S. spirits company. This partnership includes our Reed's Ginger Ale and Ginger Beer products alongside a selection of their ultra-premium products. We will collaboratively leverage creative assets and managed events from one another to introduce the spirits partnership to key retail buyers and non-trade operators around the country. We're excited to broaden awareness of our REITs mixture use potential and look forward to kicking off the program this upcoming October ahead of the holiday season. And I would look for a press release sometime next week going into more detail on this joint marketing effort. Subsequent to quarter end, we announced a new manufacturing partnership with Somerset Cider Solutions, a leading UK beverage manufacturer in Bristol. This partnership enables us to produce Virgil sodas close to market in a cost-effective manner. With this new export model, our go-to market capabilities will be much more efficient, allow us to be much more price competitive, and position the brand for further expansion in the UK. We plan to leverage this production model in the EU later in the near term and in Asia later in 2024. At the corporate level, in late July, we appointed Xu Fendang, to our board of directors, replacing Leon Saltzman, who has since transitioned to a board observer position. Ms. Deng brings more than 30 years of legal and capital markets experience to Reeds and is the sole shareholder and director of D&D Source of Life Holding, our largest shareholder, with which we formed a strategic alliance back in May. We look forward to the immense value of perspective Ms. Deng will bring to our organization as we continue to execute on our goals. Shortly after Ms. Stang's appointment, we announced a partnership with Stock Perks, a premier marketplace for retail investor engagement. We entered into this collaboration to strengthen the relationship between Reeds and our dedicated community of ginger beer enthusiasts and investors who offer unique benefits and rewards through the Stock Perks platform. If you're interested in learning more about the program, please go to the dedicated Stock Perks page on the investor relations section of our website. We look forward to engaging our shareholders in a new and meaningful way as we provide them with valuable and memorable rewards year-round. Given the inventory challenges we face in the first half of the year, we are adjusting our net sales guides for 2023 and now expect it to range between $48 and $52 million. From a profitability standpoint, we are reiterating our targets and continue to expect gross margin to surpass 30%. as well as turn modified EBITDA and cash flow positive in the second half of 2023. In fact, our July gross margin increased to 32%. Our operating expense reduction target of $6 million is well on track as we've already recognized over $5 million in gross savings year to date. With our inventory nearly back to normalized levels and optimized cost structure and continued strong demand for REITs products, we are well equipped to deliver on our financial objectives in the back half of 2023. Before wrapping up with closing remarks, Joanne will cover our financial highlights for the quarter in more detail. Joanne, over to you.

Thanks, Norm. Jumping right into our results, all variance commentary is on a year-over-year basis unless otherwise noted. Net sales for Q2 2023 were $10 million compared to $13.7 million in the year-ago quarter. As Norm mentioned earlier, the decrease was primarily due to tightened credit terms from select suppliers that impacted our ability to purchase inventory and and fulfill order volume, which offset net sales by approximately $1.6 million. Gross profit for the second quarter of 2023 was $2.5 million compared to $3.3 million in the same period in 2022. Gross margin increased 105 basis points to 25.1% compared to 24% in the year-ago quarter. Delivery and handling costs were reduced by 56% to $1.7 million during the second quarter of 2023, compared to 3.8 million in the second quarter of 2022. The decrease was primarily driven by renegotiated freight contracts, improved throughput, as well as our streamlined orbit distribution model, and partially offset by implementing a surcharge for less than full truckload orders. Delivery and handling costs decreased to 17% of net sales, or $3.04 per case, compared to 28% of net sales, or $5 per case during the same period last year. Selling general and administrative costs decreased 36% to $2.6 million during the second quarter of 2023, compared to $4 million in the year-ago quarter, as the percentage of net sales selling general and administrative costs were reduced to 26% compared to 29%. Taking all these together, operating expenses improved by 46%, to 4.3 million, or 43% of net sales, compared to 7.8 million, or 57% of net sales in the year-ago period. This reflects our work to right-size our cost structure and consistently find ways to optimize our business. Operating loss during the second quarter of 2023 improved to 1.7 million, or a loss of 55 cents per share, compared to the operating loss of 4.5 million, or a loss of $2.01 per share in the second quarter of 2022. Modified EBITDA loss also improved significantly to $1.6 million in the second quarter of 2023 as compared to a loss of $4.3 million in the second quarter of 2022. For the second quarter of 2023, we used approximately $3.4 million of cash from operating activities compared to $14.1 million for the same period in 2022. The decrease was driven primarily by lower inventory purchases compared to the year-ago period. As of June 30, 2023, we had approximately $0.4 million of cash and $22.8 million of total debt, net of capitalized financing fees. This includes $16.2 million from a convertible note and $6.6 million from a revolving line of credit, which has $6.4 million of additional borrowing capacity. The lower cash balance is a function of timing as we utilize the funds from our previously closed strategic financing in May to build inventory, which was not produced until after quarter ends. I will now turn the call back to Norm for closing remarks.