Good afternoon and welcome to Reed's Second Quarter Fiscal 2021 Earnings Conference Call for the period ending June 30, 2021. My name is [Indiscernible] and I will be your conference operator today. Today's call is limited to one hour, and will have prepared remarks from Norm 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 like to remind our 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 our actual results, levels of activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include but are not limited to Reed's ability to manage growth, manage debt and meet development goals, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in the competitive environment, future business outlook, increasing the potential impact of COVID-19 on Reed's business and result of operation and other information detail from time-to-time in Reed's filings with 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 create many incremental potential business risks, including potential impacts to Reed’s ability to access raw materials, production,…

Thank you and good afternoon everyone. We appreciate you joining us today to discuss our second quarter 2021 results. We continue to experience strong demand for our new product entries and are benefiting from the growth of our expanding DST network and the increased number of authorizations across all retail sales channels. We believe the momentum that we experienced during the first half of the year is sustainable for the balance of 2021 despite some COVID-19 related challenges that we have recently serviced. We expect these challenges to be short-term issues that will ease during the second half of the year. Let me start with a summary of the key takeaways from the second quarter to frame our results. First, for the sixth consecutive quarter we have delivered growth in net sales. This growth as a result of an increase in the number of retail outlets selling our product and strong consumer demands driving higher sales velocity particularly for Ginger Ale. During the second quarter, net sales increased at lower-than-expected rate due to extended supplier delay especially with aluminum cans. These delays were temporary and we believe they will not have a long-term impact on our business. Second, we again delivered continued gross margin improvement and we have made modifications to mitigate inflationary pressure experience in several of all of our cost of good inputs. Third, while transportation costs remain elevated, we believe they have peaked and will trend back towards 2020 levels during the second half of the year. Four, we had made solid progress on the cost savings and operational improvement initiatives we outlined last quarter. Fifth, innovation and expanding distribution continued driving strong demand from consumers and customers. Finally, we remain on track to meet our 2021 financial guidance for net sales growth. Consumer demand for our…

Thank you very much, Norm. And it's a pleasure to speak with everybody today. As norm discussed during the second quarter we continued to see strong demand from consumers and retailers across both the Reed's and Virgil's portfolio. Reported net sales for the quarter did not fully reflect their strength due to unexpected delays from suppliers. Despite these challenges we still delivered higher gross margins and made progress in cost savings initiatives. Second quarter net sales increased 4% to $11.3 million compared with $10.9 million in the prior year period. Core brand gross billings increased 2% year-over-year driven by a 9% increase in volume. The volume growth was driven by 5% case growth for the Reed's brand and 13% case growth for the Virgil's brand. New launches remained a key factor in our volume growth with an emphasis on Reed's REAL Ginger Ale Zero Sugar formulations and canned products. Gross profit dollars increased 9% to $3.3 million compared to $3 million in the prior year due to increased sales, as well as lower discounts as a percentage of sales in brand mix. Gross margin was 29% in the second quarter of 2021, an increase of 150 basis points versus the second quarter of 2020. Delivery and handling costs totaled $2.5 million in the second quarter, an increase of 70% compared to last year due to volume growth, ecommerce fulfillment costs and higher freight rates. Delivery and handling costs were 22% of net sales and $3.53 per case, compared to 14% of net sales and $2.27 per case during the same period last year. Key takeaway relative to our delivery and handling expenses is that we made significant progress over the last three months mitigating the issues we faced earlier in the year. From Q1 to Q2, delivery and handling expenses…

Thanks Tom. Before I turn the call back the operator for questions, I will just reiterate that while there is still some uncertainty out. Our results demonstrate that we are continue to navigate today's challenges very effective. Our entry into the larger Ginger Ale category with our REAL Ginger Ale is contributing to our growth and we still have considerable opportunity to fill out our distribution for this promising new product. We have built an extensive national co-packer network to support our growth and have significant opportunity to improve margin. We are all focused on controlling cost, improving gross margin and enhancing our supply chain. We remain flexible and prudent as we navigate the current environment and we continue to have to adapt to keep our employees and partners safe and our inventory on the shelf. Moving forward, we are focused on advancing our growth opportunity and we're excited for the path that lies ahead. I will now have a call over to the operator to begin the question-and-answer session.

Thank you. We'll now begin the question and answer sessions. [Operator Instructions] Your first question comes from Jack Kaya [ph] of Private Investor. Please go ahead.

Hey, Norm and team. I was -- wanted to know if you guys could talk at all about termination of the VP of Ops and sort of going further off of that any activities you guys are working on to further reduce the delivery and handling expenses. What your target goal for that line item might be? And the timeline when we could expect to see results either sort of revert back to historical costs or possibly see improvements in the future?

Jack, that's a great question. I think in terms of the termination I adequately address that in my comments and I really don't want to say more there. But if you look at delivery and handling costs, obviously, this is something that's not unique to Reed's. It's going on across the -- I'm going to say, entire industry, but multiple industries. So what we're doing is, we're partnering with a larger 3PL provider who are doing more in-depth studies in terms of locations of distribution centers relative to our customers. Obviously, by combating some of these supply chain issues, we'll be able to put larger loads together as we organically shift from bottles to cans that brings the cost down. But in addition to taking pricing we're also looking at establishing minimum order quantities. And as long as our customers are meeting those minimum order quantities, we will continue with our current policy of delivering loads, but for those that don't meet those we're going to start implementing a surcharge. And I think that's something we've seen in other industries. Obviously, we -- on their own the costs are coming down as the supply and demand factor start to level out. And then part of it is we're looking to bring in a Midwest co-packer, because we're starting to see some of those straight lengths of the Midwest increasing as well. So, I think we're doing a lot of different things and expect to see it really come back towards 2020 levels. The latter half of the year, we don't want to just rely on that. We want 2022 and future levels to be even lower.

Sure. Yes. Thanks. I certainly really appreciate the insight. One other quick question. In terms of the supply chain delays that were experienced during this past quarter. Does that mean from that -- in terms of the new distribution deals that were announced earlier this year that we have not sort of to -- not sort of begin to manifest the increase in sales that would presumably come with just being in front of more consumers?

I think that's part of it, but that's not all of it. I mean, I would look at it more as a timing difference where things came in a little bit later, so it shifted the timing of deliveries. I think we've done a fairly decent job of communicating that with our customers. And are obviously, despite the fact that we really believe that we are ahead of the curve on this and well -- and had an ample lead time in our orders, we've extended that even more to the point where I believe we are fully covered for the balance of the year and are in the process of finalizing our requirements for 2022, so we can avoid the situation if it recurs.

Great. Thanks for touching on that. And keep up the good work. We certainly appreciate all you guys are doing for us.

Thank you, Jack.

Thank you. Your next question comes from Anthony Vendetti from Maxim Group. Please go ahead.

Thanks. So Norm, as you as you mentioned delivery and handling and freight's been an issue across multiple industries. And you mentioned that you think it's peaked. I guess, A, what gives you confidence that it's peaked? And do you think it's plateaued or could head back down? And then just touch upon how you're better -- and I know you're working on streamlining the operations and the supply chain and the shipping so that the cost per pallet for Reed's starts to go down. Can you just talk about some of those initiatives as well? Thanks.

Well, to go back to the first part of your question, the several sources of information, I mean, just like investors look at various reports that folks like you put out tracking trends and what's going on. We follow that closely with respect to transportation. We also talk to our 3PL providers. And we talk to other folks in the industry peers. Other industries to see what's going on and just get a feel. And then I -- to the point where I watch freight rates on a daily basis where certain lanes are performing, and I'm seeing those come down. So it's a combination of all those. Obviously, it has my attention and I'm spending a lot of time watching, talking and gathering information. So I think that what I've seen is that they have peaked, they're coming down. I think they've plateaued for a while, but I think in the latter part of the year we expect them to come down further. So, what we do to try to bring that down? I mean, like I said on the last question, we're shipping more cans. You can get more cans on a truck than you can bottles. So on a cost per basis or cost -- case per basis cost that comes down organically. Obviously, looking when you're when you have adequate supplies of inventory you can eliminate or minimize out of network shipments. You can put ship full loads. And then some of the initiatives I talked about is we're really looking at what's the tipping point for what's our minimum quantity of cases on a truck. And we're going to look at that and what the incremental cost is. And we'll give adequate notice. But if customers are not ordering minimum quantities we're going to attach a freight surcharge on.

Okay, great. And then…

I will say, I want to make this point. Our percentage of full truck loads is increasing. So we are moving in the right direction and that's going to -- I think that's going to happen a lot on its own.

Okay. That's great to hear. And then on the aluminum can shortage, I hear that that's starting to recede in terms of that particular issue. Are you seeing that or do you still find it an issue here in the third quarter?

Anthony, I'm by nature a very optimistic person. But I'm not sharing the same optimism that you are. I'm still I guess prepared for the worst and hoping for the best. I suspect that what maybe you're starting what you're inferring to is that people panic so much, everybody over ordered. And at the end of the day realized that they didn't need it. So it's created some additional capacity, which I hope to be the case. I'm not quite seeing that yet. I know that we've taken proactive action to lock ourselves in for the balance of this year and next year to protect against that. So I'm going to continue to do that until I know otherwise and I quite like I said, I haven't reached that point quite yet where I share that same level of optimism.

Okay. No, that's fair. That's fair. And then, obviously, the Reed's REAL Ginger Ale has been a big hit. Your IRI scan data for your Reed's brands is growing faster than the overall portfolio. Are there some new innovations that you can talk about here that you're excited about for either the remainder of this year or for 2022?

Well, I'll say this. A flaker brand off of our Reed's REAL Ginger Ale are our mocktails. And we have -- our Shirley Temple version, which we call Shirley Tempting & our Transfusion, our great Transfusion which obviously is Transfusion has gotten in the market at a much faster time frame that I expected. And so we're going to obviously augment that, because it seems like there's a very keen interest in those products. And I think the positive news is it creates a somewhat of a new category. So it's not like we're taking space away from our core Ginger Ale. But we're creating something that both consumers and retailers want. So we're really excited about that. We do have a couple other things up our sleeves for 2022 that it's premature to talk about. But we think it's well within our wheelhouse and we'll resonate with consumers. But I think for the balance of this year really watch Reed's Ginger Ale, really watch the Mocktails and watch our Zero Sugar. Our Zero Sugar Virgil's line. And by the way, we are coming up with a little bit of a different look and feel on that to really, I think resonate more that we're Zero Sugar. But the other thing that we've done, if you remember last year we brought back the Bavarian nut bag, Root Beer, Swing-lid bottles and sold out before we finished production. This year we expanded it to include Flying Cauldron and we tripled our output and it's completely sold out. And as fast as we're making it, it's getting on trucks and shipping. So we're really excited about that as well.

All right. Excellent. That color is very helpful. I will jump back in the queue. Thank you.

Thank you, Anthony.

Thank you. Your next question comes from Waldo [ph] James of Private Investor. Please go ahead.

Hey, gentlemen. How are you. I have a series of pretty quick questions. One, what's been going on with the resealable 20 ounce format for convenience stores single serving. Have we -- have those -- are those hitting doors yet? Are there any sales in this report reflecting that?

It's very small. They're in CVS right now. And they're in -- there are some small regional chains. We are right now going through the -- I'm trying to think that the buying season where we're meeting with buyers to get them in for the latter part of this year and in the 2022. We missed that window last year. So, it's been limited distribution, although where we have it. The products doing well. But we expect over the next quarter to really have new news with increased authorizations on that product. So I wouldn't -- with product innovation it’s all about timing. And that's probably one that we really finish very early. Not early, not to mean last year's window, but we're on time for meeting with buy for this go around. So expect to have a lot more new next call.

Okay. And what percentage of the sales on the report were alcoholic?

Again, that was a small part, and that's something that I expect to talk more about. We took over distribution on the eastern half the United States for our ready-to-drink mule and we're converting over and part of that's been unlike the non-alcoholic beverage category. You have to register with each individual state and that's a time-consuming process. I think we've done that about 15 states. We expect to have the remaining another 15 or so done by the end of the third quarter and by the balance of the year we expect to be registered in all 50 states. You'll start to see that number pick up quite a bit in the second half of the year.

Actually, but as far as alcoholic sales, we don't have any idea of approximately 5%, 4%, 3%?

It's less than 5%.

Its point one.

It's point one. It's immaterial at the exit. It got out the end of June.

Okay. And my next question is in regards to -- I've noticed and take a look at the balance sheet out there. Is there basically any anticipation of another issuance or stock to raise capital?

Not this year. As Tom said, we have plenty of capacity on our line of credit. And despite the increase in our delivery and handling costs we believe that we're fine to make it through this year and even a majority of next year. So, it's something that's not even on our radar at this point.

Okay. And I have only two more quick questions left. One, in regards to the share price, the share price has been pretty much consistently under a dollar for probably the last I'll say five weeks. Does a company have a contingency in regards to being notified of delisting, not meeting capital requirements for the NASDAQ?

Well, we haven't been notified yet. We've been in this situation before. And we are discussing potential plans, although we have 12 months or.

Six months later.

Six months to -- the plan is really to continue to power ahead and deliver solid results and let the stock come back. I mean, we're talking about things if it doesn't. Historically it has. I'm confident that we'll be able to get that stock price over the dollar. We've done it twice before. And I think, we'll let our results speak for itself. But we have plenty of time to address that. And I wouldn't say, we formulated any real plans other than let's deliver a solid third quarter and a balance of this year.

Okay. And the final question is, with the stock price being where it’s at, it seems like it'd be an optimal opportunity for pretty much anyone to get in based on where the company is trending, based on earlier in the call. Do you see yourself? Do you think this is a buying opportunity for management, maybe to increase their position in the company?

After what -- I mean, I don't know what I can and cannot say, but I would -- if I could say, I would say buy. So I don't know if I just violated some sort of rule. But obviously I think we're severely undervalued and it’s an excellent opportunity.

Yes. That was trend as well. [Indiscernible] really -- I would speak a lot if you were -- I don't know, how to say. Have a healthy amount of shares under your belt and that would speak to the confidence?

And I do, and I hear exactly what you're saying.

All right. Because that what I'm getting it. Because based on the breakdown what I'm looking at and always that puts a lot of confidence in other investors that knowing their management is, regardless of what's going on with the EPS or the share price that they feel that things are trending in the right direction and they are taking advantage of buying opportunities to average it down or increase their position?

Great. Thank you.

All right. I appreciate, Norman. Thank you.

Okay.

Thank you. Your next question comes from Chris from hill top. Please go ahead. My apologizes. There are no further questions at this time. I'll now hand back for closing remarks.

Thank you, again for your continued support and for participating on today's call. A replay of the webcast will be archived on the 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. That does conclude our conference for today. Thank you for participating. You may now disconnect.