Good afternoon, and welcome to the Reed's Third Quarter 2022 Earnings Conference Call for the period ending September 30, 2022. My name is Justin, 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, we 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 its supply chain in light of disruption caused by elevated freight costs and 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 economic impact of COVID-19 and the war in Ukraine and other information detailed from time to time in Reed’s filings with the United States Securities and Exchange Commission. These statements, including financial guidance, involve risks and uncertainties that may cause actual results or trends to differ materially from the Company’s forecast. The achievement or success of the matters covered by such forward-looking statements, including future financial guidance, involves risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond Reed’s control. Reed's 2022 guidance reflects year-to-date and expected future business needs and includes continuing impacts of COVID-19 on the supply chain and logistics as of the date hereof. New…

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter 2022 results. As mentioned in our press release earlier today, during Q3, we continue to navigate a challenging market environment, especially in comparison to our record net sales in Q3 of last year. Net sales during the quarter were affected by a delayed shipment of swing-lid bottles that pushed a significant portion of sales into the fourth quarter, which impacted our gross margins as these products are margin accretive. Below the gross profit line, we began to realize the benefit of our cost savings initiatives, reflected by a 35% reduction in operating expenses that led to improved modified EBITDA for the quarter. We expect to see further cost reductions in the near-term as we have locked-in additional product cost and transportation savings that will take effect over the next few months. Despite our Q3 results, we remain on target to achieve our goal of reaching positive modified EBITDA and cash flow during the second half of 2023. Turning to a few highlights across our key product categories beginning with Reed's Ginger Beer. We continue to develop sales growth for cans over bottles and once again, experienced an increase in sales and volume mix for cans during the quarter, which benefits our margin and positively impacts freight costs. According to MULO’s scan data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, Club, dollar stores and military channels, our ginger beer can sales were up approximately 67% during the 12-week period ended September 30, which partially offset our ginger beer bottle sales, which were down 5% during that same period. Our Zero Sugar Reed's Extra bottles also grew by 27% during that period. For Reed's Ginger Ale, our price…

Thanks, Norm. Turning to our results, all variances referenced on a year-to-date, year-over-year basis, unless otherwise noted. Net sales for Q3 was $12.1 million compared to $13.4 million in the year-ago quarter. The decrease was primarily driven by a delayed shipment of swing-lid bottles shifting $3.8 million of net sales from the third quarter to the fourth quarter. As of today, we have shipped over 3 million of these delayed swing-lid bottles and expect to ship the remainder before quarter-end. Gross profit during the third quarter of 2022 was $2.4 million compared to $3.9 million in the year-ago period. Gross margin was 20.1% compared to 28.9% in the third quarter of 2021. The decrease was driven by lower revenue as well as higher promotional spend and sales mix. On a pro forma basis, gross profit including the aforementioned $3.8 million in sales would have been approximately $3.9 million or 26.1% of net sales. Gross profit during the period was 3.9 last year, gross margin was 20.1% compared to 28.9% over the prior quarter 2021. The decrease was driven by lower revenue as a result of higher promotional spend and sales mix. On a pro forma basis, gross profit, including the aforementioned $3.8 million in sales would have been approximately $3.9 million or 26% net sales. Delivery and handling costs in Q3 reduced by 27% to $2.2 million compared to $3.1 million in the year-ago period, driven by a continued reduction in freight rates and fuel costs as well as improved efficiencies. Delivery and handling costs were 19% of net sales or $3.38 per case compared to 23% of net sales or $3.89 per case in the year-ago quarter. Selling and marketing costs were reduced by 54% to $1.2 million compared to $2.6 million in the third quarter of 2021. As…

Thanks, Tom. While we were disappointed by some of the timing-related issues that impacted the third quarter and affected our topline and gross margin, we remain encouraged by the overall performance of the business, especially in the face of continued inflationary pressure on consumers and residual supply chain challenges. We remain on track to deliver solid topline growth for the year, and we expect the execution of our cost saving initiatives will improve modified EBITDA for the year and continue into 2023. We reduced our operating expenses by more than 30% in Q3 and they were down 12% year-to-date with even more cost reductions anticipated over the next six months. We have captured significant savings in our supply chain and anticipate meaningful gross margin expansion beginning in Q4 and accelerating in 2023. Additionally, we have depleted a significant amount of raw materials and finished goods inventory on our balance sheet and will continue to convert additional inventory balances into cash. Between our planned gross margin and OpEx improvements coupled with our various product and channel initiatives, we have made significant progress from the challenges we face during the COVID-19 pandemic that began 2.5 years ago. Despite these impediments, we are well positioned to continue executing on our plan and deliver on our commitment to making Reed's a profitable company. Operator, we will now open the call for Q&A.

Thank you. [Operator Instructions] And our first question will come from Anthony Vendetti with Maxim Group.

Hi, good evening. This is actually Jeremy on the line for Anthony. I got on late, so I'm sorry if I'm asking questions that you already discussed. Just to discuss the DSD network, I know you said you've signed up 15 states in a quarter. How many states are currently under the DSD network?

I want to say approximately 35. I mean, the remaining white space that we have is really low population centers. I mean, we have every major metropolitan area and populous state covered, so it's really filling in some of the smaller pieces.

Okay. And then just also to – just to segue from that, what percentage of your doors are now covered actually by DSD as opposed to non, and then what's your long-term goal to have that transition over what percentage of your overall net distribution [network] should be eventually covered by DSD?

That's a really good question. We have a real – a truly hybrid network, and we are working to modify and increase the participation of our DSD coverage, and that's been going on over the past year. I'll have to come back to you on what that percentage is, but I know it's increasing because obviously we're trying to leverage more of our brands to that DSD platform, particularly with the alcohol-based products. So I'll come back to you guys. I know we have a – I think a call scheduled later. We'll do a little bit more work on that, but I can tell you that the percentage is increasing where we have – particularly where we have alcohol sales.

Okay. And then just one last question again, more on the DSD. Have you seen the stores that have converted to DSD, do you see increased velocity, increased sales from those stores versus your traditional network or any sort of metrics you could share?

Well, there's so many right now, there's so many variables going on. It's hard to isolate that. And I think it's probably early to really [reach] sort of conclusion, but that's something that we are looking at and we'll continue to monitor. I mean, there's been – the conversion has been relatively new. We have a price increase embedded in it, so there's a lot of variables that I think we have to dig in a little bit deeper before we can reach to any firm conclusions.

Right. I understand. Okay. Thank you for taking my questions. I'll hop back into queue.

Thank you.

[Operator Instructions] And our next question comes from Sean McGowan with ROTH.

Hi guys. Two questions. One, just to dig in on the shift of the swing-lid from Q3 to Q4. So if that's happening, what's really driving the reduction in your full-year guidance? I mean, here we are kind of mid-November, and what are you seeing that's offsetting that, that pickup of that third quarter revenue?

Well, I think, Sean answer your question on full-year guidance, I think what's driving it is a softer than expected conversion to the rebrand of the Virgil’s zero sugar line that I talked about earlier. And we've also a little bit behind where we want to be with respect to our alcohol portfolio. And that's been somewhat of – caused by the regulatory compliance because we don't live in one big country, we live in 50 little countries when it comes to alcohol. And then that you need that to really sign up your DSD network. And you can see our DSD network is really kind of – the additions have really followed where we have all the complete registration in those states. So we're just a little bit behind in both of those aspects. We remain bullish on where we can go, but it's just been a little bit delayed and where we're able to get those products in, they've done well. So you'll start to see some more expansion in 2023 that we expected. We really expected to have done in 2022.

Okay. So you're not seeing that the consumer's not accepting the alcohol product, you just not able to get it to where you wanted to be in distribution yet?

Correct.

Okay. Great. Thanks. And the second question is, seems like Virgil's is showing more price sensitivity on the part of the consumer than some of the other products, so that's a head scratch, well, why would that be?

I could speculate. I don't know if that's going to solve anything. That market is kind of moved in a lot of different directions. I mean, I think last year you saw some lower price competing brands that were facing supply chain issues that really restricted their ability to get to the marketplace that have come back. And I think they've recaptured a lot of their market share and obviously being a lower priced item in an inflationary environment, I think it does have its positive implications. But at the other side of the equation, if you look at our limited edition swing-lid products, which are premium priced, they're still growing and doing better. So I think it all depends by market, what brands are there, and we're seeing both – in this case both high-end and low-end price – premium priced items [indiscernible] as well and maybe some in the middle that are getting squeezed somewhat.

Okay. Thank you.

You are welcome, Sean.

Thank you. And that does conclude the question-and-answer session. I'll now turn the conference back over to Mr. Norm Snyder.

I want to thank everyone for participating in today's call. Again, I want to reiterate our confidence for the balance of the year and into 2023 as we continue to progress towards our plan of achieving positive modified EBITDA and cash flow next year. We appreciate everyone's support and I hope you all have a wonderful evening.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.