Good afternoon, and welcome to Reed's Second Quarter 2023 Earnings Conference Call for the three months ending June 30, 2023. My name is Colin, and I'll be your conference operator for today. We have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Joann Tinnelly, Reed's Interim Chief Financial Officer. Following their remarks, they'll take your questions. I would like to remind listeners that this conference call will include forward-looking statements. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause actual results, levels or activity, performance or achievements to be materially different from those anticipated by such statements. 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 impediments; the availability 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 in Reed's filings with the United States Securities and Exchange Commission. These statements include finance 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 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. Reed's 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…

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 a food, grocery, drug, mass, Walmart, club, dollar stores and military channels. Ginger Ale sales have increased 29% year-to-date through July 9 compared to the same period last year. Ginger Beer cans grew 43% through July 9, 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 beer and Hard Ginger Ale. The ready-to-drink category continues to present an exciting opportunity for Reed's, given our strong brand recognition, consistent…

Thanks, Norm. Jumping right into our results. All various 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 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 increased to 17% of net sales - 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 a 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% and 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 rightsize 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 $0.55 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 our 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 end. I will now turn the call back to Norm for closing remarks.

Thanks, Joann, and thank you for everyone for joining the call. To briefly summarize our progress and outlook. We experienced some delays in building inventory due to tighter credit terms, line time availability and the timing of our fund raise. However, we are now back on track and our results halfway through the third quarter have been very encouraging. Demand is strong, and we had our highest week of orders in the history of the company a couple of weeks ago. July's gross margin was 32%, our highest mark of the year, and we expect gross margin going forward to remain above 30% as we look to achieve our full year guidance. Overall, we are pleased with our progress and outlook for the future. We are building momentum and look forward to continued execution on all of our objectives. Operator, we will now open the call for Q&A.

Thank you. [Operator Instructions] And your first question comes from Sean McGowan from ROTH MKM. Sean, please go ahead.

Thank you. Hi. Norm, hi Joann. A couple of questions. I assume, Norm, that you can't make up any of that lost volume, but correct me if I'm wrong on that. And flipping that around, do you feel like you lost any kind of permanent placement or phasings as a result of not being able to fully fill those orders?

Yes, Sean, hi. I think we'll make up some but will not recover all of it. Obviously, in the beverage space, we're not shipping widgets that can be backordered when days are lost, they're hard to make up. But I think some of the things that we've done in terms of pricing our route to market and some product authorizations, I think there's an opportunity, but we're not going to make up everything that we lost.

No, but I would assume the retailers' inventory has gotten depleted, too. So could there be a little bit of replenishment?

Yes, there'll be a little bit more of a pipeline fill to replenish inventories. And we're starting to see velocities pick up where we've been able to maintain inventory levels. So I think both of those things will contribute. In terms of placements, no, we have not lost any placements.

Okay. Good to hear. And looking at the spending where there continues to be excellent progress, I guess I have to ask, do you feel like if you had the inventory and therefore had the sales might any of these spending categories actually been higher? Like did you cut back on any spending simply because you couldn't fill the orders? Or is this a level of spending that you would have seen in each of these categories, even if the sales have been higher?

The only aspect of our spending that's variable would be transportation. I believe all - the SG&A, we would not have increased - I mean, there might have been a little bit of an uptick in some. But I think that, that wouldn't - if our sales were up, our expenses would only gone up minimally.

Okay. So yes, like the variable expense of delivery and shipping would have been higher, but selling and marketing would have been the same?

Yes. Yes.

Okay. All right, cool. And then the last question I have for now is were you not able to tap into that credit line earlier in the quarter? Is that what happened like you needed to have other changes in the balance sheet in order to tap into that?

Well, it really - it wasn't so much cash - or is the timing of when we closed our capital raise to have the wherewithal to do it. And it's really getting all of the vendors in line and all the line time arrange, which - so what comes first, the chicken or the egg? I mean you need to have the supplies there to get the line time. So it takes time to build that back up. And our credit line is targeted against AR and inventory. So obviously inventory is down and your sales level are down that really puts a ceiling on how much you can borrow. Conversely, once you start - like we are, once you start building inventory and selling more, it comes up pretty rapidly.

Yes. Okay. All right. That makes sense. Thanks a lot.

You're welcome.

Your next question comes from [Gary Goetz ], Private Investor. Gary, please go ahead.

Good afternoon, Norman and Joann. Thanks for taking the question. As an investor, I appreciate what you and the entire Reed's team are doing. I'd like to talk about a transformational way of looking at the business. Specifically, turning inventory to cash to inventory to cash multiple times per quarter. Pepsi is doing this over 3.5x per quarter. Reed's is doing this 0.7x per quarter. So it's a matter of turning the inventory over multiple times. I've seen shelves go on stock for weeks. What can you do to improve inventory turnover from a 0.7 level to a multiple level?

We're actually building more inventory and having more inventory available to service orders. I mean the demand is there. We're seeing it from retailers. We're seeing it from consumers. And it's - to use your cliché, it's like priming the pump. And it starts to build on itself and creates momentum with that. So the simple solution in which we've been focused on has been replenishing inventory, but replenishing it in a profitable manner, which will generate incremental cash, obviously. And from that, we can create more inventory and get back to your cycle is what you said inventory to cash, inventory to cash. And you'll start to see that number pick up just organically through that process.

Good. Good. As an investor, I'd like to see it go from 0.7 to 2, for example. I mean that would really turn the business around.

Yes. I mean, it just does. And the offshoot to that is a lot of positive things, obviously. Cash flow being able to replenish inventory, take advantage of the strong demand and it just builds on itself, particularly as we've improved gross margin and lower transportation costs and kept our operating costs low, more cash flow fall to the bottom line.

Great. Great. Looking forward to it. And again, thanks to both of you and the entire Reed's team for what everybody is doing.

Thank you, Gary.

Your next question comes from [Will Bendigo], a Private Investor. Will, please go ahead.

Hi Norm. Good afternoon. A couple of quick questions. First, I wanted to see if you could shed light on the Hard Ginger expansion with Whole Foods. When do you guys anticipate that fully becoming nationwide? And then can you shed any light on what the consumer response has been thus far?

Well, in terms of Whole Foods, it is - the program is nationwide. So you'll see that in every Whole Foods right now.

Right. When do you anticipate like, for instance, I'm in Dallas, Texas and those products of the Hard Ginger coming to all stores? Is that something that's going to take three months, six months a year? Or is it actively being shipped out?

Well, right now for - there are certain gaps because we can't ship direct. It has to go through a third-party distributor under the federal and state liquor laws. So right now, where we have gaps, obviously, we're looking to sign on distributors to cover that territory. So we're actively doing that, and we're very close. I think Texas might be one of the one remaining gap that we have. But in the other larger states, Florida, California, New York, we're covered there. So we're working actively to fill all those spots up. Now in terms of consumer reception, I mean, where we - in places like Whole Foods, Sprouts and Trader Joe's where Reed's has a very strong presence in brand recognition, the products have done very well. So we believe we continue to do that. And then in other stores that we've expanded to like Roundy's and Meijer, we've actually done very well there. We've had a pretty good presence of our nonalcoholic products there, but not as strong as the ones I mentioned previously. So we do have that advantage of the people know who we are, know the quality of our products. And I think that provides a real big advantage. And so far, the reaction has been very positive.

Okay. Great. Appreciate it. And then touching base a little bit on the U.K. and Asia partnerships. What are you guys forecasting for revenue there? Obviously, you guys know what you're doing, but it seems kind of like a big jump, maybe a big risk-reward, if you can shed any light of what may be revenue forecast for '24?

Yes. It's actually a very low risk because of what we've done. What really started this was met with our U.K. distributor and our numbers were going down and the numbers are going down because the price is going up. And when you look at what the competition was doing, we were basically pricing ourselves out of business. Now with the recent amount of inflation we've had, the problem became exacerbated. So my thought was, why don't we migrate to a concentrate model and we'll let everything be sourced locally. So what we've done is we're not selling finished product, we're selling our concentrate to a bottler who is then purchasing all the various raw materials. So we're not tying up any cash. So the downside to me, is very low because we've freed up cash flow for those products, and we become more price competitive. Now granted, we're not making the margin - or I'm sorry, the dollars per case that we did before in terms of revenue, but the margin is much stronger. I think our margins are like 75% or 80% on the concentrate. So it's much more profitable, while at the same time, we're tying up very, very little cash, which to me presents a very low-risk scenario.

Certainly, yes. So it kind of just sounds like it's - if it is much revenue at all, it's kind of all gravy on top.

Exactly. And the U.K. and the EU is an existing business, we're just going to build on. Asia, we're going to partner, obviously, with our new investor D&D Life Holdings that has a strong infrastructure and knowledge of the local market, and we'll work with them to develop that throughout Asia. So we're excited about that and again, using the same sort of model, it will be very low cost, low cash tying up and a huge potential as Asia, obviously, is a high consumption of ginger-based beverages. So we're excited with that and working with our new partners.

Okay. Great. Appreciate it. Last quick question. I think a common theme, the last probably eight conference calls has been the share price. I know you guys aren't happy with it and don't agree with it, and I don't think anyone on this call probably does. But here we are sitting at a $7.5 million market cap for a company that's doing $50 million in sales and projected to be cash flow positive next - at the end of the year, what are we missing here that insiders not buying hand over fist? I think a vote of confidence would be some insiders buying. So I just kind of want to see what morale is like inside the company. And if you can shed any light on that.

Well, I ask myself that question every day. The morale in the company is tremendously high because people are starting to see the results of the hard work that they've done, and it makes it very uplifting. Because you really - unless you've been operating the business for the last two years in a small business, knowing what the supply chain snafus and inflation, which outpaced our ability to raise cost does. And nobody panic, nobody quit, we put our heads together and put together a plan. And I think morale has been very, very high in terms that we're starting to see the fruits of our labor. And we're really excited. If I could fast forward three months from now, I'm really excited to share those results with everybody. And we hope that, that gains everybody's attention. Now in terms of insiders, just want to remind John Bello has consistently participated in every fund raise, has bought shares on the open market. Lenny Zaltzman, a Union Square Partner Capital - or Union Square Park Capital Partners participated also in the last capital raise. So it's really been insiders that have kind of carried the water here and really be back in the company. So I think that should be a huge vote of confidence because they see what - they see the good, bad and the ugly, right? And they're still buying. So I think there's a real - I think there's a real high level of morale, and I think there's a real amount of optimism. And my view is, let's just go on and show them. And that should turn heads and that should get that price up. So I'm confident that we will do that. But I'm just as frustrated. I'm a shareholder, too, like you, and I'm just as frustrated looking at that market cap. But it hasn't deterred us on our mission to get this company to profitability, which we believe will be the boost to really get the stock price moving.

Yes. Got it. Awesome. Well, thanks for the update. Appreciate your time and keep up the good work, and it seems like maybe light at the end of the tunnel.

Thank you.

There are no further questions at this time. I'll turn it back to Mr. Snyder for - to close out the call.

I want to thank everyone for participating in this afternoon's call, as well as our employees, customers and, of course, our shareholders. We appreciate everyone's support. We have made great progress on our 2023 initiatives and look forward to reporting the third quarter results later this year.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.