Earnings Transcript for REED - Q1 Fiscal Year 2023

Operator: Good morning, and welcome to Reed's First Quarter 2023 Earnings Conference Call for the period ending March 31, 2023. My name is Jason. I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Joann Tinnelly, Reed's Interim 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, 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, 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 involve risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond the company's control. Reed's 2023 guidance reflects year-to-date and our expectation that inflationary trends and supply chain pressure will continue throughout 2023. However, new supply challenge -- excuse me, however, new supply chain challenges that may develop and factors that could exasperate inflation cannot be reasonably 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 known pricing for ingredients, packaging and production costs, each of which have been 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 Reed's Annual Reports Report on Form 10-K, which was filed with the SEC on May 15, 2023. Although management believes that 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, June 1, 2023. Reed's assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. 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 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 Reed's investor website at investor.reedsinc.com. I will now turn the call over to Mr. Snyder.

Norman Snyder: Thank you, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2023 results. Q1 was our third consecutive quarter of year-over-year operating expense and modified EBITDA improvements, combined by the implementation of various cost cutting and optimization initiatives. We continue to see solid demand from our retail partners. However, net sales fell short due to tight credit terms from several suppliers that impacted our ability to purchase inventory and fulfill order volume, which resulted in an inflated rate of short order shipments. We believe this offset net sales by more than $1.6 million during the quarter. To alleviate the working capital challenges, we recently closed a series of financing transactions for an aggregate $5.6 million, which includes a strategic investment from D&D Source of Life Holding, a Hong Kong based investment company that has made several investments in consumer product companies, including Waldencast, a global multi-brand beauty and wellness platform that is currently valued at over $1 billion. Our largest shareholder and Chairman of the Board also participated in the financing and our secured lender augmented their current bridge note and extended the repayment date to September 29, 2023. Joann will provide additional details on the terms later in the call. The $5.6 million investment will drastically improve our working capital position to accelerate growth as we can now build up inventory to fulfill the ongoing demand for our products. In addition to the investment, we entered into a strategic alliance with D&D to import their innovative beverage products into the United States market as well as export our Reed's products portfolio into Asia. We plan to lean on their strong market presence overseas to distribute our products while utilizing our 45,000 store network here in the United States to bring their natural, better-for-you products to market. We look forward to the mutual growth of our businesses and are excited to see how the Asian market receives our fan favorite natural ginger beverages. Turning to a few updates on our key product categories based on MULO scan data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, Club, dollar stores and military channels. For the first quarter, the most representative period was year-to-date through April 9, 2023. Sales at retail were as follows

Joann Tinnelly: Thanks, Norm. Jumping right into our results, all variance commentary is on a year-over-year basis unless otherwise noted. Net sales for Q1 2023 were $11.2 million compared to $12.2 million in the year ago quarter. As Norm mentioned earlier, the decrease is primarily due to tightened credit terms from several suppliers that impacted our ability to purchase inventory as a full order volume, which offset net sales by more than $1.6 million. Gross profit for the first quarter of 2023 was $2.7 million compared to $2.9 million in the same period in 2022. Gross margin was relatively flat at 24.2% compared to 24.1% in the year ago quarter. Delivery and handling costs were reduced by 25% to $2.1 million during the first quarter of 2023 compared to $2.8 million in the first quarter of 2022. The decrease was primarily driven by renegotiated freight rate contracts, improved throughput as well as our streamlined orbit distribution model. Delivery and handling costs decreased to 19% of net sales or $3.46 per case compared to 23% of net sales or $3.90 per case during the same period last year. Selling, general and administrative costs decreased 27% to $3.2 million during the first quarter of 2023 compared to $4.3 million in the year ago quarter. As a percentage of net sales, selling, general and administrative costs were reduced to 28% compared to 35%. Taking all these together, operating expenses improved by 26% to $5.3 million or 47% of net sales compared to $7.1 million or 58% of net sales in the year ago quarter. This reflects our efforts to right-size the cost structure and consistently find ways to run efficiently. Operating loss during the first quarter of 2023 improved to $2.6 million or a loss of $1.01 per share compared to an operating loss of $4.2 million or a loss of $2.15 per share in the first quarter of 2022. Modified EBITDA loss also improved significantly to $2.3 million in the first quarter of 2023 compared to a loss of $3.8 million in the first quarter of 2022. For the first quarter of 2023, we generated approximately $1.1 million of cash from operating activities compared to $2.2 million of cash used for the same period in 2022. The increase was driven primarily by lower inventory purchases. As Norm previously mentioned, subsequent to the quarter end, we announced the close of a series of financing transactions that totaled $5.6 million, which includes the strategic investment from our new Hong Kong partner, D&D Source of Life Holding. The purchase price was $2.585 per share, which is based on a premium of 10% to the average of the bid and ask prices on May 19, 2023. In addition, we issued warrants to purchase 1 share of common stock for every 5 shares subscribed. The warrants have an exercise price of $2.50 and a term of three years. Further, the holders of our secured convertible notes augmented their current bridge note by $1.5 million and extended the repayment date to September 29, 2023, subject to certain conditions. We plan to use the aggregate proceeds of approximately $5.6 million before deducting fees for building inventory, general corporate and working capital purposes. As of May 31, 2023, we have replenished our inventory and now have approximately $2.3 million of cash and $22.4 million of total debt, net of capitalized financing fees. This includes $16.1 million from our convertible note and $6.3 million from our revolving line of credit, which had $6.7 million of additional borrowing capacity. I will now turn the call back to Norm for closing remarks.

Norman Snyder: Thanks, Joann. With our strengthened working capital position, optimized cost structure and continued demand for Reed's products, we believe we're at a pivotal point in our business and look forward to delivering on our goals for 2023. Operator, we will now open the call for Q&A.

Operator: [Operator Instructions] Our first question comes from [Will Van Ducho from Exame], a Private Investor.

Unidentified Analyst: A couple of things just I'll rattle them off, and you can answer as you see fit. What's kind of the plan for the September note coming due? Can you provide any outlook on where we are 2/3 of the way through Q2? And then what's kind of the story with the Hard Ginger right now?

Norman Snyder: All right. Well, I'm going to answer these in reverse order. We -- you probably have heard the saying it's better to go a mile deep and an inch wide than a mile wide and an inch deep. We've really adopted that philosophy with our alcohol portfolio and are seeing real positive results. Rather than spread ourselves real thin, we're going to retailers where Reed's has a strong presence and high brand recognition. As I referenced in my comments, Trader Joe's is performing exceptionally well. So we're staying focused on five or six primary retailers in approximately five markets, the Pac Northwest, Southern California, the Metro Phoenix area, New York Metro and New England and want to build a success story that we can take elsewhere, and I think that will really help with the introduction. We'll have several learnings that we can take to those other markets. And I think it's more cost-effective way of building success. Q2, 2/3 of the way there, obviously, as we indicated, the big factor in Q1 was our inability to produce enough inventory to meet demand. Obviously, with the recent financing, we continue to struggle through that. So both April and May are going to be softer than we hoped, but we think we'll start to recover strongly in June and really be able to build on momentum for the balance of the year. The September note, we're continuing to evaluate all of our options. Obviously, cash flow, protecting our cash flow is a priority as well as minimize any potential dilution that we need to do, but we haven't really finalized our plan, and we really have, I think, several options that we're evaluating, and we want to do, obviously, what's best for our shareholders and what's best for the company.

Operator: [Operator Instructions] And our next question comes from [Garry Getz], a Private Investor.

Unidentified Analyst: So first of all, I wanted to congratulate Joann Tinnelly. She's really come up to speed quickly as the CFO, getting the 10-K out and the 10-Q out. Now three questions.

Norman Snyder: Gary, I'd like to echo on that because I agree with you. Thank you, by the way.

Unidentified Analyst: Okay. So three questions. First is, you've done so much regarding cost reduction and trying to grow sales but yet, the interest costs are very high. Again, while they've come down from Q4, they're still at about a 30% annualized rate. Can you comment on that?

Norman Snyder: We're working hard to bring both the working capital line down. And also when we get to cash flow positive, we'll be able to amortize the Whitebox secured note and bring that down. So we're working as quickly as we can. Obviously, back when we brought on that secured note the markets were just really starting to fall, and there weren't a lot of options other than a real punitive capital raise. So we chose that. And I just want to comment, Whitebox has been a great partner to work with. So we're cognizant of the high interest rates. Our Board constantly reminds us of that, and we're working as quickly as we can to bring those down. And you can see the asset-backed line has come down pretty significantly from the end of the year. So we're trying to bring that down. And obviously, as we reach cash flow positive, we can service that and pay debt down even faster.

Unidentified Analyst: Okay. Good to hear. Again, all those other efforts are sort of counteracted by the 30% right. But moving on to the next question, in terms of exchange of products and markets with D&D going across the Pacific Ocean, generally, what companies do is they manufacture locally. Would you do that or would you actually transport product across the ocean?

Norman Snyder: Great question. We -- and you'll see a press release shortly. We're kicking off our first what we'll call a concentrate model in the UK, where we have a pretty robust market. And then we're going to go to Europe. So we are not -- we are no longer exporting finished goods. We are exporting concentrates and sourcing all the packaging materials and production locally, which brings down costs substantially. The big element in there obviously is transportation. And once we work the kinks out there, we're going to take that same model and use that for China. And now that we have an operating partner in Hong Kong that can manage that part for us, we will adopt that, and we will not ship finished goods overseas.

Unidentified Analyst: Okay. Okay. And then the third and big question is, I think -- and I'm sure people at the company probably think that you could do so much more in sales, were not for inventory restrictions. In that regard, Celsius just partnered with a well-known company and purchased New York, whom you and John Bello have been associated with. So any talk of looking at the big picture and trying to turbocharge sales, any thoughts of bringing in a really big partner?

Norman Snyder: Absolutely. I mean, obviously, that's something on our radar that we talk about daily. And I think you have to be very careful. There's a expression, be careful what you wish for. It's not as easy, and it's not the silver bullet that everybody thinks, but obviously, we're aware of it and are looking for the right partners from a strategic standpoint. So it's something we've been talking about. It's something -- and obviously, we have a Board member, Louis Imbrogno who is also a former Pepsi exec. So we do have -- with John and Louis and other Board members deep ties in the industry, but we want to be very, very strategic, and we want to make sure that we have the right plan and the right partner to really achieve our goals because like I said, it sounds good, but it's something that the doubles in the details, and you really need to pick the right partner.

Unidentified Analyst: Okay. I appreciate it. And congratulations on the progress to date and looking forward to a good second half.

Norman Snyder: All right, Gary. Thank you. We will have one more, Jason.

Operator: [Operator Instructions] Next question comes from [Richard Wu], a Private Investor.

Unidentified Analyst: Yes. Congratulations. I've questions regarding the details of the financing, was told the Chief Financial Officer will provide. But I didn't see any breakdown, how much each party participate and are the terms restricted shares or free traded? And second question, would you please provide a little bit more on D&D company that they're branding or kind of details? Any information about D&D?

Norman Snyder: Well, the details of the financing obviously are in the 8-K and the 10-Q that were filed today. So all documents and details are in there. But D&D put in $3 million and Mr. Bello and Union Square Capital Partners each put in $0.5 million but you'll see all that detail in those SEC filings. The shares are not registered. We have 45 days to file an S-1. So the shares are not tradable now but will be tradable upon filing of the registration statement. D&D is an investment company, and they've invested not an operating company and they've invested in several consumer products. I mean we highlighted one, but there's some other health-related products and beauty and health aid products that are across the world and in Southeast Asia. So you can -- obviously, there's a lot there. We vetted them pretty closely and checked into their investments and the companies that are involved with and feel comfortable that they are a solid partner and have a great track record and deal with some really strong brands. So we're looking forward to that partnership and particularly collaborating on exporting and importing products to our various regions.

Unidentified Analyst: Yes. My specific question is, do you have any of their brand name that you can provide us?

Norman Snyder: Well, if you look in Waldencast, I think they're big brand is Obagi.

Unidentified Analyst: Obagi?

Norman Snyder: Yes.

Unidentified Analyst : Okay. All right. I have no -- I didn't know any brand in China named Obagi or Asia. So I mean, I'm just curious so. But nonetheless, hopefully, even better results in the future.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Norm Snyder for any closing remarks.

Norman Snyder: I want to thank everyone for participating in this morning's call as well as our employees, customers and, of course, our shareholders. We appreciate everyone's support and hope you all have a wonderful day. Thank you.

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