Good afternoon and welcome to Reed's Fourth Quarter and Full Year 2018 Earnings Conference Call for the period ended on December 31st, 2018. My name is Jesse and I will be your conference call operator today. Today's call is limited to one hour and we'll have prepared remarks from Val Stalowir, Reed's Chief Executive Officer; and Iris Snyder, Reed's Chief Financial Officer. Following management's remarks, we 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 during this call, management's remarks may contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. 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, level of 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, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in competitive environment, access to capital, and other information detailed from time-to-time in our filings with the United States Securities and Exchange Commission. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance, or achievements. In addition, any projections as for the company's future performance represent management's estimates as of today, March 28th, 2019; we assume no obligation to update these projections in the future as market conditions change. Additionally, please note non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on our website at investor.reedsinc.com. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for informational and comparative purposes. We present modified EBITDA because we believe 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. I will now turn the call over to Mr. Stalowir. Please go ahead sir.

Thank you and good afternoon everyone. It is my pleasure to speak with you today to discuss our fourth quarter and full year 2018 performance and update you on our progress. It is a very exciting time at Reed's as we've completed the final key step in our transformation during the fourth quarter with the sale of our L.A. plant, completing our transition to an asset-light sales and marketing organization. In February, we closed a very successful equity offering that has provided the capital to significantly accelerate our investment in sales, build our core Reed's and Virgil's brand and accelerate growth. We now have the necessary elements in place to realize the company's full potential. And as Iris will discuss in a moment, we are forecasting accelerated growth for our core brands in 2019. During the fourth quarter, we generated 10% revenue growth of our core brands, led by 33% increase in the Virgil's brand. We have continued to generate improved margins and finished 2018 with a 28% gross margin for the fourth quarter and full year. We expect further margin improvement as 2019 progresses. The significant growth of Virgil's during the fourth quarter reflects last year's innovation, launching Virgil's Zero Sugar in cans and the early impact of our brand refresh efforts. Zero Sugar is already in over 6,000 retail outlets and Target is expanding its distribution from 900 to 1,600 outlets. The success in driving Virgil's growth came prior to the benefit of our planned increases in the sales and marketing investments, which will begin during the second quarter of 2019. The Virgil's success driven by the new can package in the Zero Sugar offering is also a case study for what we can do with the Reed's' brand in 2019 and beyond. Now, let me walk you…

Thank you very much Val and good afternoon everyone. As Val mentioned we continue to make good progress on our key initiatives during the fourth quarter and are well-positioned to accelerate growth in 2019. Let me run through the financial results. First -- fourth quarter net sales were consistent with the prior year at $9.6 million, while core brand gross sales increased 10% compared to the prior year. The strong performance of our core brands was driven by 33% growth of Virgil's brand, including continued momentum of the Virgil's Zero Sugar offering. As Val noted, Virgil's Zero Sugar continues to gain distribution and is now tracking to be $5 million to $6 million annualized business. The core brand growth was offset by the expected lower sales of exited and non-core products. During the full year 2018, net sales grew 1%, while core brand growth sales grew 8%, driven by the launch of the zero line in the second half of the year. For the fourth quarter, the combination of higher revenue per case and a 6% decline in cost of goods sold on a per case basis contributed to a 29% increase in gross profit. Gross margin as a percentage of net sales increased 620 basis points over the prior year to 28%. The year-over-year improvement in gross margin was primarily driven by benefits of the new glass supplier contract with Owens, Illinois, higher average selling prices, and the benefits of SKU rationalization. For the full year 2018, gross profit increased 55% and gross margin as a percentage of net sales increased 975 basis points to 28% compared to the full year of 2017. During 2019, we anticipate further improvement to gross margins as we begin to benefit from economies of scale on can production, the elimination of idle plant…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from the line of David Bain with ROTH Capital Partners. Please proceed with your question.

Hi. Thank you so much. First, I was hoping, can you discuss the launch strategy differential with Reed's versus Virgil's? Seems like on-premise will be a bigger category for Reed's. And I guess, at the end of the day, is there any change to the cadence and volume that we saw at Virgil's -- and could it even exceed Virgil's just given the brand recognition and marketing push that coincides with the launch?

Yes. So, we haven't really seen much of the benefits of that innovation that we saw on Virgil's on Reed's yet. We just showcased all of our cans and Zeros at the Expo Show and we're taking PO orders now. So, it's really too early to see is there going to be a material difference in the -- like you said, the ramp up cadence. I think the numbers have a greater potential then the Virgil's, but it's hard to estimate. I mean, it's just really early days. I would say that Reed's in general has probably a slightly better footprint than Virgil's, but like I said, it's going to be hard to forecast exactly how quickly the Reed's brand reacts in sort of a positive way to the innovation that we're launching.

Sure. Okay. And then can you provide how much of the product extensions are built into your guidance, meaning the CBD and Mule? And any kind of data points surrounding that with either your distributors or customers that you're hearing at this point? I know it hasn’t launched yet but--.

Yes. No, we have kind of sales [ads] [ph] out there and we have been talking and presenting, but it's really -- it's too early to give sort of reaction to overall with order interest. And we put very, very, I would say, de minimis amounts of net sales or margin improvement in the 2019 guidance.

Awesome. And last one I know you haven't reported 1Q obviously, but any hint as to how Virgil's has performed since the beginning of the year? Is there any sort of foot off the accelerator a little bit or we're just seeing the same trends at this point?

Yes, that's a great question. Now, it continues to perform very strongly for us in the year-to-date.

Okay. Congratulations on the year.

Thank you, David.

Thank you. Our next question is from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Yes. Thanks. Just wondering, seems like Virgil's obviously had a very strong quarter, up 33% and then if I just look at the core brands, it was up around 8% or 10%. Does that imply that Reed's was down in the fourth quarter? And if so, why? What was -- was that due to a refresh, what was going on there?

Yes, Reed's is not growing as of yet. So slightly down in the fourth quarter. It's just, there's been no innovation that we've launched in the fourth quarter and it's a very competitive category. I mean Virgil's, the only competitor that's doing anything is Zevia. The bigger players like IBC, Stewart’s has not done anything, Hansen’s hasn't done anything. So, that is a category that has been sleepy and we've brought a real innovation there. For Reed's, we've not brought any innovation yet as of today in terms of cans or zeros. And that one as you can see is competitive. You've got Fever-Tree in there, putting more of a focus on the U.S.; you've got Bundaberg partnering with Pepsi. So, if you're not investing and moving forward heavily, you're not going to be lapping in a positive way. So, that's exactly why we're excited right now because we have the cans, we have our zeros, so far the reactions have been very positive to the new expansion in Reed's and we hope to start seeing the benefits on that Reed's brand in the second quarter of this year.

And just a follow-up on some of the new Reed's drinks and you talked about them on the call, and I saw them out at Natural Products Expo West and I was able to sample a few. I know it's not a de minimis amount in your guidance, but can you talk about interest level? Or is it too early at this point to talk about order level? Or at least can you talk about C stores or vendors that are looking at--?

Yes, Anthony, it's just way too early. Like I said, we really showcased it for the first time. We're following up on interest that we got at the show. Our salesforce has the sales sheets and they have samples right now. So, it is just really too early to give you any kind of concrete guidance there.

Okay. And then on the -- Iris mentioned on the call, the guidance for gross margin of 28% to 32% in the first half and then 32%-plus in the second half of 2019. What's driving that increase? Is it any particular product set or category?

Yes, it's a great question. So, the reason why the first half still has some, let's say, maturing to do is two initiatives that we've launched. There's inefficiencies when you launch, let's say, upgrades or new strategies that will in long-term improve the overall margin. For instance, one was adding Langers as a new co-packer. There's always inefficiencies in terms of their production while they're getting a solid understanding of our product mix and production flow and recipes. So there's some inefficiencies really in that first half for that start-up. And then we're trying to simplify our ginger process. Right now, we're taking raw fresh ginger from Peru and processing it and brewing it, and we are currently experimenting with a way to simplify that and move closer to a concentrate model. And again, when you're doing that, you're using a lot more ginger root, you're making adjustments, and you're not hitting full -- the full potential of what that margin improvement can be. So, that's why the first half has that sort of ramp-up of improvements and then we get through that sort of a ramp-up by the end of the first half and start realizing Langers should be up and running fully and this ginger process should also be realizing its full benefits in the second half of the year.

Okay, that's helpful. And then just lastly, on the sale...

I'm sorry, sorry, Anthony, sorry one more thing. Also can production, Virgil's was our first can launch. We're launching Reed's. And right now because of the efficiencies and order minimums, we've been sourcing everything on the East Coast. We hope to move to a bicoastal by the second half of this year. That will also improve our margin outlook on both brands on cans.

Okay, helpful. Last question is on the sale of the LA plan, the private label business. There'll be -- it sounds like a small royalty on the private label. When did that -- when did that sale -- when was that finalized? And can you talk a little bit more about what that royalty is on the private label? Is it de-minimus, is it 1%, 3%?

Yes, no. It's definitely recorded in our prior--

Hi Anthony, it's Iris. We saw the plans on December 31st of 2018. The royalties are 5% of roughly that $4 million of private label, so for three years.

For three years? Okay, great. Thank you.

Thank you. [Operator Instructions] Our next question is from the line of Paul Johnson, a Private Investor. Please proceed with your question.

Yes good afternoon. Couple questions. First of all, can you give us an idea of the net cash or cash in debt as of the end or as of now roughly given the offerings?

We typically don't talk to that, so we'll release that when we release our Q1 earnings. We -- and once we publish the 10-K, we do a pro forma, so we show what the offering with 16.2. Once we took out expenses, it was $14.9 million net.

Okay. And as of the--

Our loans and the rest of cash, but we released.

Okay. And I think as of the end of the year, you had about $7 million in debt. So, let me ask in a different way. Do we -- are we sure that we have enough cash for the next, let's say, 12 to 18 months without the need for going out dilution or other ways of raising money?

That's correct. I mean that's exactly what the objective of the fund raise was. The $16 million really funds all of our accelerated growth investment for 2019 and into 2020.

Okay, great. Second question is I noticed on your presentation that a big piece of the pie that we're not tapping into is the convenient store chain. I think you identified something like 150,000 outlets and we're in less than 2,000. You mentioned CircleK, but it's only a few hundred. What is the opportunity or what is the strategy, I guess, to have more meaningful share there?

Do you want to take that?

Yes. Is this Paul?

Yes. Hi.

This is Neal. I run the Sales. The strategy we have right now is we're looking to break out and tap into C-stores. We haven't really tapped into it before. The glass bottle Reed's and Virgil's has not been widely accepted in the C-store channels. So, we have now -- we're now introducing a 16-ounce can of both Reed's and Virgil's, both in the full sugar format and the Zero Sugar format. We are rolling those out in The Street as we speak now and making presentations as we speak. They are being very well received. They're being looked at as new exciting and different to the same old big red and big blue guys that are out there. And it's in an inevitable format, no aspartame. So, people are looking for something without aspartame in it. We offer that now. The other thing we're going to be looking at closely is the CBD Hemp acceptance. And there's lots of eyes and ears on that as we now have two great 10-ounce cans in our Reed's Wellness Ginger packages. And there is some very strong interest in that also. So, we're excited. It's a new channel. It brings an incremental volume. It's big for us. The other -- the third thing we're doing also is we are -- we hired a broker -- a national broker. And they are -- we are their only beverage for C-stores with the exception of a kombucha brand that they carry. And these guys are pretty strong. They have relationships around about 50,000 C-stores around the country -- 50,000 unit C-stores around the country and we are working with them closely to have them accelerate and get us in front of the customers as quickly as possible. That's helping us in a big way. And we also are bringing on a new rep in the West Coast, who is, we believe, going to bring on some new book of business for us because he has strong inroads in C-stores out in the West Coast. So, lot going on in that front. We're getting at it pretty quickly and we're looking forward to seeing how that delivers for us in 2019.

That's great. And you mentioned the CBD and Hemp. What I read is that there's some real challenges in getting sort of the oil and water to mix and also the taste issues. Has your sort of new technology solved that problem? Is there an issue with taste or sort of the viscosity, if you will?

So, this is Stefan, the COO. So, what I will tell you is, is that we went through a lot of research, approximately 25 different manufacturers of Hemp Extract and looked at all their technologies before we landed on them. We've been stressing the product, and it's staying in solutions that we're feeling pretty good about what we've accomplished with it. No significant taste impact on our beverages as well using that extract.

Thank you. Our next question is from the line of Alex Silverman with AWM Investment. Please proceed with your question.

Hey guys. How are you?

Just first off to the prior question. I tried the CBD at the ROTH Conference and I thought it was absolutely delicious. I couldn't tell the difference between that and a non-CBD beverage. In your guidance or in your filing around the Reed's, you indicated January core was up 25% to 35%. Two questions there. One, sort of what drove that? And two, can you give us any sense of if they continued at that kind of pace?

That's the second time people are asking. Look, yes, the continued -- as I said before, the Reed's innovation hasn't hit yet. So, the majority of that growth is not going to be coming from the Reed's brand in the first quarter. So, it's mostly Virgil's and it's based Virgil's plus the zeros, both are actually growing very strongly. And we're happy with the momentum that we currently have on the revenue side.

Okay. And then on Costco, I think, you said you're in two of their divisions or two of their geographic areas. Is that right?

We have authorizations to start a rotation that we'll start shipping in end of May, beginning of June.

And what are you shipping into the Costco's?

One is Virgil's root beer and the other one will be Reed's in cans.

Got it. And then last question. Iris, I think you said in your prepared remarks, you expect a 5% to 10% per case decline in delivery and handling. Is it -- did I hear that right?

That's correct.

Is that off of the fourth quarter level or off of a 2018 level?

2018.

The 2018 in total, correct. Yes.

Perfect, great. Thanks guys. Appreciate it.

Thank you, Alex.

Thank you. Our next question is from the line of Gordon Hodge with Tracker Research. Please proceed with your question.

Yes, good afternoon. Just had a couple of questions. One was, I think your core margins on the core products before promotional discounts and swatting last quarter at least was in the 44%, 45% range. And so, I am wondering, as you get rid of private label -- you've mentioned launching cans on the West Coast, et cetera, some things that might compress margin temporarily. But I'm just curious what other than swatting and promotional discount would take that margin -- the sort of mid-40s margin down to the low 30s, I guess, will be the question? And I'm just wondering. Are you anticipating a lot of promotion and swatting fee spend in the first half of the year?

I think the 43% doesn't include the discounts as we don't -- in the past when we reported, we didn't allocate it. So, I think, you're looking at one number, the 43%, without the allocation of discounts versus the guidance of 28% to 32% that does have the discounts in there. So, we're comparing apples to oranges there.

Yes, exactly. So, that would be the primary difference?

Correct, yes.

Got it.

And that would be -- as I outlined, we have a lot of support to invest in and so we're going to continue and potentially increase from, let's say, 2018 levels that level of support. We're going to drive displays. We're going to drive promotional activity with the trade. And so, from that perspective, it's -- we're investing as opposed to not investing in that line item.

Yes. No, no, that's terrific. I just wanted to make sure I understood the variance there. So, okay, perfect. And then the other question is just, I think, you mentioned -- Iris, you mentioned something about $6 million of revenues lost in 2019, that's not how you said it, but related to the private label and other business. So, does that imply then that you're really talking about going from $32 million of sales in 2018 to $42 million to $44 million, if we strip out the legacy businesses that are no longer there? And then you mentioned something about $4 million in private label. So, does that mean $2 million is something else?

Yes, that's correct. So, we got big growth plans for this year, especially once we lap the $4 million of private label and $2 million of others, such as trying the colas, sparklers, kombucha, some of the other brands that we had discontinued in 2017 and early 2018 that we still sold throughout the year.

It's great to point out. That's exactly what the apples-to-apples comparison should be. It's the starting point of $32 million of net sales of our core versus moving to the $42 million, $44 million that we gave guidance on because none of those products are coming back. And that's the relative, let's say, comparison or benchmark investors should be looking at.

Thank you. We have reached the end of our question-and-answer session. So, I'd like to pass the floor back over to Mr. Stalowir for any additional concluding comments.

Thank you for your continued support for participating on today's call. 2019 is planned to be a truly breakout year for Reed's. We now have the necessary elements in place to drive significant revenue growth and shareholder value. I look forward to updating you on our continued progress throughout the year. Thanks, again, and have a great day.

Ladies and gentlemen, once again, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.