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Edited Transcript of REED earnings conference call or presentation 13-Aug-19 8:30pm GMT

Q2 2019 Reed's Inc Earnings Call

LOS ANGELES Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Reed's Inc earnings conference call or presentation Tuesday, August 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Iris Snyder

Reed's, Inc. - CFO

* Neal Cohane

Reed's, Inc. - SVP of Sales

* Valentin M. Stalowir

Reed's, Inc. - CEO & Director

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Conference Call Participants

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* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Christopher Walter Krueger

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Don Lardy;D.A. Davidson;Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to Reed's Second Quarter 2019 Earnings Conference Call for the period ending on June 30, 2019. My name is Diego, and I will be your conference call operator today.

Today's call is limited to 1 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, 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 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. Those factors include, but are not limited to, the company's ability to manage growth, manage debt and meet developmental goals, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in the 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 forward-looking statements are reasonable, we 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, August 13, 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 their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and as posted on our website at investor.reedsinc.com. Non-GAAP financial information is not meant as a substitute for GAAP results, but it 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.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [2]

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Thank you. Good afternoon, everyone. We appreciate you joining us today. We had several accomplishments during the second quarter, and demand for our core brands and new product introductions were very strong. Unfortunately, we encountered short-term supply chain challenges as the quarter progressed that did not allow us to fulfill all of the orders and customer requests we had in hand.

I'm going to begin with a brief overview of the quarter, discuss the short-term supply chain challenges we are working through and plans over the coming quarter to address these issues. I will then discuss our progress on brand building and growth initiatives, including our innovation and sales and marketing efforts. I'll then turn the call over to Iris to run through the financial results in greater detail.

First, during the second quarter, we generated 1% net sales growth. You will recall we divested our private-label business at the beginning of this year as part of the planned sale of Chris Reed. We also discontinued brands and SKUs that did not align strategically with our long-term focus. The combined net sales that we are lapping this year for private label and discontinued items totals approximately $6 million.

Focusing on core brand gross revenue, we delivered 13% growth in Q2 versus prior year and would have shown 28% growth if we were able to fulfill all customer orders and demand during the quarter. Despite our supply chain challenges, we generated 22% volume growth on Virgil's during the second quarter. We also delivered 7% volume growth on Reed's' brand, returning our top-selling brand to growth for the first time in several quarters.

In total for Q2, we left $1.1 million of core brand sales orders unfulfilled and $400,000 of delayed innovation sales. Had we shipped all the products we had orders for and demand on hand, Virgil's brand would have grown 43% and Reed's brand growth would have been 15%.

Turning now to supply chain. The production shortfalls we experienced in June were driven by a number of factors. The first was packaging failures as we transition from paper to pressure-sensitive labels on our glass bottles, and we incurred extended downtime at our East Coast co-packer to manage through the transition. We also had unplanned downtime at our 2 West Coast co-packers. Our main co-packer on the West Coast, our prior L.A. facility now called California Custom Beverage, or CCB, which we sold last year, was shut down much longer than expected while installing new high-speed equipment. The backup West Coast facility also had unplanned downtime in the month of June and could not fulfill the production gap created by CCB.

While a single shortfall may have been overcome, the concurrence of events at all 3 existing co-packers had a meaningful and relatively sudden impact on our inventory. Our current co-packer footprint was not robust or flexible enough to sustain the onetime issues that came our way. We need to build additional redundancy and flexibility into our supply chain infrastructure and are now laser focused on expanding our co-packer relationships to fulfill short-term shortages and ensure there is sufficient and flexible capacity to support our long-term growth expectations and new innovation.

To quickly address and recover, we have established a corrective strategic plan and are leveraging our entire leadership team. We will bring on additional redundant production capabilities over the coming months and are currently in negotiations with several potential new co-packers. One such co-packer will begin its first run of Virgil's glass in September.

Additionally, and in support of both further gross margin improvement and supply chain simplification and flexibility, we're going to leverage the deep R&D technical bench of 2 well-known beverage flavor houses later this month. While I would like to be in a position to tell you these production shortfalls will be corrected immediately, we still have work to do to bring inventory levels back to the optimal position. Our 3 co-packers are now all up and running and are increasing their levels of production output to compensate for the shortfalls to date. They are also in the process of installing new equipment to expand capacity and add new capabilities such as can production. However, it will take them to normalize inventory given the ripple effect of the June shortfall, and as Iris will discuss, we have lowered our growth expectations for 2019. This is driven by both sale -- lost sales of our core brands due to inventory availability, the delayed launch of our 16-ounce can offering and the delayed expansion of our Reed Zero Sugars and cans due to the need to refocus our available production on supplying our core items.

I can assure you that we are fully committed as a team to quickly enhancing our supply chain both for near-term demand and long-term redundancies and capabilities to support our growth and innovation. We have successfully faced and addressed many challenges over the past 2 years. And optimizing our supply chain infrastructure is now our top priority, and we will get this done.

We're also adding experience, relationships and knowledge to support our supply chain initiatives by the addition last week of Lou Imbrogno to our Board of Directors. Lou has 40 years of global beverage experience, including leading operations, contract manufacturing, concentrate operations, R&D and quality for Pepsi-Cola North America and PepsiCo Beverages International. Lou's experience in relationships will be invaluable. In fact, Lou has already been able to open a dialogue with additional co-packer partnerships that we are now pursuing.

Now turning to the progress we've made in terms of our sales, marketing and brand-building initiatives. The investments we have made in our core brands this quarter, including the Reed's Zero Sugar launch, the introduction of Reed's cans, our packaging refresh on both brands and brand awareness building programs have been begun to have a positive impact on sales momentum, as I've stated at the beginning of my call and will set the stage to help drive future accelerated growth. We are very encouraged by the initial positive response from distributors, retailers and customers around our new product news and marketing efforts.

In May, we turned on our marketing efforts, including our first-ever 360-degree marketing campaign called Canada Dry Fooled Your Mom and introduced the tag line, Ready For Real Ginger?. The campaign included digital outdoor print and radio advertising, social media programs, in-store displays, coupon programs, sampling events and enhanced PR. We launched a program in New York City and quickly expanded to Boston, Seattle, Los Angeles and San Diego. We also launched national advertising through SIRIUS Radio ads on several of their stations, including live Reed's by Howard Stern. The campaign generated hundreds of millions of consumer impression, and we received positive feedback from retailers, distributors and consumers about the campaign. Syndicated data showed sales trend improvements across all of our heavy-up markets versus all other markets.

We've also begun to leverage via paid social media the fact that both Reed's and Virgil's Zero offerings are now keto-certified. This is a large and growing consumer group, and we kicked off our keto efforts by sampling our products at the KetoCon convention in Austin this past June. And we'll be updating our packaging to reflect our keto-certified status.

On the sales front, we continue to add new doors and expand our distribution footprint in some of the largest retail chains in the U.S. During the second quarter, we added approximately 2,300 new doors, which includes 7 new SKUs and over 1,000 Walmart stores. Due to the successful sell-through of our Virgil's Zero Sugar line, we have now expanded to a national footprint at Target to over 1,500 stores.

At Costco, we executed rotation of Virgil's Root Beer in the Northern California region, a new Reed's extra 12-pack cans rotation in the Texas region. We also implemented a successful road show on Virgil's Zero Sugar cans in Texas that resulted in rotational commitment of Zero Root Beer 12 packs to launch in Q3. We also continue to ramp up our international sales efforts and are laying the groundwork to expand our presence in several countries, including Mexico, Peru, Japan, Bermuda and the Dominican Republic.

On the category innovation front, we can confirm the successful rollout of the Reed's hemp-based wellness drinks to select markets at the end of Q2, which was supplied by a recently added fourth co-packing operation based in Northern California. We're also on track to launch the Ginger Wellness Shots line in the fourth quarter, utilizing a separate shot manufacturing supply chain model.

Unfortunately, we've had to redirect the focus of our current co-packer partners to supplying our core brand needs, which necessitated the delay of the Ready-to-Drink Mule pilot launch until the end of the year. We are, however, taking advantage of the added time to further optimize the Ready-to-Drink Mule formulation, utilizing improved sugar alcohol ingredients we have uncovered through our recent new co-packing partnership discussions.

While the short-term supply chain challenges are disappointing, they do not detract from what we have today and what we are in the process of building with our Reed's and Virgil's brand. We have transformed the company and returned our core brands to growth.

In the second half of the year, we continue to expect double-digit growth of our core brands. We remain committed to driving shareholder value and establishing long-term relationships with all of our investors. We are confident with our plans and are pushing hard to build our brands and drive increased growth.

Now let me turn the call over to Iris to run through the second quarter results.

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Iris Snyder, Reed's, Inc. - CFO [3]

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Thank you very much, Val, and good afternoon, everyone. As Val mentioned, the entire Reed's leadership team is focused on addressing the current product availability challenges. We are making good progress in minimizing the impact on our sales growth efforts in the short term and building in greater production, flexibility and redundancy in the future.

Now let me run through the financial results. Second quarter net sales increased 1% to $9.5 million compared with $9.4 million in the prior year, while core brands gross sales increased 13% compared to the prior year. The strong performance of our core brands was driven by 14% case growth, including 22% volume growth of Virgil's and 7% volume growth of Reed's. As Val mentioned, our sales were suppressed by $1.5 million as a result of product shortages reflecting lower-than-expected co-packer production and delays in our innovation sales ramp-up.

Finally, as anticipated, the core brand growth was partially offset by lower sales of exited and non-core products, including the sale of the private-label business, in conjunction with the plant sales, at the end of 2018. Sales of these discontinued non-core and private-label products represented $0.9 million of sales in the second quarter of 2018.

For the second quarter, gross profit was negatively impacted by charges related to inventory adjustments, obsolete and expired ingredients and packaging transitions. Some of these costs are related to the transition of the L.A. facility to California Custom Beverage. Other costs on packaging and ingredients were related to accelerating the launch of our new packaging and reformulation efforts.

The majority of the write-offs are onetime charges, and we believe going forward, charges will be more modest. These charges impacted gross margin by approximately $0.6 million. Inclusive of these costs, gross profit decreased 25% and gross margin as a percentage of net sales decreased to 24%. Excluding these charges, the gross margin would have been 30%.

Delivery and handling costs increased 15% to $1.4 million and increased 190 basis points as a percentage of net sales during the quarter compared to the prior year. This reflects higher less-than-truckload shipments to the new retailers, inventory balancing to position inventory to the required geographic distribution centers as well as higher-than-normal handling cost for new products that were produced in limited geographic locations.

Selling and marketing costs increased 164% to $3.2 million during the quarter. The increase reflects the investment in sales and marketing infrastructure and growth initiatives. These increases in sales and marketing were expected and are consistent with our strategy to refresh the brand, increase brand awareness, support the launch of new products and packaging into the market, open new retail outlets and channels and lay the groundwork to reaccelerate growth of our core brands.

General and administrative expenses decreased 49% to $1.7 million in the second quarter compared to $3.4 million in the prior year period. The year-over-year decrease was largely driven by reduced severance, noncash performance-based equity awards and bonus accruals. The second quarter operating loss increased to $4.1 million from $2.8 million in the prior year. Interest expense decreased to $0.3 million in the second quarter compared to $0.4 million last year.

Net loss was $4.5 million or $0.13 per share in the second quarter of 2019. This compares to $3.4 million or $0.13 per share in the same period last year.

Moving to the balance sheet and cash flows. We ended the second quarter of 2019 with $1.6 million in cash and $5.4 million of availability on our revolving line of credit. While we do not expect to generate the level of operating cash flow that we initially anticipated in fiscal 2019, we have the capacity to support our efforts this year.

During the second quarter, the company used $2.8 million of cash in operating activities compared to $5.8 million in the prior year period. The decrease relates primarily to reduced investment in inventory.

Turning to guidance. As a result of the supply chain challenges we have discussed and the delayed ramp-up in sales driven by innovation, we are adjusting our fiscal 2019 guidance. We now expect to generate net sales in the range of $35 million to $40 million and anticipate core brand growth of 13% to 20%. Reported net sales growth will reflect the elimination of approximately $6 million of private label and discontinued non-core revenue in 2018.

Additionally, we now anticipate a gross margin of 30%-plus for the second half of 2019. Given the re-prioritization of our supply chain resources to maximize production output, the implementation of several gross margin improvement initiatives may be delayed to later this year. To be conservative, we are reducing our guidance to 30% versus original guidance of 32% or greater.

Now let me turn the call back to the operator to begin the question-and-answer session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Anthony Vendetti with Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [2]

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So I guess a couple questions. I know guidance now is $35 million to $40 million. I don't have what the original guidance was in front of me. So revenue guidance prior to today was what?

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Iris Snyder, Reed's, Inc. - CFO [3]

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It was $42 million to $44 million.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [4]

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$42 million to $44 million, okay.

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Iris Snyder, Reed's, Inc. - CFO [5]

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Correct.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [6]

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Okay. And then so in terms of the shortfall, so $1.1 million related to the unplanned West Coast co-packer downtimes seems like it all sort of came together, like you said, concurrently. Is that...

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [7]

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It was all the co-packers, Anthony. It was -- line was down -- this all happened in June. Line was down transitioning from paper to plastic, and it just could not run the PSL labels correctly. I'm not going to go into details of what drove all that, but it took them a month to get up and running in terms of West Coast -- East Coast production, and that's our big co-packer on the East Coast, and they do a ton of volume for us.

On the West Coast, yes, the CCB plant was supposed to be up in May, and it did not get up and running until July. And it's still not running at optimal levels. And then we had hoped to have a backup with Langers on the West Coast, and they also could not jump in and fill the void created by CCB on the West Coast. They had their own production issues. So it was sort of a perfect storm of all 3 having issues in June, and that led to, yes, $1.1 million of short ships of POs and then $400,000 worth of delayed launch of the 16-ounce cans and really us pulling the accelerator off on the Zero Sugar and the cans because of our core product needs.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [8]

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Okay. So then in the $400,000 on innovations, that's for things like the Ready-to-Drink Moscow Mules. Is that all...

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [9]

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No. No, that's what I just -- no. That's what I just said, $400,000 is really the core innovations that we're launching. So that was on the 16-ounce can that was supposed to launch in May and did not because of the production issues and then also the Reed's and Reed's cans and Reed's Zeros, which we did launch in some market. There are a lot of customers we could have gone and locked in orders, but we knew that we had production issues, and we kind of pulled back on that. So it was really the delayed launch and delayed ramp-up of those 3 items.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [10]

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Those 3. Okay. So you also mentioned, though, that the Ready-to-Drink Moscow Mule has been pushed to the end of the year, but that has nothing to do with the delay.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [11]

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No. No, that was -- no, our core -- our category innovation, there are 3, right. There's the hemp, the Ready-to-Drink Mule and the shots. Well, the hemp launched on time at the end of June and is in a couple of markets now, so we're happy with that, and that was because it was in a fourth co-packer not related to our core co-packers. Mule is definitely being delayed, and that was supposed to launch end of June. It didn't have a lot of volume planned for June. And really, all 3 didn't have a lot of volume planned for the entire year. So the reduced guidance is really driven by the -- currently fulfilling all potential orders on our core, given our tight inventory position and really driven by the delayed launch of the 16-ounce cans and the delayed ramp-up of the Zero Reed's Extra and the Reed's cans. So the innovation really did not materially impact any of the volumes or guidance since we didn't build in a lot of volume behind those 3.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [12]

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Okay. And then just on the hemp-based drink, that was on time, end of June. That's just -- there's not a lot factored into guidance like you said for that. But can you talk about a little bit how that's being marketed, any issues that you had to deal with from a legality standpoint?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [13]

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Yes. That's a good question. So no, we've got a lot of interest on the product, and again, this co-packer is kind of small. So he's got to ramp up slowly. It's not in a position -- it's not our sort of long-term co-packer partner. It's really just the launching for the pilot. So he's ramping up production as we speak. We're in 2 states. We're in Texas and Vermont. I'm not going to go into details on customers because we'd like to keep a low profile in terms of the regulatory. But so far, so good. There has been no regulatory reaction in either of those 2 states of the -- and the retailers that we're in. So far, they're happy with its performance. But it's really early days. I mean we really started shipping pallets at the end of June. So we need a lot more time to see and learn from the reaction from distributors, retailers and consumers.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [14]

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Okay. And then lastly, obviously, you outlined a lot of different issues here contributing to the quarter as well as the guidance. The guidance range not only went down from revenues but widened, right? It was -- $42 million to $44 million was pretty tight. $35 million to $40 million is not only lower, but wider. Is that because at this stage, as you're working through some of these issues, you don't yet have enough confidence that all of these issues are behind you? Or what's the reason for the widening of the range?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [15]

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Yes. Look, we want to deliver on our commitments, and obviously, we haven't in the second quarter. So we're building in a conservative plan that we know we'll achieve. And so we want to make sure that, that bandwidth captures all of our scenarios. So the bandwidth is a little -- but we also don't want to lower the high end because if things go well and we make -- continue to make the progress that we are in terms of getting back up to speed in terms of our current co-packers and adding new co-packers, I mean I didn't really think we could be able to get a backup co-packer on the East Coast up and running in September, but it looks like we will. So given that we have a lot of the optimization plans in place, the question is how quickly we'll be able to materialize all of those initiatives, and it's just hard -- it's hard to predict. So there's a little more uncertainty, but we wanted to give guidance that we know we would hit given the new initiatives, and that's why we've given you the range that we've given you.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [16]

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Okay. And you said detailed negotiation with other co-packers. So on the West Coast, CCB, which is California Custom Beverage, that's your old L.A. facility you sold to Chris Reed, correct?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [17]

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Correct.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [18]

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Great. Why don't -- I mean, I'm just curious if you -- I guess, did you not anticipate some of that? And then...

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [19]

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No, we did. We did. That's why we thought Langers -- we had Langers walk up on the West Coast. And now Langers had its own surprises and could not jump and fill any of the voids. So that was -- our backup, I guess needed a backup.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [20]

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And basically, what you're saying is you're now close to securing another West Coast co-packer that gives you that flexibility?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [21]

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Yes. We've spoken to several. Unfortunately, like I said, the one we're starting up in September is East Coast. There just seems to be better choices of strong partners east of the Rockies than west of the Rockies. But we are turning over every stone in terms of the West Coast. We have had multiple discussions on the West Coast. Some will have to add equipment such as pasteurizers to be up and running. There might be a chance that we'll get a backup co-packer up and running on the West Coast before the end of the year, but I can't commit to that at this point. Langers might actually begin stepping up, but obviously, having not stepped up to date, I can't guarantee that. So yes, there's a lot of activity right now to build in redundancy on both coasts, and we'll be able to turn on an additional very large and capable co-packer on the East Coast. And worse comes to worst, Anthony, we'll heavy up East Coast production and ship it west as needed to make sure that we fulfill all of our customer orders.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [22]

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Okay. And then the last question I have was the Walmart stores. How many did you say you were in?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [23]

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Over 1,000.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [24]

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Okay. And when does that -- I know usually, those resets happen either semiannually or usually annually. When could that -- when is that next reset date? And when could that expand beyond that?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [25]

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Yes, can you just repeat the question?

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [26]

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Yes. The reset date for Walmart, when can -- it's in 1,000 -- you're in 1,000 stores now. When could that be more than 1,000 stores? When is the next meeting with them when they look to reevaluate?

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Neal Cohane, Reed's, Inc. - SVP of Sales [27]

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Anthony, good question. It's Neal. We have a meeting with Walmart next week. So we'll review our present performance, and then we'll hope to put a good-enough story together to see if we can expand. But it's very early for them. And this is all a new step for them, the new 4-foot sets across their stores, or I should say across the 1,000 stores that they're testing, so.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [28]

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They've been really up and running for, what, 3 months on shelf?

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Neal Cohane, Reed's, Inc. - SVP of Sales [29]

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Not even. About 9 weeks.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [30]

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Yes. They've been on shelf 9 weeks. So I think it's hard for Walmart to get a solid read. I mean it just takes time to get on shelf, drive trial, drive repeat. It's probably early for them to make decisions on go, no go on expansion. But hopefully, we're outperforming whatever else is on that shelf.

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Operator [31]

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(Operator Instructions) Our next question comes from Chris Krueger with Lake Street Capital Markets.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [32]

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Your last guy went over a lot of my questions, so most of mine are answered. But in general, the co-packing issues, you said, kind of materialized in the month of June. I mean is it largely -- did it drag into the third quarter, March? Or how should we look at that?

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [33]

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It's -- inventory is tight. When you don't -- when all of your co-packers aren't producing in June -- when 1 of your co-packers is not producing in May or June, yes, it's a ripple effect. So we are expanding our production across all 3 as fast as possible, but we are tight on inventory. And so your co-packers have other customers as well. Now they have to squat you in. They have been doing everything they can to increase our output to make up for the shortfall, but we have not made up the hole that was created in June. The good news is we're in decent position on some of our core items. But like I said, inventory is going to be tight for this month and possibly into next month before we're fully back to our inventory positions to be able to fulfill all our orders across all geographies.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [34]

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Okay. And then on gross margins, you have indicated several onetime charges. Is it safe to say that you kind of went through as many of those as you could during the quarter that we shouldn't see so much of that going forward?

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Iris Snyder, Reed's, Inc. - CFO [35]

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Yes, that's right, Chris. We believe going forward that charges will be much more modest. We believe we've gotten, really, the large majority of the onetime charges, hopefully all.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [36]

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Yes. Because Q2, we were still sort of transitioning from CCB, our old plant, and we've hired a new inventory personnel here who's just very skilled at uncovering and looking under every stone. And that's the process that we've gone through, and we believe we've uncovered all the major items from that transition. So we don't expect those to reappear.

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Christopher Walter Krueger, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [37]

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Okay. And last question, I noticed with your marketing efforts much more prominent presence on like Facebook and Twitter. Just wondering if you have any feedback on how those efforts are working.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [38]

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Yes. No. We've gotten a lot of mileage in terms of engagement impressions given the amount of capital we spent there. We did a lot of tactics to learn what was moving the needle, and we were really happy with all of our social media investments on Facebook, Instagram, some of the paid social. We're going to continue investing in that platform because people are really liking the message that we're telling -- informing people for the first time that, hey, your ginger ale had no ginger in it, and so we're going to continue investing in that platform. And SIRIUS Radio actually did very well for us. I mean they generated almost 100 million impressions. Howard did a great job telling our story, and we hope to continue that relationship in the future as well. And those were very efficient cost per 1,000 impressions. Some of the others we probably wouldn't repeat because it was sort of a learning process and all tactics. But absolutely, a major portion of our future marketing spend will be on digital. And as I said, I think I'd love to keep developing and grow deeper on the SIRIUS partnership.

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Operator [39]

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Our next question comes from Don Lardy with D.A. Davidson.

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Don Lardy;D.A. Davidson;Analyst, [40]

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Val, the Target relationship, are we seeing good inventories of both the Virgil's product in [accordance] and have seen good inventory in the Reed's product? And obviously, had a supply problem. Do we see the Reed's project going to ramp back up with Target out here on the West Coast? Or what do you see happening there?

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Neal Cohane, Reed's, Inc. - SVP of Sales [41]

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Don, this is Neal. Are you seeing -- are you saying you're not seeing inventory on the West Coast or you are seeing?

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Don Lardy;D.A. Davidson;Analyst, [42]

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Well, we did, and it's gone, okay? What I'm seeing, I'm seeing slots that are now empty or renamed. And so I'm not seeing the Reed's product here in the West Coast. I am seeing the Virgil's, but not Reed's as far as Target stores.

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Neal Cohane, Reed's, Inc. - SVP of Sales [43]

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Yes. So what we have -- the problem with Target is because we are not a DSD operation, meaning direct to store, we go through their warehouse, we have sometimes a difficult time getting those guys, the store personnel, to pack up the stores.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [44]

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And order.

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Neal Cohane, Reed's, Inc. - SVP of Sales [45]

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And order. And so we have initiated a merchandiser that is now helping us nationally to fix this. And you'll start seeing the presence come back. If you want forward me the store or stores, we'll follow up on it immediately.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [46]

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Yes. We hired a firm called the Survey.com, and they're sort of the Uber of merchandising. And obviously, we focused our efforts -- their efforts on Walmart launch. So that's where we want to make sure that we do that. Because when we launched Target last year, we did see a lot of out-of-stocks because of store personnel assuming we're DSD, and someone else is going to do the work, and no one did. So they came in and actually improved our presence in Target, and that led to our expansion now. And so we hired them, and they really -- we wanted to make sure that we weren't going to do that again with Walmart. And so we had focused their energies on Walmart kickoff, which was in the first 4 to 6 weeks. And now we're shifting over the focus -- now that Walmart stores are in pretty good shape, we are refocusing their efforts on Target. So there might be...

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Operator [47]

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Ladies and gentlemen, there appears to be no additional questions at this time. I'll turn the conference back over to Mr. Stalowir for closing remarks. Thank you.

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Valentin M. Stalowir, Reed's, Inc. - CEO & Director [48]

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Thank you for continued support and for participating on today's call. Our mission is to materially disrupt the multibillion-dollar mainstream soft drink and ginger beverage categories with our superior and innovative product and package offerings and compelling consumer communication efforts. The significant growth upside we have identified remains unchanged. Our supply chain optimization efforts are well underway, and we will continue to lay the groundwork through our investment in sales and marketing infrastructure and new product news to accelerate our capture of this untapped potential. We're committed to supporting and growing our brands and driving long-term shareholder value. Thanks again for listening.

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Operator [49]

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Thank you. This concludes today's conference. All parties may disconnect. Have a great day.