Introduction - Real kombucha. Unreal taste. Web viewConference Call . April 7, 2016. Introduction . Good morningand thank you for joining American Brewing Company, Inc.’s full year

Conference Call ScriptTorrance, California, April 7, 2016

Conference Call April 7, 2016

Introduction

Good morning…and thank you for joining American Brewing Company, Inc.’s full year

results ending December 31, 2015, investor conference call.

On today’s call we will have Brent Willis, Chief Executive Officer of American Brewing

Company, and Lanny Lang, Chief Financial Officer.

On our call, Brent will provide some opening comments. Lanny will provide an overview

of our 2015 results and then turn back to Brent who will discuss our strategic priorities,

the major factors impacting our business, and our business model for 2016. We will

then open the call to questions.

We remind you that this conference call contains certain forward-looking statements

reflecting management’s current expectations regarding future results of operations,

economic performance, financial condition and achievements of the Company. Forward-

looking statements, specifically those concerning future performance, are subject to

certain risks and uncertainties.

The transcript of today’s conference call will be available on the Company's new

website, within the investor section at www.mybucha.com.

I’d now like to turn the call over to Brent….

http://www.mybucha.com/


BRENT WILLIS:

A quick thanks to everyone participating on the call, the first ever investor conference

call for American Brewing. As previously announced, I was asked to join the Board of

Directors of the company and to take on the Interim Chief Executive Officer role, and

last week I decided to do so.

Why? Well, I did my due diligence and had others do some for me too and the

conclusion was this is a massive opportunity. I never do anything small, and we used to

have a saying at AB InBev, that it is as much work to do something, as it is to do

something huge - so you might as well go big. No one on the planet believed that we

could take a small little Belgian brewer, that no one had ever even heard of, and make it

into the world’s largest but we did against some pretty strong competitors. This

opportunity, with Bucha Live Kombucha, won’t go from $2 Billion to $100 Billion like

InBev, but there is no question in my mind that this brand, in this category, in this

window of opportunity, is an absolute winner.

In anything I get involved in I look at three sources of risk – I keep it simple… and it has

worked pretty well for me. I look at #1 demand risk, #2 technology risk, and #3

execution risk.

First, from a demand risk standpoint, with Bucha, we have great category growth… and

relatively weak competition. There is a great built-in source of revenue to draw from

with one competitor that is $400 million in revenue. We just want our fair share of this –

which frankly we define as all of it.


Second risk, technology, here, we are the disruptive tech both vs. the rest of the

traditional beverage industry with a healthy functional beverage, but also vs. all other

kombucha’s in the sector, with our proprietary production process that is a real

competitive advantage.

The final risk to look at is execution risk. We define this as having the people,

processes, systems, information, and culture that leads to superior performance. Here,

in my assessment we have a long way to go. It is all about execution, but this is what

we know how to do. It sounds mundane, but in the beverage business, this is what it is

all about, and with búcha, it is not a question of if, it is just a question of when – how

long, it will take to achieve our goals.

Now before we get into how we will achieve success and some of our keys to it,

including how we will build the búcha brand, I’d like to ask Lanny Lang, our acting Chief

Financial Officer that comes via the Eventus Advisory Group, to review last year's

financial history and full year results.


Lanny Lang

Thanks Brent and welcome aboard. There is a lot here, and there has been a

tremendous amount of clean up over the past year, and I have been working on the

financials, supporting that transformation during that period.

Let me now take you into the details of the 2015 financial results, but let me please

caution you, that the results are 9 months under American Brewing leadership, plus 3

months under B&R, the previous owners. That combination for 2015 is being compared

to 12 months of financials under B&R in the prior year. It is confusing, but it is an

accounting requirement of the SEC to view the financial results in this way.

With that being said, on a full year basis ending December 31, 2015, revenue achieved

$2.42 million vs. $2.78 million in the prior 12-month period ending December 31, 2014,

a decrease of 13.2%. More than 100% of this decrease was related to two factors.

First, was the Company’s decision to exit one major account that was unprofitable at the

time of the acquisition. Second, in the transition from the previous ownership, other

accounts were also compromised. In combination, these two impacts totaled more than

$950 thousand dollars. So on an apples to apples basis, although it is a non-gaap

measure, sales would have been up more than 30% excluding those impacts, and we

expect to recover those accounts going forward.

Form a gross profit standpoint, cost of goods sold were in line with last year, up one half

of one percent, with the exception of depreciation and amortization of customer

relationships. Including those impacts, COGS increased 5% vs. prior year. Overall


gross margin for the year was 17.1% vs. 31.5% in the prior year. This impact is due to

a change in accounting treatment for freight, labor, and promotional expenses vs. how

the previous ownership accounted for these line items.

Independent of accounting treatment however, the gross margin for either 2014 or

2015, represents a “significant opportunity for improvement.” That ’s corporate code for

“its terrible”, historically, but a tremendous opportunity going forward at the same time.

A full cost accounting review by every single input into COGS and shipping and supply

chain is underway, in addition to a review of every supply arrangement and cost input

into the company’s products.

Moving on to operating expenses, they were down 24% vs. prior year. Great result,

right? Wrong. Because G&A was actually up over 103%, or more than $630

thousand…and what got cut was sales and marketing. That hurts the brand and the

long-term intangible franchise value.. In fairness, there was an ownership transition

integration, and other one-time expenses, and $320 thousand of the G&A was non cash

stemming from accounting for equity awards. Notwithstanding, the opex opportunity is

the next area of overhaul that we will be addressing.

At the bottom line, in Operating income, the Company lost $972.7 thousand on a full

year basis vs. a loss of $891.4 thousand in the prior year, or an increase of 9.1%.

From a balance sheet standpoint, assets are essentially in line with liabilities, with

current liabilities down a significant 52% vs. prior year, or a reduction of more than $619

thousand.


In summary, looking at the financial performance for 2015 it is difficult to draw definitive

conclusions given:

1) This was a year of acquisition and integration of the business

2) This was a year that also included a sale of the brewery business, …and

3) There were multiple moving parts in the integration, and multiple challenges

in maintaining sales and customers just before the business was acquired

With those caveats, a few things are inarguable that we believe are fair takeaways:

First, there is real sales momentum in the business in existing accounts, we believe

north of 30%. We had a few causalities in the transition, but we expect to regain them,

because our brand sells and sells well, in a fast-growing category.

Second, our cost of goods sold and gross margin is completely unacceptable. A

wholesale bottom up cost accounting of every input is already underway mandated by

the new leadership, and this is in the first week on the job.

And third, the balance sheet looks substantially better with significantly reduced debt on

the positive side of the ledger, but operating expenses are not being well controlled.

Fixable? Absolutely… but it will take fiscal and operating expense discipline, and

detailed work on the aspects of costs. How will we do that….. is why we have a new

CEO and leader ….with a track record of discipline and taking on difficult challenges….

and with that I’d like to pass it over to Brent to discuss our plan going forward. Brent.


Brent Willis

Thanks Lanny. Here’s how I read the 10K ...Underlying positive momentum with

customers and topline growth – a real determinant of health, and it looks ok.

But we were only in roughly 1,500 stores last year. Driving this is beverage industry

101 basics, and has the highest ROI of any activity.

The next germane point from the 10k, the gross margin and COGS, although it is

essentially the same as most of our competitors, is in a word, abysmal. We will fix it,

and it will take some heavy lifting – but we will get these things done.

I do give tremendous credit to the leadership over the past year in integrating the

business, cleaning it up, getting rid of any lingering issues, and paying down the debt –

on which they did a great job.

Because there is now such a solid foundation, it provides a springboard to accelerate

the Bucha live kombucha brand, and we are experienced hands at doing this, it is not

really that hard, but does take focus and discipline and unrelenting tenacity – fortunately

all tenets of our approach to driving businesses.

So let’s talk about our approach, what we're going to do, and from that - how you can

create a financial model on which to determine earnings expectations going forward for

the enterprise.


First off, what are we working with? What do we have to build on? Well, I am happy to

report that we have three sources of competitive advantage:

#1) we have a preferred flavor with búcha. In recent independent quantitative research,

búcha was ranked as superior in taste vs. competition, with a top two box score,

preferred or strongly preferred of 76%, or 43% above competition.

Why such a significant difference and preference of Bucha? Well, I personally believe

most of the Kombucha competitors have an acquired taste. It is quite acidic and

vinegary in finish, which frankly is appealing to a subset of consumers. What the

research tells us though, is that consumers prefer the mainstream appealing flavor and

balance of búcha. It still has the fermented tea notes and kombucha brewed flavor, but

because of our proprietary production process – unique in the industry, we end up with

an elegant, complex, refreshing, and clean, really beautiful product.

This brings us to our next competitive advantage. #2) our unique production process

that leads to búcha

a) being the most consistent product in the category

b) having the longest shelf life in the category with 9 months vs. many

competitors at 90 days. Implication – well it means it is easier for the retailer,

distributor, shipper, everyone – by an incalculable margin. Búcha is the only

competitor, that essentially has a functional/workable supply chain for major

beverage national distribution systems or future partners. – and,


c) the production process ensures, beyond a shadow of a doubt, that there is no

secondary fermentation - so as a result, no risk of increase in alcohol above

the FDA trace limitations – and

d) it is the production process – that leads to elimination of elimination of nasty

aftertaste associated with most kombuchas. Of course we have our secret

formulas and unique ingredients, that we keep locked up, but its our

proprietary processes that gives an enormous strength vs. competitors in

flavor profile, quality, consistency, and shelf life.

Our third competitive advantage on which to build is that we are actually significantly

outselling competition on an apples-to-apples basis in sales per point of distribution. A

review of IRI and specific customer data across key accounts over the past 52 weeks,

indicate sales of the búcha live kombucha brand significantly outpacing competition.

And this is despite a lack of promotional support, poorer shelf placement, virtually no

marketing, and the transition pains that the company experienced over the past year.

So, that’s what we have, now, what are we going to do with it? How are we going to

financially improve it, and how can it be modeled?

Here’s the plan – and we are only going to do three things…but we are going to do

them better than anyone else on the planet.

Number one, we are going to expand distribution in both depth and breadth. Last year

búcha was in close to 1,500 food, mass and specialty outlets. In the beverage industry,


your highest ROI driver is distribution. So far this year already, we have added

distribution in Shaw’s in the Northeast and Jewel in the Midwest to go with previous

distribution in Kroger, Safeway, Whole Foods, Ralphs, Vons and others, so we have just

eclipsed 2000 stores.

But, we are still in only 2000 stores, not 20,000 or 200,000 so we have a big upside in

front of us, and over the 30 days, I will be personally in front of customers representing

more than 5,000 outlets.

This is the first part of the model, and a good current input should be around 2,000

dollars in revenue per store per year for every new point of distribution. Take the total

number of existing and new outlets, and then take an additional multiplier by driving

more distribution depth.

What we mean by this is that we are only doing around $2,000 in net revenue per

individual store. But, this is done with poor relative shelf space, limited in-store

promotions, no point of sale, and no marketing. Winning at the Point of sale also has

significant ROI, relative to other investments, and we can expect to increase this shelf

throughput throughout the year, increasing our revenue per outlet multiplier.

The next thing we are going to do, and next part of the financial model, is to improve

cost of goods sold, gross margin and supply chain costs. We are going to do this

concurrently with our first strategy of expanding distribution.


We have already started the cost accounting line item review of every input, glass,

cardboard, production, warehousing, shipping, teas, fruits, and every ingredient and

production process to rearchitect our supply chain and significantly improve margin.

Today we have one outsourced manufacturer, in one location, in Southern California.

We ship finished good heavy filled glass bottles from there, to across the country,

refrigerated by the way.

In the future, we will have multiple production points and our distribution of finished gods

will be closer to the last 30 miles vs. today that’s more like the first 3,000, and all these

actions will have a very positive effect on our gross profit.

Also we are going to run a tight ship in opex. Financial model wise, G&A can be

expected to decline as a percent of sales every year, and I expect G&A to go from 44%

of net sales in 2015 to at least a 15% of net sales over time. But also within expenses –

last year we spent 10% of net sales in Advertising, Promotion, and Selling. I would

expect it to run closer to 20% of net sales over time.

In that statement is a very important distinction – the spending will be variable. There

will be no aggressive forward spend on marketing. It is stupid to advertise to empty

shelves, and that is why driving distribution is our first strategy. Then, as new accounts

come on, and revenue accrues from those accounts, we will intelligently spend back, as

a percent of sales to drive consumer offtake and sales per point of distribution.


So, in summary from a business model standpoint, one can expect topline growth in line

with that of the category, plus incremental topline growth coming from distribution

breadth and depth improvement. 2nd – a fundamental change in gross margin, and third

opex control with G&A running at less than half of historical levels, and with sales and

marketing at around 20% of net sales over time.

The last thing I want to discuss on the call today is our plans to build the búcha brand,

and you can bet your búcha we are going to build it. Why, - well to gain retail

distribution, retailers will require it, so there is no choice, one goes hand in hand with the

other.

We also have to build the búcha brand because in the ultimate analysis of value for our

company, the búcha brand will be our most valuable intangible asset. I had a

shareholder ask me, what about all the dilution you are going to cause me with a multi-

million dollar marketing campaign? The right question should have been, how can you

invest more in marketing to build the búcha brand to be the market leader faster. That’s

where the money and valuation is and desire from major potential distribution partners.

The second reason why we all want more spent in marketing, is the variable spending

principle – it means that if we are spending more, we are growing the topline more, and

only spending back, out of cash flow after we earn it. Even if we had more investment

or free cash, which we don't by the way, to invest in marketing, we wouldn't do it. We

would invest it in broadening distribution.


So what are we going to invest in? What is great about this category and this brand is

that it is very social media centric. This is not a brand for TV, print, promotion, or other

traditional…and expensive marketing mediums. On the contrary, we would argue that

those mediums are absolutely wrong for the brand. This is a quirky, all natural, 100%

certified organic, California, healthy brand, with 1 billion live microorganisms inside

every serving.

As such, the mediums to tap into people’s social graphs, to build the tribe and followings

amongst that group, can be done significantly more cost effectively. One of the key’s

here is to build core brand advocates, measured by Facebook likes, number of twitter

followers, and those types of targeted media. Here, we call our brand advocates –

búchadors, and we want to build an army of these fanatics tapping into the maslovian

belongingness needs of this target audience. It is our core búchadors that we will be

the tipping point opinion leaders from which to concentrically build out.

Consistent with the notion of building our tribe, we need an inclusionary rallying cry.

Our call to action will be built around the proposition to all consumers, to “Kom Bucha

with as”, an invitation to become a fellow búchador or búchadora. To become part of

the tribe, the “in” crowd, that is committed to all things natural, all things good, for the

environment, for their fellow búchadors, and for themselves. It is an inclusionary

message, and you can bet your búcha, we are going to have some fun with it. This is a

group that craves content, so the content we will …claim and rename as the authority


on “good, and good for you,” is anything related to healthy and healthy lifestyle –

especially as it relates to any beverage that we choose to put into our bodies.

The final component of marketing that we are going to invest in is continual new news,

with new and exciting, on-trend flavors. Consumers love trying new things, and they do,

especially in this category. This year we are rolling out 3 new flavors to compliment our

existing line-up including Lemon-Lime Ginger, Tropical Honey Blossom Ginger, and

Elderflower Green Tea. Everyone seems to love them and they were a huge hit and

highlight at the recent natural foods expo that búcha participated in. The elderflower

product has only 47 calories and is a perfectly balanced blend of organic black tea,

organic green tea, organic kombucha, and elderflower. It is crisp, clean, and

refreshing and aerobically brewed according to our secret formula for almost 30 days.

So, in closing, I would say this opportunity is fantastic, and I am energized and excite to

be a part of it. It may not be as big as some of the things I have worked on in the past,

but it will be, and it will be a very fun journey along the way.

We have a fast growing category, and it just getting started. The category is a disruptor

versus other beverage types, and búcha is a disruptor within the category.

Execution wise, this is not complicated, hard work, but not complicated. We have

something no one has our sources of competitive advantage in preferred flavor, in

production process, in quality, in shelf life, and in the fact that we are outselling

competition on the shelf.


These are foundations on which you can really build, a really big business, and tribe of

fanatic búchadors and búchadoras, inviting others to become part of our healthy organic

and natural movement. Thank you and we encourage you all to “Kom Bucha with Us.”

Documents

Introduction - Real kombucha. Unreal taste. Web viewConference Call . April 7, 2016. Introduction . Good morningand thank you for joining American Brewing Company, Inc.’s full year