Christopher Reed - Chairman, President and CEO Larry Tomsic - Interim CFO Neal Cohane – SVP, Sales and Marketing.

Joseph Munda - Sidoti & Co. Kevin Dede - H.C. Wainwright Alec Jaslow - Midtown Partners John Curti - Singular Research.

Good afternoon, and welcome to the Reed’s Third Quarter 2014 Earnings Conference Call. My name is Jaime, and I’ll be your conference call operator today. Participating in today’s call, we have Chris Reed, the CEO and Founder of Reed’s; Larry Tomsic, the Interim Chief Financial Officer; and Neal Cohane, Senior Vice President of Sales and Marketing.

Before we begin today’s call I have the 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, that are subject to the risks and uncertainties and that management may make additional forward-looking statements in response to your questions.

Therefore, the company claims the protection of the Safe Harbor and forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks, but not limited to risks relating to the demand for the company’s products, dependence on third-party distributors, changes in the competitive environment, access to capital and other information detailed from time-to-time in the company’s filings with the United States Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 13, 2014. Reed’s Incorporated assumes no obligation to update these projections in the future as market conditions change. I would now like to turn the call over to Mr. Tomsic, who will begin with prepared remarks..

Hello, everyone. Thank you for joining us today for the Reed's third quarter earnings call. This is Larry Tomsic, the CFO of Reed's, Inc. Here are some highlights from our third quarter results. I am excited to announce record net sales for the quarter of $12.3 million, which is a 22% increase over the third quarter in 2013.

Third quarter gross sales growth was driven by increased sales of 13% in Reed's Ginger Brews, 18% in Virgil's craft sodas, 19% in Kombucha, and 37% in private label. These gross sales increases were partially offset by a 4% decrease in our other product category that includes candy and non-core beverage sales.

Approximately 67% of gross sales comes from our core brand. 11% of gross sales were derived from Kombucha, 15% from private label and the remaining 7% of gross sales for the quarter were from the other category. Our gross profit for the third quarter increased by $709,000 to $3.9 million, an increase of 22% versus the prior year third quarter.

Our gross margin was 32% in both 2014 and 2013. We continue to see improvement in our Los Angeles plant production cost and efficiency.

Cost of goods sold, idle capacity is a measurement that we use for our plant overhead and direct costs in excess of the labor and other production costs allocated to finished goods that are produced in our Los Angeles plant.

Our idle plant cost for the 2014 third quarter was 3.4% of net sales versus 5% for the third quarter of 2013 and was $424,000 in 2014 third quarter versus $501,000 for the same period in 2013 due to cost reductions and production efficiencies. Operating expenses.

During the third quarter we aired our first national cable television commercial to support a strategic broad-based advertising campaign and believe that this campaign has positively impacted brand recognition in the marketplace. Net sales increased 22% for the third quarter and operating expenses increased 23% when compared to 2013's third quarter.

However, if you exclude the $407,000 that we spent on our television commercials, the increase was only $270,000 which is a modest 10% increase over the prior year third quarter. Interest expense was $195,000 versus $180,000 for the same quarter last year due to increased borrowing to meet the increased sales demand.

The result of our decision to invest in our advertising campaign reduced profitability but third quarter 2014 income from operations was $48,000, which is a slight increase when compared to $34,000 for the same period last year which had no national TV advertising. We are pleased to report a second consecutive profitable quarter.

Year to date profit after three quarters was $461,000, which is $0.03 per diluted share. For the nine-month period in 2013 the company incurred a $868,000 loss, so the year-over-year profit improvement was significant at $1.3 million. EBITDA also improved significantly year-over-year.

For the nine-months ended September 30, 2014, our modified EBITDA was $1.9 million versus only $255,000 last year, which is a $1.6 million or 637% improvement.

EBITDA adjustments for the three quarters were $1.3 million consisting of $536,000 of depreciation and amortization, $560,000 of interest and $318,000 for stock option and stock compensation expenses. On our balance sheet our cash and cash equivalents at September 30, 2014 increased to $1.7 million compared to only $1.1 million at December 31, 2013.

Net cash provided by operating activities for the nine-month period was $1.6 million and last year the company used $1 million. So cash generated by operations improved a whopping $2.6 million in 2014 versus 2013. This is primarily due to the $1.3 million year-over-year profit improvement.

As of September 30, 2014, the company had stockholders equity of $4.2 million and working capital of $2 million, which show significant improvements compared to stockholders equity of $3.4 million and working capital of $1.3 million at December 31, 2013.

The company's revenue has increased over 15% in the first three quarters of 2014 over the first three quarters of 2013. Reed's and Virgil's have grown 20% and 13% year to date and Kombucha sales have grown 51%.

Our private label category is down about 10% year-to-date but we have good private label orders in the fourth quarter including $1 million sale that should get us to breakeven for the category by the end of the year. Our other category has increased 1%.

We now believe that our EBITDA will be between $2 million and $2.25 million for the year, up from our previous guidance of $1.5 million to $2 million. This guidance assumes that the company reaches its goal to generate a net profit this year. It is now my pleasure to turn the call over to Chris Reed, who is the founder and CEO of Reed's, Inc..

Thanks, Larry. Another great quarter for Reed's. Very excited. The brand still pulling their own weight. Very strong growth of the brands. We moved - changed the model for selling in the marketplace from driving a - spending a lot of money in the trade to reducing the trade spend.

Last year in the third quarter we had a 13% reduction from gross sales to net sales and that was spent in trade promotions. And this year we were down at 9%. We have been trending down since our decision to do that.

We got to 14% in the fourth quarter of 2013, trended down to 10% in the first quarter and I think we have been running 9% for the last two quarters. So the big concern when we did that was that that would have an effect on sales, topline growth that might slow things down, to slow down the spend for growth.

So - but the great news is that we had a 22% growth in the quarter at a time when we took down the spend I mean 13% to 9%. So what, a 40% reduction in trade spend. So those are exciting numbers for us.

Looking forward, a couple of large projects going on now that we were talking about for a while, are the plant improvement in Los Angeles and a shift in the process - manufacturing process for the Reed's Ginger Brews. We expect to see both projects finished by the end of the second quarter of 2015.

And the West Coast renovation, effectively what we are doing is find new equipment for our bottling line. Equipment that runs about three times faster. The economics show that once it's up and running, immediately we save approximately $75,000 to $80,000 a month in automation, cutting out a lot of labor.

That ultimately, as we expand and utilize the equipment from - that’ll - we’ll be running it one shift at that time but when we move into second and third shifts, we will absorb a lot more of the fixed overhead and the plant will become even more profitable. But that one move should improve gross profit margins around 2%.

The modification to the method for growing Ginger Brew, for producing Ginger Brew, will probably net us to another 2%. So the goal for me -- one of our big projects is the improvement in processing, not only to open up more availability of production, having much more production under a roof and also lined up outsourced production.

We are hoping to -- so we will be able to cover sales up to around $120 million to $150 million off of the current relationships that we have. But more importantly, the economics are vastly improved by these changes in the process and changes in our West Coast plant.

And we would hope that by the third quarter next year when we are reporting, we will have margins up approximately 4% from where they are. The big news definitely within the company is that we had $13,000 of EBITDA last year and this year we are going to be north of $2 million.

If we haven't spent it on the TV advertising campaign, we might even be talking closer to $3 million. So that's a big shift for us. Whenever we can add 1 million of EBITDA a year, we have been pretty pleased with ourselves. Adding more than 2 is always a good year.

But the good news for us is that we have a plan in place to add another couple million of EBITDA next year. So these are going to allow us to play harder in the marketplace. One of the other big trends that it's little less tangible to us but we feel it here nevertheless, is just the conversations that are going on with the large beverage companies.

When you hear Warren Buffett defending his position in Coke and the marketplace saying, Coke's in trouble. And what we're seeing is that that really the conversations elevated in October.

Third quarter results have been under high scrutiny and people are really starting to question just from an economic standpoint and a financial reporting point of view, the viability of these larger companies.

So what we're seeing, if customers are starting to reach out more to us, trying to preemptively get involved with products or shift their product mix so that the slowdown and year-over-year decline in their Coke sales, they can somehow stem the tide there.

So I think it has been going on for a number of years but I think the conversation has been elevated in the last few months in a way that we haven't seen. And some of the companies getting hold of a trade now and talking about potential partnerships are very -- they are [bunched] [ph], they are big and they are interesting and exciting.

So we're pretty excited about that trend. We don't know other than Coke and Pepsi getting more like Reed's, we don't know how they are going to stem the big cultural shift away from chemical and toxic foods, in my mind. So that's exciting for us.

On the marketing side, of course this was the first quarter that we have put together a national TV advertising campaign. I know everybody is interested and excited to hear the results of that. We ran a lot of the ads towards the end of September, end of the quarter. So we are still evaluating the results on that.

But also we engaged a social media company and our web traffic is up 60% year-over-year and the, kind of, Internet chatter is up about 300%, Facebook and social media type promotions. If you had a chance to -- Inc.

Magazine interviewed me and created six videos that are out now and there's been about 4 million views of me talking entrepreneur to entrepreneur, and that's been good because we were leveraging that to get more exposure for me as the CEO, as an entrepreneur, and a successful entrepreneur, trying to talk to people who are interested in that kind of stuff.

So we are looking forward to 2015 to get a lot more press for the company. Recently we went to the National Convenience Store Show and that was the first time we have been there and - well, actually no, it wasn't the first time. We were there about seven or eight years ago. But this year just felt different.

People were really looking for options, new options and they were willing to consider for their cold boxes something different than what they have been doing.

And I know it's very dominated by the big beverage companies and especially the energy drinks, but we picked up a significant amount of new business that we will probably report on more in the future and definitely during the fourth quarter when we overview that that will be, we will talk more about the NACS Show.

We, of course with our financial results we have gone out and done somewhat of a exhaustive search for a new bank. We have been paying - we have a $4.5 million line collateralized by inventory and receivables. The effect of all-in, after all costs are added up, it's costing us about 14%. That made sense three years ago when we signed the contract.

The new -- we are currently hoping to sign with a top 10 bank. Our first banking relationship; we are in due diligence right now. We have about eight banks that have expressed interest. And we can say - I think we can comfortably say, Larry is here, that we will save about 50% or more on interest next year based on the new rates that we are seeing..

Yes. We are excited about that and we hope to have some good news in that front within the fourth quarter..

All right. Yes. Let's see, we also -- I think we gave it the right press but we are very excited about the Coffee Kombucha launch. The way we are looking at it is that Kombucha for the first 5 billion in sales has been a drink that has been grown - the culture has been grown in tea and made a probiotic tea.

So we have just morphed Kombucha to include coffee. So we built and grew the drink in a coffee base instead of tea base. We are in highly active in R&D now that we are relaunching the first drink here at December 1st.

We have most of our largest distributors already have authorized the product and a lot of our large customers that buy from our distributors. Retail customers have also authorized the product. So it’s - I know that we just send out about 30 or 40 packages to press that have asked to receive their first samples of this.

We did bring it to our big trade show, Expo East, out East in September and the results were very, very strong. We consider it an exciting innovation. We had started with putting coconut water with Kombucha. That was our first marriage of two big category - beverage categories.

And we think this one is significantly bigger play and it's a very interesting drink when you get a chance to try it here shortly. So the plant improvements on the West Coast, all the equipment for the plant improvement has been secured - at least deposits have been put on it.

And the company that's going to help us install this is engaged, so we envision equipment going in towards the end of this year but fully operational by the second quarter.

And I am giving us till the end of the second quarter to fully be operational but we will be phasing the equipment in - the new equipment as we are running pretty much full-time here. So we are going to -- it's going to be a little bit of a logistics thing, but we have a pretty good plan for it.

And the new process for making the Ginger Brew which has an equal economic benefit to the company, we are running trials on that. We have been since August. We will continue running those trials and we expect to morph over in February of next year. But we are moving that project along. I think that's mostly what I wanted to cover today.

So at this point I am going to open up the phones to questions..

(Operator Instructions) Our first question comes from the line of Joe Munda with Sidoti & Co. Please go ahead..

Good afternoon, guys.

Can you hear me okay?.

Yes, Joe. Nice to talk to you again..

Chris, comments about the new equipment. Just wondering how much is that going to cost you for the remainder of the year and I guess going into the next year..

Right now we're planning to lease the equipment. So we are not going to have any out-of-pocket cost. And we have put deposits down, we have a couple of hundred thousand in deposits on approximately $1.3 million for the equipment. There will be cost that we can't put into the lease.

We are figuring it's going to cost us $200,000 or $300,000 over the next six months in terms of operating CapEx type expenses. And most of that will be the auxiliary parts of installing equipment. Electrical, utilities etc..

Okay.

I am sorry, how much of that you think is going to be capitalized?.

Well....

The labor cost would all be eligible from an accounting standpoint since it’s new equipment. So we could capitalize the whole thing..

Okay. And as far as -- you talk about tripling the, I guess the efficiency of the bottling line.

Can you go into a little bit more color there As to what exactly it's going to do and as far as labor costs are concerned, are we expecting those to come down dramatically going forward? How should we model that, I guess?.

Yes. What is happening exactly is, we have a 20-head filler running 100 bottles a minute. So we are going to put a 78-valve filler on there that will run close to 400 bottles a minute. The equipment we are bringing on board is automated equipment.

So where we have two people putting bottles on the line manually, we will have one person running a piece of equipment that will put bottles on it, 400 bottles per minute. When we are modeling it, we are seeing we are going to have the same amount of labor to run the line but in reality a lot of the -- currently the packaging line isn't automated.

So the boxes and the four packs are kind of being made manually. So it will have an automatic - new equipment that automatically builds the four packs, the packaging, puts it in the boxes. And then the bottles after they are filled and labeled and pasteurized, will be put into those boxes and automatically stacked on to pallets.

So in theory we will have less people than we have now and the line will be running three times faster. So our labor per case should go down at least by 67%. So it's a significant improvement and that's why ultimately we see ourselves -- the plant has a payback of somewhere around 1.5 years to 2 years with our current volume.

But it will probably be saving 1.5 million a year in a few years over what we are doing now..

Okay. That's helpful. As far as the ad campaign was concerned, if I recall it was kind of a, a little bit of a trial for you.

Are you happy with the results and you continue to think that you're going to spend roughly $400,000 a quarter? Are we expecting that to ramp up as we go forward?.

The way I envision the ad campaigns kicking in, there is two answers. One is, I am first looking for the savings, the extra four percentage point of gross profit margin before I kick in any big advertising campaigns. This quarter we were anxious to test and trial TV to see what it would generate for us.

But in reality, we probably wouldn't spend all of our profit.

As we try to give direction, like for instance next year, we look to generate about $4 million of profits but we are going to spend about $2 million of that on advertising, which will be about $500,000 a quarter, but are probably not going to kick in the advertising programs until we have kicked in the savings from the new modification to this facility than the new process for Ginger Brew production.

So we are going to wait to finance that out of increased profitability. In terms of how do we field up a TV campaign. It is competing against many other marketing programs that we have done in the past and are currently trialing out. So it will live and die by its return on investment compared to other marketing that we are doing.

So now is the time, we are doing large evaluation on what marketing programs are going to be in place for 2015. And we have apples, peaches, pineapples and other weird fruits to compare these different models. They are very different marketing programs from social media to TV to print to just good old-fashioned demos.

But we are trying to do it scientifically, economically from a return on investment. So a bit of those studies are going on now. So I can't say since TV is still being evaluated, the results won't be in until the end of the fourth quarter. We are not sure exactly where it plays.

But I think it's probably -- there are a lot of intangibles that came from TV advertising. We were at the NACS Show in Vegas, the largest convenience store show in the country. And it was great to have people come into the booth and say, yes, we saw your commercial and what is this Ginger Brew stuff. So it has an effect.

But a lot of the things we do, we look for immediate return on investment and immediate topline growth from it, and for instance, just going into a supermarket chain and buying [NCAPs] [ph] on the 4 July, we will spend the exact amount of money and we will get a specific purchase order for that additional product.

Those are things that tend to -- we have a very definitive return on investment on that. And they tend, because of the way we are, to grab our attention more..

And then as far as my final question is concerned, how many new doors did you add in the quarter and any update on Whole Foods? Thank you..

How many new doors did we add for all of our products?.

Sure..

That's a good question. I mean we obviously had some big, that we announced in our press release, we had some big wins, including new distribution partner with RC in Asheville. I am just reading it myself. We picked up Reed's and Virgil's in the Lowes Foods supermarket.

One number I do know, our street people have picked up about 1000 new accounts since May. And I think our key national accounts, we have probably picked up another 500 stores. But the other thing is the distributors are bringing on accounts on their own besides the 1000 that were brought on since May with our own street sales force.

So I don't have an exact number but I figure that probably during the quarter we probably picked up another 1000 accounts, would be my guess..

Okay.

And then on Whole Foods, any updates there?.

Whole Foods, things are going well at Whole Foods. Nothing new to report on Whole Foods. Just good solid growth along with the rest of our customer base..

Okay, thank you..

There was one thing I forgot in my dialogue to mention, that I thought was very significant. We did a presentation to one of the largest national retailers in the country during the third quarter. And we bought IRI data, a Nielsen type data for that store for their full complete sales of their soft drinks.

So we evaluated the soft drink isle in one of the largest supermarket chains in America. And we were going in there to pitch to ask for more of our items in there, right now we have one of our products on the shelf competing with all the other products on this 80 foot set.

And I wanted my salespeople to evaluate, or as to elevate the amount of gross profits that we generate per shelf placement.

And - because we wanted to go in there if possible and not just say, please carry a natural product for your natural customers, someday you won't regret it financially, because we are nowhere near what a big soft drink company generates in terms of profitability on the shelf.

We were very surprised because we have a higher margin product to the retailer and the national brands work on much smaller margins, we actually generate more gross profits than most soft drinks in America. And that was a different conversation when we went into talk to this national chain.

We were no longer asking for a feeling, like instead of the feeling being, we are asking you for a favor and you are trying to placate a customer who is into natural and maybe gourmet.

It was - now the conversation was like, if you're into business, if you're into the economics of your business and you like making money, you need to put more of that shelf to Reed's. In terms of where we lay in the ranking of profitable brands on the shelf, I would say arguably one of the top.

Not just a good player, not just in the lower third, but one of the most profitable sodas in the soft drink in this particular supermarket chain. That was an eye-opener..

[Operator Instructions] Our next question comes from the line of Kevin Dede with H.C. Wainwright. Please go ahead..

Congrats on the great numbers..

Thank you..

And you too, Larry. You ran through your product mix pretty quickly. I got, I think 67% for core and 16% for Kombucha but I missed the [lemon] [ph] in the selling..

You are asking about the third quarter increases?.

Yes. Third quarter product mix..

Third quarter product mix is....

It was in your prepared remarks and just came out really quickly.

And Chris for you, I'm just wondering if you could give us a sense of how Kombucha, granted it's very growth, just curious to see how you see that playing out in terms of mix for the year in light of the coffee launch versus last year?.

Yes. The coffee launch itself won't be a big impact on the financials for this year. We will get it launched in -- if we get $50,000 or $100,000 out this year, we will be doing good for that. It starts out as a new revenue stream and then there is a whole introduction to it, to the marketplace and the sales.

So it will be -- we consider it will be significant for 2015. Kombucha sales for the first nine months were 51% but in the third quarter they were up 19%.

And there was some hiccup in terms of -- we were out of stock in May, towards the end of May for about two or three weeks because of a glass shift in packaging that we reported on in the second quarter. So that actually did slow down the third quarter a bit from extending and we are seeing pickup in the fourth quarter on that.

The other thing that we are noticing too is, we are having very high growth in supermarkets with the Kombucha. We have I think a more by palatable Kombucha to the current one, so we are not doing as well in natural foods but we are doing great in supermarkets and right now supermarkets and Kombucha is where the real growth is happening.

Supermarkets around the country are noticing the high double-digit growth of Kombucha and are all moving in and I guess rushing to get their own Kombucha sets in. So we envision that helping us because we are becoming a stronger player there then even natural foods.

It's not like we want to give up on the natural food customer but we go with the flow when it comes to new business. Reed's was up 13% in the quarter, 20% for the year. Extra Ginger Brew was up 26% in the quarter with the year to date up 31%. It's all that [Moscow mules] [ph] being built.

Virgil's was up 18% for the quarter, 13% for the year, Kombucha as I mentioned. Private label which was down in the first half of the year, it's actually down 11% through the three quarters. Was up 37% in the third quarter.

I can say, giving a little guidance for next year based on the new private label business conversations, things that are going on here. We will see good growth on private label next year based on what's going on. So I think we have had good growth with private label in the past. We still love what it does for us in terms of creating relationship.

We are seeing it as the first foot in the door in some of the larger national retailers and then our brands follow that initial private label relationship start. So anyway, that's going pretty exciting for us..

Kevin, the product mix for nine months for Reed's, the ginger beer family of products is 36%. Virgil's is 34%..

You mean in overall?.

Of sales. Yes. Yes..

Yes, okay. Yes, versus increases, I think that was his question. 36% ginger beer, 34% Virgil's, 13% Kombucha, 10% private label and 7% for other.

Did we answer your question, Kevin?.

Yes. That's very helpful. Thanks, Larry.

Just in curiosity sake, 13% Kombucha for the nine-month, could you give me a ballpark from where it was in 2013 [off hold]?.

In 2013 for the same nine-month period it was 10% of our total sales, company sales. It is becoming a larger part of our product mix..

Great. Okay. That's very helpful. Yes. Thank you. All right.

And, Chris, you mentioned that you are not expecting to see the stats, the full review of the stats of the trial campaign launched on advertising until the end of this current quarter?.

Yes. .

Yes, I got that right.

So can you just give me an explanation of so why you think it takes them so long to crank through the numbers?.

Well, the way we are evaluating is, what did it do to sales. And we ran the first half of the ads towards the end of July and the second half ran towards the end of September. And generally a consumer will go out and will increase purchases at the store level. That's the theory.

And our distributors -- the stores would then run out of product, the volume would go up at the store level and then they would be purchasing more from our distributors and our distributors will be purchasing more from us. So there is probably a six-week lag on the second half of the advertising. So it would fall deeper into the fourth quarter..

Okay.

So the numbers that you are looking at will be reported to you via the distributed then?.

Well, no. With our sales to distributors..

Right, right. Okay..

You are right. We could probably run some reporting from -- directly data from the distributors themselves on what they are delivering. But we are looking at our sales increases that would happen as a result of the advertising..

Okay. Sensitive topic.

I was wondering how much you [indiscernible] are, feel comfortable disclosing regarding your changes in, or potential changes in the way you are handling distribution on the East Coast?.

Which changes are you -- talking about?.

Well, you talked about plant improvements in the West Coast and you talked about reformulation and production? But I'm curious if you can offer any insight on your decision-making regarding how you are handling East Coast distribution and production?.

Production on East Coast is what you are talking about. Yes, we are keeping our current--.

Yes, production and distribution with....

Distribution model moving forward. Anheuser-Busch MillerCoors distributors for mainstream and our natural food distributors for the natural food industry. But in terms of production, we have a new style, new method for making ginger brews and it allows us to go out to non-brewery environment for manufacturing.

And once we perfect it, we will be getting quotes on that and we expect to -- we have already talked to our current facility and told them that, that this is going to be a lot easier for them to produce and we would like to benefit from that little savings that will come along.

So in order for them to remain competitive, I'm sure that they will be working with us to improve our economics there..

Very good, okay. Last question for me. I know that the coffee product is unique and I'm curious still to know how you have tried to protect your process, development of your process there? Just from competitive forces and piracy..

Well, we have that dilemma since day one because we are the world's first commercially brewed soda. There has always been thoughts of patenting different ideas but once you patent something you have to disclose your trade secrets to a large degree. And our technique here is just to try to keep the formulas and process as secret as we can..

Okay. Fair enough. Thanks, Chris and congrats again on a nice job..

Hey, Kevin, Kevin. Is this H.C.

Wainwright, correct?.

That's absolutely correct..

Yes. Because he introduced you as H.C. Warren..

Oh, okay. Well, I am in a loud environment and I wasn’t really clear on that. I did is spell it out for the people though. So hopefully....

Thanks for initiating coverage on our company during the quarter, Kevin..

Oh, yes. No, I think that we will both share in those rewards. Chris, keep up the great work..

Thanks. And our next question comes from the line of Alec Jaslow with Midtown Partners. Please go ahead. .

So is still trying to understand what happened with Kombucha.

You said you had some issues with it being out of stock but if you had to go from the 19% increase to what it typically is, 50% increase, do you know how much was attributed to some of the operational issues?.

I would say the difference between 50% and 19% was the difference..

So all operational?.

The shortage of -- having being out of stock for a couple of weeks was operational..

Okay.

So there wasn't any competitive related pressures or mix between supermarkets versus natural food stores that were slowing down sales?.

No, not that we were seeing..

Okay.

And if you could just help me understand why the Kombucha is not doing as well in the natural food stores? If you're getting any feedback or just have any idea of what's going on there?.

Well, I think our growth is going so strong in mainstream because the mainstream supermarkets have more recently embraced the Kombucha phenomenon. And five years ago -- I mean five years ago, natural foods is already 10 years into the Kombucha craze, and supermarkets didn't have any Kombucha.

So year-over-year, 2012 to 2013, it was a 73% growth, I believe was the number year-over-year. And that got everybody's attention. So there is just a lot more interest in creating shelf space right now for Kombucha in mainstream. And I think that we are doing very well.

We are still number two and supermarkets for Kombucha and number two in natural foods. We have passed in our first year many of these established players out there. So we are the number two national brand on this. I think that we started out in natural foods with a very intense advertising, marketing, discounting launch on the product.

So I think it's not a surprise when we take our foot off the gas pedal that we are not going to see the same intense growth rates there but we're still seeing great growth.

In natural foods, still a long way to go with our, in most stores still we have four of the eight flavors although the four flavors, the four new flavors that we launched second, have been getting much more placement in the marketplace. They have been expanding their ACV, so to speak.

But I think it's just, we are seeing a tremendous opportunity in supermarket right now..

Okay. That’s great. And in terms of the other Kombucha players.

And who's taking share from GT as well? Have you seen any trends there? What are the competition doing? Just be helpful to kind of get a better idea of what's going on with the Kombucha?.

You know there are a couple of national people that have been around for a while but they are very small. I think there is Bucha and LIVE Kombucha. They are in a way national players. But we pushed them and we went way beyond them pretty quickly in the natural food industry.

Then tend to -- they are more mainstream products so they are actually doing okay in the supermarket trade. I am trying to think of....

Are they -- is there anyone close number three or they pretty far back?.

They are pretty far back. The most successful other players in the marketplace beside the two other nationals I just mentioned, the regional players are finding that they are -- having a regional play has been strong. So there a North Carolina, I think they are called [Bucha] [ph] or Buchi.

And then the other player, Townshend in the northwest, have been doing very well. Staying concentrated and highly focused in a tight geographic area. And I think that’s probably us in those particular areas where you have not only a super strong number one with GT but then a very close second with the regional guy.

We have had more trouble penetrating those markets because they seem to like the regional guy and the national guy and there is less bandwidth to think about Reed's. But you know some of the beauty of where we are as being national, we have been putting more and more exposure out on the national level with Kombucha.

The press will get, with the Coffee Kombucha and the samples going out to 30 or 40 large press magazines and editors around the country. This kind of will keep hammering on a national basis.

We have done a number of print ads nationally that the local guys are going to beat real hard more locally and we are going to have more of a national presence to it. I think long term we will eventually win that contest..

Okay. And other questions. Can you give any -- private label did great.

Can you give any more details about the jump in the third quarter? Should we think about that momentum continuing?.

Well, I think some of it's just timing on delivery. Some of it we delivered earlier this year and it was fourth quarter business last year for us. So there is a small amount of shift to the third quarter on that. But what's really happening, in fourth quarter a lot of what we do are specialty items and that’s really a fourth quarter play.

And what we have found is that a lot of these people dabbled with us last year, this year this is a lot of more confidence based on last year's results to up the ante. And we are getting larger orders on products but now we are getting -- this year we have brought on some new people and their results were tremendous.

And when they came back to us this year and asked for second and third order, we told them look, we have really already booked all of our production for the quarter. So we know that each year our fourth quarter and third quarter.

So we know that each year our fourth quarter -- third and fourth quarter business will continue to grow because we are viewed as a specialty item But I think that we already can say an announce that next year we have got some yearlong business that we have brought on that will be significant. And you will see a much better private label year.

And think it will be a while before we can delineate exactly how much better. I don’t think I can say I had 37% in the third quarter, you will see that ongoing. But we should go to double digit growth next year. Some kind of double-digit growth..

Thank you. Our next question comes from the line of John Curti with Singular Research. Please go ahead..

Just a quick look through your 10-Q that you put out. I notice that delivery and handling expenses were up a little bit relative to the sales increase. I was wondering how long that might continue.

It looks as though you are still having product made by these co-packer in Pennsylvania for the West Coast customers and you are also offering some delivery terms to some new customers.

So I'm trying to get a little better handle on maybe how long those elevated delivery and handling expenses might last?.

Yes. They can go up and down depending on what kind of business we are doing. For instance we did, I think Larry mentioned we did $1 million private label order in the third and fourth quarter with one of our large customers and if we have negotiated that to be, freight included, and handling the delivery on it, actually I believe we did on that one.

Depending on what quarters it shows up and it's going to move that number up or down. But in terms of the West Coast facility, it will probably start saving freight, which is another big savings to look forward to. I mean next year it's going to be the labor cost reduction. The freight improvements, producing more on the West Coast.

We probably push from 40,000 to 80,000 cases a month back to the East Coast. And that has a significant cost included in the freight for that. The other big improvement of course will be our interest rates will be much lower next year. So we have a lot to look forward to in terms of cost savings here..

So a couple of hundred basis points on the gross margin from the efficiencies at the plan, reduced interest expense and then lower freight and handling expense..

I am going out on the limb here and I am going to say that the improved process for Ginger Brew is going to get us another couple of hundred basis points next year by the third quarter..

And that’s because you are placing it with people closer to your customers?.

No, not necessarily. What we are doing is we are producing a much streamlined -- it's actually, you know in the industry when you go to make a micro beer, co-pack a micro beer, you probably wind up spending $2.5 to $3 for a co-pack fee.

When you go out in the industry and get a soft drink, even the craft soda produced, pretty straight forward simple craft soda process, you might pay $1.50 to $1.75. So there is a good $0.75 to $1 saving between the processes that we have developed here. And we produce approximately, next year probably 1.8 million of cases of the East Coast.

So that will be significant savings. We consider it -- my goal is couple of 100 basis points by the third quarter. And quite frankly with that I am hoping to see the benefits in the first quarter, starting in the first quarter and being fully on board in the second quarter. Some point in the second quarter.

So the goal is to have both projects done by the end of the second quarter. But they will be phasing in somewhat lesser in this first quarter and more heavily in the second quarter. So we will have benefit in the second quarter, we will have full benefit by the third quarter..

And the status of the additional packer that you have in the Midwest.

Will they be accessing some of this new way of doing the Ginger Brews?.

Not initially. And thank you for pointing it out. That was the number one of our third quarter highlights that I forgot to put in there. We did bring on a third co-packer. They are in the Midwest. Kind of between the Midwest and New England.

And they are taking up some of the slack right now because we have maxed out -- at different months we max out the production on the East Coast. So when we get to busy, we go out and have them produced. So they produced in the third quarter for us. And they are kind of, right now for the moment they are a backup.

It's still more economical to run mostly our soft drinks, mostly our Virgil's line at the East Coast facility, than it is to run at this other facility. But their economics workout when we are not able to run enough of products and instead of losing the sales we produce at this facility right now.

But it's nice to have another facility that can handle 20 million or 30 million in sales..

And then, I kind of ask this every quarter, what's going on up in Canada?.

I am kind of glad you asked that. Because actually my sales force gave me a little note and said, it says Canadian update. So we hired a Director of Sales in August. 20 years of beverage experience. Coca-Cola [indiscernible]. And the new accounts being activated include a bunch of supermarket and convenience stores up in Canada.

And I don’t want to announce all of them right now because I think each of these are probably worthy of a press release. Let's just say, Canada is engaged.

Neal, are you there on the phone?.

I am..

What's going on with [Lasan] [ph].

Are they part of this?.

Yes. Absolutely. So we have a good strong veteran up there right now creating a lot of activity. So we are right now potentially seeing some fourth quarter openings of new stores. So stuff that we have been waiting to have happened for five years is going to happen here in the next couple of months. So more to come on Canada, but we are engaged..

Because I know in the past, Chris, you had said that [Lasan] [ph] was very slow mover and I just wanted to know if anything had changed there in that respect..

Well, yes. We have hired a veteran with [40 years] [ph], who can go out there, hold their hand, make them set up the appointments and start, basically catalyzing the sales there. But it almost seems like the bigger the customer, the more potential, the slower they move. And we are seeing plenty of that.

But even some of the very large customers that we have brought on over the years, I mentioned that we sat down with the actual IRI numbers with one of the largest retailers in the country and pointed out that we are making more money off of our products than any of the other. And while we ask for an ungodly amount of shelf space it made them chuckle.

They did double down, triple, quadruple down the products in the store just because there was great economic sense to upping our relationship with them. So these are big guys. We got into them a lot of time ago. It just seems that the whole thing just takes time to get the big ball rolling.

And Canada will now finally start moving now that we have committed to our investment there. I think that we have finally got the equations there..

Yes, Chris, if I can jump in real quick. And the other key to Canada, it's a little bit different in doing business than it is in the U.S. But one thing happens is, products show up through natural food distributors also up there and retails tend to get out of sight, not only for us but for all our competition up there. Retails are outrageous.

So it becomes a very slow premium sale. What we are doing, what [Lasan] [ph] affords us to do, is to get the product cheaper to the market. And we will start being the hottest price store, the more competitively priced premium craft soda in the market. That’s going to be the benefit and that will create a whole lot more trial..

And the lastly, Chris, you alluded to a little bit earlier in your comments. It does seem like a lot of the retailers want to go with one or two national brands and there maybe just one or two local brands. Everybody is playing out, let's produce 50 miles from here, 20 miles.

How are you going to be able to counter that if the perception is that you are kind of a national brand? How do you get in there?.

I don't think -- you said one or two national brands, we just want to be the two national brand. And I don't think we have an illusion that anytime soon we will be doing $250 million of Kombucha. But as long as the retailer -- we are a compelling story. The number one brand goes in there and it tastes really funky to a new consumer of it.

Obviously their numbers speak for themselves and they all say, well, you go in but while [indiscernible] tastes really good. And they go, well, that's great. And we give them instead of a 30 day shelf life, we give them 180 day shelf life. That's a big deal to a retailer in a new category.

Because he's going, oh my God, I am going to be throwing away in 30 days a lot of stuff if this doesn't sell. It takes a lot of pressure off of them..

:.

Thank you. And that does conclude our question-and-answer session. I will now turn the conference back to Mr. Reed..

All right. Thank you very much. Look forward to talking to you at the end of the next quarter..

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and please ask that you disconnect your lines..