Lawrence W. Tomsic - Interim Chief Financial Officer Mark Beaton - Chief Operating Officer Christopher J. Reed - Founder, Chairman, Chief Executive Officer and President.

Good afternoon, and welcome to the Reed's First Quarter 2015 Earnings Conference Call. My name is Mike, and I will 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; Mark Beaton, the Chief Operating Officer; and Neal Cohane, Senior Vice President of Sales and Marketing. 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 that are subject to 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 for 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 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, May 11, 2015. Reed's Inc. assumes no obligation to update these projections in the future as market conditions change. I will now turn the call over to Mr. Tomsic, who will begin with his prepared remarks..

Hello, everyone. Thank you for your interest in Reed's Inc., and thank you for joining us today for the Reed's, Inc. 2015 First Quarter Earnings Call. In addition to the press release issued today, we have also filed our 10-Q for the first quarter of 2015. 2015 first quarter results.

Driven by our Reed's Ginger Beer product line, we achieved record gross sales for the first quarter in 2015 of $11,351,000, which represents a 12% increase over the first quarter of 2014 sales of $10,122,000. It also represents the eighth consecutive quarter of sales exceeding $10 million.

Gross sales growth was driven by a 33% sales increase in Reed's Ginger Brews that represented 43% of gross sales; a 12% sales increase in Virgil's craft sodas that represented 33% of gross sales; and a 23% sales increase in private label sales that represented 7% of gross sales.

Kombucha sales declined 36% versus the first quarter of 2014 but only 3% versus the first -- fourth quarter of 2014. We encountered some temporary out-of-stock situations, which affected sales, but now have plenty of batching material to meet the increase in demand.

Sales of our other product category that includes candy and noncore beverages declined 1% and represented 8% of gross sales. Our top line promotional activity decreased significantly to 6% of gross sales versus 12% in the first quarter of 2014.

This resulted in net sales growth of 19% for the first quarter of 2015 or $10.7 million versus $9 million for the first quarter in 2014. Our gross profit increased by $356,000 to $3,259,000, which is a 12% increase over the 2014 gross profit, which was $2,903,000. The 2015 gross margin profit percentage was 31% versus a 32% gross profit in 2014.

Our Idle Plant costs increased to $668,000 in the first quarter 2015 from $470,000 in the 2014 first quarter, which was a $198,000 increase due to increases in workers' compensation expense related to new employees, additional depreciation expense on new machinery and equipment and a 4% -- 14% decline in cases produced in the Los Angeles plant.

The 2015 Idle Plant Capacity expense was 6% of net sales versus 5% of 2014 net sales. We leveraged our operating expenses in 2015. Net sales increased 19% from 2014 to 2015, while operating expenses increased only 13%. Operating expenses as a percentage of net sales decreased from 33% in 2014 to 31% in 2015.

Delivery and handling costs increased by 31% to $1,169,000 in the 3 months ended March 31, 2015, compared to $895,000 over the same period in 2014. This $274,000 increase is primarily due to the 19% sales increase and an increase in delivery costs due to a 21% increase in the average miles per shipment.

Warehouse costs also increased $29,000 due to increased production at our East Coast co-packing facility. Delivery costs and handling costs as a percentage of net sales increased from 10% of 2014 net sales to 11% of 2015 net sales.

Selling and marketing expenses increased $125,000 overall to $1,193,000 in the 3 months ended March 31, 2015, from $1,068,000 in the 3 months ended March 31, 2014.

This increase over last year is primarily due to an increase in trade show expenses due to participation in more trade show events this year, increased broker commissions related to the sales increase and increased compensation expenses including stock options.

Selling and marketing expenses were 12% of net sales in the first quarter of 2014 and declined to 11% in the first quarter of 2015. General and administrative expenses declined from $972,000 in the first quarter of 2014 to $968,000 in the first quarter of 2015 and declined as a percentage of net sales from 11% to 9%.

Interest expense for the first quarter of 2015 was $200,000 compared to $188,000 in the first quarter of 2014. The increased interest expense is due to additional purchases of machinery under the capital expansion loan and additional leased equipment purchases.

However, the company's effective interest rate was 13.5% in March 2014 and was 9% at March 31, 2015. The operating loss for the first quarter of 2015 was $271,000 versus $220,000 for the first quarter of 2014 due to a higher cost of sales and increased freight costs.

EBITDA increased $106,000 for the 3 months ended March 31, 2015, versus the March 31, 2014, quarter since EBITDA adjustments totaling $157,000 for the quarter ended March 31, 2015, were greater than the $51,000 increase in the quarterly net loss. $32,000 increase in depreciation and amortization was due to the additional assets purchased.

$12,000 increase in interest expense was due to the increased loan balances, and stock option compensation expense increased $113,000 due to additional options granted to employees. Liquidity and capital reserves.

As of March 31, 2015, we had stockholders' equity of $3,624,000, and we had working capital of $2,227,000 compared to stockholders' equity of $3,652,000 and working capital of $2,207,000 at December 31, 2014.

Our cash and cash equivalents at March 31, 2015, increased by $262,000 to $1,221,000 at March 31, 2015, compared to $959,000 at December 31, 2014.

Net cash used in operating activities of $458,000 for the 3 months ended March 31, 2015, was primarily due to the operating loss, plus an increase in inventory levels of $2,048,000, partially offset by accounts payable increase of $1,267,000 and other balance sheet activities.

Investing activities included 356 -- $351,000 used to purchase machinery for the Los Angeles plant. And $1,104,000 in financing activities was primarily due to the $171,000 additional cash borrowed on the line of credit. Balance sheet.

The $2 million increase in inventory was planned to meet sales forecast and in an effort to reduce out-of-stock options. We believe that this strategy will allow us to fulfill orders faster and will also reduce our shipping and handling expenses. The company purchased new fixed assets of $561,000 primarily through the new capital expansion loan.

Substantially all the assets purchased were for the Los Angeles plant expansion and improvement project. Outlook. Reed's expects continued growth and strong demand for its core brands during the second quarter with [ph] gross margin improvement versus the fourth quarter of 2014.

For the full year, the company's net sales target is $50 million with moderate profitability. The forecast does not include anticipated improvements in net income from the plant modernization program that is anticipated to lower labor costs and result in lower cost of goods sold in the second half of 2015.

Now it is my pleasure to turn the call over to Mark Beaton, the Chief Operating Officer of Reed's, Inc..

first of all, provide the capacity and infrastructure by which our sales organization can efficiently and profitably deliver our growth objectives; next, eliminate waste and reduce operating costs through improved operating efficiencies; and lastly, build operations, competencies and skill sets.

Now I'd like to provide an update on our Los Angeles plant optimization project. Our plant upgrade is being designed and co-managed by a company called CtR, which stands for Conception to Reality, an engineering and project management firm that specializes in beverage plant design and construction.

CtR has been in business over 21 years and has worked with more than 125 beverage facilities across both the U.S. and Canada. I am impressed with their ability to deliver on our project. Our L.A. operations master plan has been developed for optimum utilization of the existing multi-building infrastructure.

75% of the equipment has been procured for our new production line, and we anticipate the final equipment to be delivered in early July. Engineering support system upgrades are being finalized, and equipment RFQs are out. Best available used equipment is planned whenever appropriate.

Approval of our electrical service upgrade design is the hands of the L.A. County approval process. Objective of Phase 1 of the upgraded production line is by running -- one shift will provide a 66% increase in capability, and this is driven by increased line speeds.

I anticipate that plant to be online with this additional capacity sometime in mid-September. At this time, additional future investment in equipment and product reformulation may be required to allow the brewing and batching system to provide a round-the-clock, 24-hour bottle line operation.

We are excited to announce that we finalized the terms with a new co-pack partner based on the East Coast that will provide us a significant cost advantage while allowing the flexibility of having a dedicated line for Reed's products. We intend to begin producing and shipping out of that facility beginning the week of May 18. A couple last comments.

We continue to work to eliminate costly roadblocks to success, some of which are financial, others are not. I'm in the process of hiring key plant leadership to accelerate identifying opportunities, setting metrics and KPIs while moving forward towards flawless execution.

We continue to identify new supply lines and production sources for bottles, labels and other supplies that have contributed to missed sales opportunities in the past. On the logistics front, we're focused against increased usage of rail and better management of the production cycle.

On the warehouse front, we're exploring round-the-clock warehousing to further optimize production and shipments. We continue to enjoy labor cost advantages versus our local competitors. We have sufficient raw material inventory to meet current sales demands as for key products.

In closing, I am excited to be here as our products are what the consumers want. I'm committed to ensuring that we meet that demand first and in the most efficient manner possible. Thank you. And at this time, I'd like to turn it over to our CEO, Chris Reed..

Thanks for that, Mark. Thank you for joining us today on our earnings call. It's definitely an exciting time, I will say. We had 2 press releases go out today. In the second one, we talked more in detail about other new personnel that we brought on board.

And I will say that bringing Mark on board, Mark Beaton, to be the Chief Operating Officer, it was really the first time I have gone out and hired someone right from the beverage industry with direct experience in operations to come in to be a COO. And it has been such a relief to have that level of experience with Mark coming on board.

That has inspired me to, in my search for a CFO, a permanent CFO, to look for that same kind of experience. These are, Mark and now Dan Miles, who's our new CFO starting officially tomorrow, are guys who have lived at the highest level of the beverage industry, worked and run huge operations.

And they -- just for me, for some reason, I didn't think they would come play with a company like Reed's. But I think somewhat of a -- it gives a -- it feels like we've grown up to a point where we are exciting to the high-level beverage management guys.

And also, what I didn't know is they really find it refreshingly fun to be working with a company that, a, their growth rates like the Ginger Brew in the first quarter, grew, I think, 35% -- or was it actually 44%. Yes, it was pretty amazing. So they come from an arena where 1% growth up or down is the standard for many years now.

And quite frankly, the corporate environment is not quite as fun or friendly. So anyway, we're just absolutely thrilled, and I will say Mark Beaton did inspire the search and finding of Dan Miles, what I consider the equivalent -- it's kind of a crazy comment, but the equivalent of Mark for my CFO position.

These guys understand beverages at a level beyond myself. I've been a student of beverages for 25 years, and it's great to have these guys coming in here and giving the whole organization quite an education on the ways and understandings of beverages, the highest level of maybe Pepsi or MillerCoors.

So I would say we're obviously very excited about the quarter. We love the driving of the sales of the top line by our core brands, the Reed's products. I think that's a very healthy sign.

Margins, which were unusually low in the fourth quarter, which we had articulated in the last call that, that would -- that was a one -- many of the onetime events came to play and to cause the margins to be lower, you can see the margin recovery in the first quarter.

Ourselves, we feel like the margin recovery for -- especially with the commodity price pressures that were keeping margins down in the third and fourth quarter of last year are starting to recover. And we have seen that in the first quarter, but we'll probably see most of it unwinding by the end of the second quarter.

But the plant projects are still online. It's been nice to hand them over to Mark, the new COO, to run those projects. And he -- I will say I had a great plan, but he has come in and made an improvement to those plans. And the savings that we anticipate, the guidance I'd give for this year is that margins will continue to improve throughout the year.

I think that some of the margins in the first quarter would actually have been better, but the plant -- trying to run a plant and at the same time build out a new plant has been challenging. And I think you can see that in the Idle Plant Capacity.

Our barometer for effective use of our West Coast plant actually went backwards for the first quarter in a while, and that caused us to shrink margins by at least 1%, probably closer to 1.5%. So that, again, is more of a onetime thing.

And as we bring the new facilities on board, and it's not interrupting normal operations here, we'll not only get back to more normalized Idle Plant but we will -- I believe the whole point of this new plant in L.A. is to ultimately to reduce to 0 the Idle Plant figure that we follow here.

Now a couple of things operationally were very exciting this quarter. Getting involved for the first time into the Rite Aid 4,500 stores nationwide with a joint project on the Sonoma Sparkler, a brand we own, has been very exciting.

Also, a number of other products are moving in behind those, the first Sonoma Sparkler to -- into this whole new, very large relationship for Reed's. During the quarter, according to our data, we picked up 1,300 new stores and 900 new supermarkets in addition to that.

And another great data point for the brands are the IRI scan data, the scan data for the supermarket sales coming through the register. We were up 35%. And I know -- I can make a guess that we probably picked up 5% more supermarkets, but we were up 35%.

So the growth on a per-store basis is still very significant, and that's really what you want to see. Now Kombucha, down 36%, relatively flat with the fourth quarter. We're still very optimistic about Kombucha. I think we can say that you will see Kombucha recover in the second quarter. I don't believe that it will be down 1%.

I think it'll be up significantly -- or up not significantly, at least be recovered and possibly up, I would say, marginally over last year. So part of the 36% reduction drop in the first quarter, some of it is just a lot of pressure from new players in the Kombucha arena.

But also, we reported that our spend or discounting off of gross -- from gross sales to net sales went from a 12% spend to a 6% spend. And we just weren't really doing a lot of discounting or volume movements through discounting with Kombucha. And I think that there's a lot of strength in the brand.

And our own feedback from the marketplace is consumers are really enjoying the brand. When we drill down to individual accounts and look at how sales are going, they are actually relatively strong and are steady. So we have a lot of confidence in the brand.

And as I've said as in the past, whether we grow the Kombucha sales through our own brands or grow our Kombucha sales through private label, Kombucha is a big part of the future of this company, and we're still extremely optimistic about how Kombucha will impact our company financially in the years to come.

And we'll be reporting more on different developments with Kombucha that are ongoing and exciting for us. The Stronger Ginger Brew, which is a 50% more ginger than our #1 SKU, the Reed's Extra Ginger Brew.

We presented that and launched it at the Natural Products show, which is the largest natural food show in the world with 70,000 people visiting it every year in March.

That show, and along with just consumer feedback and our own partners in the distribution and retail, is showing that, that product may very well become our #1 SKU in the years to come. It won't happen overnight, but I think there's a lot of people that prefer the Stronger to the Extra.

And for us to -- well, first of all, why did we wait 20 years to launch a stronger version? We will be asking ourselves for a while. But the excitement in the future here is that I think we have a real winner. And we're looking forward to all that will bring to the company.

We presented for the first time at the Nightclub & Bar show in Vegas a couple of months back. Definitely, I think partly having the Stronger Ginger Brew with some of the inspiration, we knew that the liquor industry is having a love affair with Ginger Beers right now.

I can't say this with all authority here, but it feels like the Moscow Mule is the #1 drink in America, surely one of the fastest growing. And from the trade show in Vegas with Nightclub & Bar show, we are now working with some of the largest liquor companies in the U.S.

And we have some very exciting new relationships that we will disclose later in the year. So that is, I think, is part of the reason our Ginger Brews are up 44% year-over-year for the quarter.

And I would say that so the long -- the things that are going on right now, the long-term benefits of -- or the most exciting things going on, the new relationships with the largest liquor companies in America, some of the largest, definitely the new management team, the new -- relying on and accessing this very high level and very experienced people in the beverage industry is having a dramatic effect already at this company.

And we anticipate that in the next 12 months, we'll see a very large transformation in our organization. And I think the timing is very good for that.

The trends that we follow and continue to expound on are that the larger soda companies are out of sync with the times, and the trends keep favoring companies like ourselves, a leader -- or us being a leader of craft sodas, also a leader -- the leader of the natural soda industry, some of the announcements even in the last couple of weeks are very exciting to us.

Panera Bread has given out a press release with a list of all of the chemicals that they will no longer have in their food. And if you read that list, clearly, it effectively says that we won't to be carrying Coke or Pepsi, unless there's some vast change in what they're producing for beverages and what chemicals they're putting into food.

Chipotle coming out again in favor of removing GMOs from their foods. And I've looked closely at these things. And McDonald's, just in the news, talking about the lagging sales. So the big, established paradigm that we grew up with of the fast food restaurants and the high-tech sodas, that paradigm is shifting.

It sounds big and almost too much to hear it from a small $50 million company. But the conversations we're having right now are -- we are the solution, the next generation. We're the right thing to have as a replacement for your Coke and Pepsi products. And the outreach from fast casual restaurant formats in the U.S. are unparalleled for our company.

So we're very, very excited about what's going on with Reed's. We're thrilled to have the new management. We see a very rosy future for the company and are anticipating and looking forward to a significant acceleration from our current situation. I appreciate you guys taking the time today to listen in.

And I'd like to open the floor to questions and answers..

[Operator Instructions] Our first question comes from the line of Mark Sofferman [ph], a private investor..

I'm wondering apropos what you were just talking about with chains like Panera and Chipotle.

What has prevented the company from doing a contract or penetrating into the restaurant market as the natural soda leader? What -- there's something that has obviously prevented that sales channel, and that's been an ongoing frustration for me because it seems like such a natural channel for you..

Well, I appreciate the question, Mark. We are in the fast casual restaurant trade channel right now, and it happens more on a smaller-chain basis and more independents where you have a shop or an owner who can make a decision like that.

But the larger corporations, if you look at the landscape of beverage in America, every large, organized group that sells a lot of beverages have tied up with either Coke or Pepsi, whether it's a sports arena or it's a large fast casual restaurant chain such as Panera or Chipotle.

But I will say that as I've mentioned already just a few moments ago, Panera Bread effectively said by putting out that press release that they're not going to put up with it anymore, and they're open to people coming in and offering the solution.

So I'm not at liberty to talk about the specific names of people that are talking to us, but I will say that there's a reason Coke and Pepsi are as large as they are. They tie up people in contracts.

And it takes somewhat of a leap of faith if you're someone the size of a Panera or a Chipotle to make that kind of a statement or change in your business model.

But I will say it was just shocking enough to us to see the announcements from both Chipotle and Panera on their own intentions going forward because that does exclude -- both locations, that does exclude them from using Coke or Pepsi products, if they are truly going to be GMO-free at Chipotle or all these food additive chemicals that were listed in the Panera release.

So they've made bold statements, and we, of course, are reaching out..

Don't you have to be -- have a fountain program for really for a company like that to be able to work with you?.

Yes..

Do you a fountain program being developed?.

Yes..

Soon?.

Yes. And we'll announce that..

Okay. And what....

And it's an announcement that will come out soon..

There are no further questions at this time. I'll now turn the call back to you. Please continue with the presentation and/or closing remarks..

Well, we must have been very thorough with our presentation today. Thank you for joining us. We look forward to having you back at the end of the second quarter and reporting even more interesting results. Have a wonderful day, and we'll talk to you soon. Bye..

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