Dan Miles - Chief Financial Officer Chris Reed - Founder, Chairman, Chief Executive Officer and President.

Paul Johnson - Private Investor Mike Olberding - Private investor Sam Gravina - Private Investor Alex Colcernian - Private Investor.

Good afternoon, and welcome to the Reed's Second Quarter 2015 Earnings Conference Call. My name is Harman Koi, 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; and Dan Miles, the Chief Financial Officer.

Before we begin today's call, I have Safe Harbor statement to read to our listeners. I would like to remind our listeners that during today's call, management's remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may have additional forward-looking statements in response to your questions.

Therefore, the company claims protection of the Safe Harbor of 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 represents management's estimates as of today, August 13, 2015. Reed's Inc. assumes no obligations to update these projections in the future as market conditions change. I will now turn the call over to Mr. Miles, who will begin with his prepared remarks. Please go ahead, sir..

Thank you. Hello, everyone. And thank you for your interest in Reed's Inc., and thank you for joining us today on Reed's 2015 second quarter earnings call. My name is Dan Miles, I am the CFO of Reed's. In addition to the press release issued today, we filed our 10-Q for the second quarter of 2015. Let's turn to the results.

Demand was strong for Reed's beverages. Total net sales for the second quarter ending June 30, 2015, were a record $12.2 million, an increase of 9% versus the second quarter of 2014.

We believe that sales could have been higher by at least $2 million if it were not for out-of-stock issues driven largely by significant lower than expected production at our East Coast co-pack facilities.

Our promotional expenses for the second quarter, which includes such items as promotional spends with retailers and slotting fees decreased 18%, and accounted for 7.5% gross sales or $1 million for the quarter compared to $1.2 million or 9% of gross sales in the second quarter of 2014.

We believe this speaks to the continued strength of the brand after more than 25 years in the marketplace. Gross sales were driven by a 22% increase in Reed's Ginger Brew and represented 46% of gross sales. Total Kombucha sales increased 15% and represented 12% of gross sales.

Sales of other product categories that includes candy and non-core beverage sales increased 41% and represented 6% of gross sales. These sales -- these increases were partially offset by a 4% decrease in Virgil’s craft sodas which represented 33% of gross sales and 9% increase in private label sales that represented only 5% of gross sales.

During the second quarter, we made strategic decisions to produce private label Kombucha for a major grocery chain. We've included these sales in our Kombucha product line results as we believe that this is the best way to show the overall demand of our Kombucha beverages.

Regarding Virgil's, our total Root Beer sales includes swing-lid pints, 5 liter kegs, and 12 ounce bottles that grew 7% during the quarter. Where we experienced weakness was primarily our Root Beer Black Cherry, Cream Soda, and Zero Diet Sodas that had out-of-stock issues during the quarter.

Our private label sales that exclude Kombucha produced for the grocery chains were down 60% over the year and only represent 2% of our gross sales. Our private label business was down due to a couple of factors. During the quarter, we utilized our Los Angeles facility to produce significant 5 liter Virgil kegs for a major warehouse club.

Additionally, we produced significant private label Kombucha order for a grocery chain, but as I have mentioned, we've included in the Kombucha category rather than the private label category. For reference, if we include the private label Kombucha order in the private label category, it would have been up 9%.

As a reminder, our private label and Kombucha products are only produced here in Los Angeles. We originally got into the private label business in 2008 to generate cash flow during the recession when people were not spending money on premium craft sodas. When you look at the business and the industry today, things are different.

Today, we see a surging interest in not only craft soda but continuing trends of natural foods. We believe we are in the sweet spot for both of these movements. During the quarter, we utilized our plants to produce our core branded products where we see the most opportunity at this time.

We have expertise to develop and produce unique private label products, and should we go into a recession, we'll have the excess plant capacity that is the desired capability to have. Our gross profit in the second quarter was essentially flat at $3.6 million. Our gross margin decreased 3% to 30% in 2015 when compared to the second quarter in 2014.

Our Idle plant cost for 2015 second quarter was 5.5% of net sales versus 4% in the second quarter of 2014.

This was impacted by a couple of items including; we are focused on upgrading the Los Angeles plant equipment in 2015 with the goal of increasing its capacity from a current base of 100 12-ounce longneck bottles per minute over two shifts to 300 bottles per minute in one shift.

Due in part to preparations for this upgrade, idle capacity increased by 418,000 over the same period last year, and this was related to repairing, repositioning key equipment, upgrading utilities, incremental plumbing, and replenishing supplies.

As our sales pace grows, our excess plant capacities and costs will become a smaller portion of our overall cost of sales. We anticipate this cost will decline as the plant production increases.

As a reminder, cost of goods sold capacity is a measurement that we use for plant overhead and direct costs in the co-packer labor allocated to finished goods that are produced here in Los Angeles. Let's talk about expenses.

Operating expenses, our total second quarter operating expenses increased 43% to $4.1 million compared in the second quarter of 2014. Delivery and handling costs increased 54% to $1.4 million or 12% of sales in the three months compared to $926,000 or 8% of sales over the same period in 2014.

This $503,000 increase was primarily due to a 13% increase in total cases delivered and a 39% increase in the total number of deliveries. This resulted in 18% decrease in the cases per delivery and the subsequent cost increase of 11% per delivery.

These metrics will be used to monitor the activity that will bring delivery costs back in line with Reed's historic rates of 8% to 9% of sales. Selling and marketing costs increased $286,000 overall to $1.3 million in the three months ended 2015 from $1 million in 2014.

This increase over last year is primarily due to an increase in the trade show and the related travel expenses, increased brokerage commissions due to the increase in sales, and the addition of three new sales employees.

G&A expenses increased $1.4 million due primarily to non-cash stock options and one-time stock compensation expenses that alone accounted for $347,000 of the $456,000 increase. Additional G&A expenses included the net addition of one senior management extra position and severance expenses related to exiting employees.

We expect G&A expenses to return to normal level in Q3. Our interest expense was $193,000 versus $178,000 in the second quarter of last year. The $15,000 increase was due to additional borrowings associated with equipment borrowing.

For the second quarter, we had a net loss of $691,000 or $0.05 per diluted share that compares with a net profit of $633,000 or $0.05 per diluted share in the last year’s second quarter. For the second quarter, our modified EBITDA was $94,000 versus $1.1 million in the prior year second quarter.

We had $780,000 in EBITDA adjustments in Q2 consisting of $240,000 of depreciation and amortization, $193,000 interest expense, and $347,000 attributed to stock option and stock compensation expenses. Balance sheet. Our cash and cash equivalents on June 30 were $215,000 compared with $959,000 on December 31.

Net cash used in operating activities was a negative $1.8 million for the six months ended June 30. This is primarily due to the operating loss of $957,000, increases in inventory level primarily consisting of raw materials of 2.6 [ph], accounts receivable increase of $1 million that was partially offset by account payable increases of $1.6 million.

As of June 30, the company had borrowing ability of $1.4 million under the $6 million revolving line of credit. Additionally, the company has $1.6 million of future borrowing availability under the $3 million CapEx loan agreement use for equipment. As of June 30, 2015, we had stockholders equity of positive $3.3 million.

In conclusion, the company's revenue has increased 13% in the first two quarters of 2015 versus 2014. Reed's branded beverages has grown in sales 26%, and Virgil's branded beverages grew 4% in spite of the missed opportunity to fill open orders. EBITDA has continued to be positive at $450,000 for the first six months of 2015.

Now I'd like to turn the call over to Chris Reed. Thank you..

Well, thanks, Dan. The second quarter definitely -- there is a lot that doesn't show up in the numbers. We try to estimate exactly how much sales because [indiscernible] we had our third facility onboard which we were scrambling to bring on and is still getting very close to coming onboard at this time.

This impacted obviously net sales but also impacted the freight costs, so we had much higher freight costs due to shipping less than full truckloads to customers because we didn’t have the full availability of products that they were ordering. So it kind of snowballed a bit.

Obviously cash was tight during the quarter, but we have a couple million dollars of raw materials that we build up for private label projects in the third and fourth quarter and the opening of our new facility and anticipate the unwinding of the $2 million back into working cash out of inventory by the end of the year.

The plants -- the both plants, the West Coast renovation and the East Coast new facility are moving forward quickly, and we are getting down to the last few steps to be up and operational on the East Coast plant and what turns out is that -- in order to get the West Coast plant fully operational, we need to have the East Coast, second East Coast plant up and running, so we can defer our productions during the period of time where we are installing new equipment.

So, to shut down here we actually need the East Coast plant up and running, so that's a high priority for the company right now. About 90% to 95% of the equipment needed for the startup of the new three times faster production bottling lines in LA have already been purchased.

Most of the equipment around 75% is currently here, and the other 25% is waiting to be manufactured and delivered to the factory here.

So, we have an exciting plan, the utilities, the support, the layout, the concept for the new plant in LA is pretty much finalized, and the project is moving along nicely at this point waiting for a window in a next two to three months where we can move production to the new facility on the East Coast for a three or four week period while we get the equipment installs up and running.

We look forward to that because it will have a dramatic impact on our idle plant costs which were running, I believe, at 5.5% of net sales and were down to 4% last year. The increase is mostly the activity, the added expense through the activity to get the plant ready for the equipment.

So there is a lot of reorganization going on in the 80,000 square feet we have out here, lot of moving equipment, building support, infrastructure and utilities for the facility to handle the new high speed line that's going in.

So that should not -- not only will idle plant costs come down in general because we won't be out continually preparing for the plant, that should be finished by the end of the year.

But the idle plant, one of the big components of that number is labor, and as we go to a plant that can run with less people, three times faster, our labor costs per case will shrink dramatically.

The other component is for a long time we've been moving product from the East Coast to the West Coast, approximately 500,000 cases a year, probably closer to 600,000 or 700,000 at this point, and primarily because the plant in LA is not fast enough to operate -- to produce enough product to cover demand west to the Rockies, so we not only vision ourselves moving to our normalized 8% to 9% of net sales for freight, we actually see that figure reducing further as we get for the first time the West Coast facility capable of keeping up with the full demand for the West Coast.

I believe Dan did an estimate and showed me a report that we would save conservatively [ph] $800,000 a year in freight from moving to full production of all the needs of the West Coast out of the new facility.

So you are not seeing the new management, in the financials you are not seeing the new management coming in here and reorganizing the business tremendously.

Not only building the physical structure very different than it was at the beginning of the quarter, there has been a large revamp of personnel and that's why our G&A had a pretty large one-time expense for some of the coming and going of new employees here.

So during the quarter we also accelerated our movement into new markets and including trade shows for the bar and nightclub industry where we brought our unique trade show experience from natural foods and grocery to the bar and night club industry. We had a tremendous result, we are still bringing on a lot of bar and night club business as we speak.

It dovetails very well into our existing distribution through the [indiscernible] network, the MillerCoors and Anheuser-Busch distributors we have around the country. We've also created a unique package for the liquor industry that will go primarily through liquor distributors such as the Southern Wine & Spirits.

During the quarter -- and also we took our products to the largest restaurant show in the country for the first time and had a tremendous response from the restaurant trade. And so, we will continue to be at the night club, bar, and restaurant on an ongoing basis, based on the results of these trade shows.

That's an addition to the last third quarter, we started going to the national convenience store show, and that had been – continues to be a very successful source of new business for the company.

The IRR data that provides the results of our sales in supermarkets showed acceleration during the second quarter moving from – I’ll put out my notes here -- moving from 34% growth of Reed's Ginger Brew during the 52 weeks, when we looked at 24 weeks, so we were at 41% growth for Extra Ginger Brew in supermarkets, our number one SKU in supermarkets.

In the 12 weeks, we were up to 44%, and in the last four weeks, we had 45% growth. So it is an exciting time for us.

We've also moved into some of the largest relationships that we've ever had with the Absolut Vodka Group, and that particular relationship has started out with an initial launch of a package that would include one of their bottles of vodka and some of our product in there with a recipe for the famous and fastest growing drink in America, the Moscow Mule.

Ongoing and continuing, we are expanding into distribution with our new retail pack for the liquor trade, the seven ounce bottle of the stronger Ginger Brew which is a version of our Ginger Brew stronger than our Extra, and primarily designed to be the perfect accompaniment for Moscow Mule.

We have been putting that product everywhere, but now we are engaging the 1,250 sales people at Absolut Vodka to span readily through their distribution networks.

So it became initially just a one-off kind of relationship where they from time to time partner up with mixers, and the excitement grew within both organizations, but primarily at Absolut, the parent company too expanded the relationship into other liquors and other times of the year and more of an ongoing relationship to rollout what they see as a great opportunity to expand their vodka sales through the partnering up with our amazing Ginger Beer.

So that's a very exciting development for the company in the second quarter. Nine months ago, we were approached by a large fast casual to -- they needed to change what they were doing with their sodas, and they asked us if we could come up with a natural fountain version of our products.

And I can proudly say nine months later we’ve come up with what is the -- what we can see is the future of the fountain business in America, I think I’m going to be prophetic here and say 10 years looking in the future, there will be a dramatic change, the equipment look and feel of the fountain experience will be much more sexy and in line with the draft beer, tap handle kind of experience.

And the drinks will be natural without sodium benzoate, GMOs, or high fructose corn syrup, and they will be higher in juice content; they will have functionality like ginger or hibiscus [ph]. And we are going into trial here; I think we are the number one contender for this $40 million to $50 million of new business at this point. It is hard to tell.

I just know that we've been exciting ourselves and the client and going to trial here in the third quarter. So these are exciting developments.

Of course we've expanded the conversation showing up and talking to some of the largest companies and retail food service operations in the world that rely on fountain sodas and offering an opportunity for them to have glimpse of the future and to meet the most disruptive soft drink company in America and see how fountain drinks will evolve over the next 5 to 10 years.

We’ve, during that time, partnered up with some of the most exciting largest manufacturers of equipment for the fountain industry and have come out with some very exciting designs that match up the incredible quality of products that we are able to develop.

When we started this we didn't know about this opportunity, started out pitching draft to this large fast casual, ended up being encouraged to try fountain and learning that in fact we can do fountain, we can do it economically.

The client right now, the bid we are about to put in looks that the client makes an additional $100 million a year by going with our system from kind of preliminary [indiscernible]. So there is lot of economic interest besides not wanting to serve a high fructose sodium benzoate cocktail after what supposedly touted as a healthy meal.

So the pitch is powerful, we are positioned in the right place, we are way ahead of the curve on this, and the nimbleness of our company is allowing us to have these conversations, and is surprising us and we are very excited about it.

And as CEO -- that's probably my primary job besides just making sure that two facilities get onboard so we can keep up with existing sales. So despite our financial performance for the quarter, things are extremely exciting here.

The most exciting period of time in the history of the company, we see more opportunity now than we ever have, and internally at least we are calling ourselves the most disruptive beverage company in America right now. So at this point, I think I've gone over most of the things I wanted to say and I will open the floor for questions..

[Operator Instructions] Our first question comes from the line of Paul Johnson as a Private Investor..

Yes, good afternoon. I had a couple questions. Can you talk a little bit more about the very large increase in accounts receivable, looks about -- looks like about 24% over last year. And a very large increase in inventory you talked about little bit, but it is up 62% if I did my math correctly.

I also wanted to ask it seems like the Kombucha sales have slowed way down, and the pace of growth is a lot slower, and finally when do we get to hear from Mark Beaton, he has been onboard since March, and I think a lot of investors are hoping to hear from him. Thank you..

All right. I appreciate that. So I am going to write this down, the Kombucha down was one of the questions. The inventory and receivables up. And then there was a comment on hearing from Mark Beaton. .

Correct. .

So Kombucha was down approximately I think 33% in the first quarter of this year.

We attributed to in the first quarter of the slowdown in spend on the marketing dollars, so we basically let the brand kind of sit on its own for a bit without a heavy spend on advertising and promotional, and we saw the sales down in the second quarter year-over-year approximately 16%.

Overall, we were up 15% and that was because we started a large private label Kombucha project for one of the larger supermarket chains in America. As I have been mentioning in prior calls that Kombucha - it is crowded category, we are not the leader of that category such as we are with craft sodas in the natural soda business.

So it is a more difficult thing. We are at number two; I believe we are still number two. There has been a number of launches of new Kombucha companies they have been heavily funded including Kevita and Healthy Kombucha, what's it called, oh my god, it is not right.

Both of those companies have been heavily fueled on a big cash burn as they are promoting their Kombuchas. And we have kind of - right now the Ginger Brew for us is taking off particularly with the Moscow Mule and Absolute Vodka and just in general.

Our Ginger Brews have been growing quarter-over-quarter in a very - it seems to be accelerating here over last year. So we are kind of going with the flow on that. Kombucha, by no means is something that we have written off. We are going to have periods of time where we focus on it and then we let it be a little bit.

I mean the continual driving promotional spend is not even healthy for a brand. So you will see quarters coming up where we are more heavily focused on Kombucha. But I have been mentioning in prior quarters that our feeling on Kombucha is that we are going to make money from Kombucha one way or another.

We have just proven ourselves up the go to for large retailers for private label. There are a number of other large opportunities in private label Kombucha. For instance it is estimated at Whole Foods that they sell approximately and it’s probably an old number, over 100 million a year of Kombucha.

There are Whole Foods and larger chains out there in the country that have expressed interest in a private label Kombucha. And I believe that we are in a unique position to capture some significant business that way as we settle into our ability to produce and grow our Kombucha.

Obviously getting the West Coast facility onboard, then having the extra capacity at a time where we are maxed out with capacity is quite important to us, for the future of Kombucha growth.

Inventory increases at this time of the year over last year, I will say there has been an inventory increase due to the impending bringing on board of the third facility. So there was a stocking of the third facility for raw materials that created some additional inventory requirements.

But there are some conservatively larger private label projects later in the year that are larger than last year that we are required to purchase in a timely manner and so our inventory build will look bigger this year than last year. We anticipate that the inventory buildup will be on unwound by end of the year.

And we anticipate that comfortably because we are basing it on actual purchase orders for large private label projects during that period of time that are fixed and carved in stone, it’s not a wishful thinking.

I guess Dan, my CFO, when he first came onboard said we need to bring on additional money and we did reach out to our bank and our bank offered us a $1.5 million of extra above our current line of credit and we turned them down [indiscernible] the inventory unwind that we were able to accomplish relatively –[indiscernible].

So the AR increase not exactly certain why it is higher, it should be higher because sales are higher, sometimes timing [indiscernible] quarter you’ve just shipped a lot more goods than you had at the prior year’s end of quarter.

Dan do you have any comment on why our receivables are up higher? Because I don’t believe we are actually aging any different on our receivable right now, are we?.

No. In fact that's a very remarkable strength of Reed’s is we have almost zero bad debt year-to-year, it is less than 100th of a percent. The increase in AR has already been realized in cash and payments through now. So the bump is most likely due to major increases as we got very close to the end of the month. .

Right because your aging is not anymore than - it is normally under 30, right?.

That's correct. .

Yes, so that's just timing thing.

Is there any more questions?.

There are no more questions at this time. However, [Operator Instructions] And our next question comes from the line of [Jeff Briggs] [ph] from Singular Research. Please go ahead. .

Hi, guys, how is it going?.

Great.

How are you doing Jeff?.

Good. So quick questions for you.

I know with all the updates to the plant and [indiscernible] shipping cost and things of that nature, how do you see gross margin sort of leveling out as all that stuff gets integrated?.

All right. That's a big subject. So one of the things you noted during the quarter is we went from 4% to 5.5% of backwards crawl on our idle plant, so 4% of net sales in 2014 to 5.5% in 2015 second quarter. So that 1.5% increase is directly affecting the gross profit.

We envision that unwinding relatively quickly as we move into the final stages of installation and that’s a tremendous amount of reorganization of the 80,000 square feet here and just support infrastructure that goes in.

So we not - and then additionally as the new facility comes on board and a very large component of the idle plant cost is labor -, the labor efficiencies, I think conservatively, labor is going to go in half and it is somewhere around a couple of hundred thousand, 210,000 a month.

So we - and the freight savings – okay, let's not get ahead of ourselves, freight is not part of the gross profit margin. So we envision going to zero eventually on our idle plant.

So for 5.5% to some point 12 to 18 months out to zero is my plan and I believe it is a viable plan, some assumptions based on continual growth at the pace we are doing, et cetera, but it seems like our private label something will fill this plant. I mean you build it they will come.

Surely we turned away a lot of opportunities here because we haven't been able to run more than we have. This additional thing that was eroding margins from 33% to 30% year-over-year was the product mix went from more heavily Virgil's to more heavily Reed’s. And intrinsically we have less margin with Reed’s.

So we calculated we lost somewhere about 3.4% from the shift in the composition of the products that we were selling during the quarter to the more expensive Reed’s.

So that obviously doesn't seem to be going the way of the trend, so there will be conversations here about possibly adding a price increase to a product that hasn't seen a price increase in many years now and is well below similar products in the market place. So we will be considering a price increase to build back margin.

The new East Coast facility and the addition of the new West Coast or the revamp of the West Coast facility ultimately we had a 30% margin this quarter with 7.5% of promotional spend. I'd like to call the total margin 30% plus 7.5% so that’s 37.5%. The prior year we ran 9% plus 33% so we had 42%.

Some of the erosion of that total margin from 37.5% was the idle plant went up by 1.5% so it would have been 39% if idle plant had stayed the same versus 42% and then the product mix eroded another 3%, so it is pretty clear what happened year-over-year.

Now what we anticipate getting to with the new facilities onboard, freight reducing, idle plant reducing, is to move up into the mid 40s, somewhere around 45 some point next year and if we can keep our operational promotional spend down in the 7% to 8% range, we will hopefully be getting a 37% to 38% margin.

And we are hoping to do that on top of significant growth next year and expenses staying, we think that they - we had one-time $300,000 in G&A. We had elevated expense in the sales due to more trade shows. I don’t actually see that going down next year.

I think as we grow and margins improve we will probably even up our presence at trade shows around the country.

The return on that spend seems to be tremendous and is accelerating what we've got going here, it is time that we show up in the rest of the industries and not stay so centric, grocery centric as we have been for first the 25 years because the restaurant industry and I’m sure the bar industry, Absolute Vodka had a choice of Ginger Beers, did a full analysis of everybody in the world that they could have partnered up with, and they liked the flavor, they liked the authenticity and quite frankly we are the only ginger beer in the world that's brewed from fresh ginger, so I think they picked the winner but I think that the - we haven’t even begun to sell product in the liquor trade.

So we see an acceleration of margin.

We haven't seen it this year, we have a good internal explanation for it and we have a great plan for moving forward between strategic price increases on Ginger Brew getting both facilities up, reducing freight from currently 12% back to 9% and much lower not just our historical 9% freight but actually seeing freight unwinding down into the 6% and lower as we get a West Coast facility that’s actually able to keep up with the full West Coast production needs, and cutting out that East to West freight that we've been doing for years.

Is there any other questions, Jeff?.

No, that's it. It is really helpful. And it’s actually a little better than I was projecting out. So it is good to hear. And yes, looking forward to hearing something on the fountain side next quarter or two..

We actually have one more question. It comes from the line of Mike Olberding, is a private investor. Please go ahead..

Thank you. I was wondering on the last conference call Mark Beaton was referring to 75% of the equipment being procured for the West Coast plant and expecting delivery in early July and then maybe reaching what he called Phase 1 which was the 66% increase in speed by mid-September.

So I am assuming some of that didn't happen and it is all getting moved back.

Do you have a new estimate on when it might reach that goal?.

Well, everything that can move forward right now on the peripheral is moving forward.

Currently we are at - we needed a third facility up and running, the new facility on the East Coast, up and running so that we can turn off the [indiscernible] in LA for initially a one week period to do an install and an additional two weeks in the following month to have the full plant installed.

So to have that three weeks off we need - we don't want to be shutting down the 100,000 cases a month that we can run here at the detriment of not filling orders. I mean you could see in the second quarter we project conservatively somewhere between $1.5 million to $2 million of business that we left on the table by not having product produced.

So the plant coming online will save us a ton of money but at the expense of screwing up our products in the marketplace by being out of stock anymore than we have been, we are just not willing to do that.

So the equipment is ordered, we have a great design, we’ve worked with one of the world class designers of plants, Mark immediately jumped in and added his flavor to it by bringing in some contacts. And we have a significant improvement of design over what I was proposing with my people.

So we are excited about the new plant and we are getting close to having the third facility up and running properly. We hoped to have it next week. But we've been saying that for the last two or three weeks now.

Here so we are trying not to hold our breath but hopefully August will see our new facility onboard and we can start looking in the third quarter later - well probably in the fourth quarter obviously in the fourth quarter at this point in October and November and December to having the West Coast facility come fully on board. .

Okay, thank you. And then one other question.

This fountain program you are developing and hoping to get, if the plant is on board like you were just saying, [indiscernible], could you still move forward with that fountain program or is that also need to have West Coast, East Coast and West Coast… ?.

The logistics or the ability to produce bag in a box or to make your syrup concentrate and put it into the box, the bag that goes into the box that feeds the fountain equipment is 100 times easier than producing a bottle with counter pressure, carbonation and pasteurization and labeling.

So we are not utilizing our current facilities to produce our bag in a box. We have outsourced facilities that have already lined up capability for a million bags in a box a year or approximately $35 million, $40 million of business a year. .

We have one question come from the line of Sam Gravina. Please go ahead..

Hello, Chris. How are you doing? In past calls you probably – in some past calls, my memory is not so good, but you’ve given some guidance for profitability for the year.

I didn’t hear anything about that this year? Do you think this year will be profitable, 2015?.

That's a good question, but I think it will be profitable. Fourth quarter traditionally with us, last fourth quarter was rough and we believe we have corrected a bit of the issues that created the difficulties in margin in the fourth quarter but there is some part of it that it was lot of private label that tends to shrink margins.

Third quarter will depend a lot on our ability to get the third facility up and running so that we can start to fill some of this backlog demand for our products which – if we have our luck and the next week is the week that we get up and running we can start - we will have six weeks to fly some production into and take advantage of some of the demands that's here right now.

But I would say that I think that obviously EBITDA, I expect to be EBITDA positive, I expect to pick up some positive EBITDA in the third and fourth quarter for the end of the year, but I think profitability may be questionable for us. I mean it is a good question. I don’t think we have really - we have a moving situation right now.

I think we haven't really gone through to see exactly what our projections are, that kind of work, that kind of analysis is going on right now. So we can't really answer that well. And there is a lot of balls in the air that will change things dramatically here.

So I don't know, I think though it is going to be - it is less - right now because of the missed opportunities in it - in this second and part of the third quarter, I think it is going to be a little bit attenuated from where we were projecting it to be. .

Mixed feelings, because out here in East Coast I have been seeing empty shelfs and your call kind of explains that. And when the products come in it just it just empties the shelf again. So it seems like you left money on the floor by not being able to fill these orders..

That's accurate. .

Is East Coast more of a problem than West Coast or is it like the same everywhere else?.

I agree - I think the East Coast is more of a problem because right now for instance we’re just running the plant 24x7 here on Virgil's Root Beer. And right now we've been out for three or four weeks on Virgil's Root Beer on the East Coast. So we are scrambling and bringing on production right now but you are absolutely right.

For a while not only are our distributors once we’ve produced the product evaporating it the day after a production.

If it shows up on a shelf and hasn't been there for a few weeks, our cult following passionate consumers are going to and we have seen in the past, they are going to strip that shelf, if they haven't seen a product for a three or four weeks and they see it, it is gone. One customer, it is gone.

You can't have a big enough shelf for our situation right now. And it is probably going to be that way for a - people are going to hoard this product for a while until they feel comfortable again.

We never function well - we’ve never - the shelf has never been an appropriate place for our product because generally speaking they will give us a lot of placement on the shelf for like extra Ginger Brew at a Whole Foods. You show up at noon and the product is gone. It is gone all the time. The customers are complaining.

We tell the stores you can't just fit us on a shelf, you have to build a permanent display, pile of goodies on the floor or you are never going to have your customers happy because you got people who come in here and if they see it, it is empty all the time on the shelf.

So even when we were in stock at the distributor, at the warehouse, it is still oftentimes out of stock on the shelf. .

It seems we have one more question and it comes from the line of Alex Colcernian, is a private investor..

Hi, Chris. Congratulation on the quarter and the demand for the Ginger Brew. I have tried the product all across the country, I have seen it in a lot of different store shelves.

I was wondering if you might be able to provide a little bit of color on the different flavors of Ginger Brew and how the demand may vary across the extra, premium, Raspberry and so on..

Maybe pull out some paperwork here, so let me take a look at the actual SKUs for the quarter. Actually Ginger Brew was up 20%, Premium was flat and Ginger Brew was flat.

So it seems to me, I mean actually that's not fair because I have Extra Ginger Brew was sold at Costco which added another $0.5 million in sales - what’s that going to be, so it was like 4.2 versus 3, that's like 40% up, something like that. Anyway it was up $1.2 million a quarter. So I would say that our Extra Ginger Brew is on fire.

And it is the preferred item and I will say that, that’s just a quarter Original and Premium are generally growing in low double digits, somewhere between 10 and 15 and our Extra has been running in the 30s for a while right now.

So - but we of course with the relationship like Absolute Vodka coming onboard, just coming onboard, and there is a few more things going on with Extra we see nothing but acceleration for Ginger - oh yes, how can I forget? With a stronger Ginger Brew coming onboard, just being produced last week for the first commercial batches and that first batch evaporated immediately.

We are seeing the Extra Ginger Brew is preferred 9 or 10 to 1 on our Extra which is our number one SKU. So we have our number one SKU coming in right now was stronger. So that's a very, very exciting piece of it.

Yes, will it scavenge Extra, sure, will it not - will it send it backward, absolutely not, it will just accelerate beyond - every time we added another Ginger Brew we just get more business. So and plus it is going to have a unique pack. It is going to go exclusively into the liquor industry.

And that has been picked up by some of the largest liquor distributors in the country and in partnering up that product with Absolute. So that has a pretty fast and fun trajectory. But I really appreciate you saying at the beginning of your comments congratulations on the quarter. There is a part of us that could sit here and cry about spilled milk.

We should have had another facility onboard. God, we thought we did and we are kicking ourselves in the butt but that's very short-term thinking. What's going on here is the tremendous strength in the brand once production is up and running, there are just so much more business.

And God, we - even the highest estimate showed us being a 13.4, we have 12.2, we were 11.1 last year and we feel comfortably looking at the orders that we could have filled conservatively by the CFO, was a $1.5 million to $2 million and that would have been a bigger quarter than anyone would have anticipated. And I think the fun is just beginning.

So thank you and I - we are very, very bullish right now..

There are no more questions, sir, at this time. .

All right. So I am going to call it quits after an hour. I don't want to hold people up waiting to hear what else I am going to say. Thank you very much for your time.

And I think that we look forward to some very significant quarters and I can't wait to report next year the second quarter after two new facilities are onboard or economics that bring to the company and a significant growth that seems to be appearing here. So thank you for your time and interest in Reed's..

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