Chris Reed - Chairman of the Board, President, Chief Executive Officer Dan Miles - Chief Financial Officer.

Anthony Vendetti - Maxim Group Mitch Pinheiro - Wunderlich Securities Kevin Dede - Rodman.

Good afternoon and welcome to Reed's first quarter earnings conference call for the period ending March 31, 2016. My name is Scott and I will be the conference call operator today.

Participating in today's call, we have Chris Reed, the CEO and Founder of Reed's Incorporated, Dan Miles, Reed's Chief Financial Officer and Mark Beaton, Reed's Chief Operating Officer. Following management's remarks, they will take your questions. And 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, that our management may make additional forward-looking statements in response to your questions.

Therefore, the company claims 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, 2016. Reed's Incorporated assumes no obligations to update these projections in the future as market conditions change. And now I will now turn the call over to Mr. Miles, who will begin with his prepared remarks. Please go ahead..

Thank you Scott and good afternoon everyone. Thank you for your interest in Reed's Inc. and thank you for joining us today for Reed's Inc. first quarter 2016 earnings call. My name is Daniel Miles, CFO of Reed's Inc. In addition to the press release issued today, we have also filed our 10-Q for the 2016 fiscal year with regulatory agencies.

As in the past, I will start with a recap of our results. Then turn over to Chris Reed, the CEO and Founder of Reed's Inc. for more explanation of our results. 2016 results first quarter. The company was fully engaged in regaining the growth of Reed's products.

We believe that the company has corrected the supply chain troubles from Q3 2015 as out of stock conditions in Q1 were substantially limited to our candy sales. Gross sales fell by 5%, while net sales at 6.3% over 2015. Reed's branded products grew by 5.3% in 8-ounce servings and 5.6% in gross sales.

Other categories were decreased by our customer's slower reinstallation of our full line of offerings on the shelf again. Specifically the Virgil's brand decreased 11% and Kombucha's 17%. Other Reed's branded products declined 31%, candies 30% while private label brands manufactured by Reed's increased 2%.

At year-end 2015, the company implemented the beverage industry standard 8-ounce serving metric as our standard for measuring volume. The 8-ounce standard more accurately reflects the wide packaging diversity that Reed's offers. During this call, I will be referring to 8-ounce equivalents when discussing volume unless specifically addressed otherwise.

In Q1 2016, gross sales per 8-ounce was unchanged, while net sales decreased 2%, reflecting the fixed costs slotting fees on lower volume. Promotions and allowances for beverage products increased 14% to $774,000 from $679,000 in gross sales from the prior year.

Non-beverage products such as candy, glassware and mail order are not in the volume metric discussion. These items as a group totaled $426,000 in gross sales, a decrease of 31% over 2015 from a base of $621,000. This decrease is a direct result of a California lawsuit that required the company to find alternative suppliers.

The company successfully engaged new suppliers in 2016 and will begin reselling the specifically affected items with a new vendor later in this second quarter.

Cost of goods sold consist of raw materials and packaging utilized in the manufacturing of products, co-packing fees, repackaging fees, inbound freight charges, inventory adjustments as well certain internal transfer costs.

Cost of goods sold also consists of direct production costs in excess of charges allocated to our finished goods in productions and certain cost not allocated to SKU activity. Plant costs include labor cost, production supplies and repair and maintenance.

Our charges for labor and overhead allocated to our finished products are determined on a market cost basis which is lower than our actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced.

Our total cost of goods sold increased to $8,111,000 in the quarter, an increase of approximately $1,509,000 or 9.4% over the same quarter in 2015.

The increase was due to cost not specifically allocated to finished SKU productions, transfers and direct write-offs of $705,000 compared to a credit of $98,000 in 2015 or $803,000 variance between the years. Idle plant cost continued to reflect the improved operations by decreasing 59% over the same quarter in 2015.

Our gross profit of $1,893,000 in the quarter represents a decrease of $1,367,000 or 42% from 2015. As a percentage of sales, our gross margin decreased to 18.9% in 2016 as compared to 30.5% in 2015.

The gross profit percentage decrease between first fiscal years is primarily driven by the unallocated cost of $705,000 in Q1 that are included in the cost of production noted above. Had these one-time non-cash charges not existed in the quarter, the company estimates the gross margin would have decreased to 26%.

Delivery and handling expenses consist of delivery cost to customers and warehouse costs incurred for handling of our finished goods after production. Delivery and handling costs decreased by 27.4% to $849,000 in the three months ended March 31, 2016 as compared to $1,169,000 in the same period in 2015.

The decrease is due to lower sales volume of 4.6% with a combination of rate and utilization mix reductions of 22.5%. The decrease of 8.5% for the first quarter is comparable to our historic rates. Selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows.

Selling and marketing costs decreased $152,000 overall to $1,041,000 in the three months ended March 31, 2016. The decrease over last year is primarily due to reductions in public relations, advertising, promotions, professional fees and broker fees.

Employee compensation, travel and entertainment and trade show expenses as a group were flat versus the prior year. General and administrative expenses consists primarily the cost of the executive, administrative and financing personnel as well as professional fees.

General and administrative expenses increased $291,000 to $1,205,000 during the three months ended March 31, 2016. The increase was due to increases in bad debt of $120,000, compensation related expenses of $72,000, amortization of certain fees of $40,000, increased filing fees $26,000 and upgrades to the IT functions of $17,000.

The loss from operations was $1,202,000 in the three months ended March 31 as compared to a loss of $17,000 in the same period in 2015.

The loss was comprised in decreases in sales volume of $668,000, cost of goods sold increases of $1,094,000 that were partially offset by the LA plant cost savings of $395,000 and total lower overall operating expenses of $180,000.

Interest and bank related charges increased $124,000 to $378,000 in the three months ended March 31, compared to expenses of $254,000 in the same period in the prior year. The increase is primarily due to our increased borrowing on the revolving line of credit, an additional term loan and the new borrowing on the new capital expansion loan.

The $1,169,000 decrease in the modified EBITDA for the three months resulted from increases in EBITDA adjustments totaling $183,000 for the quarter less the $1,309,000 increase in net operating loss. The 73,000 decrease in depreciation and amortization was due to the raise in the asset base.

The $190,000 increase in the interest expense was due to the increased loan balances. And the stock compensation expense increase of $69,000 was due to amortization of prior year stock awards. Cash and liquidity.

As of March 31, 2016, we had a stockholders deficit of $581,000 and a working capital deficit of $645,000 compared to stockholders equity of $785,000 and working capital of $730,000 at December 31, 2015. One moment while I take a quick drink of water.

Our cash and cash equivalents at March 31, 2016 decreased by $1,168,000 to $648,000 at March 31, compared to $1,816,000 at December 31, 2015. Net cash used in operating activities for the three months ended March 31 was $755,000.

Investing activities included $186,000 for the LA plant not covered under the CapEx borrowing agreement and $227,000 used to pay down leases and lines of credit. We believe the company currently has the necessary working capital to support existing operations until a revolver becomes due in December of this year.

Consistent with past refinancing practice regarding the line of credit, the company believes that this will be successful in renewing the line of credit for another timeframe similar to the past, which is a two-year timeframe. There are no assurances that this refinancing will be completed.

Our primary capital source will be positive cash flow from operations through the balance of the year. Our sales goals do not materialize as planned. We believe the company can reduce operating costs and can be managed to maintain positive cash flow for the operations.

Historically, we have financed operations primarily through private sales of common stock, preferred stock, convertible stock, convertible debt, a line of credit from a financial institute and cash generated from operations. We may not generate sufficient revenues from product sales in the future to achieve profitable operations.

If we are not able to achieve profitable operations at some point in the future, we eventually will have insufficient working capital to maintain our operations, as we presently intend to conduct them and to fund the expansion of product or product development.

In addition, our losses may increase in the future as we expand our manufacturing capabilities to fund the marketing plans and product development. These losses among others may have or may in the future continue to have an adverse effect on our working capital, total assets and stockholder equity.

If we are unable to achieve that profitability, the market value of our common stock would decline and there would be a material adverse effect on our financial condition. If we suffer losses from operations, our working capital may be insufficient to support our ability to expand business operations as rapidly as we deem necessary at the time.

Unless we are unable to obtain additional funding, there will be no assurance that we can obtain that financing on acceptable terms or if at all.

If adequate funds are not available or not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our levels of operation, including reducing infrastructure, promotions, personnel and other operating expenses.

These events could affect our business, results of operations and financial condition.

If adequate funds are not available or if they are not available on acceptable terms, our ability to fund growth of operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures will be significantly limited. Therefore, our outlook.

It should be recognized that while supply chain interruption has had a significant negative impact on the company in 2015, the company sales have been slower than expected to recover from lost shelf space in the first quarter of 2016.

Operational results have significantly recovered to fill orders as they arrived at a stable margin after discounting that one-time charge. The new plant will add to our operational capabilities.

In the quarter, we demonstrated the first all-natural beverage delivered in a fountain setting which when launched would enable the company to be recognized as the leading provider of natural healthy beverage. Now it is my pleasure to turn over the call to Chris Reed, the Founder and CEO of Reed's, Inc..

Thank you Dan. Welcome and thank you for joining us today at the Reed's Inc. first quarter 2016 results. I am going to try to keep this short because I believe we have already gone pretty long here. So I have got a timer going. Sales disruption of the third quarter, at a time to explain it, we were down to one plant from two plants.

That after 24 years of running a co-packing on East Coast with this plant, it was the first time they actually for all of August couldn't produce a case for us and our West Coast plant which is now getting a relatively large revamp, a $5 million revamp, to be able to run three times faster was not up and running.

So, we are running our slow line at full pace. So the first thing that happened during that time is that we preferentially produced for the Reed's line. So we didn't completely shut off production for every other SKU, but we produced more Reed's than on a percentage basis, because it was our number one line and our fastest growing line of products.

The second preferential treatment was for the Virgil's soda line and the third preferential treatment was for the Kombucha line. The effect of the preferential production was that Reed's products were out of stock for three or four weeks during that period of time. Virgil's was out six to eight weeks and the Kombucha was out for about 12 weeks.

Also during that time, we had to stop all promotional activity which hurt momentum and some of our distributors like UNFI slowly allowed our products to come back. Our largest customer UNFI slowly let our products come back in with some of the smaller items in the Virgil's line, for instance coming on as late as February.

So the effect of this is that Reed's even with this hindrance and we probably have somewhere between 40,000 and 50,000 customers and we don't have a perfect window into what happened during those times we were out of stock, but we can imagine that some of them switched to other brands, other things ended up in our shelf positioning.

Reed's is back on growth in the first quarter at 5% up for the brands, even with the hindrances of not having it in stock during that period time in the third quarter. Also, it was trending against last year where the Extra Ginger Brew, for instance, have been up 37%.

So it was a tremendous growth in 2015 and we were able to match an accelerator to expand on that growth even with our supply chain problems. Virgil's was down 10% for the quarter, but Virgil's Root Beer which got better preferential treatment at the distributor level and also in production was up to growth at 1% growth for the quarter.

Our Kombucha was down 17%, private label and candy were down. Supermarkets are still trending up for Reed's. Both Virgil's and Reed's in mainstream supermarkets are doing very well. And the Stronger Ginger Brew is finally in introduction to the marketplace, including a recent placement into the Kroger supermarket chain.

The product reception for Stronger has been phenomenal. It's a better Extra Ginger Brew. We see people preferring it over our Extra, somewhere maybe five or 10 to one and so retailers are very excited about it.

It did not add a whole lot to the 5% growth of Extra in the first quarter, but it's off to the races and large and significant placements are happening for that brand. There is still a very big opportunity with the West Coast plant to operate three times faster with the investment we are doing.

And we are expecting savings of up to $75,000 $100,000 a month from that. And the East Coast, we have expectations of savings of approximately $150,000 a month that are yet to be implemented. We have negotiated lower contract production rates and we can bring online more fully these plants are doing it.

So, we see an opportunity to save between 5% and 6% of sales through the West Coast facility coming online and the East Coast facilities being managed and into getting fully implemented to receive the savings that we have negotiated.

Our current margins running around 26% are, in my estimation, running about 2% lower than expected and that is partially due to the supply chain issues and the way we have had to manage the supply chain.

The efficiencies weren't normal efficiencies from being our steady state efficiencies should increase our margins a bit, but also with the 5% to 6% that we envision from the West Coast plant being improved and the East Coast plant negotiations and full implementation.

We should be able to see up to five or six percentage point for those plant improvements and a couple of percentage points additional on margin due to the improved general management of the purchasing and scheduling of raw materials, et cetera. So some of the highlights of the quarter are idle plant was down 59%.

There was a $400,000 savings for the quarter. If we had brought the full West Coast new plant new line onboard and created these kind of results we would have been excited.

The fact that our new COO Mark Beaton has been able to implement efficiencies into our existing plants and get us the $400,000 a quarter of improvement in operation expenses is a really good kind of a future projection of what to expect when the new plant comes onboard. The new plant runs three times faster with less people.

So we again are envisioning another $75,000 to $100,000 of savings a month from the implementation of that plant. Delivery and handling was down to 8.5%, down 27.4% from $1.2 million to $0.8 million. So there was another $400,000 savings during the quarter from just the management of our current delivery and handling freight.

And what we were anticipating, we didn't anticipate this at all, I mean obviously Mark came onboard, we expected improvements, but we expected the new plant to be able to save a lot of transshipments from the East Coast to the West Coast and save approximately $80,000 a month or approximately $0.25 million per quarter.

So we are pretty excited about the wins that we are seeing there. It's definitely helping the financial situation. We still have two more plants. The other highlight is that we had two plants onboard in 2015. Now we have four plants producing for the company.

We knew at the end or the middle of 2014 that we had maxed out our two facilities and 2015 absolutely needed a third facility online. That third facility did come onboard eventually at the latter part of the third quarter, but also about the same time the fourth facility came onboard. So it feels like we have a very good handle on the supply chain.

The opportunities still are significant for us in grocery. We are still a young brand.

We are in the top 50 soft drink brands now and there is still a huge opportunity for more ACV, more higher percentage of stores carrying our product, competitors like Izze have twice the number of stores than what we have with our products in and there is definitely a big opportunity for more items.

And the longer we are in stores, the more mature supermarkets we see a significant increase in the amount of business we do as we are able to run more promotions and introduce the customers who visit those stores to our products.

There is still a huge opportunity in DSD and primarily we have been focused on grocery and more recently, we have been bringing on Anheuser-Busch or MillerCoors distribution partners around the country.

For instance, our Manhattan Beer, MillerCoor's largest distributor in the country, Manhattan Beer distributor is up to approximately $1 million in sales and based on our early work with them here, we are a few years into the relationship, we can see that we can go up many times more business in Manhattan Beer.

We are currently doing about $8 million in the Anheuser-Busch, MillerCoor's distribution networks and we can see that since we are in our infancy, the projection we would give is somewhere between $50 million and $100 million of sales in the channel of up and down the street through these distributors and convenience store, nightclub and bar.

Craft soda is still a significant driver for the business. I know I have mentioned this before but we were going into Safeway to make a presentation and we bought $300 million worth of scan data from the Nielsen type rating service called IRI and we analyzed the sales and gross profits generated by item on the soft drink aisle.

I believe there is 115 items in the store being sold scan through the register and the number one, two, three and four brands were Coke, Diet Coke, Pepsi or SKUs and Coke, Diet Coke, Pepsi and Diet Pepsi.

Number five was Reed's Extra Ginger Brew and then in hindsight, we decided that it wasn't really fair that Coke had 75, 80 inches for their one SKU and we had two four packs about 9 inches. So on a gross profit per linear foot of real estate, Reed's Ginger Brew was the number one gross profit generating soft drink in Safeway during a 52-week.

That to me says craft sodas will follow the success of craft beer.

Today, I believe if you were to ask a supermarket chain would you rather have your craft beer aisle or your regular beer aisle, I believe that the answer would be craft beer because the margins are significantly higher than the loss leading type wars that go on in the low price beer or low price soft drinks.

And the retailers are starting to see the light that craft sodas offer that same type of economics. So I believe we are still at the beginning of the craft soda revolution.

Probably one of the most exciting things that happened over the last two years for us is that we have been asked to develop our soft drinks into a bag-in-a-box format, a soda fountain format. What makes this interesting again is the economics around it.

30 gallons of soft drinks from me, for instance Extra Ginger Brew, if you would like to buy it today from our company, you would have to buy from a distributor 13.3 cases to pour 30 gallon at approximately average street price of 27 box for $360.

Or I can sell you at a very good margin to myself, the same product in a concentrate bag-in-a-box for 20% of that cost.

The economics of this new way of buying Reed's products, Virgil's products and quite frankly during the R&D period, we have developed and pulled out of our R&D war chest all of the products that we develop during the bad economy where that drove us into private label.

So now we have soft drinks coming off of this new bag-in-a-box that include Extra Ginger Brew and Virgil's Root Beer, but also include Orange Passion Mango Soda with fresh juices or Hibiscus Grapefruit Soda.

And let's say the client who found us through their ferreting out and vetting the marketplace for an excellent partner to replace their current Coke or Pepsi partner is very excited about the kinds of flavors and soft drinks that are currently being developed by Reed's. We hope to go into trial in July and a bigger more expanded trial in November.

The equipment is also very exciting because we believed from early on that if you are going to have a new soft drink, you need to have a new soft drink fountain product that's natural. You needed to look different than the machines out there. There are actually 700,000 soft drink soda fountain machines in America.

It's probably the primary way that people get their soft drinks. And while we have been significantly pricey for most of American commerce, as we bring down our cost for our products by 80%, the number of accounts that can talk and consider offering products like ours goes all the way, I believe, to McDonald's.

So we are having very exciting conversations with large national retailers right now. We are in the heavy R&D. There are three or four ways we envision this going to market and we are trying to vet the best way to do that with feedback from our new partners.

We did expose the product at Expo West to 70,000 people who walked through there from the natural food trade and we are about to expose it again at the National Restaurant Show in a couple weeks in Chicago.

The Expo West show was very well received and we have a number of national retailers that are in negotiation with us and also putting it into their blueprints for new concept stores coming out. So it's a very exciting time still for Reed's, if only with a hiccup. Craft sodas is still hot. The economics have not gone away.

The bag-in-a-box soda fountain is a significant new opportunity. There will be some very exciting announcements coming later on this.

And we believe, for instance, even I waited till February to bring on our lesser SKUs, pick up seven items now in May, allowing us for the first time to go back into a promotional activity, in fact now they are sending out an email blaster to 60,000 customers and letting them know that Reed's back in stock. So Reed's is back.

We are getting back not only shelf placement we were at before, we have a number of new distributors coming onboard in large national retailers that carry the product now that weren't carrying it before. We have been a little bit slack and relax in certain way in giving that information to our shareholders.

But in a certain way, we have also been reluctant to painting a target on our back and let everybody know what's going on at Reed's. So it's still extreme enthusiasm around what we are doing and we look forward to having wonderful quarters moving forward. And at this point, I am going leave open the floor to questions..

[Operator Instructions]. Our first question is from Anthony Vendetti from Maxim Group. Please proceed..

Thanks guys. How are you? Just in terms of the plant improvement at the headquarters, did you mentioned that the total cost for these improvements would be $5 million? And then if you could just talk about where you are with the second phase of that? I may have missed that..

Yes. It's a good question and I don't think I addressed it to the degree that I can now. And I am not sure on the $5 million. I believe equipment was somewhere between $3.5 million and $4 million and soft costs are running somewhere closer to $0.75 million to $1 million. And if anyone else knows better, feel free to chirp in.

That's my best understanding. In terms of where I think the utilities associated with the new plant, such as increased steam production, increased electricity, plant air, water, gas, all of that are in the process or finishing the process of being installed.

The equipment has been purchased and it's staged around the plant perimeter or in the warehouses that we control around where we are located in Los Angeles. There is a full plan and implementation and I would say that we would have this done in two to three months from now.

But one of the more recent issues that have come up is that a number of our private label customers and we tend to do a bunch of third and fourth quarter private label business, have doubled down or tripled down their business for the year.

So we are having a stronger private label third and fourth quarter than ever before and it is also the only place we can run it is in LA. So if we can squeeze in a little bit of this, we will try but the fact remains we probably need two two-week periods where we shut the plant down to fully implement the new lined high-speed automated line.

So it will probably get pushed back because of orders and business till the end of the year..

Okay. So that's because the orders that you have, you don't want to completely shut it down before then so it will get pushed back a little bit. But everything's been purchased and ready to go and you will stage it according to demand and when you can bring it down at low demand.

Is that right?.

Right. So there are efficiencies obviously coming in. But most of it's not from the new plant, it's just Mark Beaton and the management of the existing facilities.

But there are some of the packaging line, et cetera that are kind of on the peripheral that won't interrupt the current line that we will be able to implement it and that will have some effect on the efficiencies of the plant here.

I think the real, the big boost in production quantities which allows us to stop the transshipment and save $80,000 a month, that won't happen until we can shut the line down and actually implement this. So the big savings will have to wait..

Okay. So $80,000 a month is from the new plant.

But the $400,000 that, I don’t know it's Chris, you talked about that or Dan you mentioned that, the $400,000 per quarter in improvements are just from efficiencies that Dan and Mark have put in place prior to these plant improvement, right?.

Right. Yes. And it surprises everyone. But yes, there is new management, new personnel are in there, new contracts with contract laborers and just a lot more efficient general management of the people out there running the products. It's just running a whole lot better..

Okay.

And should we expect as these efficiencies start playing out and as the new plant comes on on-stream, the $80,000 a month, how much should we see overall in terms of gross margin improvement on the corporate line?.

I envision and Dan will correct me on it, some of it's freight, which is below the line, but there is approximate in freight from the West Coast facility because we are transshipping 40,000 or 50,000 cases a month to the West Coast.

And Dan's analysis, we save about $80,000 a month for freight by getting this plant up and running and running everything the West Coast needs from this plant. They have not put in the efficiencies of running the plant three times as fast with less labor, because it's automated.

And they said, well, you know, but we are going to have more equipment, we will have more depreciation and amortization against that. So they are kind of holding that there. But a lot of that is non-cash-ish and I am okay with the actual cash that we are going to be saving off of labor there.

So there will be savings beyond the freight in the West Coast, is what I am trying to say. The East Coast is not in sync yet.

And what we have done is that we have three facilities making sure that we don't miss another order, but what we do have is a situation where were paying $1 case more than we should be and we know what the contract rates are going for right now. We have a contract we are staring at. We know how to do it. We have to implement it.

So we are going to trying to implement that over the next three or four months. And that's a big saving. That's a significant saving somewhere around 150,000 to 200,000 cases a month. So between the two of them and it's not all gross profit, I am expecting to save 5% to 6% on expenses.

Some of it's going to show up, particularly the toll fee on the East Coast will show up in the gross profit margin and then reduction of freight will show up below the line..

Okay. And then lastly on some of the customers that you may have lost during these interruptions and you said UNFI, most of them have come back slowly. Would you say you have regained at this point, 80% of the customers? Or 90%.

I think fair analysis is that we lost somewhere less than 10% of the customers during that period of time or 10% of the placements during that time and it was severe. But there is a lot of love here. So it's just coming back.

And of course, some of lees strong SKUs, like maybe Virgil's Root Beer, when that's back in stock, you are obligated to bring it back. But Black Cherry Cream may not have had customer base and it might have been out for four months or three months and someone found something else to stick on the shelf.

So there is less brand pressure to put that back in. But it will help that first time we have been able to since September of last year to run any kind of marketing or promotion with UNFI has been in May. And for the first time, they are going to announce to 60,000 customers, hey, Reed's is fully back in stock.

And Virgil's, the Kombucha was hit the hardest because it out the longest. Virgil's Root Beer is already back into growth. So I think that a lot of the supermarkets are more difficult because they have long period scheduling of changes on their aisle.

Their planograms come up for review once or twice a year and when you go to Wegmans and say, hey, you know that Kombucha we were doing their, they are like, well, look the next time the review is July. And Kombucha didn't really fully come on till early part of this year after being out practically since August.

So it's actually pretty impressive, but we had such a head of steam going into the third quarter, we missed $5 million worth of sales, and that $5 million worth of sales would have put us about 30% that quarter. So, we really pulled a lot of wind out of our sale and I think that -- but we are still looking forward to getting that back.

We are doing all the right stuff, some of this might take up to a year to do.

I know Harris Teeter dropped us, and you go in there to customers like -- the big supermarket chains don't really have a lot of tolerance for people who can't keep their SKUs in stock, but our ACV, our percentage of stores we are in in large format supermarkets mainstream is still high.

I think we are back to where we were with Reed's and we are down 2% or 3% from 23% to 21% or something like that with Virgil. So, there is still reaching out and re-getting that in keeping and getting that relationship reinvigorated. But it's going very well. In the meantime, we have got new customers coming on. So, we expect to get a lot of it back..

Okay. Great. Thank you..

Our next question is from Mitch Pinheiro with Wunderlich Securities. Please proceed..

Hi. Good afternoon guys. First, Dan, thanks for putting all that product data, the 8-ounce case volume data. It's very helpful, and to the degree of your detail was even more helpful. So thank you for that. A question about, just sort of following up with some of those other questions.

So when I look back, I was a little surprised when we last spoke on the conference call that this quarter was going to be flattish. It turns out it was down 6% with last first quarter.

If I go back and look at the six-month period to six months, so fourth quarter plus this quarter compared with the same periods a year ago, you are up about 5% in revenue.

And so, is that sort of -- I mean, I realize that you had a tough comp year-over-year, and I realize that maybe you have got this big windfall in the fourth quarter when your sales were up 13%, sort of like getting back your channel fill maybe from being out of stock.

Is 5%, is that kind of rate if I look at it six months over six months, and I am seeing what you have given us in the sales of Reed's, and is that like the right type of level mid-single-digit growth for the next quarter or is there anything – How should I --?.

The way I would think about that, Mitch, is that normally the warehouses and distribution companies that we are partnered with have a full warehouse, and there is not a period of time -- it is not a big one-time selling to get them their inventory, they are working inventory.

So fourth quarter benefited from a working inventory, restocking on a lot of the items, so it might have been flat per se, if you took, let's say, I don't know what you would say the working inventory is, but if you are selling $3 million, $4 million a month, most of your people are going to have at least a week or two supply.

It could have been $1 million or $2 million just to get back into -- not everything was out of stock completely, but so the figure was like $1 million, $1.5 million of sales from that period. So you might have had a flat fourth quarter, and a 5%, 6% down first quarter, so you are running below where you were last year.

If you are trying to look forward, you have got to remember that the third quarter was a horrendous thing last year, so we should be in growth over the third quarter in this year for certain.

And in the fourth quarter, as I have mentioned, we have had a number of clients double down on their private label for their favorite new private label stock that we have been doing for the last couple of years, and the plant is booked up.

We have already laid out every day through the end of November, and it's just complete 100% operation for these customers. So we kind of know we were booking a little bit more than last year there, and we were trending in the third quarter against it.

So we expect to be up some, but we also -- this bag-in-a-box, we are moving forward in very -- we are past second base [ph], and I think we are past third base and this is like a $30 million to $35 million gig that throws off a significant amount, so that's also partly what's driving our excitement, but also getting back into that growth mode here again like we were right before the third quarter last year..

So in the near term, so UNFI is just starting to promote you, but everybody knows that you are back in stock and feel good about putting it back on the shelf.

So are we talking just like modest growth in the second quarter here or I mean like flattish kind of thing?.

Yes. It's really hard to tell what's going to happen in May and June from what UNFI is doing, and all of the reclaiming stuff, but I can't really say. I think, again, we gave our projection that it will be flat for the first quarter and we were down 5%, 6%. If I say we going to have modest growth, I may be off on that.

So I would say short-term, it's kind of hard to tell. We thought after the fourth quarter, we were probably not thinking as factoring in as much the results or the effect of restocking the warehouses, but we thought that things have been really gone right back into the swing of things. And so, I would say that the second quarter could be flat.

It could be up a little, it could to be down a little bit. We are not certain right now..

Okay. And then just your thought process on the private label like delaying, wanting to fill orders for private label.

When I look at private label being [indiscernible] in this quarter, less than $0.5 million dollars, and the lowest of your gross profits, why would you want to delay the ability to save $250,000 a quarter, why would you want to delay that for a low-margin private label business? Is there something beyond that? Obviously relationships are going to grow, is there something more than just the dollars here?.

You are making, Dan CFO, so happy with your question. All right. Just a little bit of clarification on that. The East Coast is not a private label thing. It's just an implementation, and we are not slowing it up for private label at all, so most of the cost savings can come from the East Coast.

The West Coast plant, there is a lot of relationship with these customers, and the orders had already been agreed to, and then when someone says, I am going to double it, you are right, you could say no because I really want to get that plant onboard, and these savings we are talking about $80,000 a month that we would be saving from doing that, but then there is the best gross profits being generated per month by running private label instead.

So let's say those four weeks you give up, you can run 80,000 cases with a gross profit about $4. So it is about $320,000 versus what you would save during that four-month, $320,000.

So it's a wash, and given a wash and being a bigger company with better relationships and more business in the future, I will always take more business with an economic wash..

Okay. No. That's fair. Just wanted to make sure I understood that.

And what sort of a timing of your East Coast, the savings, you know getting the toll charges down, et cetera? Is that something that's going to be phased in, in the back half or how should we look at that?.

We have had our issues with this facility, and this is a facility we went into in 2014 at the end of the year knowing quite well we needed them up and running well before the summer of 2015, seeing that in 2014 we were already maxed out on two plants and even a little short in 2014 too.

So, we finally goosed it by putting a $0.5 million into plant improvements there and putting in the conveyor and buying a labeler and scheduling those up. So it was then scheduled for February and then April and then June and hiccupped all the way up to September. And the new COO said, damn it, I am going to bring on a fourth facility.

I don't trust these guys. So we finally have worked out things enough to move forward, because we’ve partnered in a different way now. We finally figured out the magic soup and we are going to have a real go at it here over the next couple months.

So my answer would be, we expect in the next two or three months to be fully operational and have this place doing some really good stuff for us. But if not, then we will be looking to figure out another way of doing it.

The reason I have a lot of confidence that we can save money over what we are currently paying is when I first renegotiated the contract in 2007, 2008, I had three bids that I was working off of, and the current facility had the low bid. And since then they have raised prices significantly, and we have new contracts at the low bid again.

But it's just, if it was a real smooth partner, it would be easier. We just can't afford another hiccup. It's more important for us to stay in stock and not have a hiccup, than have a hiccup and save money on some cases. So now we have a backup to the East Coast so that we can run and work through the remaining what we call bugs.

But we have a clear vision on it, and we hope to do it and phase it in over two or three or four months-ish..

Okay. So in the back half..

The back half, yes. Right..

And then I guess just final question and then actually one -- just a clarification. Dan, you mentioned slotting. You gave a number, I think, in the quarter. I didn't hear what that was or I missed it. Sorry.

Did I hear that correctly?.

Yes. We have -- slotting fees are fixed. You pay them one-time. And unfortunately, the sales volume that it was attached to didn't materialize as much as we expected. We do believe that as the sales continues to grow, the slotting fees will drop back into the mix.

What happened is, as we picked up a couple of additional distribution houses that require slotting fees. We are going to be looking to minimize those in the future..

Yes. Okay. And then I guess finally just on your fountain.

Will there be revenue at all this year just from testing in fountain?.

I believe there has to be, and I can tell you my salespeople are out on the West Coast meeting with national retailers there asking for dates and sourcing and buying equipment, so it's kind of moving fast and there is a lot of pressure, particularly since we took it to the Expo West, and now we are putting even more pressure on it by taking it to the National Restaurant Show.

So it's a very -- there is no doubt -- I know this is me doing the politician thing, there is no doubt the world needs a new soda fountain product out there. That should just be clear as a bell. Everybody is dying for it.

Every new concept restaurant chain is better, natural and more trendy and more foodie and crafty, and just there is no real room for Coke or Pepsi except it costs nothing and they mark it up 10 times, and they are making a fortune of it. So that's the main reason Coke or Pepsi, which show up in a new account, because you just can't live without it.

So, there is a desperation for what we are doing out there. And that's why we didn't start bag-in-the-box. Bag-in-the-box came to us. We didn't even have a clue or a thought on it.

We didn't believe we could do it with a brewed soda and the natural ingredients, but when someone waves $30 million or $40 million worth of business in front of your face, you go okay, I think we can try this.

So there is just this thing will -- it's not like just -- we have already done the worst thing we could have done for ourselves by putting it out in front of 70,000 trade people. Because it's like oh, so I get Reed's and Virgil's and all – and Orange Passion Mango and Hibiscus Grapefruit Sodas and all those cool stuff you develop, Mr.

Reed, I get that at 20% of what I have been paying for your stuff Where do I sign. So I am not saying it's a problem, it’s a lot of pressure. And we are just going to heap it on here. So, will we sell bag-in-the-box this year? Absolutely. What will the economic impact be? I have no clue, baby. I don't really go there [ph]..

Yes. Okay. And that's fair. And what about, so you have so much on your plate including this massive, your efficiency upgrade here in LA, who is going to handle this massive project for you? Are you able to handle that internally? Do you need to hire somebody? I mean, it sounds like you have your hands full as is and you can't mess this one up.

This is like your first and only chance? So how do you think about that?.

I don't feel like it's the first and only chance, but I will say I think the evidence of how things are playing at Reed's from an operational standpoint are the four facilities, before the plant came onboard $400,000 a quarter, which is more than we projected we would save bringing the plant on after it was on to the freight savings, just what you are looking at is a new level.

Mark Beaton came as the Senior VP of Operations from Dr. Pepper. So right now today, we are in an SQF audit to go to Level 3, which is our third-party independent audit, just a little anecdotal. The description from the guy is, what was it? It wasn't like bedazzled, some crazy adjective he used of blown away.

I mean this a guy who was here earlier a month just to go to tell us what things he needed fixed, but just absolutely floored with the transformation of this facility. So behind-the-scenes and the same things happening with Dan Miles, the new CFO.

The IT, the software, the infrastructure, all the peripheral to the CFO position, he has just done unbelievable stuff. So I think I kind of lost the train, actual train of your question there.

What did you ask about?.

Do you have the manpower and internal expertise to handle this very important potential development?.

But we have targeted a person, an employee that we will be hiring to liaison with the facility on East Coast, so that we’ve determined we need a person on the street at all times to make this thing run real smooth.

We also determined that we need an absolute at all times ready to flip the switch back up while we are saving money for every case that runs through the place, and we are willing as a group to work within those constraints, but I think you are looking at a group here that is showing more capability than we would have imagined, so we are really thrilled with just the level of management that's here.

So do I feel comfortable being able to implement these things? Not only do we hire [indiscernible] East Coast is going to be a liaison for the company 24/7 at the facility. This facility here is coming onboard because Mark Beaton has built facilities with this group called Concept to Reality.

So this engineering firm has fully vetted the installation, so this isn't Chris Reed buying equipment and installing the first plant, running at 100 bottles a minute. This is a fully automated, fully vetted, come visit the plant, that is what I would say to you, Mitch, here in Southern California. It's just a beauty right now.

It's really at another level..

Okay. All right. Well, listen thank you for taking the questions. Much appreciated..

Sure..

And our next question is from Kevin Dede with Rodman. Please proceed..

Hi Chris, Dan. Thanks for taking the question.

Listen, back to sort of what Mitch was alluding to, would the decision to hold off on the plant upgrade in LA, can you just give us sort of a bird's eye view of your floor plan and whether or not you think that push jeopardizes the opportunity in bag-in-the-box?.

Wow, that's an interesting questions. Bag-in-the-box, we currently produce around 30,000 cases a week in LA, which is about 60,000 gallons of finished goods. This particular bag-in-the-box project that we are bidding comes on next year and is running somewhere around 40,000 gallons a week of concentrate.

So in terms of volume of liquids, it's pretty simple. The equipment is a small footprint and the bag-in-the-box filler is in a line of packaging line. The whole thing is semi-automatic that can run significantly beyond what we will need to for this client. It is about a $0.25 million. So it's a small footprint, relatively easy to do.

I think we have most of the peripheral auxiliary equipment we need to do it. I have been doing the R&D around this. This has been very dear to my heart, so Mark Beaton is kind of running the revamp here, and I am kind of running R&D in bag-in-the-box.

So I think that when I gave up the COO position to Mark, I put it in good hands and things are moving really, really well there. But that freed me up to do a little bit of what I consider the biggest opportunities for the company right now, moving into this whole new arena..

Okay.

I guess the takeaway is that, yes number one, the production for bag-in-the-box will be conducted there in the brewery in LA, number two you are not concerned that you won't have the floor space to meet production demands?.

Right now, the current line is in about 3000 square feet and we have expanded the new line to 13,000 square feet, but it's not a big deal. God. I tell you what.

Getting your product into bottles, getting it labeled, getting it pasteurized, carbonated, all that stuff and putting it into boxes, palletized, I mean that is a whole lot of work, and putting your syrup together and batching this up is just -- it's about one-tenth of the effort of a fully bottled packaged product, so it's a cakewalk for operations relatively speaking..

Yes.

It just seemed to me that you might need more space to brew, right, given the amount of volume?.

It is.

If you are talking about 40,000 gallons a week, you are talking about an hour per batch at a thousand gallon tank sitting there, yes, just in filling, having a filler, you have got three people running a square foot somewhere around the 20 x 30 space in the plant, 600 square feet or less and you are filling $30 million plus worth of business out of that 600 square feet.

I think it's some of the best square footage you will ever spend. But it's very simple. It's not what's going to be the barrier to entry to that. The barrier to entry will be brewing up concentrates that are able to go into these bags and the flavors we have done and the development and not doing it with chemicals.

That's where the barrier to entry on this baby will be, but we don't see this as an operational challenge, but we do want to control it 100% for at least the first six months. There are people who do this for a living. But we are not going to let anyone touch it. I will personally be involved.

But there will be a high level of, practically a sea level, person overseeing this to make sure that even though it's a relatively simple thing, it's a very big deal and we don't want any hiccups of any kind. And quite frankly, the client is asking for redundancy. So while LA will be the place it's all being made.

I think probably you are right, within a month of the West Coast plant, we will need to have the East Coast facility, at least a backup facility, ready to rock and roll on the drop of a hat in case there is an earthquake or anything. So this is too big a deal to leave it to non-redundancy..

Fair enough. You talked to the rebound and promo spending at UNFI.

Can you speak to that, I guess, across to your full customer base? Do you see that turn back full breadth and could you specifically speak to perhaps what you have done in April versus say March?.

Yes.

So getting back into, we have stopped all promotions effectively everywhere for a long period of time, and we were quite frankly -- the second you say, okay we have got all of our promotional, we are able to promote again, and we were in some way back in stock on Virgil's by October, Reed's maybe late September-ish to October, and then over to through the end of the year and the beginning of this year, we started getting fully in stock on stuff.

Generally, every one of these people, everyone of these distributors that we work with were three or four months out on any kind of promotion, because they are like, okay, fine, so you are ready to promote, it's January, good I can give you April, I can give you May.

In the case of UNFI, I think yes, February that finally bought on – they went from seven or eight of our SKUs back to the 20 SKUs and they started bringing them on and they started talking to us and letting us to get back into a promotional thing.

And now, we have got big promotion on Stronger starting up and reintroduction promotions going on at the distributorships, and I think the second quarter right now is running flat to slightly below last year, but we kind of see that the promotions are kicking in and kind of hoping for a pretty significant end of May and hopefully June will be a lot healthier with all the reclaiming of stuff going on..

I know that there was some thinking about repacking Kombucha line and I was kind of wondering where you were with that, and whether or not that's still something you consider and whether or not that sort of factors into promoting that line again here coming off of this downturn?.

Well, you know, my sales manager loves you for that comment. So there is a big debate about the packaging on it. Now the new line is able to put the label on. I designed a bottle, that’s a custom bottle that's a first unique bottle package, and it has kind of a concave side which makes it extremely challenging to put a label on.

So, Avery developed a special label that could be bent into that reverse curve, and the new machines we are buying can do that.

So it will look a lot better than it has, but the problem is the product looks fantastic out in sunlight out in the street, but it looks kind of in a poorly lit supermarket shelf, it can get pretty dark and kind of get lost there. So there is somewhat of a big debate on a relaunch that would include a repackaging.

We surely have the capability we have been producing Kombucha for private label customers like, I don't know if we have announced who it is, so I won't say. So we have a different bottle. It's more traditional Kombucha edition. There has been a push here to do it, so you’ve just pushed it a little bit more..

Well, don't take me wrong, Chris. I mean think I appreciate the uniqueness of the original bottle. I just know that there were some issues with the label. And I think you solved that, maybe you solved some of the point-of-sale attractiveness..

Right. We still make the best Kombucha on the market.

And Kombucha is still a very fast moving category, but I will say that Kombucha, there has been a lot of funding of Kombucha companies for first beverage, put a bunch of money to help aid Kombucha, but you taste these things side-by-side, Reed's just blows away the other Kombucha's out there in terms of flavor.

And you hear rumors, I know Hain Celestial, I think they are putting their high HPP juice, they are going to put out a Kombucha line on that. They have a Celestial Seasonings Kombucha that hadn't done very well for them over a bunch of years. But there is a lot more attention to that category, and yet we are not walking away from it.

I think though we may end up doing what you are asking about, but there is still a long runway for us to play with it. We have a lot of confidence in the customer, loving what's the best. So, ultimately that wins new customers and that's what we have seen over all the years we have been in business..

Okay.

So you also mentioned a couple of times, Chris, the 5% to 6% decline in costs and I am just kind of wondering from which base you are referring?.

All right. Let's say you are running about 80,000 a month off of the West Coast, and let's put it at 200,000 on the East Coast or maybe 150,000, a dollar a case on 150,000 to 200,000 cases, you are running roughly $0.25 million a month or $3 million a year.

I am going to pull out my calculator here and you divide that by $50 million, so that would be 3/50 is about 6%. So we have talking about 5% to 6% improvement by bringing these facilities fully onboard..

Okay. So when we look at the June quarter and obviously you’re not going to be all the way there yet, would you compare that -- yes, I am sorry, go ahead..

We are not going to be there much at all. To be honest with you, the surprise and wonderful significant increase of private label in the fourth quarter has eaten up and we have plotted out every date through the end of November, and it doesn't look possible for us to do anything but run almost full out.

I think we have slotted six days a week and we are arguing about the seventh right now from July 1 all the way to November 30 so that it is going to preclude us from doing the benefit on the West Coast, but the East Coast benefit can be implemented as fast as we can move in theory, and probably it will happen over two to four months.

At least, we are going to do our damnedest to that. How's that? Because we are motivated. That's probably the bigger part of the cash savings that are open or opportunities for us. And they are not just pie in the sky, we think we believe. It's like negotiated contracts..

Great. Okay. Fair enough. Thanks for that. I also wanted to extend my thanks Dan for that schedule in the 10-Q.

But my question regarding it is, granted we have a nice comparison for March-to-March, what about the balance of the three quarters of 2015? Would you expect to just offer those as you report those quarters or is there a chance you might be able to offer that data prior to that?.

That's a good request. I put it together with the sales manager here and we looked at it from the perspective of what information should be included and things like that. I thought for quarter-to-quarter would be a good view. Annually, I think if you go back to the 10-K, it's in there, but going forward, I was planning to do each Q as they came up.

I believe in the next quarter, I will be doing a cumulative year-to-date, which would be day one through the end of the second quarter, but I will also break out the second quarter of itself as well, and with the same comparison and same timeframes for the prior year.

It really does help to know it and I am looking at that as in terms of 8-ounce servings, because we have so many different packages.

The problems that you will get into next as we get to the Q3 is the interruption in the sales activity, and it will be interesting to see how the mix of what was actually produced and sold, how it plays against the actual margins of those items, so yes, I will do it for each quarter and I will accumulate it moving forward as well..

Guys, can I just say, we are 40 minutes, 45 minutes into the questions. I don't want to torture the people who are following us.

Let's take other question, we are available, you can reach out to us through our IR site, and I would like to at this point close down the questions for sanity sake unless you really have a burning one, Kevin, give us a call and we would be happy to go through stuff with anyone.

So I want to thank everyone for their time today in following the company, and we are still live and kicking and extremely enthusiastic and hoping to be as disruptive as possible in the beverage industry and in the upcoming years. Thank you very much for your time..

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

Thanks Scott..