Reed's CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Reed's, Inc. (REED)

Reed’s, Inc. (NASDAQ:REED)

Q1 2013 Earnings Conference Call

May 14, 2012 16:14 ET

Executives

Jim Linesch - Chief Financial Officer

Chris Reed - Chairman and Chief Executive Officer

Analysts

Joe Munda - Sidoti & Company

Vipul Sagar - Blash Capital

James Kuzowsky

Michael Rudin

Operator

Ladies and gentlemen, thank you for joining the Reed’s Inc. First Quarter Earnings Call for 2013. Your host for today Jim Linesch will now begin.

Jim Linesch - Chief Financial Officer

Good afternoon everyone. My name is Jim Linesch, the Chief Financial Officer of Reed’s Inc. I would like to welcome all of you to our first quarter earnings conference call. With me today is Mr. Chris Reed, Chairman and CEO.

I would like to remind our listeners that in this call, management’s remarks may contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks, but not limited to risks relating to demand for the company’s products, dependence on third-party distributors, changes in the competitive environment, access to capital, and other information detailed from time-to-time in the company’s filings with the United States Securities and Exchange Commission. In addition, any projections as to the company’s future performance represent management’s estimates as of today, May 14, 2013. Reed’s Inc. assumes no obligation to update these projections in the future as market conditions change.

Now, I would like to make a few brief comments about our financial performance for the quarter, which will be followed by Chris Reed who will give us an outlook of the company’s business at this time.

During our first quarter, sales increased by 24% to $8.1 million and our gross profit increased by 28% to $2.5 million. The increase in revenues was spread evenly among our brands and our private label products. Last year in the 2012 first quarter, our private label revenues included approximately 400,000 of ingredient sales. So, aside from that the increase in private label cases actually increased by 55% in 2013, representing additional new business in the first quarter that was not part of 2012. Our private label business represents approximately 15% of our overall revenues. Kombucha sales were approximately 7% of our case shipments of branded products during the quarter.

Our tangible cost of goods sold reduced to 60% of net sales in the first quarter compared to 64% of net sales in 2012. The improvement compared to last year is primarily due to lower margins on the ingredients sales that I mentioned above. However, we have experienced margin improvement of about 1% on our branded products and higher improvements on our current private label sales.

Cost of goods sold idle capacity is a measurement of our plant overhead and direct cost in excess of the Copac labor allocated to finished goods produced in our Los Angeles plant. In the first quarter, these cost increased by 317,000 or 86% to 686,000. The primary cause of this increase was our Kombucha production holding up to plant. Our bottling process for this cultured beverage has been very slow and has utilized an inordinate portion of our plant capacity. With recent equipment and process improvements, we believe that we have largely solved the production issues on Kombucha and we look forward to a dramatic increase in our line speed, while we follow this new product.

Other than Kombucha, we are also taking strong measures to increase the overall capacity of our Los Angeles plant to accommodate more of our West Coast demand for products. At a minimum, we should experience a reduction of idle capacity cost to levels experienced in prior quarters. Delivery and handling expenses are a combination of the outside warehouse expenses for finished goods handling and outbound freight to deliver products to our customers.

During the first quarter, we had our dramatic increase in these cost to $427,000, up $127,000 to $906,000 or about 11% of our net revenues. During our 2013 first quarter, we devoted a larger portion of our West Coast plant capacity to Kombucha and private label production. As a result, we produced a higher portion of our branded soft drinks in Pennsylvania and incurred freight to move the product to our West Coast customers. At the same time, we had very strong increases in sales in the Pacific Northwest, where case volumes shipped increased by 48% over last year. This is our highest cost region to ship to.

We also were required to use more temperature-controlled freight containers during the cold winter this year than last year, especially to the Pacific Northwest. We estimate that approximately one-fourth of the overall freight increase was due to the use of temperature-controlled freight, a cost that will not be recurring. We have plans to resume producing more of our branded soft drinks on the West Coast and we feel that our delivery and handling cost will come back down to approximately 9% to 10% of net revenues in future quarters.

Combined SG&A cost increased by about $400,000 to $1.9 million in the first quarter, an increase of 28%. Stock option expense increased by 93% and the other increases were primarily compensation and professional fees. Our overall full-time staff increased by about 8 people mostly in sales. We feel that we are on track with our plans for 2013 regarding sales and margin contribution. While our plant and shipping costs were high in the first quarter, these are both areas that we can and will improve. As we continue to increase our sales and expand our distribution network, we also look forward to improving our overall bottom line performance in the quarters to come.

Now, I would like to turn this call over to Chris Reed, our President and CEO. Thank you.

Chris Reed - Chairman and Chief Executive Officer

Thanks Jim. Well, thanks for joining us today to get catch up with Reed’s in our first quarter earnings call. You know, it’s funny I am nervous today and I am like – I feel like oh, boy, I should be defending this performance, but really here behind the doors and where we are right now, it’s actually extremely exciting, because we would have loved to shown a profit for the first quarter and if I were running the first quarter next year with the same sales and everything, by that time with the plant being fully onboard here with branded not having to ship refrigerated trucks and etcetera, etcetera, we probably would have shifted the first quarter somewhere around $300,000 or $400,000, and then much closer to profitable in our absolute worst quarter of the year because of seasonality.

The way I look at the quarter and the reason I am excited about what has happened here is because as Jim mentioned, we sold off commodities that took us from $6 million to $6.5 million in the first quarter of 2012. So, we really had $6 million of what we call our normalized normal sales and we did $8 million in total sales in the first quarter. So, we really went up $2 million in a single quarter, our worst quarter of the year. And that’s the excitement that we are feeling and that’s the excitement that we are living in the second quarter here just great improvement in the amount of business that we are doing year-over-year. So, and it’s coming from – last year, we did not have Kombucha. Obviously, this year, we have a third contributor to the revenue growth and it’s doing well. I will get into it little bit more, but just really in our hearts, we are looking at 33% growth for the first quarter and that’s how we feel about what we are doing.

And quite frankly, I have looked at the plant situation and I have got really sick and tired of it. So, I got rid of a plant manager in January, hired a hotshot to come in and got rid of him in April. And I am running the plant. I am a chemical engineer. I used to design oil and gas refineries and the amount of time it takes me to manage a plant manager, I am getting a lot more done. So, today, we are running Kombucha in the second shift and I have three major projects that are going to impact the way it runs. And if I get two of them, two of the three to work, then I will have a 100% improvement in the rate of sales.

So, we are rebuilding the equipment. We are just doing everything that you would expect a plant to do and I have told everybody here in three months you will see a completely different plant here. And I am kind of micromanaging it for a little bit and I know that sounds like a bad use of CEO, but I kind of put my old tension where it’s most needed in the business. And I am looking at an opportunity of about $100,000 a month here to unwind expenses and improve performance. And I consider that worth my attention. So, if the plant is getting a couple of hours of my time a day, and I am having a lot of fun, because I feel that we are having great success and I am an engineer. So, I am good at what I do in that regard. And I think it will reflect here in later quarters.

And also we have spent a lot of time looking at Kombucha and how best to move Kombucha into the marketplace. We have looked at the increasing availability of gross profits for marketing and advertising, and I kind of fill back on what we do well here and that’s a push, and push marketing. And we beefed up the sales force with a number of new people, but we have also beefed up relationships with companies that do marketing and merchandizing out in the field. So, we have a big new relationship with one of the largest specialty and natural food marketing groups that is going to supplement our marketing for the Kombucha rollout in our own products. And that just started.

I will say in the quarter we launched four new flavors. We doubled up to eight flavors for the Kombucha. And I say that’s in my press release, but I like to say it again. I feel like our four new flavors were inspired and it’s we are seeing it in the marketplace we go from anyone who is trying to following company closely have gone out there and seen our four balls and a cooler, we will comment a number of different ways from I wish it was brighter on the shelf to, man, you got a small presence there. So, having eight items actually will build the line just from the shelf presence and people start noticing, hey, there is another line there. It’s not some fluky little thing. So, the new flavors Coconut Water Lime, the pomegranate as POM Wonderful, Ginger Kombucha, we actually do buy the pomegranate from POM Wonderful. They do have an organic single strength pomegranate and it is a very high, high level experience of pomegranate for those foodies out there.

The coconut category is on fire. Kombucha is on fire. We married them in one drink and then we came out with a Cabernet Grape. So, they are just – we just saw all the first POs last week. We launched it at the show, expo, our big natural foods show in Anaheim in March. And we have had a lot of tent up excitement around it with our sales force clouding it, some advertisements to the trade, but now it’s fully unleashed and sales pipeline is still obviously, Kombucha in May is quite nice, up probably somewhere around 70% or 80% over the prior months. So, we got the okay last October for Whole Foods, and we are already in a quarter, the Whole Foods, it’s really slow. I mean, it’s like you got the okay, corporate and then you have to go sell every individual store. So, it’s a lot of fun, so not every change that way. We got into sprouts in 150 stores and that started up in April and probably take through the next few months to fully slide in, but that’s eight flavors. And so most of the new business for Kombucha has not come on, not only the new four flavors adjusting the light of day, the number of accounts – large national accounts that have approved the Kombucha items, the original four flavors haven’t even fully come on board. So, the run rate is somewhere around $2.5 million. We are still holding to our projection, our guidance that we should to be able to at least double, but our goal is to triple this year, the sales or the run rate towards the end of the year be closer to $7.5 million and from us that translate to about 30,000 cases a month. So, we are north of 10,000 and we are moving in a not so linear line, but moving pretty well and feeling confident that we will be hitting these numbers.

But what that means to the company is when you are running 30,000 cases and you are netting gross profit somewhere between $5 and $7 a case. You have got somewhere around, because I do the math in my head 30 times. So, 150,000 to 200,000 of this additional gross profit every month that doesn’t have an expense against it. So, that should help us move into more profitability at these later months, quarters come down for us. And I don’t know if we are going to pickup couple of million dollars of new business every quarter here, but we are keeping our fingers crossed obviously our first quarter seasonally our worst. So, it feels like if we can do at this quarter, we might be able to show some nice results moving down the road for the other quarters of the year.

And in the meantime, I am not taking my eye off the ball for the marketing sales where I do spend a bit of my time, but the plant has some very easy fixes, and I am just knocking heads together right now and actually building a great team, and the teamwork is going to show improvements here. Every week if a major new project done simple things like just doubling the amount of refrigeration, doubling the compressed air, adding 50% more steam capacity, and just listening closely to what’s slowing down this plant. And I think we are running somewhere between 45,000 to 55,000 cases a month. I am moving the plant up to somewhere between 80,000 and 100,000 cases a month is my feeling over the next three to six months and that will have a dramatic and direct impact on profitability here.

So, I am trying to think of if there is anything I need to feel and compelled to talk about before opening the floor to questions here in a minute, but I guess that kind of concludes my ramble on the state of the union. And at this point, I would like to open the floor to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is from Joe Munda with Sidoti & Company. Please go ahead.

Joe Munda - Sidoti & Company

Good afternoon, Chris and Jim. Thanks for taking the questions. Jim, I was wondering if you could breakout for us, I thought a little bit you had mentioned private label 15% of overall revenue in the quarter, I think you said branded 64% and then you said Kombucha is 7% of branded, is that correct?

Jim Linesch

Yes.

Chris Reed

Not even 7% of sales.

Jim Linesch

7% of – Kombucha was 7% of branded cases shift.

Joe Munda - Sidoti & Company

Okay. Can we get like hard sales numbers, would that be possible?

Jim Linesch

At this time, Joe, we are not providing that. To tell you honestly, I don’t have a solid breakout of the promotions and allowances by product group. And so, we would have to be talking about net sales. So, that’s why I translated it to cases shipped.

Joe Munda - Sidoti & Company

Okay. And then Chris, as far as Kombucha and the plant issues, you guys said you solved the issues. Can you give us a little bit more color there, because I was just looking at CapEx and it really hasn’t changed year-over-year, and I was wondering are you going to be – are you feeling capacity control constraints and are you going to be rewarding more capital to building up the plant?

Jim Linesch

Well, I think people have noticed if you have been out in the field in New England and you’re following Kombucha there. We’ve actually been out of stock for a little bit lately. And so we are – and so we been feeling it in the plant and I am following it very closely what’s going on in the plant and it’s just we have done as we are not really spending a lot of CapEx, but we are leasing equipment. So, we’ve leased new air compressors, leased just all of basics, so you’d get into a brewery bottling environment. So, we have – so we are not flowing down things for really small investments that correct the situation. So, did I catch…

Chris Reed

And generally we are not spending a lot on CapEx. We are buying a new boiler, we’re buying some parts for our crowner, but it’s not – we are not talking about major expenditures on the CapEx side and some of the items that we are bringing online now were expenditures last year like for instance we are just bringing on some new tanks that we bought last year and they are coming on – they are online now.

Joe Munda - Sidoti & Company

Okay, okay. And then…

Chris Reed

There is no great big plan for CapEx coming up.

Jim Linesch

Earlier in the year we were out for quotes to find a filler that would double the speed of the line, but after spending time out on the line and looking at what performance we can get by just keeping our current equipment and support systems just running properly, we can probably double the output from the plant just from that. So, I’m a firm believer in fixing what you have before doubling down. We’re not talking more than a leasing a $350,000 piece of equipment to double the speed of the line, but I probably told that we’re leasing some around $0.5 million to do the complete job, that’s probably going to happen now because we are expanding relatively rapidly.

Joe Munda - Sidoti & Company

Thanks. Jim you had spoken about delivering and handling you said approximately a quarter of the $420,000 or $27,000 increase so roughly $107,000 was due to the temperature controlled freight and that should be – that’s one-time in nature I’m guessing because of quarter you have said. But I mean 8%, 9% to 10% of revenue in future quarters is that a viable number?

Jim Linesch

If you look back historically that’s pretty much what we have been running. And so…

Joe Munda - Sidoti & Company

It won’t be...

Jim Linesch

We feel that we will get back down to that a part of it is getting branded production out of our plant here in Los Angeles and a part of it is using smarter freight delivery.

Joe Munda - Sidoti & Company

Okay. And then…

Jim Linesch

A big picture Joe…

Joe Munda - Sidoti & Company

I’m just – I don’t need control but I’m trying to figure it out you’re shipping products from Pennsylvania and how is that going, I know $100,000 I mean on temperature control is not a lot, but you’re shipping products from Pennsylvania to the West Coast. So, I’m just trying to figure out how or what you guys are going to do because you say you’re constrained in the plant in LA.

Jim Linesch

Alright, so the plant is in constrained when it’s what I’m about to do to. I am freeing up the plant, so it can run approximately twice as fast as it currently is running.

Joe Munda - Sidoti & Company

So, then you can move what you have in Pennsylvania back to LA?

Jim Linesch

No, we just don’t have to shift from Pennsylvania. So, if a customer orders in the – if a customer ordered in the first quarter of this year we have to ship it with temperature controlled equipment from Pennsylvania to LA. Not only do we have the freight, but we have refrigerator freight on top of it. So, there was a $100,000 just in refrigerated access costs over normalized freight from Pennsylvania. But we wouldn’t have to spend any freight. So, it probably works out to about $3 a case on our 100,000 cases, so there is a $100,000 in freight, refrigerated freight the extra cost, but there is also a couple of $100,000 in just freight in general that we get rid of by running the plant for all of our branded products on the West Coast.

Joe Munda - Sidoti & Company

What happens in the summer months you’re not going to need...?

Chris Reed

Well, we don’t need refrigerated, but once the plant is up in running fully then we don’t need to ship at all from the East Coast.

Joe Munda - Sidoti & Company

Okay.

Chris Reed

So, there is huge savings on a per product sale.

Joe Munda - Sidoti & Company

Okay and you are at max capacity right now I am guessing?

Chris Reed

No, no I think I have mentioned in my dissertation that we were doing somewhere around 50,000 cases and I am going to try to boost it to 100,000 cases a month here by the end of six months, and by the end of three months most of the projects will be done.

Joe Munda - Sidoti & Company

Okay. And then you’re hoping and my last question then I’ll hop back in the queue, so the Kombucha is running at $2.5 million a quarter right now?

Chris Reed

No, on annualized basis.

Joe Munda - Sidoti & Company

Annualized basis and you want that get to $7 million by next year, right?

Chris Reed

No, by the end of this year about the fourth quarter we would like to be at like 30,000 cases a month which is approximately $600,000 a month of sales or about $7.2 million. So, that’s kind of our goal feeling level that we’re going to get, but still there is a lot of uncertainty in all of that, but we’re moving in that direction nicely.

Joe Munda - Sidoti & Company

By the fourth quarter?

Chris Reed

Yeah.

Joe Munda - Sidoti & Company

Okay, alright. Thanks guys.

Operator

Our next question is from Vipul Sagar with Blash Capital. Please go ahead.

Vipul Sagar - Blash Capital

Hi, there Chris and Jim. It’s something that I had talked to you before about Dallas pricing, I walk into Trader Joe’s and I go to Whole Foods and I see your four pack of whether it’s the Ginger Brew or the Virgil Root Beer they go for like $4.50 and your Trader Joe pricing is about $3.99 in the West Coast. And I would talk to you about just whether its Phentermines or so many other competition, whether it go Q-Ginger or (indiscernible) Ginger People. They all have pricing of anyway between $6 up to $8. And if you see that you had to ships stuff from the East Coast why wouldn’t you just raise a little bit of your pricing. Why wouldn’t you be a little proactive and say okay this is going to impact my bottom line, I have to increase my costs for shipping it.

And just it’s not like you’re going to be even close to the competition even if you raise it by $0.50 to $0.60 a four pack it will go to $4.50 from $3.99 or $4.75. I mean even if you do it temporarily I mean that would have tremendously helped the bottom line for the short-term blip pace and if you are saying that this freight cost was there. But just on the big picture, I think the pricing is a little low for Ginger Brew and Virgil Root Beer being that they are such great quality product with quality ingredients, you are putting fresh Ginger in it, it’s organic, it’s no caffeine and all that sort of stuff. So, any thoughts about raising a little bit of your prices on the core product, whether it’s in Trader Joe’s or in the Whole Foods.

Chris Reed

Well, first of all, the price increases etcetera, they are not – it’s not as nimble out there as you think. We probably – if we made a decision today on this phone call to change prices, the price change would probably effect somewhere in August would be way to sooner, but it will probably be September or October. We do look at that, I wouldn’t say that Q Ginger and Phentermines and some of the brands you mentioned are competitors, because if you added all the brands you mentioned up and you times divide 50 you would still not reach one of the Ginger Brew SKUs in volume. So, they are not really they are cute and their price to stay very cute and very small volume.

And I guess if you came up with enough of a marketing budget or you might be able to move it to a high volume and have the high margins. But we are also looking to the mainstream and if you go into mainstream and start looking for your four packs around for $4.49 to $3.99. Yes, you’ll start pricing yourself way out of the market. So, we are straddling the natural and the mainstream marketplaces. And for a quarter moving the prices around, it’s very, it’s not very nimble. And I think that you’ll see that we actually our margin did increase although our cost of shipping did go up. I think you will see us improve margins this year, that’s the trend here. I think we already picked up a point in the first quarter and as we better utilize our plan on the West Coast and absorb that factor that fee called unused plant time. We see ourselves being able to shift the usage rate and utilization of the plant to a point where you will pick up more margin this year. And we are very aggressively marketing the new Kombucha, so that actually for a new product launch into such a big category with such an entrenched competitor we are actually spending a lot more, we are having a lot more erosion on the top line than we have in prior years. And so we hold margin during this time and even to improve it with actually showing to the strength of those exercises.

So, ultimately I think you are right we need to look at the price sensitivity to our products and volume versus profitability for, but we have a big vision for the products. We like to be the (indiscernible) of the soft drink industry, the Sam Adams of the craft soda industry. And we want to be the biggest player here, so we have made it extremely difficult for a lot of these new startups to do anything because A they can’t get pricing like we have, because we have a very large organization with a lot of just amazing contracts with production and purchasing that allow us to keep a freshly brewed ginger ale at the price it is. So, that has and yet over time, we do move the price up, so maybe this year will be a price increase year. The $4.99 that you are seeing or the $4.49 that you are seeing in markets, for the most part you will get the whole country our frontline pricing from the distributors is $5.99, but the bigger accounts are promoting the product or loss leading the product a little bit stay in line a little bit with Trader Joe’s. So, Whole Foods might look at Trader Joe’s pricing and it can’t be too much above that even though normally I might charge for $5.49 for the price I am receiving the product at.

So, I think we are also benefiting a little bit from the commodity pricing. And I think that over stime we will move the price up, but first thing I don’t want to get sad and leave you here, right now it is time to make this plan lien and mean and then we can revisit this.

Vipul Sagar - Blash Capital

Okay, and my next question was about the debt. Have you guys looked at getting something that is a little lower interest rate because that’s about $650,000 a year, that’s something Jim can address that?

Jim Linesch

Well actually we feel like we are getting a pretty good rate in our current relationship we have been able to decrease it to by about 4%. We just generally feel that we are not at a point where we can go for a regular commercial banking relationship. And personally I feel that we need to have at least three to four quarters of profitability and then we can make the jump in to something that is substantially lower. At this time, we haven’t seen anything available that would be substantially lower than what we have. And we have an excellent relationship with our lender. They have been very liberal with us as far as allowing the term loan and allowing our collateral base to be fairly broad and so there are trade offs but we are looking to that point where we could be eligible for a better relationship. And it will probably coincide pretty much with the term of the loan that we currently have.

Vipul Sagar - Blash Capital

Now the outstanding shares as of this quarter was $12.3 million?

Jim Linesch

Correct.

Vipul Sagar - Blash Capital

And that’s with the forced conversion that happened with one of the support staffs? So, it is still out there that hasn’t been converted or its all factored in?

Chris Reed

It’s out there. There is really only a handful of shares.

Vipul Sagar - Blash Capital

Do you know often how many shares because they convert into what three...?

Chris Reed

It’s four to one.

Vipul Sagar - Blash Capital

Four to one.

Chris Reed

I don’t know, I think there wasn’t more than 12,000.

Vipul Sagar - Blash Capital

12,000 okay, so no more than around 50,000 coming from that side?

Chris Reed

Yeah, it is, yeah, there is 10,000 left.

Vipul Sagar - Blash Capital

10,000 and also 40,000 left.

Chris Reed

Yeah.

Vipul Sagar - Blash Capital

We’ll add.

Chris Reed

Yeah, the major bump was the Series B and then it stopped to crewing.

Vipul Sagar - Blash Capital

At December 31st.

Chris Reed

Dividends and we just seem logical to get rid of the overhang.

Vipul Sagar - Blash Capital

Got it, now you know in your press release, say you get a distribution of more than 13,000 stores out there, retail and super market. If I were to ask you a rough number on how many of that the Kombucha is already being shift into, what would be that percentage you would think?

Chris Reed

Basic one clarification is 13,000 supermarkets that we are in. We are probably in 10,000, 15,000 other accounts around the country.

Vipul Sagar - Blash Capital

Okay so about 25,000.

Chris Reed

Yeah, there is about...

Vipul Sagar - Blash Capital

Potential accounts.

Chris Reed

3000 supermarkets in natural foods alone, they have means like Whole Foods, Sprouts, I would include Trader Joe’s in that number.

Vipul Sagar - Blash Capital

That’s 10 – 3000.

Chris Reed

3000 what we call supermarket by natural food store.

Vipul Sagar - Blash Capital

Okay.

Chris Reed

And there is about approximately 10,000 natural – supermarkets around the country we are in and those are more mainstream Kroger, Safeway, Publix, Fred Meyers, and all those kind of guys.

Vipul Sagar - Blash Capital

Okay. So, I know it’s only two – about 2.5, you said about for this quarter was about 625,000 approximately and revenue from Kombucha.

Chris Reed

Right.

Vipul Sagar - Blash Capital

And is the promotion being done the same way was done the previous quarter or it’s a less aggressive now and it’s on a standalone basis?

Chris Reed

It’s less aggressive and the first quarter definitely there is lot of pipeline sale and there is a lot of pretty heavy trial going on just people trying the product. It’s more into a steady group and starting to pickup as a summer months are warming up here and then of course we have into that. We are still many of the chains were still just giving flatted in for the first time and then we have a four new products coming on. And then on top of that, we hired eight new sales people, but we also have a relationship with a marketing company that has a national reach and it’s large in the supermarket and grocery, specialty, natural food trade.

So all those should check into prove things and we have some other things we’ll put out press releases on in the next decade that are also potentially very large customers for Kombucha so, it’s – there is a lot of things in the fire that could game change the Kombucha, but it’s on a steady phase of growth here and that we keep a pulse on the marketplace, and I would guess that somewhere around 2,000 accounts right now carry the Kombucha. And I would also guess that of the eight accounts, the large accounts in U.S., approximately a third of them are currently carrying the product. So, we see it, still see a tremendous upside for the Kombucha and we should be considered at our infancy here with what the performance of that product will be.

Vipul Sagar - Blash Capital

So, when I see the condensed balance sheet and its discounts of 300,000 and 399,000 respectively for March 2013 and December 2012, so, is that like we will be talking about?

Chris Reed

No, those are – that’s our allowance for doubtful accounts and that number is primarily due to the fact that our promotions and allowances come through as deductions from the collection on our AR. So, we make a provision estimating how much those would be. It has very little to do with actual doubtful accounts. It really just has to do with the rate that we are experiencing deductions for promotions and allowances.

Vipul Sagar - Blash Capital

So, that would be under cost of goods sold then, cost of tangible goods sold?

Chris Reed

Promotions and allowances are actually a deduction from gross sales. So, it’s not shown as a separate cost item.

Vipul Sagar - Blash Capital

So, in that $8.1 million, they have already been deducted.

Chris Reed

Yeah, that’s our net sales for the quarter.

Vipul Sagar - Blash Capital

So…

Chris Reed

Yeah, that’s already been deduced, yes.

Vipul Sagar - Blash Capital

Okay. So, you don’t, you mean see it so, you ended that Kombucha promotional pricing is already been factored in?

Chris Reed

Yeah, it’s had to come off the top line…

Vipul Sagar - Blash Capital

Okay, so there is no…

Chris Reed

No other way to report that.

Vipul Sagar - Blash Capital

Okay, okay and that makes sense. Final question I had was about and this is a big picture where I feel like I’ve said this before that the Ginger Brew and your Virgil I mean I think the Virgil buy was an other best buys you did in 2000 for 4000 and you took it and expanded it and those are like your crown jewels. And I feel like yes, Kombucha is taking all this energy away right now from whether its raw material issues we had last quarter or production and plant capacity and all these things and I feel like just in that is the attention that is given to these two brands that you have the crown jewels of the Virgil and the Ginger Brew I mean they were at a point where they were just starting to produce profits and show attraction and bringing not only the top line which you are growing at 20 some percent, but also showing one or few pennies down to the bottom line. And I feel like are you giving that attention that these are the thing, its like when management takes eye off the ball of the main crown jewels and I always worry about that. And I feel like I’m seeing some of that in the numbers basically where whether it’s a production issue or whether it’s raw material or things like that when there were issues with the label last quarter and manufacturing didn’t slowdown all because of Kombucha. And so and I know when you bring something new online there are hiccups there are growing pains, but can you say something about that basically?

Chris Reed

Well, I mean actually it’s a very great point. And we have to justify what we’re doing with Kombucha. And Kombucha has to justify spending that kind of time and attention. And I agree with your assessment, I think that if Kombucha hadn’t come along, we would probably be have shown a very different I’ll say quarter in terms of profitability. So, there has been a bit of spend on just lost gross profits or spending gross profits to get the Kombucha going. And at the end of the year the way the vision for it is you are in the fourth quarter you’re running 30,000 cases a month and you are throwing off 6 to 7 bucks a case of gross profit from it and its catching and it’s moving on its own, its in the mix we don’t have to baby sit it, bottle feed it and its another happy revenue crown jewel like Virgils and Reed’s. If it doesn’t get there I mean if we don’t see a significant growth decent growth in the second quarter here, we don’t see decent growth in the third and fourth and obviously we won’t waste our time with Kombucha and to keep the resources and the attention on it as much. But we’ve to have a brand running at $7 million after effectively one year is pretty healthy for us. And sensing that Kombucha can get to a million cases a year throwing off $5 or $6 a case just like the private label business we do, we look at the gross profit dollar and think of all the things we can do with it. And it has to build – it has to that bet gamble that we are taking right now and Kombucha has to pan out. And it – I would do think that there is no way we can pay much attention as we are in Kombucha right now and keep all of the attention on our own products. I’m sure that it’s not happening to that degree.

But we’re still out there the beauty of having the sales force that now is managing three items, and when they are in sales pitch, they are at Korger, at Safeway, they bring up Kombucha along with our Reed’s and our Virgil’s. So, we are still able to move it along but not necessarily with their focus being 100% on those two. And we think the same way you do. We ask ourselves this Kombucha worth it. And right now the feedback from what we’re seeing is that yeah, we should certainly we should definitely continue with what we’re doing. And but the proof it’s going to be in the pudding. This year is going to tell everything about Kombucha, is it going to be something you relegate to a line at just as $5 million to $10 million or is it going to become a major component of this business for future wise down the line. So, I mean, I think we are staying awake. I appreciate questions like this, because you challenge us at our core and what we are thinking and how we are moving the company. And I know it seems kind of stupid to be as distracted as this company looks like it is with private label with branded, with two brand crown jewels, and then Kombucha on top of it. But I feel that it’s an interesting way to play and I don’t feel like raising tons of money until we have a business model for growth that shows a great return on each dollar we bring in here for the marketing on Reed’s. So, I have become somewhat conservative that way I would say based on what we just went through from ‘07 till now.

And we are more likely to just make the money before we start spending it on marketing as opposed to raising it, trying this, and trying that, but I believe that the private label I feel justified from gross profits, but I feel even as justified with the relationships we are building with some of the largest foodservice companies in the U.S., the largest supermarket chains in the country, but they are now relying on us for products that we are producing for them. And that is getting a door into these $1 billion enterprises that we have ever had before and we can sit down at the table and talk about our branded business in the way we have never been able to. So, I still – I can justify private label, Kombucha, I feel that, I feel pretty comfortable that Kombucha is going to be either a modest success between $5 million and $10 million in new business, the higher margin, where it’s going to be an outrageous success. And it’s going to take a few years to see it go from $25 million to $100 million. And I don’t see it necessarily becoming our crown jewel per se. I still believe a vision that the products that we have are crown jewels of Virgil’s and the Reed’s and there is enough for the soft drink industry and we are going to be the first premium soda company in America that is a household name. So, we are still moving in that direction. We are still very excited about that and that we believe Kombucha is going to help us get there.

Operator

Our next question is from James Kuzowsky. Please go ahead.

James Kuzowsky

Hey, guys. Thanks for taking my question.

Chris Reed

Hey, James.

Jim Linesch

Hi James.

James Kuzowsky

I just had quick to ask you about the Kombucha, how many cases did you ship in the quarter if you could give me that number?

Jim Linesch

Jim?

James Kuzowsky

Yeah, sorry.

Jim Linesch

I normally don’t put out case counts, Chris, would you like me to respond or?

Chris Reed

That’s fine.

Jim Linesch

Okay, 300,000.

James Kuzowsky

Okay excellent.

Chris Reed

Wait a minute, he asked you how many cases you sold off Kombucha in the quarter?

Jim Linesch

300,000 cases will be (indiscernible).

Chris Reed

That’s a total for the cases that you guys shipped.

Jim Linesch

I am sorry 39,000. Pardon me.

Chris Reed

I don’t think anyone heard you Jim.

Jim Linesch

29,000.

James Kuzowsky

Okay, great. And then actually I noticed in your press release that you guys had mentioned a large private label customer and that I don’t think you had talked about it all yet on the call if there is any color that you could give on that or if there is any timeframe that when you can see that contracts at your statements?

Jim Linesch

That’s a good point. Well, because it’s when we could say it was fun, their answer with smile. We are currently processing the first orders today and I think it’s somewhere between $300,000 or $400,000 in the second quarter, but it’s still the trial and the customer is really large customer and this was just tested out.

James Kuzowsky

Alright, excellent. Thanks a lot.

Jim Linesch

Thank you.

Operator

Our next question is from Michael Rudin. Please go ahead.

Michael Rudin

Hello. I was wondering are you seeing any of the potential customers you said there we are going to reorganize their shelves in April-May time actually doing it in taking any of the Kombucha product done?

Chris Reed

Yes. Some of the accounts we are talking about we have portal into the data. So, we could actually see the scan data as we sell. So, we are in a quarter of the Whole Food stores. And moving into regions steadily around the country and I couldn’t – those are the most difficult accounts once you get approval and you have to get approval of the regional and you have to get approval at each store. But yeah, there is very few accounts that we mentioned that we are not going into. I believe we are going into the Sprouts market at this time. And I have to get my national sales manager on the phone, and I think he had another call here, but I haven’t heard anything to the offices, and I keep somewhat of a pulse on that. So, everything seems to be going normal for the grocery trade, slow but steady.

Michael Rudin

Okay. And then at the end of ‘12, you had a run-rate I think of 2.5 on the Kombucha and then it’s still the same today, is that correct?

Chris Reed

Yeah, it was running about 2.5 during the first quarter and second quarter we are seeing it move higher than that somewhere between 3 and 3.5.

Michael Rudin

Okay, thank you very much.

Operator

There are no more questions at this time.

Chris Reed - Chairman and Chief Executive Officer

Alright, well, I want to thank everybody for coming. A copy of the transcript, the recording also be on our website within a day or so and look forward to joining you in other quarter and reporting on our second quarter. Have a good day. Bye.

Operator

Thank you, ladies and gentlemen. This concludes your call. You now all disconnect.

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