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Reed’s, Inc. (NYSEMKT:REED)

Q3 2013 Earnings Conference Call

November 14, 2013 16:15 ET

Executives

Jim Linesch - Chief Financial Officer

Chris Reed - Chairman and Chief Executive Officer

Analysts

Eric Rose - Reed

Vipul Sagar - Blash Capital

Alec Jaslow - Midtown Partners

John Curti - Singular Research

Malcolm Maclennan - Oppenheimer

Operator

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

Jim Linesch

Good afternoon everyone. My name is Jim Linesch, the Chief Financial Officer of Reed’s. I would like to welcome all to you to our third quarter earnings conference call. With me today is Mr. Chris Reed, Reed’s 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, depended on third-party distributors, changes in the competitive environment, access to capital, and other information detailed from time-to-time in the company’s filings with the United States Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, November 14, 2013. Reed’s Inc. assumes no obligation to update these projections in the future as market conditions change.

And 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.

First, I would like to mention that it appears that the release did not make out, it is available on Marketwire and we believe it will be picked up [indiscernible].

Chris Reed

Jim, I just surfed in, I just searched on Google Reed’s third quarter and the Wall Street Journal has it up there right now. So it looks like it’s the complete press release.

Jim Linesch

Okay, great.

Chris Reed

That’s the first, I think the first thing that came up in the Google search.

Jim Linesch

Okay.

Chris Reed

All right.

Jim Linesch

Okay. For a little bit of an overview of our 2013 financial results for the quarter.

Our financial message for the third quarter is that we have invested in growth and we are experiencing pay back on our sales and promotion strategy. Our increase in gross sales before promotional deductions is 33% for the third quarter as compared to last year. Our top 12 SKUs comprising close to 70% of our revenues grew at a rate of about 34% in the quarter.

Our new product volume Culture Club Kombucha has grown to be $5 million business today run rate with a potential to double last year. Along with our sales growth, we are delivering gross margin growth too. Our gross margin has a percentage of net sales increased by 100 basis points by 32% in 2013 third quarter while compared to 2012.

Overall gross margin dollar growth in the quarter was ahead of sales growth with 29% increase over 2012. I would like to note that we have added a table in the MD&A section of our 10-Q that breaks out our growth sales from our net sales probably figures our non-GAAP information [indiscernible] add more transparency to our results that shows our promotional spending separate from our growth sales which is the reduction in sales for reporting purposes.

Net income of $34,000 our EBITDA during the quarter was $372,000, interest cost was $80,000 and capital expenditures were $161,000. This indicates that on the average we experienced positive cash flow of approximately 31,000 during the quarter which include many changes in current assets and liabilities.

Our inventory increased by $302,000 during the third quarter primarily due to a large sugar purchase that related to capitalize about 1.5 million pounds this stabilized our sugar cost for several quarters.

Our Los Angeles plant improvement are largely complete and they are making a big difference production is up to record levels giving us more capacity in meeting our West Coast demand. This will benefit us in reducing both [indiscernible] cost and excess idle plant cost.

There were no significant one time cost during the quarter, selling, general and administrative cost increased by about 27% compared to last year. Delivery and handling expenses continue to be approximately 10% of sales. We had a one-time contract turn unprofitable during the quarter due to our need to meet a firm delivery deadline which we did meet. Expediting cost on that contract increased our freight and cost of sales during the quarter by about $100,000 and now that we have contributed directly to profit.

Most of our selling cost increases were due to increased trade show, advertising and promotions. This year reduced costs have resulted in effective promotion of our products in a variety of media and advance. As we start to turn our planning focus for 2014, we are anticipating further accelerations in the growth of our great product line and [indiscernible] creative line extensions to our top selling products.

I would like to turn this call over now to Chris Reed, our President and CEO?

Chris Reed

Thanks, Jim.

Well, definitely from my point of view it’s a great quarter so nice to be able to pose 28% net revenue growth. So that’s been a milestone obviously, we announced as a milestone and definitely there are some feeling when you hit $10 million a quarter can remember when we were doing a couple of million a quarter 5 or 6, 7 years ago and just looking at a company they are doing $10 million a quarter and doing [indiscernible].

Again, there is still a feeling with this company that we are just starting – getting to the starting line to do the kind of business that our products of Reed, Ginger Brew can do. The Kombucha now I think – our guidance on Kombucha has been all over the place and we jumped into a very big pool about $300 million a year in sales. And we didn’t know what a strong national player jumping in, I mean there were a few. You had Celestial in that mix already for five years not able to really capture much business.

And so we are seeing a lot of people run up against the wall but we knew we are a different kind of a player. We knew that we had a better pole to the market and kind of had, I think we had the right sense of what wasn’t working with the other brands and felt like we could do the right thing and have a successful brand. And so I think our guidance went some – we may go in there 5% or 10% of this business real fast and look we have $15 million or $20 million or $30 million in new business in a year, year-and-a-half.

So when we look at the date, for Kombucha [indiscernible] but we hired a broker in May to help support the marketing efforts. And he shared with us the date that he gets the [indiscernible] on how we performed. And we were at a get together of the sales force and [indiscernible] of all places. About two, three weeks ago and we put the slides and we looked at him and his impression through his eyes, he has never seen a product launch as strong as Kombucha in the history of being a broker of natural food products. And showed us some highlights, how we cracked the Top 20. The first Kombucha outside of the top player GP to ever track the Top 20 with a flavor also shared some data where figure number two with years ahead of us with a number of other brands going after GP. We are now is the number two brand in the category.

I think as Jim mentioned, we have about $5 million run rate right now. It’s been one solid year from November 1st to November, where we’d actually had the product in full distribution within the distributors who handle natural food. So we have one good year with it and according to the brokers of natural foods that’s a damn good year.

According to us, we are not going to throw it away, it’s a good thing. It feels young so in its cycle. The mature supermarket’s natural food, whole food type outlets that have it projected their sales currently with our products in Kombucha projected nationally show that there is a $50 million worth of business before factoring in the new flavors that came out more recently.

So it still feels good, where our goal is to take it from – doing this year to get to a $10 million run rate by the end of next year. And bring on $4 million, $5 million new business next year in just Kombucha sales. I think we never launched a product line before and I know I mentioned it in my prior conference call, we have been one SKU, one item launch at a time, company’s from original Ginger Brews to all the way up to Kombucha. And we are learning a bit about asking for lot of shelf space and taking a big section.

We are also learning that on a certain way, the market somewhat moved on from Kombucha, they were looking for high pressure pasteurization products – the next thing, the next thing so certainly they are not really sure from Kombucha has already matured up. I mean, its growing well. But it got to the biggest thing in the natural food store in America and they are kind of like we are real happy with number one, why do we need you? Number two, and there has been a fight to get in there. We’re going to fight with the customers to educate them on a new brand, they should give a try. Partly what gotten us in a stand and partly what’s keeping us in and selling and turning over new customers, as we have added some lights to the category. Not like a [indiscernible] light but we brought in Cabernet Grape Kombucha, we brought Hibiscus Grapefruit Ginger and then we married coconut water – coconut water category with Kombucha. And so tremendous innovation with our coconut water line Kombucha.

So people are starting to take us more seriously and they are saying okay, there is more that Kombucha can do. I think if anyone has been following coming really closely its on the card, I don’t know if you had the chance to see the YouTube video Thas T-H-A-S Thas Kombucha for some popular rapper and a DJ guy wrote a song on our Kombucha, with an all sync we see no random. There the ad agency that’s been putting together snoop dog and his organic gardening effort with us over the last year and having to blast to 22 million Facebook followers about Reed’s.

So Kombucha still very enthusiastic about still hearing a lot of good feedback from customers, still feeling, it’s at its infancy. As we do a [indiscernible] one of the $50 million but we think we are going to be able to not to extrapolate today’s sales into the full marketplace. And we don’t think today’s sales where a brand after one year maxes out. We think 15 years to get to the huge level of the current Kombucha and I think its going to take us time to educate and turn on the world to our style of Kombucha.

We are very pleased with it, was in Las Vegas last night and picked up an award from the natural food industry for the best new beverage launch for 2013 for our Culture Club Kombucha. There is probably a press release out on that. I think we are now through PR, I’m not sure it hit the IR website. But its definitely being crowded out there by our sales and the trade.

Yes. So trying to look at my notes here, if I’m actually trying to do a little more focus this time, its been kind of random. But, the new players and they all get a question on them. They launched in a – and they are currently doing about 25% of sales and 75% of sales are the – the older – saw first four SKUs that came out of that line.

We are in approximately 50% of the natural food accounts, they are in the scan data and the new products are in about somewhere between 16% and 20% of them. It’s still a battle. I mean whole foods, 320 stores, we are in 130 of them now. Every quarter we seem to pick up another 30. So they are painfully letting us into the network. And what’s for in there, we get to advertise to the consumer. So before that we got to wait, so maybe its another year before we can really start advertising to consumers.

We sponsored a concert tour in the fall where 25000 people get to try the Kombucha and get coupons and all the advertising for that large concert tour we were featured in.

The other aspects of the business, I think they are very important long-term, not everybody knows it. But [indiscernible] deeply, we are GMO free where packaging is getting GMO free on it. Our GMO free is an accelerator for brand definitely within natural food, it’s a big deal. We are proud of that. And it means a lot. And we had upper management from Whole Foods congratulating us our distributors and key retailers around the country. Of course, all the people trying to get us through Washington state wanting us to show up et cetera.

So it had more of an impact and maybe people were out of touch with that part of the industry. So we are real pleased with that. That will pay dividends going down the road. We started came in hierarchy and say this here too, a little side note. How do you make a public company [indiscernible], how do you make Wall Street [indiscernible] to the Hippy Natural Food, [ph] Yogaman person corporations and food don’t necessarily mix. But, we spun it in a way in terms of spin with real. Our company is owned by our customers. And then we put a stock symbol and we have started to show up that our big trade shows into events, letting people know that we are owned by our customers. And I think I had to – kind of the way you would start and found the company back when you are Ben Franklin [indiscernible] Boston or something bunch of people who will get together and fund the company. We kind of like it.

So let’s see what else we have here? The margin improvement, I want to really show highlight there. I know Jim talked about it. But, I don’t think we were talking in prior quarters about how great the margins are going to get. And first of all, I would like to let you know the 100 basis points is kind of phenomenal in light of the fact that our spend, I mean, Jim mentioned 33% growth overall on our growth basis not net basis of revenue. But we only detect with 28% growth, how does that happen it because you are spending more through this dealing, it is standing more. That’s kind of negative but we were able to spend more heavily and improve our gross profit margin by 32%.

So after we stop spending that gross profit margin, if we kept it similar or standard last year on a percentage basis which is about 8% and 12%, we would have had a 36 or 500 basis points increase in gross profit margin. We are still coming through Jim but I appreciate that’s why. That is the way to think about.

The other thing to think about is, while we have spent a bit this year in improving the plant performance. And when I took over the plant after bringing in some hotshots to make the plant work. And I’m trying to pat myself on the back or scary as a CEO, just can’t keep his hands of stuff. But, I’m an engineer by heart, I design in gas refineries, I’m a LNG expertise. And this plant was not going to beat me. So we are doing about 40,000 cases a month and a good month. And in the last 30 days we ran at a 100,000 cases a month. So pretty happy with that. I’m telling everybody here we are running a 100,000 cases a month, the average for the next year which will push us from probably about 0.5 million cases to north of 1 million cases.

And the plant feels life without a $1 million capital improvement which we would 50% more out of the West Coast plant. The plant booking – should be able to run between 120s and 130s when everything is being smoothed out here. And everybody will say Mr. Reed, you are too optimistic here.

But I did just show them a 100,000 cases in 30 days which I’m very proud off. And it was not a meltdown 30 days, it was a smooth 30-days like we can do that all day along kind of 30-day.

So very excited about that that’s running 6 days a week with extra days off, two weeks of five days a week and two weeks of six a week and we can do seven. So we are running about 5000 cases to-date, so possibly 120 to 130. So we are [indiscernible] with the current equipment.

Small investments again we will do it, it’s not a big deal here. We ran short of production this last year and we would have seen probably an extra $1 million or $2 million in the second and third quarter with the extra production and we are not going to let that happen again. The negotiations for East Coast production to supplement our current East Coast production is going very well.

We are actually because we have a flat in LA, probably we have a difficult product to make, reported to brewery, the brewer [indiscernible] brews ginger ale’s under the leased brand. We are working on some simplified ways where we can pre-process here in LA and shift something that makes it a lot easier for us to find production both in and outside of the U.S.

Let’s see, so the West Coast plants going to – so the margin improvement that was all part of the margin improvement thread is still going to benefit from the West Coast plant solely coming on board. Third quarter did not benefit much at all from that increased activity. Fourth quarter and first quarter next year they will start to see margin improvements and that will show up in freight improvements not having to ship across the country. And just producing cheaper, I won’t put a number to it. But I would be sad if it was 1% improvement. It’s something because you are seeing a vision for the future for this company just more regional produce, its not in the heavy deal mode on a product launch where margins are moving up to what you would really want to see in a brand like this not hovering around 30, but hovering closer to 40.

I think that’s when you can – you start to see our own plan as long-term player to our manager, 3 to 5 years from now highly profitable company growing quickly but having a significantly better margin. We know where we can go and hopefully you are starting to see that some of the people aren’t familiar with our operations.

I think that – I don’t rely on talking on annual basis but this has been a bit more marketing. We recently included the quarter, we showed up at the Taste of Soul, 3000 people in LA, we have a very prominent booth and we have had a lot of aftermath from that show and just being invited into a lot more retail and promotional type activity that came on the heels of the Life is Good company and their big benefit where we were the featured soda.

So much more of that kind of simple marketing where you are out in front of the public; they are trying the product. It’s happening and at the same time we want to talk about chesting more deeply in 2014 other marketing from social media, internet base to some select cable TV like Food Network et cetera. So there is a lot of interesting things that are coming into play that way that we are very excited about that will hopefully add a bit of acceleration on to the hard push. I would like to say we are still a company, we’re pushing, we are pushing away to $40 million run rate here. And with no marketing sales to speak off at least in a serious way and we can’t wait to meet the public know well aware of what we are doing here, what our products represent.

Now some of the more exciting things that have happened that are far reaching for the company is, we’ve tapped into a new way of being able to get feedback from the marketplace on key data that’s being generated from sales in the [indiscernible]. I don’t know how it missed our awareness. But, I think we have found a data source for 550,000 account nationwide and it’s going to allow us to really fine tune our efforts here. And that’s, as I go from being very focused on making sure that West Coast plant is handling your West Coast need for 2014 and make it sure that we don’t short sales ever again we just not in the near future. That project seems to be moving along nicely and my attention and awareness is going deeper into the marketing that’s going to make this a household name with a sexy story of reading [indiscernible] photos from a couple of hundreds years ago. We crafted [indiscernible].

And also to just the sheer structure of the sales force and how do we micro view the efforts to our sales force and tie every marketing activity into direct results in a way that only the Internet and high-tech data is now allowing us [indiscernible]. I think we are getting smarter, the longer we are in business. I think it will continue to increase the results and hopefully the piece of results as we move forward. And I know everybody waiting for time we start showing more profit that we feel strongly that what [indiscernible] Kombucha is laying the ground work for significant growth in that arena. And we weren’t exactly certain what the spend would be to launch and grow a company from zero to $5 million in sales in a one year period. So maybe we haven’t given the perfect guidance that.

I will say that the brand is promoted less in the third quarter when the second quarter started and started to generating much more of the cost to grow it. I wouldn’t say Jim might take it to the breakeven but I think if you factor in the top line discount and the spend, the increased spend in marketing fro increased people on the street and brokerage firms. I think we are still not at breakeven from that line – the Kombucha line self-supporting itself for our marketing effort. But its getting very close and they should be able to do that and have a very nice budget for growth in 2014.

I’m going to look at my notes real quick, although I’m sure if I open it up to questions, you guys will remind me of anything I skipped over. I will say that the docket – the accounts that have reached out to us from our high profile Kombucha launch in the Kroger’s and I think we were surprised by the supermarket trade. We were heavy beating on the natural food trade to get our Kombucha in there and out on the side, supermarkets trade around the country accounts have jumped into bring our products in.

I think they like the fact, that we have a better in the one-month shelf life, six shelf life. We regarded Giant Eagle, Kroger’s, Wegmans, Jewel-Osco and new supermarket chain continue to jump on board. Definitely the data, the IRI data for Kombucha in the main stream, I think you growth was more than 50%, I think its closer to 70% and it’s a very fast moving functional beverage category.

And we look good, and we taste better too and the competition, their funky case really appeal to the people who have grown up on it. But our team is actually build better to the mainstream first time customer, who will pick-up a bottle. Anyway that kind of wraps it up.

We are still very enthusiastic. We see nothing by clear [indiscernible]. We are very, very excited about what’s going on and anyway at this point I’m going to open up the floor to questions. Thank you for listening.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)

Our first question comes from Eric Rose with Reed. Please go ahead.

Eric Rose – Reed

Hello. Of course, this is Eric Rose your investor in Florida here. Since I talked to you actually last year, I have taken a part time job with [indiscernible] introducing people to Reed, so selling a lot of Reed’s. My question, I have got two of them. One, we only got two SKUs in our store –

Chris Reed

An extra.

Eric Rose – Reed

Yes. We have the extra ginger brew and the Root Beer. And I guess and I’m you probably cannot answer this but are you doing any knock off score Reed’s is that why we don’t have the other SKUs are available in other stores country wide.

Chris Reed

The Virgil’s and Extra, Trader Joe as their brand in most categories and somewhere along the way they decided that the wine and the beer needed to be branded. The people want generic Trader Joe’s wine et cetera. So they drew the line there and try to go completely generic and private label on all the brands for the soda and they tried to kick us out of there. The brand is just so damn strong that we do such a tremendous business with them that we weren’t able to do it.

But it is a miracle in the world of beverages they have two SKUs in Trader Joe’s, don’t think that you don’t try to get more SKUs in their and for 10 times they threatened to bring it more in. But nationwide we have two SKUs, the Virgil’s Root Beer and Extra Ginger Brew, our top two SKUs in Trader Joe’s.

And quite frankly, we feel extremely fortunate for that after 15 years. So we made them redraw the line below Reed’s soda. So we are pleased with the Reed’s, we are able to do that.

Eric Rose – Reed

So that’s great. Yes, I have lastly, we have a number of customers that I think we have increased with our stockings in the store because we are having at least one of the gentlemen coming in and buying three cases and they are pleading, I finally got into [indiscernible] so we could order early. My other question is, [indiscernible] able to get Reed’s – I had been [indiscernible] they didn’t carry it, now [indiscernible] is that nationwide and we are going to possibly get it [indiscernible].

Chris Reed

That’s a great question. And you email [indiscernible] website after this, we will you stores. The FDA they had us recall the larger release, the redirect as you are saying because of the language on it and even the RX, the Reed’s with the R, Reed’s with the X on it. That kind of blew them out. And it was a real bonus contention, I will say I was proud of myself. I did go toe-to-toe with the FDA and after three times they told me I stayed adamant with them and said I will say this and I hope this doesn’t get back. Walking in here, I could be nauseas just leading with you guys but I’m not actually in a disease state you just make me nervous. I’m on a boat or my pregnant I could be nauseas. And a nausea release is not a disease playing.

And so they pondered that and they basically told me take it off the market never show it up in the market I came home in three hours later, I got a very cryptic email from the FDA saying you are approved, keep that on the market. It was quite an experience. But it’s kind of drifting back out into the marketplace as we have been cleared on it. We have had to relabel it, in other words put a straightly lower the little cam, so that it would kosher with the FDA and change them of the language and take the X out of the R. but that’s it is coming back out and I will, give us an email, I will send you a list of stores.

Eric Rose – Reed

Of course. I say my family, we like it. We keep four carton around. They are really wonderful. Okay. Well, I’m real happy to see the stock going up and it looks like you guys are having another wonderful year and I’m sure glad I invested when those little bottle flyers came out. Thank you.

Chris Reed

Thank you, Eric. And thanks for supporting the brand in Trader Joe’s.

Eric Rose – Reed

Yes. You bet.

Operator

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

Vipul Sagar - Blash Capital

Hi, Chris. I had a question – bunch of questions, but the first is, how much was the Kombucha sales for the quarter?

Chris Reed

I think $1.2 million. Is that right, Jim?

Vipul Sagar - Blash Capital

Hello, $1.2 million?

Chris Reed

Yes. I think Joe –

Jim Linesch

Sorry, I was on – well, that would be correct on a growth basis Chris.

Chris Reed

Okay.

Vipul Sagar - Blash Capital

So $1.2 million and you went from a production of 9000 to 15000 in last quarter you said, in the conference call, last conference call you said you are running around 24,000; 25,000 cases a month. If I would remember right so, what was the number on this time? Was seems like it was just 20,000?

Jim Linesch

Yes, I think that you are right, it’s about a month when we are giving the result it balloons up to 24 in a month. And it kind of came half of that. We went from 52,000 cases in the second quarter to 60,000. So we grew about 18% quarter-over-quarter.

Vipul Sagar - Blash Capital

Okay.

Jim Linesch

Year-over-year about 478% with that.

Vipul Sagar - Blash Capital

So now for the fourth quarter that is since this fourth quarter started, what is the run rate on cases for Kombucha?

Jim Linesch

That is running about the same as the third quarter.

Vipul Sagar - Blash Capital

Okay. So 20,000 to 25,000?

Jim Linesch

We did 60,000 in the third quarter; so it’s just running about 60,000.

Vipul Sagar - Blash Capital

Okay.

Jim Linesch

And we look at -- we don’t think necessarily as a negative, we watch the temperatures drop and also they were promoting a lot less heavily on the Kombucha than we did in the second quarter and third quarter --

Vipul Sagar - Blash Capital

Fantastic.

Jim Linesch

A little less than the fourth quarter little less. So it’s more or alike stabilized sales and not just intro-trial deal trying do sales for us.

Vipul Sagar - Blash Capital

Make sense.

Jim Linesch

And you’ve got to watch temperatures drop, beverages generally drops significantly in the third quarter. We’ve hold the fourth quarter, we hold the fourth quarter in the same volume, the third will be very pleased with that.

Vipul Sagar - Blash Capital

Okay. Now regarding the private label, I read that you have mentioned something about doing a couple of million bottles of Spiced Apple Pumpkin? And this was a –

Jim Linesch

Couple of million?

Vipul Sagar - Blash Capital

Yes. Couple of million bottles.

Chris Reed

Yes. That’s once a title, I saw that article.

Vipul Sagar - Blash Capital

So, it was not –

Chris Reed

It was 160,000 to be accurate.

Vipul Sagar - Blash Capital

160,000 cases or bottles or what?

Chris Reed

Bottles.

Vipul Sagar - Blash Capital

Okay, Okay, so that means –

Chris Reed

Couple of bucks a bottle, and something like that. So, it’s third of the $1 million on our special, in our unique Spice Apple Pumpkin swing-top by gross. So the exciting thing about that is the data for this quarter swing-top products kind of went through the roof for us. And as we tool up the plant to be North Americas only automated swing-top facility it gives kind of nice edge with the large supermarket chains. That we are looking at the specialty packed to come out of people like us. And I will predict something while we are way up this third quarter over last year, we are going to be way up next year. I have a soft thought for those old styled European bottles.

Vipul Sagar - Blash Capital

Grows as a beer company yeah?

Chris Reed

Yes.

Vipul Sagar - Blash Capital

Okay. So remember last quarter the 412,000 private label contract that was rejected?

Chris Reed

Right, we took the pole right down on that.

Vipul Sagar - Blash Capital

Yes. And so any progress on that in the third quarter and any update for the fourth quarter?

Chris Reed

So far we have sold about 6% of it, so we have a plan for liquidating it. We are still reaching out to the customer to see if they are interested in moving forward in [ph] Libya in an attenuated basis. And we are still optimistic although the individual we are dealing with is not longer with the company. So we are having to dig around to find the -- who will be the right person to talk to.

By assurance of liquidating inventory, we will find some way to sell it off in a way that’s probably about what we wrote of, so that shouldn’t be an ultimate loss. So we’re recovering a loss.

Vipul Sagar - Blash Capital

But, when you saw the 6% was that in the third quarter?

Chris Reed

6% between getting it back in today, because I knew I will get that question and I anticipated it. But it’s the only -- we basically we have talked to a number people, we’ve a number of clients who are now taking the products. So as picking up and we are just started really the 6% in the last 3 to 4 weeks while its operated.

Vipul Sagar - Blash Capital

The next question is about the private label how much of the 10.1 million you did in third quarter with private label approximately?

Chris Reed

I’m going to leave – I had something here but, Jim, why you don’t jump in and answer to that.

Jim Linesch

1.39.

Vipul Sagar - Blash Capital

1.3 million private label in the third quarter.

Chris Reed

That was in table 4 just out of, Jim.

Jim Linesch

1.1.

Chris Reed

All right. So it’s up 20%?

Jim Linesch

Mm-hmm.

Vipul Sagar - Blash Capital

So, you remember in the fourth quarter of last year, you did not have the 800,000 in private label when you and so it showed like you only grew the sales by 6%, but it was, because of a Private Label that was not renewed in the fourth quarter?

Chris Reed

Right.

Vipul Sagar - Blash Capital

And this year whether you are look at a private label for the fourth quarter approximately, and you usually do about 1 million in a quarter basically, a little over a million in a quarter.

Chris Reed

We still have some very big projects that are still on the bench believe it or not. And in fact looking at progress one minute before the conference call came in, but and the sales that disappeared last year the 800,000 of the Sparkling Juice client. Our list is not here this year, but so we don’t have to trend against that. I think that we are -- but we are hopeful on a $300,000 $400,000 order that’s pending right now that seems to be probably 50% to 80% chance of moving forward.

So I wouldn’t know, I say that similar to last year but more. The same kind of growth that we are seeing that’s kind of a guess so unless Jim best answer.

Jim Linesch

No that’s the best answer right now.

Chris Reed

Yes.

Vipul Sagar - Blash Capital

And so further quarter you are looking at between $0.5 million to $1 million in private label?

Chris Reed

I don’t know, Jim do you have that –

Jim Linesch

I think what we were saying is that number –

Chris Reed

You do a lot tax rate in the fourth quarter even with the 800,000 a year effort.

Jim Linesch

We are looking early to make sure when we say the prediction. Even though we were in it.

Chris Reed

But it seems like we are doing a same guys and a few extra this year so –

Jim Linesch

So we have some over time, we have the lemonade.

Chris Reed

Okay. So anyway there is some additional business this year over last year in private label.

Vipul Sagar - Blash Capital

Okay. And then this butter beer that you have, the thing we are seeing and Whole Foods have been seeing it for like a few months, but I am also seeing it another store for the last, maybe few weeks or a month. What part of your sales are that? I mean is that might really growing fast, you just had to –

Chris Reed

That is number 7 in our list for the quarter and it was up 158% year-over-year.

Vipul Sagar - Blash Capital

Say it again.

Chris Reed

It was up a 158% its in number 7 item in the company and it did about 300,000 in the quarter. I know doing about 1.2 year and growing very fast. How big is it going to be on the income. I wasn’t saying it was a joke, we did have an actual customer result Wal-Mart has been excluded in the Harry Potter DVD sets and we are trying to get them to buy 3 million cases. Instead of that back to the 7 movie series for Harry Potter and really while the customers but when that didn’t happen we didn’t think it would go anywhere.

Vipul Sagar - Blash Capital

Okay. And my next question is the Pennsylvania Co-Packers, are they producing everything you need now because it was like you were not getting about 5% -- 4% to 7% that you wanted?

Chris Reed

Yes. They didn’t, for the third quarter now, for the fourth quarter with the West Coast plant running full out. I believe we are seeing ahead of sales for the first quarter since the first quarter. So second and third quarter they are binged by lack of capacity on the East Coast.

Vipul Sagar - Blash Capital

Now the LA plant, you just said that you are doing 100,000 smoothly is that from the fourth quarter, you have been seeing that?

Chris Reed

Well, we did it in the last 30 days.

Jim Linesch

That’s one month

Vipul Sagar - Blash Capital

Okay.

Chris Reed

The 30 days row in a row is very smooth. I mean, right now, I don’t know, we are significantly higher currently closer to 80,000 to 90,000 pieces a month right now definitely north of the 40,000 that I started with and the 60 I got to in the second and third quarter. It’s now good 80 to 100 right now.

And I had a goal to get to a 100,000 by the end of the year, I’m not going to say that we are going to have it each month 100,000 but we will truly able to do it right now and my intention is going other places its an exciting thing.

Vipul Sagar - Blash Capital

Okay. And so basically, what I am trying to get is, the fourth quarter onward will you start seeing not having the freight cost, additional freight cost?

Chris Reed

Yes.

Vipul Sagar - Blash Capital

Okay.

Chris Reed

So you see that more, definitely first quarter and second quarter next year will be heavily benefited by what’s going on. Kombucha margins for instance on a cost basis, our ability to put out Kombucha at the beginning of the year and the cost involved. We have probably taken production down to at least half if not one-third of the cost that is costing us.

So our margins in Kombucha is going up a lot and then also factors in heavily as we stay in this category as our margins increase so much, we are going to have a lot more capability to promote and drive Kombucha business while maintaining a pretty healthy margin. So that is a real game changer for us.

Vipul Sagar - Blash Capital

Okay. Thank for answering my question. And good job.

Chris Reed

Hey, the last few times you are on the phone with me quarterly it was more upsetting, so you are seeing our product out in your market a little better?

Vipul Sagar - Blash Capital

Only of the 4 new flavors, I am only seeing the coconut line. I am only seeing the whole four but the new four, I have never seen the mango or the grape. I haven’t seen it anywhere.

Chris Reed

All right.

Vipul Sagar - Blash Capital

And there is only one place – a one co-op that has it. And that’s of the 4 new flavors, the only of them, the coconut lime, I am seeing at one store that’s it. So maybe by year end I don’t know but. The whole fours are there basically but then, of the new 4 only one is showing up.

Chris Reed

Yes, the new flavors we are getting out there and they are still a 25% of our sales. So I don’t know if they are 25% of our sales in total marketplace that you come from. But shows some of the potentials, but we will launch this year. We are surprised we don’t, a few more kind of game changing flavors on Kombucha, because the 4 flavors we put out, put it in the marketplace and me as the player but the next 4, the new 4 flavors that came out recently Cabernet Grape has just made people, they are happy to give us some attention now because they are so damn creative. And customers who are starting to hey, there is interesting Cabernet Grape, and Cabernet Grape has been doing very, very well alongside the closing of waterline. The next two flavors are stronger than maybe the first eight or similar but they are kind of game changer. So we will not --

Vipul Sagar - Blash Capital

They will be introduced in the fourth quarter?

Chris Reed

In front of people, when people think of Kombucha, they realize they can have GT, but they need to have number 2 at this point. So I think that just throwing at end because I don’t know if I mentioned that we are definitely hot on the trials of two more flavors here.

Vipul Sagar - Blash Capital

In the fourth quarter?

Chris Reed

No. They will look back then get out roughly before --

Vipul Sagar - Blash Capital

And that’s why I am like surprised where your production in Kombucha is not going up more than 20,000 cases, I mean in your LA plant is all the projects are done that you are working on to get to a 100,000 cases.

Chris Reed

Well, it demands, right now the demand is running about 20,000 cases a month. And its moving a new brand out there. But I think we could say we are number 2 in the industry and I think we can say that with the strongest beverage launch in the natural food industry in this year.

I don’t think anyone outgrew us, as fast as that. I mean there is no one who is tracking that. But I think I talk to the very large national broker for natural foods and I said how do we compare in this launch, compared to other launches. And they said this is the most outrageous data that I have ever looked at my life for a launch. And you guys should be growing in the isles till the death. I said, well, we have high expectations in $300 million category. But it takes time.

We didn’t cramp Ginger Brew down everybody’s throat the first year either an instant success. It took a while to be the number 1 selling soda in these three years.

Vipul Sagar - Blash Capital

Okay.

Jim Linesch

I also wanted to point out that our Kombucha sales are not constrained by the capacity of the produce. We really worked on our production and we could drop our production tremendously given the demand that we will have.

Vipul Sagar - Blash Capital

Okay.

Chris Reed

Well, that’s optimistic. Any other questions out there and thanks Vipul.

Vipul Sagar - Blash Capital

Thank you.

Operator

Our next question is from Alec Jaslow with Midtown Partners. Please go ahead.

Alec Jaslow - Midtown Partners

Hey guys, congrats on your $10 million quarter.

Chris Reed

Hey Alec, thank you for initiating coverage on the company.

Alec Jaslow - Midtown Partners

Definitely, definitely. I just had a question about just trends for your cost of tangible goods sold, it seemed like as a percentage of sales, goes up a little bit relative to last year, and so when they get percents from you, if there is any reason for that and should we expect that trend in the near term going forward?

Jim Linesch

Alex, if you look, you probably don’t have a yes, if you look into their MD&A section.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

Of the 10-Q under operations. We are breaking out the growth sales in the net sales. And if you locate the tangible costs of goods sold in relationship to gross sales, you can see that it is falling year-to-date its up. The same for quarterly it is slowing like 200 basis points. And so the real difference in the relationship between tangible cost of goods ensures have to do more with promotions.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

[indiscernible].

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

So we actually had improvement.

Alec Jaslow - Midtown Partners

Okay. So as promotions has been different than did much more than usual?

Jim Linesch

Yes. But one thing [indiscernible] at a rate much faster than sales.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

This year.

Alec Jaslow - Midtown Partners

Okay. And then similar question for G&A, it seemed it was 12% of sales versus 9% for last year and I was going to try and get a sense, if we see that trend going forward as well?

Jim Linesch

G&A is a little bit more on the linear side than percent of sales and we are really not anticipating very, very close than that in the category. And we really only had about I think we only had 70,000 over last year. Most of the increase in SG&A is in Joe’s costs.

Alec Jaslow - Midtown Partners

Okay. And just – sorry, just in terms of the fourth quarter trend versus last year previous years, do you expect the upcoming fourth quarter to be similar or is there anything –

Jim Linesch

As far as cost structure?

Alec Jaslow - Midtown Partners

Yes. Cost structure and sales, I mean more sales on the sales side?

Jim Linesch

Oh, on the sales side. Yes, they are still trending up. I think it will be way up over last year. That fourth quarter does tend to be our softer quarter although we are filling in here a lot with private label and others.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

We don’t find. And from the cost side it will very similar. It has some reductions. It is in half and that we also have a few more cost. So I would say it’s a pretty much the same.

Alec Jaslow - Midtown Partners

Okay. So it will be a soft probably comparing to the prior three quarters?

Jim Linesch

Yes. Probably will be.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

There are still some things on the table in for Kombucha.

Alec Jaslow - Midtown Partners

Okay.

Jim Linesch

I think late in the house but it still has something to Kombucha sales.

Alec Jaslow - Midtown Partners

Okay. Great. And then in terms of you boosted your selling and marketing and just want to get a sense with you expect the trends to be like for the next few quarters of selling and marketing, flat to up or just flat?

Jim Linesch

No --

Alec Jaslow - Midtown Partners

I think that depends on what we do with the trade shows, they are a pretty good chunk. You are going to anticipate a big jump in sales stuff, I don’t think --.

Chris Reed

I think what happened last year after a very profitable second quarter as we started signing some contracts relatively quickly figuring okay we got a pretty good spend not anticipating just what the third quarter and fourth quarter – first quarter Kombucha not only problems with production, but the launch and the cost that they are entering into the marketplace. So we kind of – we are just unwinding part of the expenses through the end of the third quarter. And we are not reinitiating or initiating other things yet. So we are kind of evaluating it.

We are also I mentioned there is a new way to tap and see what’s going on in the marketing – that’s going to make us much more nimble in the marketplace moving forward some data sources I’m alluding to 550,000 stores nationwide that we are about to sign contracts with. And I think we are going to sign, we are going to – this year its about marketing and its about managing the sales force that we want to grow relatively rapidly but in a way that it paid for itself.

So there is going to be a bit more attention on the VSD growth back in new marketplace, New York city, Manhattan, who is the largest distributor. We are going to start to utilize some of the data to really fine tune our roll out into mainstream and start accelerating more push unfortunately, its about more push instead of pull in the marketing sense.

But I don’t anticipate accelerating from here I think they are going to be strategic and how you grow the top line and probably even start to back off if I spend a little bit. So I would say that I know we were on lining that we got into last year we won’t be doing this year, if we probably won’t go beyond the current spend and I don’t know if we reduce from here but we’re more likely to do that than to increase at the moment.

Jim Linesch

That’s right.

Alec Jaslow - Midtown Partners

Okay. And just to get a sense of where – Johnson I might have missed this, forgive me but what have you found so far as been the most efficient use of your marketing dollars, we look at marketing efficiency as revenue per marketing dollar. And just trying to get a sense so far of what you found to give a best tool for you guys to use.

Chris Reed

Well, that’s the score point here I think that’s a good question. I think score card is the real -- it reminds me of Michelle. And like one of the things that they right down I believe it out we have a CRM systems but I’m going to get a really moderate version of it so that our guys walk into the car GPS knows where they, tell them who the account is what they sell who the contacts are, they create a lead on, they follow it. I mean we’re kind starving for data, we keep thinking god if we had like $1 million or $5 million or $10 million how the hell we grow the company and what do we know it’s going to give us the return on investment I mean we for god sake we’re at New York Stock public company with good graphing. I’m not saying that we’re here thinking to raise but we’re smart business people so we need to get smart on if there is a spend out there, that’s a huge return for investors ourselves --

Alec Jaslow - Midtown Partners

Yeah.

Unidentified Company Speaker

So, we got to do it. So, this is the year where we drill in a bit more and we have kind of anecdotal kind of feel for what’s working with, we don’t have really good answers in this yet, we know we work hats off and we got 28% growth.

Alec Jaslow - Midtown Partners

Yes.

Chris Reed

Not great isn’t. So, we could get more details in that but it’s do we know what the – there the discounts are doing we know that they’ll see them on a street versus the headquarter call so we really haven’t drill down though and my bugging Jim for this and am I giving we’re starting to get data a lot more data inside the company and I have Alice who is now doing good work with the company internally on this. And we’re starting to get little smarter but we’re also starting to realize that man we are – we’re going to get a whole lot smarter than that 2014 and we’re going to come out of 2014 probably with the business model that’s scary so we’re all very fired up about some of the stuff we’ve assembled upon as a company.

Alec Jaslow - Midtown Partners

Okay, yeah that’s great. All right. That’s all I have right now. I appreciate your time.

Chris Reed

Great. Thank you, Alec.

Alec Jaslow - Midtown Partners

Thanks.

Operator

Your next question is from John Curti with Singular Research. Please go ahead.

John Curti - Singular Research

Good afternoon gentlemen.

Jim Linesch

Hi, John.

Chris Reed

Hey, John, thank you for initiating coverage.

John Curti - Singular Research

Yes, yes, I know, little quicker than the previous caller.

Chris Reed

Yeah. Go ahead.

John Curti - Singular Research

Question regarding promotional and other allowances around 12% versus about 8% last year, was a good chunk of the increase attributable to Kombucha?

Jim Linesch

Yes. So, we increased spending with both our Kombucha and our region the results but the Kombucha you take that 12% in the quarter it’s running at about just keen in year-to-date is running over the lower 20. So, yeah it is impacting that overall numbers.

John Curti - Singular Research

Okay. And then on the delivery and handling expenses, it’s running about a million bucks a quarter for the first three quarters and as we get into the first half of next year with your production difficulty you saw and more production coming out of your plant in Los Angeles, how much do you think that goes down or maybe on a page basis because obviously you’re going to be selling more product and shipping it to more people there on. Any idea what that looks like?

Jim Linesch

No, we historically if we look at when we were producing a little bit more in the east it was running I believe between 8% and 9% those net sales that’s kind of rough but now it’s up to 10. So, I would say we could get that down to 8% to 9% range.

Chris Reed

In fact when we were producing on the west.

John Curti - Singular Research

Yes, so the shipments, yes.

Chris Reed

Missed that, that’s okay.

John Curti - Singular Research

You’re 8 to 9 on the west and then went up to 10 when you got to ship out of the east maybe goes back down to 8 or 9 in production.

Chris Reed

Correct.

John Curti - Singular Research

The – going back to the promotional expenses and allowances do you think heading into 2014 that you’re probably going to kind of stay in that 12% 13% range or does it move up a little but because it sounds like the Kombucha promotions are little more.

Jim Linesch

Well, we’re hoping it will come down a little bit.

Chris Reed

So, you see the trend is up 20% overall for the year to 15% in the third quarter, we probably started the year 25 to 33ish in Kombucha and it’s trended down to 15. I think you should say between 15 and 20 in Kombucha for the next year. And I think that we could be a lot more strategic on our core brand. I don’t know you’re dealing on those products necessarily it has a good return on investments but that’s some of the analysis we need to do I would like to see it move back to around 8%. So, again we’re trying to research and see whether it’s gaining us, we do like to see the growth on our core brands they’ve been steady and solid.

And I know the guys are putting us into more supermarkets and every time you do that you’re spending either – it’s part of that slotting part of that goods offering promotion to get going in a new store. So, we’ll – but I think they could be more strategic especially I would tell you what might be it was we’re having trouble producing new testings why are they putting out deals so that’s the real question you got really it is a slow down on the things that are big volume things are blowing through here and I think we could have been a little number during that time where production was the challenge I would say. And we probably didn’t need to do that but I think it’s some of the things that we’ve awarded ourselves to – we’re trying to deal smarter about.

With the increased – with the increased penetration now into the grocery trade do you think that you’re required the same level of promotions in the grocery trade is in say the – where you got your start in the national trade and if the promotions are less there do you think you may actually end up being able to – spend less on promotions in that. Our national trade because they see business flowing away into the grocery stores.

Jim Linesch

I don’t think that will happen. One of the things we’re talking about is maybe having a little bit, so we’re priced point instead of the promotions or that you get into a situation sometimes where you’re as you’re not in familiar territory you’re adding to do some education. And so that’s what we do, we’ve been able to avoid in the natural food because everyone knows what Kombucha is has they flows into mainstream that’s we probably will encounter meetings with generals and at certain level kind of educational promotion.

Chris Reed

Partly what happened to with the Kombucha and we have a – it’s not commodity product so we have the Coke of natural food and people like to promote Coke in front of the store and the natural foods they like to promote the most popular sodas the Virgil’s Root Beer and the Reed’s Extra Ginger Brew. And our guys lot of cases they say you got to carry Kombucha and I like why we got Kombucha. So, look you want to feel on the Extra Ginger Brew this month, yes we do, okay we’ll take care either Kombucha you got to play with it.

So the guys they go give you got to give a feel on Virgil’s juice. So there are some wheeling and dealing on our core brands to kind of leverage us in. So, I think that we’re getting all the placement so probably be more share promotions around Kombucha, two for 6 bucks going to 299 from 349 normalized national price. In mainstream most people think of mainstream is being more expensive but they don’t necessarily like the promoting until they get familiar with you. So, as we become more successful in mainstream that we more and more hey you know we did really well we got a big list from that promotion, we want to run it again.

Right now we’re still doing pretty modest promotions in mainstream quarterly maybe it’s came down or a deal trying to get off the shelf into some kind of an intact where it possible but nowhere near the kind of business in dealing there is almost required because we’re such top tier product in natural food. And are they taking away your business in natural foods, I don’t know, I mean it’s interesting I think Kombucha, well, look at the data Kombucha was growing at a quite a clip and in that supermarket nationwide are growing out phenomenal clip and they’re almost doing as much Kombucha business outside of supermarket as they are in the natural foods trade as probably Kombucha active but somewhere this is at least 50% of the business at this point.

And it’s growing really fast and I think it’s probably has attenuated the growth of Kombucha which looks to the branch of the 20, like around 20% in natural right now while being I think a 60% or 70% mainstream. So there is a little shift there but anyway we just like to be part of the equations number two, and we are the necessary evil we believe for these guys who are thinking about Kombucha the way they should be and it takes a Pepsi to keep Coke on their toes and to keep the deals flying and to keep the number one guy to give up a little large and to stay competitive in its promotions. So us out in the marketplace has really wild up some of the Kombucha they probably hadn’t been a promotion for the couple of years all of a sudden the guys having to reach into its pocket book and because we see Reed’s come along. And I think that’s also may be slowing down some of our fast relaunch but we’re not disappointed of what’s going on here. I really think that question wasn’t being asked, but go ahead.

Jim Linesch

As we focus on this.

John Curti - Singular Research

All right, just a couple more. You mentioned your top 12 SKUs doing about a 70% of your revenue I think they were up 34%, are there some product categories that may get deemphasized and you shift that production capacity to your faster sellers?

Chris Reed

No we produced everything. I think and honestly we should probably pruned a little bit on some of the 33 products where things that aren’t really going that well, but I will say that to sale in view is that I look at the way we wants Kombucha the way we got smart that we go to market need to be refined and it is getting refined and there is a lot of SKUs I believe that we haven’t really given the attention to that are players like the Energy Elixir but there they probably we were a little bit better at launching as we’re learning to do with Kombucha we probably those products could be doing 5 times or 10 times much as they are doing I completely got distracted on the question. What was your question again?

John Curti - Singular Research

It’s just the.

Jim Linesch

Premium SKUs.

John Curti - Singular Research

Opportunity to may be prune some things out quite and replace it with your faster growing?

Chris Reed

Yes, we anyway, it turns the production that was the first question. Here we produced for everything right now we don’t, we really shouldn’t have a production suite it’s kind of called soft guard when the facility we’ve never been at a maximum facility and we have given them our projections for the year and they currently price us with the reduction in what they could produce. And that won’t happen again, but I won’t I’ll try not to lead production constraints limit the SKUs I have, it should be because of SKU should be reduced because they’re not performing well enough and we are spending too much of marketing in it they’re not really returning.

The case is our 55 Calorie Extra ginger brew that was a great product to launch and it was launched poorly and that will give the guys a headsup I’m not really impressed it was a most requested product here with the low calorie version of our number one SKU and we’ve put it out may not taste great with all the CV there but it’s still a great experience for people who don’t want 80 less calories that every time they drink it they finally got there the 264% year-over-year for the third quarter. So we are seeing what happens when you have the right marketing behind our product. But with a very lean and mean sales force we are very under-marketed with our current SKU.

And we’re going to try to get a lot smarter on organizing and managing that this next year with a very sophisticated CRM and a whole lot more data coming back. And then ultimately we’ll see an increase in the number of employees in the sales and telemarketing arena at our company. So we are as I say I think that we got we’re getting better of what we do here it’s not like there is a really great one-on-one book on how to launch a beverage company we’ve been scrappy, we’ve survived when most of our competitors have gone under in an economy that melted premium sodas and we’ve come out pretty shiny but we got a long way to go before we’re slick as hell and 2014 is my basically I'm just telling, I’m telling shareholders that you’re going to see a new company coming out as we can already see that there is a lot more we could be doing here with the SKUs, Light 55 and how we go to market like we have the Kombucha and starting to anyways go ahead.

John Curti - Singular Research

And my last question relates to an agreement you signed a few months ago with Lassonde Industries up in Canada for I think they have the exclusive distribution up there, I know it takes time to roll things out and the like can you make any comments on how that’s going, are they single-hold product?

Chris Reed

Yeah I think they take forever in a plan, plans are moving along great I think that we’ve heard if it’s December 1, or February 1, but they’re going to finally start launching we have given an exclusive for Canada and we’ve given them all of our distribution in Canada to start from Lassonde. Lassonde is equally excited as on our sodas they are on our Kombucha where the CEO I guess is a big Kombucha fan and see the big opportunity in Canada with our Kombucha. So we’re it is not a factor, it’s not adding the revenue, it hasn’t, that switch hasn’t been turned on and at the time I was buying Jones Soda I think it we’re a big part of that business. So we know with all star Lassonde has and we’re very excited about it.

John Curti - Singular Research

Okay, that’s all my questions. Thank you.

Chris Reed

Thank you John.

Operator

Our next question is from Malcolm Maclennan with Oppenheimer. Please go ahead.

Malcolm Maclennan - Oppenheimer

Chris, how are you?

Chris Reed

Good, how are you doing Malcolm?

Malcolm Maclennan - Oppenheimer

I'm pretty good, now look I don’t mean to put a wet blanket on your conference call when I think there is some area that you haven’t addressed and it costs me some money, if that would stock price but I spent a lot of money on my wardrobe and you got these food products that I got to have all my stuff taken at. I mean I think you got to have like you got to be 18 and older and I hate this chocolate covered ginger stuff, how is that going?

Chris Reed

Yeah it’s another one of SKUs like the 55 et cetera that are moving along, and because here we launched and we got Kombucha and you got to keep the name, brands going forward and they somewhere off way off of the side of that talk, may be I should fill chocolate and ginger there. I don’t have the data in front of me of how chocolate ginger is doing, I will say that’s infancy and it could represent a couple of room for sales in a number of years and to get the attention it needs and deserve. So but the feedback is great and you’re over 18 now.

Malcolm Maclennan - Oppenheimer

Yes, but I’m telling you.

Jim Linesch

I got to have a lot of things altered here.

Chris Reed

Yes, yes now it is great stuff, we get such high acclaim from that part it is put out that put forward at every event we sell both chocolate covered ginger but it’s getting out there we’re the only guys doing it and it should eventually become a real player for us.

Malcolm Maclennan - Oppenheimer

Well congratulations I think it’s great quarter I think the future is extremely bright.

Chris Reed

Well thanks and help us out there in Oppenheimer to spread the news.

Malcolm Maclennan - Oppenheimer

Yes sir.

Chris Reed

All right, have a good day.

Malcolm Maclennan - Oppenheimer

All right.

Operator

Your next question is from [Samuel Gravina], Private Investor. Please go ahead.

Unidentified Analyst

Hi, this is Sam I actually don’t have a question but good job anways, thank you.

Jim Linesch

Thank you.

Chris Reed

Thanks Jim -- Sam.

Jim Linesch

It’s actually Sam.

Chris Reed

I appreciate it I know you’ve been an investor for a long time. You have your number one holding is REITs, your number two is bid claims.

Jim Linesch

Bid claim, good kidding.

Chris Reed

All right, next.

Operator

Your next question is from Jack Wilson with Capital Finance. Please go ahead.

Operator

Mr. Wilson, your line is live. Please go ahead with your question.

Jim Linesch

I think he’s got tired of waiting.

Chris Reed

No I try to care about that bid claim comment.

Jim Linesch

Yeah and with me.

Operator

And your next question is from is Rachel Jacobson with [Atlantic]. Please go ahead.

Unidentified Analyst

Rachel had to leave but this is [Janos]. And a question that I didn’t have until I was listening a lit bit ago was kind of scared me you said coming out in 2014, that your business plan is going to be scary, what do you mean by a scary business plan for 2014?

Chris Reed

Not that where I meant by that. Jim, did I say something about scary?

Jim Linesch

Yeah you said, coming out in 2014that your business plan will be scary. May be that was just.

Chris Reed

Scary good.

Jim Linesch

That was scary good.

Chris Reed

Yes.

Jim Linesch

Yes I don’t remember seeing I think the enthusiasm is very high here, the results were producing in 2013 are marginally accelerated from prior years and I think the activity is going on the way Kombucha now are driving force, the private label continue to be driving force and our brands doing well and our own new relationships that are coming on board and the way we’re going to market we’re pretty enthusiastic and we don’t really see an end in site to the U.S. and North American roll out. I’m very excited about international sales starting to heat up a little bit. So I mean I, it didn’t mean to you use the word, I mean --

Unidentified Analyst

Okay, I got it, I -- I had that’s all I’ll leave here to kind of light you some others.

Jim Linesch

Oh it’s fine, but you can’t light in much after bid claims.

Unidentified Analyst

Okay. I mean Chicago and there is a major market and I’m right down in the middle of the city and as you probably well know that the Dominick Chain will be evacuating the market by the end of the year and to-date there is only been may be a handful of those stores has been taken over a couple of them by Jewel and a couple of them by Mariano’s. And I know that they you just signed the deal and with Jewel, but I’ve gone around then I find a very difficult to find a product and is that lack of the current distributor in this market or is it the lack of getting it in it’s store level?

Chris Reed

You’re in New York city right?

Unidentified Analyst

No, I'm in Chicago.

Chris Reed

So probably we just brought on about year and a half ago Chicago largest distributor Central distributing which is the --

Unidentified Analyst

Yes.

Chris Reed

We have a guy on, one guy on the Street and one guy kind of the chain management and they’ve grown the area for may be a $1.5 million to $3 million over a year and a half. So it’s one of our fastest growing areas and I like to say that people they generally start to see a brand when I start here people talked about the brand it was about $200 million in sales. So we’re still $40 million in salesish company and what that represents in your marketplace is you see it in Trader Joe’s, you see it will Whole Foods there Jewel, Treasure Island and some select mom and pops up down the street that are I mean as once you start being aware of the brand you’ll start to notice it more but still very much as infancy in all these markets.

Unidentified Analyst

Yes as I know that.

Jim Linesch

Yes.

Chris Reed

Yeah.

Unidentified Analyst

The question is one for you. right now based upon going forward and a wonderful numbers in that stuff that we’re doing what keeps you awake at night?

Jim Linesch

First of all there had been times where I would kept awake and even this year was quite when we had that private label guy sell out on a lot of product in and all the problems with keeping of the production and just how frustrating is to now that we could be putting out 33% to 40% growth quarters instead of what we were doing. Those were very irritating times but in the bad time of the economy we’re burning $700,000 a month here those were times that kept me awake, but I sleep like a baby.

Unidentified Analyst

Yes, you wake up every other hour crying.

Jim Linesch

I love it, how you did like baby, but that will actually I really I feel like extremely enthusiastic and we have I’ll tell you what happened actually that not ramping so much, but after the screw up in the second quarter of a, not having enough production and b, having this big private label thing meltdown on us. I started a new turn a new leaf with my employees and everybody here knows about it and it’s public by now know about it we, everybody has projects now and every week we meet on projects it sounds really stupid and simple basic math and marketing but we’ve gotten away from that because everything that going so damn well and you’re moving into speed of light and we’re all very happy and out of the structure it has really brought a lot of this I actually I have all my means of Friday and when I walk out of here on Friday there is nothing loose posing around in my head.

So I have great weekends and I have great sleep. I feel like we’re extremely well organized and getting better all the time and I think every one here if you could clearly the management and the people that reports me directly they all know there has been a big shift here and they all know that we’re not into screw up and if there is screw up being at 25% growth for the year but we are not going to do that again.

Unidentified Analyst

Okay. Let me ask you this. With these projected big rose and everything that I ensure is going to happen. Do you foresee a need for a raise, a capital raise or a secondary offering of the stock or are we solid in foot lines of credit what you are currently using and are financing?

Chris Reed

As we become better at what we are doing in our financials to continue to increase, in actual we are looking better and better to banks. It is easier for us to borrow on our receivables and inventory and the ability to borrow more is there. Ultimately we are planning to have earnings -- more earnings and we are seeing more task just not only for our working capital but to making of the investor world happy and to be balanced with it and not just to spend all on marketing and sales. We keep promising. We showed a little bit of that 2012s and say you are seeing us move – we would have been better in the second quarter.

So I didn’t have lunch, [indiscernible] what was the question again?

Unidentified Analyst

Accelerated sales and increase –

Chris Reed

Okay. So right now, the things that caused me to do a raise as we do an acquisition of a company as I alluded to earlier in the conversation if we get data screen flow that we are trying into shows that we have an opportunity or we started marketing things, one market that we have to preemptively stretch into a national rollout that would cause us to raise money for marketing. From the working capital standpoint Jim and I have had this conversation of -- $450,000 that got tied up because of the private label things kind of put a little stress on our working capital although our bank just step up and gives us some extra working cash and we have been selling off that inventory and trying to reclaiming that.

We don’t – I don’t believe that we need to raise money. We have had a couple of years now without raising money. We don’t anticipate needing to raise money an acquisition or a really successful marketing launch in the key market would probably cause us to raise money.

Unidentified Analyst

Okay. Then on the flip side of that you feel that in the near future or the semi-distant future that we are a candidate to be taken over by someone else? Well, has anybody been sniffing around lately based on the numbers that we are able to increase?

Chris Reed

They are sniffing around plenty. And I do have open invitation from some of the larger companies who have befriended over the years to show up in their board room and talk about acquisition. We are the coke of natural food. It’s a very enviable place to be when coke and sodas are not growing. We seem to be growing.

So we have been approached by European entities and other people looking to acquire us and we generally say – we just got to this starting lane, I see that sound of hand [indiscernible] I’m just about to start to do the serious stuff that I wanted to do all my life. I have got three to five years to really mature thing up lay past $100 million hopefully cultured it, $200 million. And I just don’t want to preempt it and try to value it right now. So its not like a majority shareholder. I’m a major one. That can’t really stop things. But I basically would say to anyone. Please give us a chance to make this company look interesting to Wall Street.

Unidentified Analyst

Well, that makes good sense to me on that.

Chris Reed

Thanks.

Unidentified Analyst

So financially, you are okay with lines of credit not looking for a raise pretty well the company can support itself going forward?

Chris Reed

Yes. That’s right.

Unidentified Analyst

Okay. That’s what I have right now. I don’t have anything else.

Chris Reed

What was your name again?

Unidentified Analyst

My name is Ziyanos.

Chris Reed

Ziyanos.

Unidentified Analyst

And my company is Estanic LLC in Chicago.

Chris Reed

Estanic. Well, I do appreciate the questions today.

Unidentified Analyst

Thank you for your input on it. Hopefully I can talk with you guys again soon.

Chris Reed

Yes. Sounds good.

Unidentified Analyst

Okay. Thank you. And I’m going to drop off now.

Operator

Our next question is from Mike Owarding, Private Investor. Please go ahead.

Unidentified Analyst

Hi. I have been wondering for a lot time about the Virgil’s Zero line which I have sent away for and tasted it and I think its really delicious and as a consumer strangle loose weighting this diabetic and I know I’m not the only consumer, I have to like that. So I was wondering, do you envision zero line getting into mainstream and so you any promotions coming up and also not at all?

Chris Reed

Zero, number one, two, three, four, five, six, number six item in our portfolio is Virgil zero and the cream soda zero, it’s probably like 12 or 15. And again, if we were just a zero Virgil company, would have a lot more attention going into those brands. And they would be going a lot further. I think they could – you want to see an example of great marketing on a zero calorie natural iron, the company is [indiscernible]. And I got acquisition for our company and now a high flyer. And the beauty of what we are offering is face better, doesn’t have the sugar alcohol which are real problem. And it doesn’t have the aluminum can, which you can argue against for Alzheimer’s et cetera.

So we have a better, the best natural diet soda line in the marketplace and we need to find a way to take all of this incredible creativity that now with Kombucha, with our original stuff and now with the zero line. What is the amazing thing about this, I got about 12 more wines in my brain and I really need to be tied down. Not all beverage, they are not even all food. So I think god, we slow that down.

Excuse me, I said, excuse me it took a page next to your couple of your Kombucha’s. And I don’t what else do you want, I think we will do some interesting things with [ph] Slingwood as this plant is getting fully operational for high-speed of swing saw protection. But, I can’t say that we have a specific goal although we have been – the Diabetic Association of America, the American Diabetes Association have reached out to us to be at their shows and we are starting to think we need to do some marketing there.

Generally what we are seeing is a relatively seeking, we probably have the highest per -- earnings per sales person of any beverage company in America. Basically these guys are working really hard and ultimately they will need some relief with more people to help them do the listing of all the brands that we have here.

We are just slowly – not slowly, we are very consistently growing Euros. It’s in there growing well like our other brands are. We started advertising a little more for the trade just to kind of we had a little more juice fired to the Virgil zero line. But you are right, its another incredible opportunity at Reed and we really need to do something about it.

Unidentified Analyst

Yes. I think it will do in mainstream. Do you have anyone at mainstream or is it all in just –

Chris Reed

Our Kroger’s has the Virgil zero Root Beer and I know Giant Eagle does in the Pennsylvania marketplace. It typically we are going to have one of the zero’s, you the Virgil Root Beer zero. I’m going to say you somehow acquired a [indiscernible]. The public is still thinking, I don’t that is [indiscernible], my question to them is how the hell did you ever [indiscernible] team?

Unidentified Analyst

Well, is just that my Diet Pepsi has been ice down, the business I started years ago and so Virgil Zero is a real tree, you almost feel guilty drinking but –

Chris Reed

It’s a lot more natural than [indiscernible]

Unidentified Analyst

Right. I just [indiscernible] have it in the mainstream Kroger’s and [indiscernible] I particularly the – I think was black cherry flavor.

Chris Reed

I think the cream soda is – I think that is a brilliant design. One of my -- most proud of the Virgil Zero cream soda. It is so [indiscernible] it is nothing unhealthy about it. So –

Unidentified Analyst

Well, I want to and that’s really the only question I had left. And you had answered. Thank you.

Chris Reed

Thank you.

Operator

There are no more questions at this time.

Chris Reed

Well, we went for a way that’s long we have ever been. Thank you so much today everyone who joined us and still on the line and appreciate you calling the [indiscernible]. And look forward to reporting year end. Thank Jim.

Jim Linesch

Thanks buddy.

Operator

Thanks ladies and gentlemen. This concludes your call. You may all disconnect.

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