Reed's (REED) CEO Chris Reed on Q3 2016 Results - Earnings Call Transcript

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

Reed’s, Inc. (NASDAQ:REED)

Q3 2016 Results Earnings Conference Call

October 13, 2016 04:30 PM ET

Executives

Chris Reed - CEO and Founder

Dan Miles - CFO

Analysts

Anthony Vendetti - Maxim Group

Operator

Good afternoon and welcome to Reed’s Third Quarter Earnings Conference Call for the period ending September 30, 2016. My name is Benjamin and I will be your conference operator today. Participating in today’s call, we have Chris Reed, the CEO and Founder of Reed’s Inc; and Dan Miles, Reed’s Chief Financial Officer. Following management’s remarks, they will take your questions.

Before we begin today’s call, I have a Safe Harbor statement to read to our listeners. I would like to remind our listeners that during this call, management’s remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. Additionally, please note, non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for informational and comparative purposes. The Company believes that the presentation of non-GAAP financial measures provides useful information regarding the Company’s financial condition and results of operations. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Legislation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks, but not limited to risks relating to the demand for the Company’s product, dependency on third-party manufacturers and 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, October 13, 2016. Reed’s, Inc. assumes no obligations to update these projections in the future as market conditions change.

I will now turn the call over to Mr. Miles, who will begin with his prepared remarks.

Dan Miles

Thank you, Benjamin. And thank you for your interest in Reed’s Inc., thank everyone on the call for joining us today in our third quarter’s earnings call. My name is Daniel Miles. I’m the CFO of Reed’s Inc. In addition to the press release issued today, we will also file an 8-K with this press release with the SEC. As in the past, I’ll start with the recap of our results, highlight the financial activity and then turn the call over to Chris, the Founder of Reed’s Inc.

The Company continues to be fully engaged in regaining the growth of Reed’s products. After discussing the results of Q3 today, we believe it would be appropriate to put the supply chain problems from Q3 2015 in our rear view mirror and focus on moving the great brand forward. With that in mind, let’s talk about the performance.

During the quarter, gross sales of 8-ounce volume grew18%, while net sales revenue increased 15% over the same quarter in 2015. Specifically, Reed’s Ginger brand products increased 14%; Virgil’s brand products increased 13%, other Reed’s branded products that includes our Flying Cauldron Non-Alcoholic Butterscotch Beer increased 68% and private label brands manufactured by Reed’s increased an additional 36%. Discounts for 8-ounce decreased 5%, reflecting a decrease in promotional dollars over a significant increase in volume. Non-beverage products such as candy, glassware and mail order are not in the proceeding volume discussions. These items as a group totaled $440,000 in gross sales, a decrease of $228,000.

The Company began shipping all bulk candy SKUs in the late second quarter and started shipping mail order just week. We believe the candy volume will return to the past levels by the year-end.

In recent quarters, we discussed external impacts that affected the margins in those specific quarters. In the third quarter of 2015, it was a supply chain interception. In the first quarter of this year, it was the methodology used to track outside inventory. During those earning calls, we stated absent those onetime issues that impacted the gross margin, the margin would have been 27%. Rather than discussed now why the margin improved from 15% in the third quarter last year to 23% in our most recent quarter, I am going to explain what kept us from achieving the 27% gross margin during the quarter. I will then outline what we have in place to get our margins back to 27% by the end of the first quarter.

Here are the issues that impacted the 27% margin. Higher labor costs in our co-pack plants of 125 basis points and higher packaging cost driven primarily by our financial condition of 240 basis points and higher ingredient costs of 30 points and lower sales prices based on product mix of 190 points. These increases were offset partially by our lower LA plant cost of 240 points.

Your Company is currently implementing corrective actions that are based on ingredient handling processes, vendor capabilities, purchase price leveraging and contract enhancements with key vendors. Specifically between now and the end of the first quarter of 2017, we believe the following actions will improve our margins back above the 27% level.

The R&D team in conjunction with major ingredient vendor has developed a new process for handling a key ingredient that will not affect the taste but will dramatically improve yield. This initiative alone is expected to potentially drive between 80 and 100 basis-point improvement in the margin. We continue to work with our company-packers to improve operational efficiencies and handling scrap where scrap is reduced or voided altogether. This will generate potentially another 50 basis-point improvement.

Three, we have identified alternative sources for key raw materials that on a contractual basis will yield at least 100 basis points. Four, we’ve looked at our own purchasing practices and believe that with our improved financial position, we can now leverage discounts yielding another 50 point basis improvement. That brings us to number five, currently in the third quarter, our sales mix is weighted towards lower margin items. As the mix shifts back towards the core brand, this will yield another 70 basis points.

And finally, over the past four quarters, our operations team has demonstrated the ability to cut idle plant cost by $1.25 million when compared to the previous four quarters. We look to our production partners to not only avoid price increases in the coming year but to add meaningful price reductions. We believe that between a product mix of higher margin items and these initiatives, we will realize our initial goal by the end of Q1 of next year of 27%.

The analysis on an 8-ounce basis is described and discussed in a more -- in detail in the 10-Q which will be filed with the SEC in the coming days. Chris will discuss later the initiatives that will take us from 27% gross margins to well over 30% as we enter into the 2017 key selling season.

We remain focused on controlling costs and operating the business more efficiently. And during the quarter, the Company exceeded our own goals by cutting total non-production costs by 27% or over $1 million over the same quarter in the prior year.

Let’s highlight that specific cost cutting activity. Delivering and handling expenses decreased by 34% or $453,000 in the quarter over the same period in 2015. The decrease was achieved even as we shipped higher sales volume of 18%. The decrease was due to a combination of better shipping rates and use of rail for cross-country shipments. Selling and marketing expenses decreased by 26% or $324,000 over the same period in 2015. The decrease over last year is primarily due to reductions in sales compensation related expenses of $213,000, reductions in sales support activity of $83,000 and reductions in sales operational costs of $30,000.

General and administrative expenses decreased 21% or $237,000 in the quarter over the same period 2015. Staff compensation expenses decreased $26,000, G&A operations decrease $38,000, G&A support decreased $43,000 and miscellaneous costs decreased $129,000. The miscellaneous decrease was due to a decrease in bad debt of $170,000 offset by higher warrant amortization expenses. Therefore, when compared quarters, the profit from operations increased by $2,340,000. More significant though through volume, margin and expense initiatives, your Company achieved its first operating profit in eight quarters at a $196,000 compared to a loss of $2,144,000 in the same period 2015.

Interest expense and bank related charges increased $94,000 to $415,000 in the quarter as compared to expenses of $321,000 in the same period 2015. The increase is primarily due to increased borrowing on our revolving line of credit and additional term loan, borrowing on capital expansion loan and higher rates from the new terms that were implemented in 2015.

EBITDA increased $2,310,000 in the three months ended September 30, 2016. The increase was the net result of increases in operating profit of $2,237,000 and EBITDA adjustments of $64,000, EBITDA. The adjustments are $21,000 decrease in depreciation and amortization, a $94,000 increase in interest and a stock option compensation decrease of $9,000, which brings us to the liquidity.

At September 30, 2016, we had stockholders’ equity of 972,000 and working capital of 637,000 compared to stockholders’ equity of 785,000 and working capital of 730,000 last year-end December 31, 2015. Cash and equivalents at September 30, 2016 increased $744,000 to $1,947,000 compared to $1,203,000 at December 31, 2015 or last year-end. Net cash used in operations decreased $423,000 to $1,675,000 over the same month, which was a result of an increase of payments to vendors of over $2,100,000 that was partially offset by an increase in accounts receivable of $1 million. Net cash used in investing activities was $567,000, primarily, on the LA plant.

Earlier this year, the Company successfully completed an equity transaction that raised net proceeds of $2,200,000 to provide additional working capital. As a result of the equity raise, the Company now has the cash to complete our plant and fund our future business. As I stated at the start of the discussion, we believe the Company has put last year’s supply chain interruption in the rear view mirror; it’s behind us now.

As we stated last quarter, we believe that with the additional equity funding, the improving volume, better margins and decreasing operating expenses, we now have a solid footing for future growth. Management is growing the Company one quarter at a time; we’re not looking back. We look forward to further driving the operating efficiencies and leveraging the growth that is at hand with the strengths of the Virgil’s and Reed’s brands in the craft soda segments.

It’s now my pleasure to turn the call over to Chris Reed, the founder and CEO of Reed’s, Inc.

Chris Reed

Thanks, Dan, I appreciate that. Well, I’ll give you -- that was very thorough analysis from Dan. I’ll give a little additional color on my perspective on sales. Reed’s was up 13%, Virgil’s was up 12%, Kombucha which during the supply chain issues of last year we preferentially kept Reed’s as well supported as we could without the production plants up. And then second priority was Virgil’s. The third priority was Kombucha. Private label at that time was all we’ve got, it was committed to and it got a pretty good preferential there.

We didn’t want to burn relationships with the largest retailers in the U.S. who effectively said things like we don’t produce during this time; we’ll throw everything out, including your brand. So, there was less leverage that we had in that situation. But Kombucha was out for six months and its sales are down about 50% year-over-year. But the interesting thing about the sales being up is we -- the supply chain issues of last year, we lost some distribution during that time. So, we lost approximately somewhere between 15% to 20% of our distribution in the marketplace during the outages and year-over-year we brought back about a quarter of that and there’s been an acceleration more recently as we’ve fully been in stock. The lead time with large national retailers, it takes time to get back into the marketplace. But the fact that we’re up in the growth on our core brands at a time we’re also recovering accounts. And we’re down from the account that we had prior basically implies that the sales of our products per account are up significantly over where they were a year ago. So, that’s actually a positive.

The stronger Ginger Brew which we consider probably the best product in our mix in terms of consumer love and preference, number one SKU, before that was Extra Ginger Brew and we’re watching at the trade shows people prefer the Stronger -- the Stronger was up 293%. So, now that supply chain issues are behind us, it’s getting the launch it deserves and it’s going very well. I’m watching a lot of the new growth coming in, new placements coming from that new product from us. The Butter Beer -- Butterscotch Beer, Harry Potter franchise has come back with more books, more movies, and we’re selling this in Europe, in Paris, in London. They’re putting it in Books-A-Million and stacking it next to the Harry Potter books, our Butter Beer. It will have a life of its own. Now, I think it’s our fifth SKU, number five SKU. I think -- anyway, so it’s been very exciting to -- that’s kind of a one-off interesting thing. And the Harry Potter -- they just opened Harry Potter land here and they’re putting out more movies next year. So, that one will probably continue to run.

For new distribution, we brought on target in CVS, also we brought on Nevada for our beer DST distribution up and down the street distributor and Southern California and San Diego brought on distribution with a large distributor down there. So, we keep filling in the voids, the gaps in our national distribution with Anheuser-Busch, MillerCoors type distributors. So, new business is still very exciting for the brands.

The financial health I think highlights as Dan mentioned; delivery costs are just being managed down by better choices and just smarter use of freight out there. Traditionally, we’ll run between 8.5% and 9% of our net sales would be spent on delivery cost and having it down to 7.3% takes a lot of pressure off of the expenses and makes it a lot of more probable in the future that we can start showing more profits here from the Company.

Now, the new plant in LA is projected to drop the delivery cost by another $70,000 a month that would have been about 210,000 out of 910 I believe is what we spent in delivery cost. So that would drop that down another 30%. So another 2 or 3 points, we get it down to the 5 percentage points. So, those are really big goals for the Company for a long time and we’re great under the leadership of our COO, Mark Beaton. He’s just doing fantastic stuff and bringing in line our delivery costs.

G&A ran 7.1%, typically runs between 9% and 9.5%. And what I would expect to get -- how to get 7% in the past would be having more sales to absorb more of a G&A and make it a smaller percentage. So, it’s nice to see G&A shrinking at the time where the sales are just recovering here. It definitely points to some great percentages of -- lower percentages of G&A as a percentage of net sales in the future.

Sales expenses were 7.4%; I can’t remember a number that low. We typically run 8% to 9%. So, I think we knew we needed to manage things down. We know we need to conserve capital here. I don’t think we -- even though sales expenses were down, you price it now, yes that’s not really a good thing necessarily, but we can see that with less accounts out there, we’re driving more sales. When we see the recovery, we brought back about a quarter of the accounts that we dropped with the supply chain issue and it seems to be accelerating here.

The idle plant costs, I remember when they were 450,000 a quarter, only probably about year ago, now they’re running 168,000. Now, idle plant is a number -- non-GAAP number we use internally. It means to us, if we didn’t have all the fixed over heads here and we were contracting out our production, we would be charged a certain amount. And by having -- comparing it to what it’s costing us right now, we have an additional expense of about 168,000 a quarter by not outsourcing. So, obviously, it’s not a situation we want to continue. We have a new plant that’s coming on line by the end of year and makes it seem that we’re going to quickly hopefully reduce the idle plant down to parity with outsourced production. And as we build up volume, we’ll see a significant benefit over having our own facility and having -- versus outsourcing production. There is more benefits to having your own plant.

We do a number of unique packages that we cannot outsource. So, we don’t really -- while we can talk about outsourcing swing lids and outsourcing Kombucha, outsourcing five-liter party kegs, outsourcing draft and soon Bag in the Box and you can do that, but some of that would be very prohibitive. We’d almost have to build a plant within someone else’s plant. So, we’re very excited about the financing highlights for the quarter. They point to making it a whole lot easier to be lot of more profitable in the future. I think it’s kind of a proof of my new management team with Mark Beaton and Dan Miles working hard and being very focused on this.

Now margins have a 23.4, I mean, I agree with Dan. I don’t want to look at last year’s margins which were affected by the supply chain issues. I think everybody asked the question, where did the margins go? When we were short on cash before the raise, there was packaging purchasing was happening, I mentioned this in the last quarter in less efficient matter. And we think that we have 3 percentage points of margins just by -- as we now are moving into better contract negotiated rates for packaging.

Margins were hit, because during the quarter, this quarter as we get back into the marketplace and a lot of places, there was a spend that was greater as a percentage of net sales than we had of the charge-backs and spend by the sales force to get back into the marketplace. So that worked out to about 1.5%. The product mix reduced with the less high margin -- having less Kombucha sales, which are very high margin and Virgil’s sales being less of a mix. The margins were reduced by another point and we see that mix coming back.

Now, the new plants, my expectations from the new plants that are coming onboard and the negotiated better labor rates with these facilities and et cetera, efficiencies of having a plant in LA to run three times faster with the same number of people, I’m looking somewhere around five percentage point in margin improvement from that. So all told, my goal at some time next year, hopefully by the second quarter, by the end of the second quarter, we’re running somewhere between 31% and 33% margins. That with growth will make for some very exciting gross profits and profitability of the Company.

Now, we continue to do quarters like this, I don’t think Dan mentioned it, but I’m going to say. Obviously we’re negotiating with banks right now. We don’t expect to be paying the interest rates we’re paying for more than a few more quarters. Definitely by the end of the third quarter, this year -- next year this time, we will have interest rates half and then probably considerably less than half of what we’re paying right now. So, we’re looking forward to that benefit from all this hard work. So, the plant progresses, they’re going very well. Most of the utilities infrastructure are already in place, equipment purchased staged and the plan is in place, it’s already schedule to go online; East Coast production are moving very well for us. So that we have for the whole year pretty much stayed ahead of all the production and sales needs of products. So, we’ve been in stock very well.

There are a couple of things that probably don’t show up as much in the balance sheet income statement, but they’re very real. There has been a lot of R&D our products are better this year. And because -- particularly because, we’re invited by a large fast casual to develop a replacement natural soda system Bag in the Box to replace Coke, Pepsi products in their thousands of accounts. That R&D has spilled over to our own product. We’ve learned things developing for this client that is now -- some of it’s been implemented here at Reed’s and Virgil’s. But probably 90% of it hasn’t been implemented where we can’t move fast enough with some of the ahas that have come out of this. But Dan mentioned, we have a more efficient way of making our Ginger Brews, we’re making better Ginger Brews. And we’re going to change some products right now, very quickly here. I know they’re going to have a huge impact with customers, because there are significant improvements. So, we’re very excited about that.

We’re moving ahead with trial at the fast casual. Also, it’s not just about making the world’s greatest new natural soda for fountain and changing what soda fountain will be in the next 5, 10 years. We can clearly see how that will shift. And we believe we’re at the leading edge on that, nothing the big guys have come up with comes even close. They’ve come up with Blue Sky and Hansen’s and soda. I mean, I don’t want to go into it and I don’t want to help fix their issues but they’re not holding a candle to what we’re producing. They’re staying high in calorie, high in chemicals and sodium benzoates and the client doesn’t want that and the world doesn’t want that.

On the second part of this, the flip side of the coin is, we don’t want to go into a soda machine like soda machines are today. They just scream to mom, this is poison; I don’t want my kids drink it. So, we need a new look and feel. And that’s going along tremendously well, great breakthroughs with what’s going to be the look and feel to complement the incredible new taste and natural soda fountain coming out. So, that is particularly exciting to me because it’s a big vision for the future. Potentially this one job would generate $8 million to $10 million of gross profit a year. So, it’s part of the goal to come in and get to a $1 a share earnings here, so that we hopefully have a really nice PEE on that. So, that’s part of our internal thinking process within management.

Now, during the R&D phase, as I mentioned, there’s going to be a lot of innovation going into our existing products. There’s also a new product line that I would say, if I’m excited about the soda fountain, I would think there’s an equal excitement about the upside potential of this new development, new product line coming out of soda fountain. And all I can say, because we don’t want to show our hand, is that we have our first national pitch to one of the largest retailers in the U.S. to be exclusive for the national launch. And we think it’s a really big deal, we think it’s so timely, and we think it’s exactly what the world’s screaming for right now in the beverage industry. So, I can’t get into more detail. I’m just excited about it. I think we’ll be able to talk more about it once we’ve signed up a national retailer for the national launch of this product.

So, I don’t think we’ve been more excited. I don’t think we’ve had more support from management. One of the things that I just want to announce too that’s also a big initiative here at Reed’s is that I’m having a new Board come onboard. You’ll be seeing a proxy slate of our new candidates for Board members in it. So, it’s going to be a fully independent Board. And it just includes some very exciting industry winners. And it’s going to be people who have individual expertise that I think will really complement this significant management improvement that I brought on line in the last year with my CFO and COO. So, this is -- I think shareholders have been asking for this. I think everybody is going to be really excited. I have to say I’m very excited. There’s already been some big conversations with very big players because of the kind of doors these guys kick open.

So, I want to thank you. I want to thank first my team for a stellar quarter, sales team for recovering things so quickly, for all the recovery going on and just working and operations for just coming in here and really killing it. Everybody watching the pocket book and producing a great financial but mostly knowing in my mind that we have the kind of controls we need to move into some significant profitability moving forward. So, I want to thank our team, I want to thank anyone who is listening here today for being interested in Reed’s.

And at this time, I’d like to open up the floor for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Anthony Vendetti

The LA plant, I know that you’re still looking to finish the final renovation or the final rollout of the new equipment in there. Is that scheduled to happen still in December and for how many weeks will it be partially down to implement the remaining improvements?

Chris Reed

I believe we’ve scheduled one week in November, one week in December to bring the new facility on line. I don’t think it’s going to be a big interruption. Most of the private label -- that puts a huge pressure on the plant. And I think we’ve gone over time here and we’re having everything get out of our schedule here from private label. And we can produce on the East Coast to ship to the West Coast, so it shouldn’t be any interruption. We don’t anticipate with this much notice and planning any interruption at all with the sales and keeping everything in stock.

Anthony Vendetti

And in terms of the rollout into targeting CVS, it looks like it’s just the beginning, right, starting with a couple of products. You’re in a lot of the stores but with CVS, there is a still -- in CVS, it’s not most the stores and target, it’s most or greater than 50% but with CVS, there is still chance to rollout into other stores. Can you talk about what that rollout -- what do you expect that rollout to look like as we move into the remainder this year into next year?

Chris Reed

Well, our experience is that once we get our foot in the door, the products perform very well. I mean, the good news is when you get-in on the shelf, it gets customers and it moves. Long time ago, we would be too exotic for the world. Nowadays we’re almost to mainstream, I wouldn’t say that, but with Target and Safeway bringing in these very cutting-edge brand new enterprises, it makes total sense for them to bring in the coke of natural foods number one products there. So, we have a lot of confidence that we’ll do very well in these accounts. We’ll support it with the market it needs. And we’ve rarely seen ourselves be held to lose or to be held to the footprint we’re given. We will just continue to expand once that door is open. I can’t imagine it not continuing.

Anthony Vendetti

And your private label, I think Dan you’ve mentioned, it was up 36% this quarter. Is that a trend that we expect to continue or is that going to vary quite a lot from quarter-to-quarter?

Chris Reed

I’d like to answer that. I just think that what’s going to happen is private label is a thing -- the reason we’re up this year is because the people who bought it last year, blew through the product, they were highly successful and they just doubled their orders. Now, the reality is management has been holding back. Sales has been holding back because A, there has been supply chain issues. They didn’t want -- nobody has been feeling real comfortable and putting more pressure on our supply issues. But once the plant is up in LA that runs three times faster with the same labor, we can triple what we can run. We’re running about 1 million cases a year right now; we can run up to 3 million cases here. And with the new production partners in the East Coast, we’re not going to be held back as much. And my sales force has been very reluctant to bring on any new clients. I think there is going to be a little bit more sales push for private label and not to the detriment of our branded but we strategically use this private label to build relationships. And I think you’ll see some announcements coming up here shortly of another a big national chain that started with private label that brought our branded.

So, we still like it and it will probably expand, even though our branded focus will be the primary focus. And as we move more and more into profitability here, as margins are improving dramatically and the volume recovery et cetera, et cetera, we will probably start accelerating brand marketing. So, you’ll -- but every once in a while, there is going to be a strategic need or desire or just a lot of profits that can be grabbed from a private label transaction.

Anthony Vendetti

Is there a breakeven point in terms of revenues and where you need to be at in terms of revenues or gross margin, so that you will be at profitability? I know there is a lot of leverage once you get up there in the gross margin range of the 30% to 33% that you’re talking. But, is there a level you need to be at in terms of revenues that gets you there?

Chris Reed

Well, look, yes. 23.4 is nowhere near acceptable. The recovery to 27 and 28, 29 is when you count the mix or where we were. That’s a given to get back to that. And if we’re running 28s with all of the discipline and improvements in delivery and handling costs, the discipline that’s been going into the expense reductions in G&A, the selling expenses might have been low, not we would expect those to accelerate some with the accelerated profitability. And then, as we produce better financials and the interest rates coming down, I mean, I think we’re moving target right now, but I would say that at 45 million, you’re profitable under the new scenario of what we’re doing; if not actually you’re probably pretty profitable. But with what you’d expect traditionally, when weren’t hiccupping, we were running 15% to 20% growth without having a marketing budget or not being profitable.

So, once we’re -- next year we’d expect some kind of modest good growth just by the pushing of the market push into the marketplace and recovery et cetera. But what we really like to see the acceleration is going to come from just being a lot more profitable and being able to drive more of that -- some of that money going to the bottom-line, but some of it going into all the opportunities we have as a leader of the craft soda industry. So, I think that we’re definitely at breakeven and we should be able to morph into a significantly profitable, more profitable company here over 2017.

And obviously, if we get a big private -- not private label, but a fast casual job to supply their soda fountain, then all bets are off; we’re to races and we’re making phenomenal amounts of money. So, our goal is inflection point right now. I know we’ve been saying it for a number of years. The last year’s supply chain thing didn’t help, otherwise you would have seen us in the 16s million to 18 million this year with significant profitability. So, we’re still going to get that. We’re on track for that and we have stuff that we never dreamed of in addition coming on line.

Anthony Vendetti

Can you just talk about the test market in one fast casual for the Bag in the Box that happened in September; how did that go, any feedback yet on that?

Chris Reed

No, we’re scheduled to go in here and it did not happen in the third quarter. But we’ve been set up in the system and all the dotting Is, crossing Ts and barcodes and all that packaging have been done. And it wasn’t really a delay from Reed’s; it was a delay from the equipment people. And actually we’ve been asked at the last minute to -- because management’s gotten involved and they’ve asked for a flavor shift. So, we’re probably going to be spending a couple of weeks in R&D here as we finalize final flavor. So, the good news, it’s moving forward. You know this is a big gig and there is a lot of pressure from the other guys saying no, no, you don’t need to go with Reed’s, we’ve got your solution, but they don’t. And we’re very excited that we stay way ahead of this. And now with the equipment solution that came from Reed’s, it’s really exciting. We’ve just become a very valuable partner to this client.

Anthony Vendetti

So, most likely, it looks like it will be a November test [Multiple Speakers] stuff?

Chris Reed

Yes.

Anthony Vendetti

And then there is a last question for Dan. You talked about a lot of line items, OpEx coming down looks like in total about $250,000 this quarter sequentially. Should that be now the new run rate around 2.7 million or so a quarter for operating expenses?

Dan Miles

I believe 2.7 is the optimal number. What we didn’t have or we don’t have experienced in a while are one-time charges from regulatory agencies while they seek additional revenue and no bad debt from a large customer; we don’t foresee any of that. And with that in mind, that would keep the G&A, which is the one that is most susceptible to significant changes.

Chris Reed

No. I like the way on that Anthony. I appreciate you guys keeping cost down. I think that fairly 2.7, 2.85 is probably -- I’d give that more of that range. Have you guys -- have you taken me from 3 or 3 plus, down to 2.7. I’m thrilled because that makes a lot easier to do what I’m trying to do here. But yes, I think that we had a tremendous quarter. I’m pretty impressed with my guys. But, actually there’s a lot of things coming down with the new plant that’ll be improved. Anyway, I’m glad you’re saying 2.7. I just caveat it.

Anthony Vendetti

It sounds like obviously that could be -- obviously not going to hold you to it directly, it sounds like you obviously there could some fluctuations on a quarterly basis, based on some unforeseen expenses and some things you might want to increase for a particular quarter due to rollout or some extra R&D or plant improvements or something like that but in general that’s a good -- that’s an optimal number to look at?

Chris Reed

The expenses are going to go up, because we’re going to make more money here and we’re going to accelerate our selling expenses. We’re not going to ignore the opportunity sitting here. We’re not here just to generate tons of profits. We’re at the leading edge of a revolution in the soda industry right now, and we’re not going to go to sleep on that.

Operator

We have no further questions from the phone lines at this time.

Chris Reed

I am giving it a second. If anyone has a question -- that’s not too many questions. Maybe we were very thorough today. I definitely appreciate everybody’s time today and I think it’s kind of fun that we didn’t keep you on the line forever. So, if there aren’t any more questions. I’d like to say we look forward to seeing you all on the call in another three months.

Operator

Thank you. Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask you please disconnect your lines.

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