Reed's (REED) CEO Chris Reed on Q2 2016 Results - Earnings Call Transcript

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Reed's, Inc. (NYSEMKT:REED) Q2 2016 Earnings Conference Call August 4, 2016 4:30 PM ET


Chris Reed - Founder & CEO

Dan Miles - CFO


Mitch Pinheiro - Wunderlich Securities

Anthony Vendetti - Maxim Group


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

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. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks, but not limited to risks relating to demand for the company's products, dependence on third-party 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, August 4, 2016. Reed's Inc. assumes no obligations to update these projections in the future as market conditions change.

And now I will now turn the call over to Mr. Miles, who will begin with his prepared remarks. Please go ahead, sir.

Dan Miles

Thank you, Denado, and good afternoon. Thank you for your interest in Reed's Inc., and thank you for joining us today for Reed's Inc. first quarter 2016 earnings call. My name is Daniel Miles, CFO of Reed's Inc. In addition to the press release issued today, we filed our 10-Q for the 2016 second quarter fiscal year with the regulatory agencies. As in the past, I will start with a recap of our results, highlight the financial activity and then turn the call over to Chris Reed, the CEO and Founder of Reed's.

Let's start with the second quarter 2016 operational results. The company continues to be fully engaged in regaining the growth of Reed's products. We believe that the company has corrected the supply chain troubles from Q3 2015 as Reed's Ginger Baked products and the Virgil brand products have begun growing sequentially month over month. Our brands have not recovered enough to grow year-over-year, which is the customary measure of success.

Gross sales, 8-ounce volume, fell by 8.3%, while net sales decreased 9.7% over the same quarter in 2015. Specifically, Reed's Ginger brand products decreased 13%; Virgil's brand products decreased 6%, and Reeds's Kombucha products 61%. Other Reed's branded products -- that includes our Flying Cauldron Non-Alcoholic Butterscotch Beer -- increased 42% and the private label brands manufactured by Reed's increased an additional 33%.

In Q2 2016, gross sales discounts per 8-ounce decreased 1.6%, reflecting a decrease in volume over a stable promotional spending base. Non-beverage products such as candy, glassware and mail order are not included in the volume metric discussion. These items as a group totaled $575,000 in gross sales, a decrease of $200,000 over 2015 in the quarter.

The company began shipping all S candy SKUs late in the quarter, after a settlement was reached with the California Attorney General. And new supplier products began shipping. We believe the candy volume will return to past levels by year end.

Our total cost of goods sold will decrease 1.7% to $8.39 million in the quarter, a decrease of approximately $148,000 in the same quarter, 2015. The decrease was due to lower volume of 8%. Gross margin as a percentage of sales decreased to 23.7% from 29.9% in the same quarter of 2015. For a year-to-year comparison, 2016 had additional margin dilution of 1.3, resulting from increased sales of discontinued SKUs. After adjusting for this, the net quarter margin in 2016 is 25%. The transfer cost allocation correction discussed in the Q1 call earlier this year resulting in an overstatement of the prior year margin of 2.2%. After adjusting for this, the second quarter margin of 2015 was 27.7%; therefore, the net gross margin change on an 8-ounce basis from 2015 to 2016 was a decrease of 2.7%.

The gross margin difference of 2.7% is made up of a price decrease of 2% and a cost increase of 1.7%. The cost increase is comprised of a labor increase in mix, based on where the production occurred. Idle plant costs increased 1.3% in Los Angeles, while the other plant cost increased 1.9%. This quarter's idle plant cost increase reflects the improved operations over the same quarter in 2015, which was the first quarter under new leadership. We believe idle plant costs to remain in line with the prior year's results for the remainder of the year.

Our company's gross profit of $2.6 million in the quarter represents a decrease of $1 million or 29% from 2015. In response to the lower sales volume, the company initiated cost reduction initiatives. During the quarter, the company experienced a profit loss by -- exceeded the profit loss by cutting total nonproduction costs 29%, or $1.84 million in the same quarter from the prior year. The net was a narrowing of the operating loss between the years.

Delivery and handling expenses decreased by 26%, to $1.06 million for the three months ended June 30, 2016, compared to $1.429 million in the same period in 2015, or a decrease in the expense of $365,000. The decrease is due to lower sales volume of 8% in combination with a rate and utilization mix reduction of 17%. As the percentage of net sales, the decrease to 10% in the second quarter of 2016 is comparable to our historic rates.

Selling and marketing expenses decreased 29% to $954,000 in the three months ended June 30, 2016, compared to $1.335 million over the same period in 2015, or a decrease of $381,000. This decrease over the last year is primarily due to reductions in compensation-related expenses of $173,000, $88,000 in trade show-, advertising-, and public relations-related expense, and another $106,000 in travel-related expenses, while $14,000 was reduced in the operations of the sales group.

General and administrative expenses decreased by 30% to $931,000 in the three months ended June 30, 2016, compared to $1.369 million in the same period 2015, or a decrease in the expenses of $438,000. The decrease over last year is primarily due to reduction in compensation-related expenses of $326,000, net bad debt activity of $73,000, and the general administrative and operations of $12,000. These decreases were partially offset by increases in consulting and legal expenses, specifically the California lawsuit of $35,000. Therefore, the net profit and expense changes narrowed the operational loss by $146,000 or 30%, to $349,000 in the three months ended June 30, 2016, compared to a loss of $493,000 in the same quarter 2015. The loss was comprised of a decrease in net sales of $1.186 million that was offset by lower costs of goods sold of $148,000 and lower expenses of $1.184 million, as discussed above in detail.

Interest expenses and bank related charges increased $223,000 to $416,000 in the three months ended June 30, compared to expenses of $251,000 in the same period 2015. The increase was primarily due to our increased borrowing on our line of credit, an additional term loan increase and existing capital expansion with intended higher rates from negotiated terms from 2015.

EBITDA remained positive for the quarter. EBITDA decreased $99 -- $89,000 from the prior year that resulted in adjustments totaling $12,000. Plus the $77,000 increase in the net loss for the year. The $21,000 decrease in depreciation and amortization was due to the raised asset base, less retirements of older equipment. The increase in the interest expense was $223,000 was due to the increased loan balances and the rate increases. Stock option compensation expense decrease was due to only 2,500 shares being issued year-to-date and the non-recurrence of immediate investing for key employees.

Second quarter 2016 financial year-to-date highlights; I emphasize year-to-date as opposed to the quarter because for financial, we are projecting versus the year-end balance sheet. As of June 30, 2016, we had a stockholder's equity of $1.082 million and working capital of $1.216 million, compared to shareholders equity of $785,000 and working capital of $730,000 at December 31, 2015.

Our cash and cash equivalents decreased by $969,000 compared to $1.816 million at December 31. Net cash used in operations increased $2.260 million to $4.104 million over the same six months from the previous year. This was a result of an increase in payments to vendors of $3.429 million. Net cash used in investing activities was $78,000, as most of the additional equipment acquired during the quarter was financed by our primary lender, PMC. During the quarter, the company successfully completed an equity transaction that raised net proceeds of $2.239 million to provide the working capital to pay the vendors highlighted earlier.

In conjunction with the additional capital from the equity sources, the company reached an agreement with our primary lender PMC to extend the loan maturity dates for all of our loans until Q4 2017. The company believes that we've turned the page from last year's supply chain interruption. We believe that, with the additional equity, the improving margins, decreasing operating expenses, your company is in a better position to achieve the success this year we all anticipate.

It's now my pleasure to turn over the call to Chris Reed, the Founder and CEO of Reed's, Inc. Thank you.

Chris Reed

Thanks, Dan. This is Chris Reed, the CEO and Founder. Second quarter, we're still getting our bearing. I don't think we anticipated this year. It seemed like the fourth quarter, we were back into recovery relatively quickly. And in the first quarter, it turned out that our situation wasn't as -- recovering as fast as we thought.

The second quarter looks like it accelerated, going from 6% sales reduction in the first quarter to 10% in the second quarter. But what we're seeing actually is the April-May was relatively slow, but May started us back into distribution with many of our products in what we call normalized distribution with our larger natural food distributors like UNFI. And June was a very strong month. July backed it up. So it seems like for us, obviously we're going to continue to watch closely here, that we're back to closer to parity with 2015 sales.

Obviously our participation is that trending against last year's third quarter, where we had our largest supply chain issues; we'll be back into growth in the third quarter. We had a very strong fourth quarter last year, mostly getting the pipeline backfilled in with all the products that was out of -- all the customers that were out of stock. But we have a significant increase in private label business. More importantly, we have a pretty strong game plan where we've gone into the databases and looked at where we lost shelf placements during the supply chain issues of last year. And we are targeting those accounts with a pretty strong outreach and focused outreach to bring back on line a lot of the accounts that had dropped the product.

So we know pretty much where we dropped products, and during the supply chain issues of last year, we preferentially kept our top product lines, our number one, two, about to five product lines as in stock as we could. The lesser items I call, like the Spice Apple Brew or Cherry Ginger Brew, or Raspberry, or the Virgil's cereal line, and especially the Kombucha line, production was out for up to four months on those items. So we lost on average that 20% to 25% of our sales, we lost about 50% of that business. So it's -- a lot of our efforts besides just the general effort to grow our core brands is targeting, finding the accounts for those lesser items, our lower-ranked SKUs, and reaching out to the retail sellers and basically telling them that product's back in stock. It's a lot easier to get a Virgil's Root Beer or Reed's Ginger Brew because they're number one-, number two-selling sodas in the natural food industry, and there's very high demand on them.

So far the effort seems to be going well to bring our lesser SKUs back in. Kombucha, it has special issues regarding a very hot category and a proliferation of new competitors in the Kombucha arena. So I think our being out of stock for four months has definitely opened up our shelf placement up to a plethora of people getting back into it. But we still have a lot of confidence. Consumer feedback is still this is the best Kombucha in the marketplace. Our own internal testing marketing research shows it's the best Kombucha. We're looking at a real strong relaunch of the products back into the market and are working a Kombucha plan to bring it back in.

Stronger is finally with our production partners -- our new production partners were able to give Stronger a better focus in the market. It's getting a launch that we would have hoped to have had last year, but it got interrupted. And it's already up to 10% of sales of our number one SKU, the Extra Ginger Brew. Our own expectation is that Stronger will become our number one SKU due to early results and just consumer feedback.

We are hoping that we've turned the corner here and are back to parity in expansion over last year. And there's a lot of exciting things that we reported in the operational highlights. You can see the new distribution partners coming on board, retail and distribution. I think that some of the more exciting things that we're looking forward to -- we look forward to a recovery of margin, there was an inefficiency to this period of time where not only was supply chain interrupted but our cash, working capital, we had depleted tremendously during that time and there were a lot of inefficiencies in our ability to go out and purchase packaging and raw materials to build our products. So margins have been hurt during this time and we're getting back into a much more steady state and a higher degree of efficiency in our ordering, which is allowing us to negotiate stronger terms and stronger deals for our packaging.

So we anticipate recovery in margins and of course the large projects: to build a high-speed, efficient plant in LA, we're moving along nicely. Much of the utilities and support areas, mostly utilities, to the new plant are installed. The equipment has been purchased, and is waiting to be put on line in November and December of this year. So it's moving along smoothly; it will increase our ability to produce in LA from a million cases a year to closer to three million. It will triple the speed of the line and with the same number of personnel, so it will be significant labor costs savings; we'll absorb a lot more of our fixed overhead and we will cut out the trans-shipping from approximately $65,000 a month that's currently happening shipping product from the East Coast production to supplement the missing quantities that we can't produce here yet.

So also, we have new production partners on the East Coast. They are keeping us in stock, but there has been inefficiency with mostly at the time we were having an up to -- right now, we're at 99% fulfillment rate with customers. We got as low as 53% or 54% during the worst of it last year with supply chain issues. And to cover and fix that problem, we brought on production plants not for the cost efficiency of it but just to have -- to keep our shelf placement and it's better to sell a product at an inefficient lower margin than to not sell it at all.

So we have a bit of work to do to bring in the most efficient mix of productions at the different plants, obviously, producing everything we need on the West Coast and not trans-shipping with the West Coast facility is an obvious solution we're implementing, but -- and in addition, there's a -- we're building a -- we're working with a -- running the cheapest production facilities and the best geographic location facilities to keep shipping down on the East Coast.

I'm also in the process of developing a simpler process for the production of our ginger brews that will allow our production plants to simplify their effort -- their process for producing ginger brews and bring the costs more in line with the costs of building our sodas, which are at this point in time considerably cheaper to build. We still have a target somewhere in the next three quarters to improve our margins with a combination of the better efficiency from our being in a better cash position and just getting in more of a steady state with our inventories and productions.

We anticipate margin improvements. Our goal is to get up there between 31% and 33% in the next three quarters. We really feel like we turned a corner and we're going back into growth. We know and look forward to quarters where we're producing and selling $13 million - $14 million in a quarter and having 32% margins and having additional gross profits of $1.5 million, so that we can -- above our current expenses, which will allow us to accelerate and get much more aggressive with our marketing.

So there's a deep and continued focus to get to those points. We feel like we'll be there relatively shortly. We worked hard to keep our expenses in line with our situation, our decreased sales situation and gross profits. So that effort didn't really cause us to diminish our efforts in the marketplace. You can see from Dan's description of what constituted between expenses between this year and last year. And most of it was non-cash stock option compensation around compensation to employees, and the turnover of our C-level employees, which ended up being a pretty big cost to last year for the company. So we feel like we're running approximately $3 million a quarter in expenses. We also feel that we can maintain $12 million a quarter or more of sales and therefore, at 25% margin, and that's increasing and recovering, too, we should be able to generate $3 million or more a quarter and stay in a cash flow positive situation.

So from a cash point of view, we feel like we're at a good place. At the time we raised money, we were definitely tight. And payables have been stretched out and vendors, suppliers were getting a little bit uncomfortable. And we brought them back into a high degree of comfort. But we were -- had built up a significant inventory to start off our summer season in excess of what we had in prior years. But we are just committed to staying in stock at that time and we're managing as the summer season progresses that inventory down. And that actually represents quite a bit of working capital on top of it. So it's kind of, in my mind, a buffer over our current situation.

Obviously, the new plant situation, the new process, and the recovery of sales and in gross margins just from efficiencies here -- we can feel and see a steady improvement here moving forward. There -- obviously some of the big opportunities are still there, which is exciting for us. I hate to say still there; it seems to have moved forward.

Our natural soda fountain, our first natural soda fountain for the industry; the need, I think we talked about, just every new concept has to deal with the fact that they are a trendy hipster. They're healthier, they're better for you, more foody-oriented type of food service operation. And they just don't really have a good place for a Coke or a Pepsi in the machine. But at the same time, the margins of a soda fountain system are something that an economic reality that they can't ignore.

So there is just a deep need in the marketplace for this. We have been in development since November of 2014 to try to produce a natural soda fountain option for a large fast food casual in the U.S. and I'm happy to say that we're going into retail consumer -- into a real account in September for us to trial. And not only are exciting new beverages are going to be sold for the first time to the public as a soda fountain equipment, some of it -- version -- not only is it our existing brands, there are a number of new products that we've developed specifically for this client. The new equipment that we are using that represents the future of the look and feel of this new soda fountain is also equally -- it's probably as exciting.

So it looks a lot like a microbeer draft system where someone will come over and pour himself what they would -- you would think would be a beer, but instead they're going to get these craft sodas. So we can't wait to see the results. Our fingers are crossed, but we kind of have reason to believe, based on other trials of craft sodas at this national food service chain, that our versions are significantly improved with much sexier equipment and a considerably more natural and better flavor experience of -- that was tested -- over what was tested prior. So that initial test used craft sodas from another company and had a tremendous response. Based on that result, we know that we have created a significant improvement over that.

So that's exciting. We have a large list of national retailers that have -- that go -- that run the gamut from we need it now, we need it yesterday, we want you to put it into our blueprints for our new concept store, to we're just very excited about it. So this hasn't manifested and translated into sales yet for our company, but I'm here to say that it's still moving along significantly well. It's very disruptive. There's 700,000 soda fountain machines in America, and it will -- if we get this gig with this national chain, it will add 80% more consumption of our drinks overnight.

So we will -- and hopefully this trial -- I don't have exact timing on it; my sense is we'll know by the end of the year if we've got the gig or not. So -- but we've seen the results at the natural products show, we've seen the results at the national restaurant show, and they have lined up around the block to taste the next generation. Probably the most exciting thing to happen in soda, at least soda fountains, in a very long time.

So, out of that development R&D came a -- we've been pushed to reduce calories but we've come up with some new products that are extremely exciting. And we're currently reaching out to national retail partners that would take an exclusive position with these new products in development, and do a national rollout with us. So we have -- we haven't really been talking about it much, and we believe we -- we're very confident with what we've produced, and we will be presenting here in the third quarter to a number of national chains that would give it a high profile.

We're growing up in the way we launch here. I don't think we've ever tried this kind of a launch before. So despite what the second quarter looked like, we think we are turning a corner, we think we're walking into significant new business. We believe we came out of this stronger than ever. And there's a tremendous amount of enthusiasm and excitement around our position where we are right now. Obviously, we'd love to turn the hands of time back and not have had our supply chain issue, but I believe we're much stronger for this. And I also believe that the kind of -- we looked, last year -- we walked away from $5 million of orders in the third quarter, which would have produced a $16 million third quarter, with relatively high margins.

So we look at that and we mark [indiscernible] giving guidance of a $16 million third quarter this year, but significant improvement over last year. But we see that we're getting back into the swing of things beside the opportunity that we believe is going to add a very large amount of incremental business eventually, which is the soda fountain business.

We also look forward not only to the success with that partner, but the coming out party that that will represent, our debutante's ball and onto the international scene as a major player, having pushed a large national soda brand out for our newfangled better soda system coming in. so it's still the reason there hasn't been exodus from Reed's during the time when stock options are dropping, and it looks like the world's ending for Reed's, and the reason nobody's walking out the door is because nobody wants to walk away from the next four or five or six months and the significant improvements and the whole new -- basically what we've been waiting for all these years: significant new business coming in.

So I think that we'd like our shareholders to know that we obviously have always been a very enthusiastic and optimistic person, but I don't believe that our optimism is poorly placed. Anyway, without further ado, I'd like to open the lines to any questions the people may have regarding our second quarter financial results.

Question-and-Answer Session


Thank you. [Operator Instructions] Our first question comes from the line of Mitch Pinheiro with Wunderlich Securities. Please go ahead, sir.

Mitch Pinheiro

Hey, good afternoon. Looking at third quarter, I just want to get a feel for what we should be expecting. So I hear loud and clear that last year was obviously the trough in the whole -- in the -year, so you're going to see a pickup. But how far back are you? Like, of the -- you said, I think, of some of the smaller, less core SKUs, you're 50% of the way back, and that was maybe 20% of your business, so you pick up 10% there. What about Virgil's and Reed's? How far back are you?

Chris Reed

Well, let me clarify that. Our lesser SKUs, which represent somewhere around 20% of the business, are down 50%. And we're in a recovery mode on that. And it's -- there are not only national chain calls that we have to do to try to give the reassurance that we're back in stock and we're not going to mess up their shelves with big out of stocks. Which isn't that easy to do, but we're having success. Not complete success. There's just a lot of lesser -- with large, independent accounts in natural foods, they're supermarkets but one-off, five-off type smaller chains. And we have -- we pay for data so we can see exactly when and what happens. Raspberry Ginger Brew was in, now not in. So there's a call going out, talking about these SKUs, and there's a big effort going on. We'll know more by the end of the third quarter.

It's not instantaneous recovery, there were some products -- obviously products went on the shelf, other competitors probably, and we may or may not get back in instantly. But we are seeing that there's a lot of simple recovery that is going on. Can we get 70% of that 50% drop so that we are only down 20% after a while? That's a question we will be able to answer better after we continue this effort here.

Mitch Pinheiro

I should have asked a better question but I guess what I'm looking for is you're going to see revenue growth next quarter, correct?

Chris Reed


Mitch Pinheiro

Year-over-year revenue growth, is it -- are we going to see the same thing -- are we going to see a similar type of gross margin improvement as well, sequentially. Is it going to stop you there?

Chris Reed

Yes, we're going to continue to see gross profit margin. I think it's just going to keep ratcheting up. The reasons are, there are going to be bigger gross profit margin improvements when the West Coast facility comes onboard. There's going to be significant improvements when the simpler Ginger Brew process where we bring in something that allows the production plant to treat this more like our soda line, the Virgils. And we'll get more Virgil-type pricing we'll see significantly there. There's just been an inefficiency, especially during the cash crunch that we experienced from the reduced sales and the reduction in working capital and there was a bit of hey, don't go ordering a normal run of that packaging, just order what we need to get through this next run, even if it costs a bit more to run short runs of that packaging.

So there is efficiency getting back in there that will ratchet up, too. So I think that there's going to be big leaps from the production shift in the West Coast facility, improvement in the way we bring our products to the production plant, particularly on the East Coast. And that'll happen later in the year. Let's speak of 1% to 2% improvements and then some chunkier stuff happening as the facilities come back on line more efficiently.

Mitch Pinheiro

Is that why Virgil's is down? The gross profit margin in Virgil's year-over-year? Is that down because of the inefficiencies on the East Coast, or I mean --

Chris Reed

Well, yes. The answer is yes. Right now, what was happening during the time we were trying to get back into product fulfillment of orders, we were producing some of the product in plants that were significantly far from the market, just to get it done. So we spent a bit more on freight and handling and also more expensive plants to run it at. So now we're dialing in the better deals and negotiating, playing off the plants against each other a little bit to kind of leverage the new position we find ourselves in.

Mitch Pinheiro

Okay. And then just two more questions. One regarding the LA plant. When do you intend to close it, shut it down, how many weeks is it going to be shut down for, when do you start building inventory around, to -- for a cushion inventory, and when does it come back up?

Chris Reed

Well, it's two weeks, two different times. And the buildup will happen around November, late November. So it'll be -- I think the first -- beginning of late November, we'll do the first shift out and probably late December, the second one. So I know our guy keeps telling us by the end of the year, we'll be up and running here. Well, we'll be up and running, actually, at the end of the first two-week shift. It'll be -- so I have the real question, will it be completed by that time? You know, with all the extra production capability and the fact that December's slower than the summer months for soft drink sales, it won't be really that difficult, it's not like it's a super large challenge for us to build up inventory. More probable will be we'll shift production to the East Coast during the West Coast shutdown and we'll incur some additional freight cost. But we're talking $30,000 - $40, 000 of additional freight during that period of time. So it's not -- we're not envisioning a big deal about this.

Mitch Pinheiro

And so in terms of like dollars, what do you think the dollar -- the pressure on your working capital is? Is there a dollar amount you're -- are you building four weeks of inventory, like 100,000 cases of Reed's? What are you looking like there?

Chris Reed

Well, okay, I'm giving you a parameter here. Last year we were running somewhere around 220,000 cases, or approximately a whole month ahead of sales on the floor. And I think we got as high as 370,000 cases at the time we were raising money. So it's -- inventory -- as we go through the summer months, we're unwinding that and we'll get back to a couple hundred thousand cases. So in terms of working capital, the 150,000 cases in addition works out to approximately $10/case or $1.5 million. So it's a significant buffer. There's a relatively lax situation when you're -- how many days you're paying suppliers and how much inventory you have. It doesn't look like we're sitting on a ton of cash but, we have a significant buffer in effect that we are running cash flow positive at this time.

I mean, that's a -- yes, we're watching it closely. The plants come on board, we start generating capital. We get to 32% and $13 million, you start to throw off $1.5 million of cash. So it's -- we're looking forward in a short period of time, those are our goals, to get there quickly. And that's a modest goal, considering what's going on.

Mitch Pinheiro

Okay. And just a final question, on the fountain. Is it -- how many stores of tests is this going to be? What area of the country is it going to be tested in? And are you giving this particular chain an exclusive on the product for a period of time?

Chris Reed

Well, it's the Midwest. It's currently one store. And we haven't negotiated that.

Mitch Pinheiro

Okay, thank you. I'll get back in the queue.

Chris Reed

Nice to talk to you, Mitch. Thanks for covering us.


Thank you for your question. [Operator Instructions] Our next question comes from Anthony Vendetti with Maxim Group. Your line is open, please proceed.

Anthony Vendetti

Sure, thank you, just a couple quick questions. Gross margin came back a little bit this quarter, actually a lot, versus the first quarter of 2016. How should we look at that going forward, or Dan, is that tough to predict because of whether or not the product mix in any particular quarter is private label versus branded?

Dan Miles

Thanks, Anthony. Anthony, the number that I'm forecasting for the remainder of the year is north of 25. And that's with our current operations as we stay now. Come towards the very last end of the fourth quarter, we typically sell more higher-margin items, but we've got some of the things, the headwinds, that Chris just alluded to, to push. So would I say we'd be closer to 28, 29, fourth quarter? No, but I know we will be north of 25 as our base from here to go up for the remainder of the year.

Anthony Vendetti

Okay. And then, maybe Chris, if you could talk a little bit about Kombucha because I know that was down a lot. Maybe some of that, like you said, there's a lot more competition in the space, but now that things are back on track, can you give us a little bit of flavor for what the chances are of that starting to pick up traction and win back customers, or is that going to be a long recovery period, do you think?

Chris Reed

Well, yes. The last year's SKUs were off 50%, Kombucha was off 60%. So it's a -- relatively they're similar, yet Kombucha seems like it got hit harder. Kombucha had a four-month or five- or six-month window, depending on the distributor, where it was just out of stock. You know, nobody waits around that long. So we're back to -- we have 40% of the sales we had before. The fact is, on some level, we shouldn't have -- that's a big recovery, not small. So it was really a detrimental thing. Now we know that we have the best Kombucha in the marketplace. Now that's obviously a little bit subjective and it's our own very biased opinion about it. In terms of flavor, that's where we stand. We have a low-cost production because we own our facilities. We have exclusive glass company with a Chinese glass supplier.

We have a lot of benefits to many of the players out in the marketplace. One of the largest benefits is that, once you have another -- a company that's already covering its own nickel, and is not exclusively a Kombucha company, we can play harder with this brand. Especially when we are in recovery with margins, we're up in $13 million, $14 million in sales, we've got 30-plus margins and we're throwing off an extra million a quarter. A modest spend of $100,000 a month would let just about every consumer in the natural food industry, or a large percentage of them, know that this Kombucha's back in stock. Hand them a coupon for a free trial. Tout it as the number one Kombucha, the best-tasting Kombucha in the world. We have significant relaunch ideas for the Kombucha, but right now, later today, tomorrow, we're going over the big Kombucha relaunch.

So we're going to give it legs, we're going to reach out to every retailer we have the data on -- we know exactly where we lost it, so by end of the third quarter, we're going to know how easy or hard it is to get back into the accounts that used to have it. But we're confident. We're confident in the product, we're confident in -- we've come up with some tricks with Kombucha that are going to produce Kombucha 2.0, that we think are going to play very well with the customers. So we have a high degree of enthusiasm about it, we're a long-term player with things we do in general. We don't need it to cover our nickel, especially moving forward. And we can get very aggressive.

So if they think there's an aggressive player out there, then wait until they see Reed's with a bit of recovery here. So, especially if you look at us if we get a big fat casual chain and all of a sudden, we've added another $8 million in sales for the quarter, we've already recovered it to $13 million to $15 million, you drop another $8 million on that, start throwing off a couple million dollars a quarter, what kind of resources can we put behind our Kombucha?

So, they'll make us a formidable player, we're competitive, we don't like losing. We're aggressive people by nature, so we don't like being in the situation we're in. So we're going to be a significant player in Kombucha. Mainly because we're the best and we think that is an important point. If you can absolutely wheel in customers and have the power and management and money and resources behind this, there's no reason we shouldn't have a significant win.

Anthony Vendetti

Okay, and then on the stores that you just were a strong Ginger Brew, so you're in 1,600-plus Kroger stores. When did that rollout start and same thing for the 350-plus Shopco locations?

Chris Reed

I saw a press release during the quarter. I don't know if it was announced as something that happened and then it was rolling out, or if it was rolling out -- I actually would have to ask my sales manager how that rollout is going. Again, there's not a lot of resources going towards it. We're staying within our means. We're generating cash, we don't want to do another raise, and we feel like very shortly -- we're doing what we can without a big spend. But get us to a budget, get us to an additional $1 million a quarter to play with, and the kind of marketing -- this place has zero marketing on some level. I mean, obviously it doesn't; we go to trade shows, and we get press, we have people out on the street, we go to events, there's some marketing going on but the kind of accelerator that we anticipate having will be significant.

And I think Stronger, one of the things going on with Stronger is we are looking for a significant large liquor company partner to step up. We're dancing with a few but we'd like to see 2017 to have some very aggressive and very big marketing/co-marketing programs around our brands and the Moscow Mule. I don't want to say too much more than that, but that also is in the works. And we think that we will be able to drive that, with someone who will want to be onboard as an equal partner with that.

Anthony Vendetti

And then just lastly on the store trial; you're starting with one store for the bag in a box fountain sodas. Is it -- has that particular vendor indicated if it'll go from one store to multiple stores or is it possible after one store it would roll out nationally, and then the second part of that question is, once you finish the install in your headquarter office in LA, will you be able to meet that demand if they decide to go forward starting beginning of 2017?

Chris Reed

All right. The trial is to vett us as a potential soda supplier for their current chain. And their chain is a significant national fast casual chain. The one we've been talking about through most of the earnings call. But we're talking about -- what did we say? -- triple-digit number of accounts.

Anthony Vendetti

Yes, I know, but I guess my question is, have they given you a little bit of a blueprint of ok, we'll go -- if we select you, we're going to go from one to a certain number of --

Chris Reed

It's not really clear. It seems like their national contract is due up in 2017 and somewhere, I don't think the big deal is our ability to keep up with the rollout. I think we've given them 60 days to get up to a national level - 0 to 60 - to supply. And they're going to give us a lot more time, probably six months, I think the equipment is probably -- the equipment is new equipment, its sexy new equipment, and they're vetting that right now along with us. And I think that will probably be the slow piece in the rollout chain. And my sense is over six months, but I don't doubt.

Anthony Vendetti

Okay, no, that's good update. Thanks. I appreciate it.

Chris Reed

You know, the customer would love to see this -- they want to get behind this newfangled thing because it's a marketing opportunity for them to flaunt being the first in the world to put out this system, this product, this quality, these new drinks, the equipment. So there's going to be a lot of pressure for them -- I mean, we did a calculation that they -- you know, some estimates of $1 per share earnings for this company. So the management has been on a roll and this would just be -- this is something they're not going to want to sit around; this is a very high profile thing at the corporate level.

Anthony Vendetti

Okay, great. Thank you very much.


Thank you for your question. It does appear we no longer have any questions. Mr. Reed, I'll turn it back to you for your closing remarks.

Chris Reed

Well, I appreciate your time, look forward to getting through this third quarter and showing some results. So far third quarter is looking very good. Keep our fingers crossed that all this nice recovery and growth is continuing here. And we'll be sitting here in a few more months -- three months to talk about it. And thank you for your patience with us and we're excited as ever. And thank you for participating today and taking your time.


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

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