Lawrence W. Tomsic - Interim Chief Financial Officer Mark Beaton - Chief Operating Officer Christopher J. Reed - Founder, Chairman, Chief Executive Officer and President

Good afternoon, and welcome to the Reed's First Quarter 2015 Earnings Conference Call. My name is Mike, 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; Larry Tomsic, the Interim Chief Financial Officer; Mark Beaton, the Chief Operating Officer; and Neal Cohane, Senior Vice President of Sales and Marketing. 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 distributors, changes in the competitive environment, access to capital and other information detailed from time to time in the company's filings with the United States Securities and Exchange Commission. In addition, any projections as to the company's future performance represent management's estimates as of today, May 11, 2015. Reed's Inc. assumes no obligation to update these projections in the future as market conditions change. I will now turn the call over to Mr. Tomsic, who will begin with his prepared remarks.

Hello, everyone. Thank you for your interest in Reed's Inc., and thank you for joining us today for the Reed's, Inc. 2015 First Quarter Earnings Call. In addition to the press release issued today, we have also filed our 10-Q for the first quarter of 2015. 2015 first quarter results. Driven by our Reed's Ginger Beer product line, we achieved record gross sales for the first quarter in 2015 of $11,351,000, which represents a 12% increase over the first quarter of 2014 sales of $10,122,000. It also represents the eighth consecutive quarter of sales exceeding $10 million. Gross sales growth was driven by a 33% sales increase in Reed's Ginger Brews that represented 43% of gross sales; a 12% sales increase in Virgil's craft sodas that represented 33% of gross sales; and a 23% sales increase in private label sales that represented 7% of gross sales. Kombucha sales declined 36% versus the first quarter of 2014 but only 3% versus the first -- fourth quarter of 2014. We encountered some temporary out-of-stock situations, which affected sales, but now have plenty of batching material to meet the increase in demand. Sales of our other product category that includes candy and noncore beverages declined 1% and represented 8% of gross sales. Our top line promotional activity decreased significantly to 6% of gross sales versus 12% in the first quarter of 2014. This resulted in net sales growth of 19% for the first quarter of 2015 or $10.7 million versus $9 million for the first quarter in 2014. Our gross profit increased by $356,000 to $3,259,000, which is a 12% increase over the 2014 gross profit, which was $2,903,000. The 2015 gross margin profit percentage was 31% versus a 32% gross profit in 2014. Our Idle Plant costs increased to $668,000 in the…

Good afternoon, and thank you for joining us on today's earnings call. This is Mark Beaton, the Chief Operating Officer here at Reed's. I would like to start by saying what an exciting opportunity it is to work for the leader in the premium craft beverage space. My beverage experience includes both Pepsi Bottling Group and most recently with Dr. Pepper/Snapple Group, where I served as a Vice President of Operations. I've only been with Reed's now going on 2 months but look forward to improving operational efficiencies and production volumes with improved margins. As discussed on previous calls, and under the leadership of Chris Reed, Chris successfully set the stages towards optimizing our plant operations, both here in Los Angeles and at our East Coast co-pack facilities. Chris has since transitioned those responsibilities to myself and my team. Moving forward, we intend to focus on the following 3 core deliverables to drive sales and improve margins: first of all, provide the capacity and infrastructure by which our sales organization can efficiently and profitably deliver our growth objectives; next, eliminate waste and reduce operating costs through improved operating efficiencies; and lastly, build operations, competencies and skill sets. Now I'd like to provide an update on our Los Angeles plant optimization project. Our plant upgrade is being designed and co-managed by a company called CtR, which stands for Conception to Reality, an engineering and project management firm that specializes in beverage plant design and construction. CtR has been in business over 21 years and has worked with more than 125 beverage facilities across both the U.S. and Canada. I am impressed with their ability to deliver on our project. Our L.A. operations master plan has been developed for optimum utilization of the existing multi-building infrastructure. 75% of the equipment has been…

Thanks for that, Mark. Thank you for joining us today on our earnings call. It's definitely an exciting time, I will say. We had 2 press releases go out today. In the second one, we talked more in detail about other new personnel that we brought on board. And I will say that bringing Mark on board, Mark Beaton, to be the Chief Operating Officer, it was really the first time I have gone out and hired someone right from the beverage industry with direct experience in operations to come in to be a COO. And it has been such a relief to have that level of experience with Mark coming on board. That has inspired me to, in my search for a CFO, a permanent CFO, to look for that same kind of experience. These are, Mark and now Dan Miles, who's our new CFO starting officially tomorrow, are guys who have lived at the highest level of the beverage industry, worked and run huge operations. And they -- just for me, for some reason, I didn't think they would come play with a company like Reed's. But I think somewhat of a -- it gives a -- it feels like we've grown up to a point where we are exciting to the high-level beverage management guys. And also, what I didn't know is they really find it refreshingly fun to be working with a company that, a, their growth rates like the Ginger Brew in the first quarter, grew, I think, 35% -- or was it actually 44%. Yes, it was pretty amazing. So they come from an arena where 1% growth up or down is the standard for many years now. And quite frankly, the corporate environment is not quite as fun or friendly. So anyway, we're…

[Operator Instructions] Our first question comes from the line of Mark Sofferman [ph], a private investor.

I'm wondering apropos what you were just talking about with chains like Panera and Chipotle. What has prevented the company from doing a contract or penetrating into the restaurant market as the natural soda leader? What -- there's something that has obviously prevented that sales channel, and that's been an ongoing frustration for me because it seems like such a natural channel for you.

Well, I appreciate the question, Mark. We are in the fast casual restaurant trade channel right now, and it happens more on a smaller-chain basis and more independents where you have a shop or an owner who can make a decision like that. But the larger corporations, if you look at the landscape of beverage in America, every large, organized group that sells a lot of beverages have tied up with either Coke or Pepsi, whether it's a sports arena or it's a large fast casual restaurant chain such as Panera or Chipotle. But I will say that as I've mentioned already just a few moments ago, Panera Bread effectively said by putting out that press release that they're not going to put up with it anymore, and they're open to people coming in and offering the solution. So I'm not at liberty to talk about the specific names of people that are talking to us, but I will say that there's a reason Coke and Pepsi are as large as they are. They tie up people in contracts. And it takes somewhat of a leap of faith if you're someone the size of a Panera or a Chipotle to make that kind of a statement or change in your business model. But I will say it was just shocking enough to us to see the announcements from both Chipotle and Panera on their own intentions going forward because that does exclude -- both locations, that does exclude them from using Coke or Pepsi products, if they are truly going to be GMO-free at Chipotle or all these food additive chemicals that were listed in the Panera release. So they've made bold statements, and we, of course, are reaching out.

Don't you have to be -- have a fountain program for really for a company like that to be able to work with you?

Yes.

Do you a fountain program being developed?

Yes.

Soon?

Yes. And we'll announce that.

Okay. And what...

And it's an announcement that will come out soon.

There are no further questions at this time. I'll now turn the call back to you. Please continue with the presentation and/or closing remarks.

Well, we must have been very thorough with our presentation today. Thank you for joining us. We look forward to having you back at the end of the second quarter and reporting even more interesting results. Have a wonderful day, and we'll talk to you soon. Bye.

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