Ladies and gentlemen, thank you for joining the Q2 Earnings Call 2012. Your host for today is Mr. Jim Linesch.

Good afternoon, everyone. My name is Jim Linesch, the Chief Financial Officer of REED’s, Inc. I’d like to welcome all of you to our quarterly earnings conference call. With me today is Mr. Chris Reed, REED’s Chairman and CEO. I’d 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. ActuaA0l results may differ from those discussed today due to such risks, not limited to risks related 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 Securities and Exchange Commission. In addition, any projection as to the company’s future performance represents management’s estimates as of today, August 13, 2012. REED’s, Inc. assumes no obligation to update these projections in the future as market conditions change. And now I’d like to make a few comments about our financial performance through the quarter, which will be followed by Chris Reed who will give us an outlook of the company’s business at this time. We are pleased to report that our margin growth has carried us into profitability during the quarter and year-to-date. Our 39% growth in margin contribution is a result of our long-term sales efforts and our developing a healthy balance of prices, promotions, and costs of our sales. Our successful promotional programs are accelerating our sales velocity without a significant erosion to our gross profit percentage, which improved to 34% in Q2, a 3% improvement. This was achieved…

Well thanks, Jim. Thanks for giving the report. I don’t know if I have much to add - maybe we’ll just go right to questions. First I want to congratulate the whole company for doing a fantastic job during this quarter. Obviously as a company, I just want to make it clear to everybody that we don’t think quarter-to-quarter. There’s so many different things we would do if we were just trying to make a quarter really successful. But I would like to thank Neal Cohane and the sales force for keeping the pace of growth at 27% for the year. It’s pretty substantial and very impressive. Also for purchasing production under Thierry Foucaut for the amazing margin improvements they’ve really taken to heart, and at the same time they’ve reduced the inventories significantly here, freeing up the cash flow for us to grow even faster. I want to give special thanks to Jim Linesch for his vision and hard work in bringing the Kombucha product line to the company, and really spearheading that and partnering with me on that project and pulling off what has been a… Only we know technically how challenging it has been. But I think the evidence in the marketplace speaks for itself. We are the second true launch into a $300 million category - you’ve got to wonder why there’s not hoards and hoards of people piling in to the category. It is extremely technically challenging to do what we’ve done, so thank you Jim. And for all the support staff in the company, I think we have a fantastic team onboard and it’s definitely why we’re able to show the results we have shown with a 468% stock lift from our low for the year. We’re very pleased with our IR effort. We’ve…

[Operator instructions] Our first question is from Richard Kreger with Ironridge Global.

What are you seeing on the international side given the growth you’re having domestically?

I will say that Monday we’re flying off to our first Asian conference tradeshow for the first Natural Products Show in Hong Kong. We’ve had a lot of outreach, people coming to the natural food shows in the US who have expressed interest in exporting our products. We have a small beachhead in Tokyo and stores that kind of cater to expatriates and Tokyo Plaza, some high-end stuff, a little bit going on in Singapore, a little bit in Hong Kong but nothing of significance. So we’re hoping to see a little more action from that. We’ve got a beachhead in Europe for a while so we continue to sell in Europe. We’re 9 shelves in the convenience stores in Israel and we have a little business in Jordan, Lebanon, a little business there - so it’s just really small potatoes. We do well in Canada, a good amount of business in Canada that’s really just an extension of the US, and we do even more business in Mexico which is kind of odd, and in South Africa. But you know, I’ve said this and I’ll continue to say this. The main focus of this company is going to stay where the huge opportunity is in our face, and we have so much business to do in the US. We’ve only captured getting into 10,000 supermarkets - we’re in our infancy in supermarkets. We have an untapped up and down the street, untapped on convenience stores. And I will, no matter what happens internationally, no matter who shows up to talk about business in India or Asia or China we will continue to keep the main focus of this company in going after the low-hanging fruit in the US that continues to expand for us. And I will go with the flow but I am not by any means spending a lot of time and energy of the company on international sales. It’s coincidental that you’re asking as we’re running off to a Hong Kong show.

[Operator instructions] Our next question is from George Santana with Ascendiant.

Just a bit of a technical question: so the private label versus the branded business, can you give us any more color or figures as far as the uptake in terms of overall capacity?

You mean capacity for production or capacity for growth?

Well, capacity for production. As I understood it, the strategy was to really soak up all that excess capacity that’s the genesis of the private label business. Now it’s really contributing nicely but you still have a little bit of cost of goods sold there on the idle capacity. So you know, are you at 80%, 90%, where are you?

We’re definitely below 50% still. I mean we’re talking about the West Coast plant. Just so you know, in terms of production Sam Adams built a plant, got a hold of Diageo, got their Smirnoff Ice to go in there, sucked a whole lot of production out of the contract production arena - all these different regional breweries like High Falls and Rolling Rock and you name it who have gone into private production as a business model. So there’s so much capability and availability right now that somewhere north of $200 million in sales we’d truly get into trouble, maybe but probably not, and we’ve already proven ourselves pretty competent at acquiring or building our own facilities. So the West Coast plant can support about 1.5 million cases a year, approximately $30 million in sales. That’s still only less than half of our sales right now. So we have a lot of upside with it, but with the way Kombucha’s going we are considering when we have to double the speed of the line here in LA to be able to support $60 million of sales. But more and more we’re very nimble, we have a lot of engineers on staff and there’s a lot of places we can push off a lot of this production. We just have to joint venture with someone and put a little equipment in, then morph their capability up and we won’t have to straddle this plant in LA with some of the private label that’s come in here to suck up the production. So juggling production is our specialty and I’m not very concerned about it, although short term in the best case scenario Kombucha could cause a tremendous strain on the business if it tries to do $20 million next year out of the gates. But we’re up for it and we’re already doing a lot of plans. A lot of my spare time’s being eaten up in just acquiring equipment and doing some design work, and ferreting out how to go with this really strange cultured beverage and how to make it a big-time enterprise.

I think another point on the private label is that as we advance in this business we’re gaining more contracts that are consistent throughout the year. We still have some large contracts at the end of the year but it’s becoming more of a consistent year-round, and it’ll be a little bit easier to organize and schedule it with the new contracts we have.

So if I heard you correctly, the West Coast plant can support about $30 million in sales on an annual basis - that’s on one shift, right?

No, no, that’s pretty much total right now. Without spending $150,000--maybe $300,000 we can double the speed of the plant. So these aren’t really huge investments for us. It’s definitely south of $500,000. It’s time, energy, organization and that kind of stuff but we have the bandwidth here.

Sure, you run pretty lean. So the likelihood, as you continue to suck up all that idle capacity should we expect a margin improvement to accompany that?

Okay, concerns on the horizon: obviously anytime this economy even barely looks like it wants to recover the oil prices go through the roof which will have an effect on glass prices which will affect us. I don’t like the idea of raising prices. I’ve been pretty good at keeping costs down. So there are some potential pressures on the horizon, but then in a sense that benefits us because there will be in theory more people acquiring gourmet food products and being willing to spend the higher prices we charge. So maybe it will balance out. The other thing is we’re playing smarter. As you can see, we went into Kombucha and when you look at it, the cost of goods equals the cost of goods of Reed’s but you can charge twice as much - do the math on that. So we’re smarter, we’re playing smarter. We’re negotiating more private label that’s not… We did something to get in the door and it wasn’t pretty, and it had okay margins. Well now we’re playing in a higher-margin arena. We’re saying “Look, we did that for you already. Now give us your better deal, you know? If you want us to build your lower-margin stuff give us the other stuff, the stuff that comes from Europe, etc., where we get to compete with European companies doing it.” So we continue to play better and you’re seeing it. And where’s the future going to go? It gets better.

[Operator instructions] Our next question is from Joe Munda with Sidoti.

You guys said you’re going to increase basically the operating expenses going forward with ad spend and increase the sales staff. How should we look at that going forward as far as modeling it out? I mean is it going to be pretty much 9% of overall revenue? I mean how should we look at it going forward? Should we see it tick up $200,000 a quarter from here?

Just to say, clarify for people listening in, Joe is the one analyst who’s covering us at the moment who has the estimate for the year for the earnings, so Joe is trying to model this. It’s a good question. Can I say that we’re going to grow sales, if we grow at 25% to 30% that we will keep our expenses between 10% and 15%? I think we’ve gotten religion. People want to see earnings here. I think we’ve also seen the value of reducing our reliance on outside capital and going into profitability by the way, Joe, also will eventually give us more bankable. You know, a few more quarters of this and we should be able to drop our interest rates a bit. But ultimately paying off debt is interest we’ll never have to pay. So if I can give you a hard, fixed rule here I think that you’ll see that we will not increase expenses as fast as we’ll increase revenue. And I’m not going to model it for you but I like the model of 25% growth to 15% increases in expenses, it should be doable.

Okay. Chris, also you talked about, or Jim spoke about in his opening remarks doubling the size of the company. Is that through acquisition or is that through organic growth?

Okay, I think that, I don’t know if we gave the guidance for ’12 that we’re going to double the company. The thing I see in the company is we’re in the eleventh quarter of 20% to 30% growth - pretty steady. We see that ongoing. We see that we’ve already captured enough business for 2013 although I’m not giving any… My belief is that we’re going to continue at that pace, and we’ve always hoped to find something accelerated. We think Kombucha is a game changer and is going to accelerate us out of that. You know, we’d love to see it go north of 30% this year and then hit 40% next year, but there’s so much that could change that. I think we’ve shown steady, year-over-year, somewhere around $4 million to $6 million of just branded growth. And private label’s been chunking on some bigger pieces there. And Kombucha is a real unknown, and if we pick up 10% of the category in the next 10 to 12 to 18 months there’ll be $20 million of new things from that that we have to factor in there.

Do you think you can do that, Chris?

I think it’s challenging just from a production standpoint.

So wait, let’s say what’s the capacity for Kombucha? How many cases do you think you can do in a year for Kombucha if you guys are going the same way right now, the same mix between branded, private and let’s say Kombucha?

Well, it’s a good question. I think that we would have fun to get 1 million cases a year out of this place to do that. But we’re trying to gear up for that. And again, you know, with a partner helping us with the engineering we could probably double the speed of the plant, get it up to 2 million cases a year by the second year-ish.

So by 2014 you think that’s a possibility.

A million cases is about $20 million so you know, I’m kind of the guy that I’m not going to sit back here after all these years and go “Well, we just didn’t want to work hard enough or be smart enough to figure out how the hell to make this stuff,” you know? So our ability to grow… We started producing 5000 cases a month for the first couple months and we’re leaping up to 15,000 in month 4, so we have the potential to go up by I don’t know, 100,000 per month growth is pretty doable by us, maybe more. So it’s moving very fast. Really, and that’s getting ahead of us - that’s just production capability. If the world’s going to say yes, that this is their new favorite Kombucha - that’s a really big question right now.

I mean there’s really only one guy, GTs or Synergy selling it in the marketplace and it’s everywhere. I was just at Whole Foods last night and it’s everywhere. So I mean…

And we have one store that’s 6 weeks’ into it and we knew our numbers - we’re doing about 60 cases a month and that’s good, 60 to 80. And we finally said “What are you doing of GT?” and they said “Oh about 600 to 800,” and we’re going “Holy crap!” I mean how do they move that much stuff out of that store? It’s got to be the number one thing in the store, forget milk. So as you’ve seen the numbers are huge, it’s a phenomenon. There’s no doubt it’s a phenomenon. We are the best-positioned company that I know of to go into the scrappy, very technically-challenging place to be. It’s just super challenging to do. There’s a reason Coke when they bought Honest Teas dropped the Kombucha component of it. There’s a reason other players have just drifted out. There’s a lot of little guys regionally trying to put their feet in the water but we’re the only national company with horsepower to come in there, and the way we’re launching is like we’ve never launched before. But the key here is not can we launch powerfully, can we get it in everybody’s face, can we be just really effective with production. All I know is it’s really all up to the customer right now. We’re going to be in every store. Everybody’s going to get a chance at it. If trial works we’re done.

Okay, yeah, because I saw one other one - KeVita? I don’t know if you guys know that one.

Yeah, we know everybody.

Yeah, that one wasn’t as good as GTs’.

No.

And so Unify is going to pick this up, they’re going to pick the Kombucha up for their entire distribution?

Yes, I guess that’s the press release but yes. I can’t imagine, right now based on what we know we can’t imagine the whole industry isn’t going to pick it up.

Okay. Yeah, because at $5 a bottle I can’t see why if you guys roll it out it’s going to be profitable going forward. That’s just the way I look at it.

Look, if Kombucha does what it’s going to do you’re going to have some fun figuring out what our earnings are in 2013.

Well I hope it comes to that.

Yes sir. Our commitment is just to continue to be a creative outfit that continues to do stuff like this. So we’re nimble, we’re competent and we boldly go where few have gone before and we’re just trendsetters. So I think we’re just showing capability and enthusiasm, and you’ll see us - something here is going to fly in a big way.

And then just one last question and I’ll hop back out. What do you think of Jones Soda here at $0.47?

Well, I didn’t look at the price but quite frankly we’ve reached out to them to talk to them again this year and reiterated our guidance that they ,as an operation, we would just be doing what they should be doing which is tightening their belt, cutting out the fat and making the place work. So I think that what happened from our conversations is that they just basically decided that somebody at the Board said “Damn it, they’re giving it to us the second time.” Our last time was a couple years ago when they changed direction, they got an ATM and tried doing what they’re doing. But I really am impressed. I’ve attempted to call up the CEO and just say “You go girl, I love it!” and it’s just the basics. I just don’t think they have anything like a Reed’s or a Virgil’s and they damn sure don’t have anything like a Kombucha. But yes, it actually behooves us to see them do stuff right and to be successful, because everybody thinks “Are you just another Jones? Are you going to screw-up like Jones?” So whenever they need help they should just give us a call.

Our next question is from [indiscernible].

Hi there, great quarter. And my question was about the distribution of Kombucha. I live in Portland, Oregon, and I haven’t seen it anywhere. And your press release said it would be on the West Coast so that was one, and all I see is GTs Synergy and Townsend which is a local Portland company.

Yeah, it’s still just rolling out. I know we delivered to Unify on August, the first product in there on August 3rd, 4th. So if you’d like send me an email and I’ll send you accounts in Portland who are going to or are carrying the Kombucha.

Well, the region is carrying it practically like at Fred Meyers and Whole Foods and New Seasons.

Well I can tell you that Fred Meyers, being a subsidiary of Kroger’s is going to be a corporate call. It’s going to take more time than the individual accounts, and Whole Foods getting presented to it, etc., has more criteria, too. So the big chain launches will be second phase, although we do have our first chain and it’s doing quite well.

Which one is that?

Earth Fare.

Okay, but that’s on the East Coast, right?

Yeah, it’s in North Carolina. They have 22 Whole Foods-type stores and they’re doing quite well.

Yes. Okay, so sometime in August I should be able to see it somewhere in Portland you’re saying.

Yeah, send me an email and I’ll make sure that you get a bunch of stores in Portland quickly. But it’s just rolling out. I mean I’d say that it’s going to go exponentially into the stores over the next few months.

Okay, and my next question was about the price of oil. You mentioned that before, and also in your last quarter. How do you go about factoring that basically? I mean that thing moves wildly based on every time there’s a recession, and there’s no recession but there’s a Euro crisis, or there’s no Euro crisis. So how do you bring about a little stability in your pricing basically, in your margins.

First of all locally the fuel, oil prices affect more freight - the more regional I can get the production the better I am. So we have been producing a lot more of our West Coast needs out of the West Coast and that has helped margins here.

Yeah, that has had a favorable impact on our margins.

The glass prices is probably a bigger component; it’s more of a… The glass price. The price of natural gas affects glass because that’s what they use for fuel, and that has been more stable during the barrel prices. I worry less about what it does to my commodity costs than what it just does in general to the economy. There’s no way I’m going to factor Romney or Obama so that’s not where we are - we’re not worried about that kind of stuff because we continue to seem to be able to grow well in a bad economy. And actually the longer the economy sucks the more time we have to really get our act together before the loose money comes in and fuels up every Tom, Dick and Harry to do a beverage company. So it’s actually a really good time for us to grow the company, less impeded by other distracting companies that come in with money that shouldn’t be out there. So I don’t try to factor it. We’ll deal with it when it comes, and the problem will be if they try to get to $150 they’ll just see the world economy melt again.

Okay, and then my final question was you mentioned that you do a lot of your production on the West Coast for the west side. How many plants do you have?

I have a main plant in New England and a main plant in Southern California, kind of grabbing both corners of the country. We’ve negotiated Northwest production and Southeast production and Chicago production, but we will end up being regional at some point.

Our next question is from Eric Rose with Reed’s Incorporated.

No, I’m not with Reed’s but I am an investor and I don’t have a big question, just a comment, Chris and Jim, that it’s very gratifying to see the stock going the way it is and to see the beverages and the rollout of the Kombucha. And I too am anxious here in Florida to try some of the Kombucha. I’m probably your biggest supporter here in the state of Florida and in fact, I’m enjoying a Virgil’s Root Beer while I’m talking to you. It’s fantastic.

Yay! Eric from Florida, how do we look in the market? Are you seeing anything improved there or getting to see more of our products out there?

Well yes I am, and seeing it in Publix and some of the other stores here in Win Dixie. I don’t see it moving as fast, and it worried me a little bit. I was in Green Market and a couple other stores and I’m seeing sales on these products, markdowns on prices and I’m thinking “What’s going on here?” you know? And then I’m thinking well maybe they’re just moving inventory to keep it fresh and keep it moving.

Well, more likely what we’re doing is building new customers, because we’ve gotten into those chains and now we’ve hired a person to manage it, one guy to handle Florida. And so his job was to go, spend the first 6 months getting into Publix, getting more facings in three, getting it up and going. So part of it is to promote the product to let the customer who is deal driven to get some trial on it. And hopefully like your Root Beer you’re drinking, they get hooked and they say “Well damn it, I don’t care that it went back up to full price; I’ve got to have me my Virgil’s!”

Yeah, well that’s wonderful. And anything I can do for you folks here I would love to. I’m semi-retired and a former chef so I love the product and I love promoting it, and turning friends and colleagues onto it.

Well just send us an email if you really want to go out in the marketplace, we’ll set you up, man, we’ll get you out there. You sound like a great guy for that.

Our next question is from Barbara Gray, private investor.

Chris, listen, I want to congratulate you guys on the outstanding job you’re doing. My specialty in college was marketing so I kind of follow the marketing side of stocks. I’m a private investor for a long, long time and I got into yours because I was attracted to your marketing and I’m more attracted now. You guys are doing a bang-up job. My question is kind of oriented toward the stock. Of course as a trader I watch it every day and I’ve noticed a pattern. The stock seems to start going along very nicely and then it will be hit, and it looks like it’s hit by short sellers but the volume is small - there are 200- to 300-share lots and it will go down significantly which probably shakes out a few people. And then like it did for this last week and even today it went down sharply and then as soon as your news came out, in fact I put a buy order in as soon as I saw that because I knew what was going to happen and it responded nicely. I noticed the short sale right now, my latest shows 221,000 short, up from 183,000 which is a 20% increase. I realize these guys are going to get hit hard if you continue on the path you’re on and I’m sure you will, so I just want to congratulate you for the job you’re doing. Outstanding, just keep it up and I’m sure there are going to be more and more investors watching this stock. And once it’s over $5.00 you’ve got investors that can come in and buy it, the funds can buy it, too. So that’s the end of my comment.

Barbara, congratulations on your nice hit or nice 10% gain today.

Yes, that was very nice.

Good timing. Look, I want to say something; this is ridiculous. I don’t know if I’m out of line but I really worry about the shorts because we didn’t tell you everything that’s going on here and I just worry for your safety. Anyway, we’ve got a lot going on. It just keeps expanding for us. Kombucha does modest success or massive success, it doesn’t matter - we’re going to continue to be who we are. It’s just people love what we do and ginger will continue to be researched, and we love it every time a new cancer research comes out or arthritis, or inflammation, muscle recovery for athletes, nausea relief for people doing chemotherapy better than Dramamine. All that stuff is just beautiful and someday the message will be out there more deeply to our public. People will get it that drinking a ginger brew has all kinds of health properties, and I will not stop being a true believer. I will not stop my mission to increase the consumption of ginger in America. And I just, you know, I appreciate the people who are in here for the long term. We’re not sure how to manage the stock. I’ve seen people ding the stock at the end of the day; someone just maybe has a little vendetta and there’s 100 shares go down, and I just go you know, I don’t have any counterpart that dings it back up. We don’t give a damn at some level of what goes on. I apologize for you trading people out there - we are just completely focused on one thing. Management owns a bunch of stock, we want to see the end game. We look at gross profits increasing, increasing, increasing and that’s what we’re going to get bought out someday for, is what they continue to take and throw to their bottom line. So I’m not saying we’re mercenary. We’re sensitive to who’s in there for a shareholder but we are completely long-term here. There is no quarterly interest. I don’t even care what Q3 does. I do care what 2013, 2014 and 2015 are doing. But anyway, I’ll quit my rant. Are there any more questions?

Our next question is from Nicole Lundy.

Yes. My question is about the price of the stock, seeing that it went up to past $5.00 in the past 7 months, what do you actually this phenomenal move in the stock? Is it because of the sales revenues or is it your IR?

Well, it’s interesting, it’s a good question. I think from our low we’re up 470% and we must be in the higher echelon of what people have done this year. I think we’re artificially suppressed. I mean we have a huge base of $2.00 a share for 4 years approximately, you can look at that, so it’s only fair to say that it was very undervalued. Some people were getting out of the stock, maybe a large block for tax sell reasoning at the end of the year. Maybe we switched IR in March of 2011 and it just started sinking from there. Maybe our other IR firm was doing a really great job, I can’t say, and for Andrew and others out there they probably were really good. But at the end of all this, after all the years of being a public company since the end of ’06 I just decided we’ve had so many different shareholders, so many institutions reach out to us, so many different analysts - let’s just compile it into a great database, let’s hire our own person, someone who’s very articulate, who can handle talking to any type of person who’d be interested in the stock and let’s just start reaching out to them. So it’s been very basic. There’s not been a real push to make the stock go up because there’s not a real push to go sell a whole lot of stock to fuel up the company. So none of that’s going on here. I think you have an artificial suppression. You might have had some shorts in there that got a tough time through what happened with the stock. But you do have 11 quarters of sustained growth. You have anyone who’s doing the math on this who watches really slow growth on expenses and fast growth on the top line, you can just see the widening that that’s going to accomplish on the graph. And I don’t see the stock overpriced at this point. I just see the fundamentals in what we’re doing to continue to improve here. We’re really just looking at the bricks and mortar. We do not want to fluff up the stock but there’s nothing we can do about the performance of this company and some of the things that are about to probably get announced here in a bit. So I just feel like we’re going to try to keep things mellow but we’re not going to go sell stock to cool off the stock. There’s not much we can do about the way people are perceiving it but we will continue to be ourselves which is successful.

[Operator instructions] Our next question is from Samuel Gravina, private investor.

It’s my first time calling in to one of these but I’ve been following your company for about 25 years, and I’m no longer a young man but I’m very happy now to see the price going up. I was curious about products. You can’t do everything so I know you’ve got to lose some products. I haven’t seen the ice cream, and I haven’t seen the Reed’s Rx lately. Are those discontinued or are you just dropping things?

That’s a good question, Sam. The ice cream is still out there and it doesn’t get focus like it could, and the Rx, we’ve been asked by the FDA - I think there’s a notice out there that we would like to see us change the label on it. So I believe we have approval on it or we’re getting approval on it, and we’re going back and forth and about to get approval on a language that they can accept on it. So it’s just once you get from being just a healthy soda to actually using your soda for nausea relief, even though nausea’s not a disease in theory you’re getting closer to that health claim and you get more and more attention from the FDA. So that has a hiccup there and it is getting a little bit of redone packaging. But I thought you were actually going to bring up, you know, You have a bunch of items out there like Dr. Better and 55 Calorie Ginger Brew, and how are you going to give all these products attention? and quite frankly, the way we’re taking Kombucha to market and the sheer force that we’re going and the way we’re going, and we’re spending a bit more on this launch than we have in the past because in the past we didn’t have a lot of extra money to go after a significant launch. So what that has done for us is it really has made us look back at a few things that are still waiting to…I would say they’re launched but not launched the way we’d like to see them launched, like the Dr. Better will get a re-launch, the Elixir will get a re-launch, the energy drink Elixir. And the 55 will probably get a significant re-launch once Kombucha is rocking down the road in solid fashion here. And again, that’s all wishful thinking because I don’t know if we’re going to have a lot of bandwidth if it does what it might be doing here. So but anyway, hope that answers your question.

Our next question is from John Gravina.

Yeah, my stock’s done really, really, really well.

Well I appreciate that and we’ll keep working hard for you.

Our next question is from Gary Spiro, private investor.

First of all it’s a great quarter and I’m glad to see that things continue to accelerate and go in the right direction - very encouraging, very optimistic. And I think you can be low-key but I think that things are trending in the right direction. So I think everybody that’s stuck with this for a long time I think are really excited and energized by how things are trending. Talking about trending, I wonder if you can speak to, and not your specific numbers but maybe a breakdown in the growth this quarter of Reed’s versus Virgil’s, vice-versa, and whether you see any significant trends going forward? That was question number one. Question number two is are you working on or have you considered revamping packaging on the Reed’s and Virgil’s lines going forward? Is there something that you’re considering and are you working on it now?

Jim, you want to handle the breakdown question?

So we’ve been really in our branded business pretty much 50/50. This year we’ve seen a little bit of an uptick of the Ginger Brew lines, maybe just expanding a little bit faster than the Virgil’s. But then it will flip the other way the next few months. So on the average it’s amazing how close the 2 brands are contributing, really 50/50. And we pretty much see that continuing. A lot of our promotional thoughts are centering around the ginger so maybe the Ginger Brews will start growing faster but right now they’re pretty much neck-and-neck, 2 great brands.

Okay, and the packaging element?

The packaging is my baby and how dare anyone think about changing it. It’s difficult. We’ve engaged and gotten quotes from a number of really hot-shot re-packaging groups out of Beverley Hills, and the proposals sit on my desk and quite frankly by now we would have had the re… You know, I designed up the packaging for Ginger Brew with a kid with concepts 23 years ago with a background in liquefying natural gas and doing oil and gas refinery. So I don’t pretend to know what the hell I’m doing on that. At least that’s the way it started, and now that I’m a more seasoned marketing-oriented guy I see the branding strengths and weaknesses of Reed’s. So if we weren’t so damn busy with Kombucha we would probably be in the middle of a rebranding thing on Reed’s and then eventually Virgil’s. So good point and definitely on our radar.

I have one other question; this is probably something you can answer quickly. Has anybody approached you or have you approached anybody, or have you given any thought to aligning yourself with another beverage manufacturer, brewer, whomever. And maybe co-branding using Reed’s Ginger Brew or Virgil’s as an additive, as a flavoring for another beverage company like a Sam Adams? Or do you want to stay out of the alcoholic arena? Is this something that you’ve ever given any thought to? I’ll let you speak to that.

Well, we haven’t said no to anyone, and we are the world’s greatest mixer; there’s nothing we can do about it. I did say no one time to Seagram’s for what was it, Spiced Captain Morgan wanted to do a rollout of Reed’s and Spiced Capitan for 5000 stores in Southern California, and at that time I was very young and idealistic and I said “No, that’s not our mission.” Now I realize that a lot of people have been introduced to our drinks because somebody mixed a dark and stormy for them, some rum and lime and some Ginger Brew - see, I’ll give you the recipe. And you know, we had Bacardi doing stuff with us for a while, and Sailor Jerry has done a bunch with us at Coachella and all these big festivals. So actually I think we were at the Los Angeles Food and Wine Festival this past weekend and some vodka company was pouring a lot with us. And we’ve had actually the largest brewer in Japan ask for samples and conceived, said they were going to mix it and make some kind of a blend with beer. So it’s being looked at. We’re business people now and we’re open to it very much, and we’re definitely partnering up for the mixer thing. And that’s another wave of marketing that will probably hit. And even though we’re not much in promoting the consumption of alcohol we are into promoting our product, and if they’re going to have a drink they might as well have one that’s dosed with ginger in it. We can feel okay about it.

I know things seem to be doing well here in New England. Stop & Shops are doing well with it from what I can see, and Whole Foods and everybody else. So I’m looking forward to a great 2013 as you said and hopefully onward and upward!

Thanks for sticking with us, Gary. We’ll try not to disappoint.

Our next question is from Ernie Arnold with B.B. Graham.

Chris and Jim, it sounds like you’re doing a good job there on the finances.

Hey Ernie, thanks for taking us public.

Yeah, we’ve had quite a ride, quite a ride. I’m always focused on the margins and the net income; growth of revenue is great but it always helps to see the margins improving. It sounds like the Kombucha has some of the best margins for you but what is, if you break down your branded, your private label and now the Kombucha separately about what percent of revenues does it break out?

We’re just starting the Kombucha so we can pretty much say zero. We are selling the first few months like 5000 cases but that’s just starting. And so far this year our private label has been in the range of, I think it’s around 11% to 12% but that ratio will go up in the second half. And as far as margins go, private label is a little bit less than our branded business but private label does not involve discounting. And they’re very healthy margins for us, so they’re coming in pretty close. Maybe our branded business all in comes 2% to 3% higher than the private label but they’re pretty close.

And I think I heard Chris say earlier that you try to keep the expenses 10% to 15%? Did I hear that right?

No, if the revenues were growing 25% we would try to have our selling SG&A expenses grow at a slower pace.

Okay, okay, I see that.

And by the way, to clarify Kombucha’s launch really hasn’t hit much of Q2. For Q3, I’m going to make a guess somewhere between 3% and 5% of sales. It’s not going to move the needle that much but it’s all incremental.

Absolutely. I mean it’ll take at least a year or so to really see how it’s sticking. Pretty good.

Another point, Ernie, on the expenses is that we have the infrastructure already to dramatically increase our sales, and in our G&A maybe add a couple people but it’s not material. So where we want to increase expenses is in our sales and you know, we’re able to be nimble. If that works, great. If it doesn’t we’ll scale back accordingly. So we’re pretty nimble with the costs.

Well, I’ve been watching and seeing how the handling of the capital expenses and building out the system that can be efficient is a task in and of itself. And each quarter you can see where it’s becoming a little more efficient and you have to reach that point where now you’ve crossed into profitability. So I want to congratulate you on that. I know it’s been a long, hard shlog but you know, you’ve worked through it. So good job and I look forward to continuing to follow you.

Thanks so much, Ernie.

[Operator instructions] Our next question is from George Santana with Ascendiant.

A couple small follow-up questions. You mentioned last quarter, Chris, that you couldn’t stop selling your butter scotch flavor. the [indiscernible] kept asking for it. And I’m wondering, you said it was a Halloween beverage so it would show up in Q3 or have you discontinued it?

Oh no.

It’s not discontinued. We can’t shut it down.

Yeah, we can’t stop it.

If you’re going to get an email or a Facebook comment, one out of 2 or 3 is a “Oh my God, I just tried that butter scotch beer and it’s insane!” But so it’s got a great following, and our big plans for the Halloween time even in the midst of a Kombucha rollout and everything else going on - you know, Harry Potter and all that stuff really isn’t going away believe it or not. I don’t know what they’re going to do commercially with just how big a piece of the culture it is. They’re going to just keep having DVD sets out every year at Christmastime, who knows. But the more the word gets out the faster it sells and that’s the way our online sales of that product, I wouldn’t say it’s super material but it could end up being material at some point.

But it kind of took on a life of its own.

So you’re co-branding a Harry Potter beer with J.K. Rowling, is that what I’m hearing?

No, not really. It’s a butter scotch cream soda and it was inspired by Harry Potter’s deal and all the young wizards who drank his butter beer in all the movies, and it’s the best-known mythical soda in the history of the world. So I figured hell, we’ve got to put it out so people can taste it. And we did get a cease and desist letter from Warner that said “Look, we have the intellectual property for butter beer, don’t do that,” so we just let them know, “Okay, how about butter scotch beer? You don’t own that.” And it’s called Flying Cauldron and it looks very cute that way, like something some wizarding book might have in it, but they haven’t-- You know, we were working closely with them and we made it clear they weren’t there to help me circumvent their intellectual property, but we gave them complete disclosure on it and said “This is exactly what we’re doing, and we’re aware you don’t want us to use “butter beer” but we don’t think you own “butter scotch.” So it’s a little bit of a tightrope and it’s not a big deal right now, but we’re having fun with it and hopefully we won’t get in too much trouble. And it’s not like everybody here is a trademark attorney but we’ve asked them quite frankly. Their trademark attorneys are who we’re talking to, we’re not talking to anyone else. We’re saying “Look, you don’t own everything that’s wizarding that ever was created, so let us play in this arena.” And we hope we’ve circumvented it.

That’s great. And also, as you bring out, you just keep adding products, they continue to sell well. Are you seeing any kind of benefit on the slotting fees that are demanded of you?

Well, you know, when we hit the supermarket trade, generally speaking our top 5 items are what goes in there. And Kombucha’s already being slotted into a number of supermarket chains but it’s in a different part of the store. So we don’t bring 20 SKUs of different beverages into the supermarket aisle. It’s generally just our top 5 things. So we play in natural foods. Since we have a deep relationship with the stores and with the natural food distribution we’re able to expand who we are in those types of accounts. And we’ll keep a very focused thing, and when we roll out into mainstream .it’s generally at most 10 items that we’ll go into a big beer distributor with. And later on, as we get more well-known we might launch other things. I’ll tell you that, though, when Kroger took one look at Dr. Better or the Dr. Pepper natural version that we created they just immediately put it in all of their stores that have Reed’s. And butter beer might have that kind of action because it’s such a unique item. But anyway, I think I answered the question. I think I lost myself there in my rant.

Slotting is not material for us right now if you’re talking about slotting fees. We’ve been able to grow without having a large expenditure in that area.

(Operator instructions.) There are no further questions.

Thank you so much for coming to our earnings conference call today and I really appreciate all the questions and the people, especially a lot of you who’ve been with the stock for a while. And we look forward to even more fun earnings calls in the future. Have a wonderful day.