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

Good afternoon everyone. My name is Jim Linesch, the Chief Financial Officer of Reed’s Inc. I would like to welcome all of you to our first quarter earnings conference call. With me today is Mr. Chris Reed, Chairman and CEO. I would like to remind our listeners that in this call, management’s remarks may contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from those discussed today due to such risks, but not limited to risks relating to demand for the company’s products, 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 14, 2013. Reed’s Inc. assumes no obligation to update these projections in the future as market conditions change. Now, I would like to make a few brief comments about our financial performance for the quarter, which will be followed by Chris Reed who will give us an outlook of the company’s business at this time. During our first quarter, sales increased by 24% to $8.1 million and our gross profit increased by 28% to $2.5 million. The increase in revenues was spread evenly among our brands and our private label products. Last year in the 2012 first quarter, our private label revenues included approximately 400,000 of ingredient sales. So, aside from that the increase in private label cases actually increased by 55% in 2013, representing additional new business…

Thanks Jim. Well, thanks for joining us today to get catch up with Reed’s in our first quarter earnings call. You know, it’s funny I am nervous today and I am like – I feel like oh, boy, I should be defending this performance, but really here behind the doors and where we are right now, it’s actually extremely exciting, because we would have loved to shown a profit for the first quarter and if I were running the first quarter next year with the same sales and everything, by that time with the plant being fully onboard here with branded not having to ship refrigerated trucks and etcetera, etcetera, we probably would have shifted the first quarter somewhere around $300,000 or $400,000, and then much closer to profitable in our absolute worst quarter of the year because of seasonality. The way I look at the quarter and the reason I am excited about what has happened here is because as Jim mentioned, we sold off commodities that took us from $6 million to $6.5 million in the first quarter of 2012. So, we really had $6 million of what we call our normalized normal sales and we did $8 million in total sales in the first quarter. So, we really went up $2 million in a single quarter, our worst quarter of the year. And that’s the excitement that we are feeling and that’s the excitement that we are living in the second quarter here just great improvement in the amount of business that we are doing year-over-year. So, and it’s coming from – last year, we did not have Kombucha. Obviously, this year, we have a third contributor to the revenue growth and it’s doing well. I will get into it little bit more, but just really in…

Thank you. (Operator Instructions) Our first question is from Joe Munda with Sidoti & Company. Please go ahead. Joe Munda - Sidoti & Company: Good afternoon, Chris and Jim. Thanks for taking the questions. Jim, I was wondering if you could breakout for us, I thought a little bit you had mentioned private label 15% of overall revenue in the quarter, I think you said branded 64% and then you said Kombucha is 7% of branded, is that correct?

Yes.

Not even 7% of sales.

7% of – Kombucha was 7% of branded cases shift. Joe Munda - Sidoti & Company: Okay. Can we get like hard sales numbers, would that be possible?

At this time, Joe, we are not providing that. To tell you honestly, I don’t have a solid breakout of the promotions and allowances by product group. And so, we would have to be talking about net sales. So, that’s why I translated it to cases shipped. Joe Munda - Sidoti & Company: Okay. And then Chris, as far as Kombucha and the plant issues, you guys said you solved the issues. Can you give us a little bit more color there, because I was just looking at CapEx and it really hasn’t changed year-over-year, and I was wondering are you going to be – are you feeling capacity control constraints and are you going to be rewarding more capital to building up the plant?

Well, I think people have noticed if you have been out in the field in New England and you’re following Kombucha there. We’ve actually been out of stock for a little bit lately. And so we are – and so we been feeling it in the plant and I am following it very closely what’s going on in the plant and it’s just we have done as we are not really spending a lot of CapEx, but we are leasing equipment. So, we’ve leased new air compressors, leased just all of basics, so you’d get into a brewery bottling environment. So, we have – so we are not flowing down things for really small investments that correct the situation. So, did I catch…

And generally we are not spending a lot on CapEx. We are buying a new boiler, we’re buying some parts for our crowner, but it’s not – we are not talking about major expenditures on the CapEx side and some of the items that we are bringing online now were expenditures last year like for instance we are just bringing on some new tanks that we bought last year and they are coming on – they are online now. Joe Munda - Sidoti & Company: Okay, okay. And then…

There is no great big plan for CapEx coming up.

Earlier in the year we were out for quotes to find a filler that would double the speed of the line, but after spending time out on the line and looking at what performance we can get by just keeping our current equipment and support systems just running properly, we can probably double the output from the plant just from that. So, I’m a firm believer in fixing what you have before doubling down. We’re not talking more than a leasing a $350,000 piece of equipment to double the speed of the line, but I probably told that we’re leasing some around $0.5 million to do the complete job, that’s probably going to happen now because we are expanding relatively rapidly. Joe Munda - Sidoti & Company: Thanks. Jim you had spoken about delivering and handling you said approximately a quarter of the $420,000 or $27,000 increase so roughly $107,000 was due to the temperature controlled freight and that should be – that’s one-time in nature I’m guessing because of quarter you have said. But I mean 8%, 9% to 10% of revenue in future quarters is that a viable number?

If you look back historically that’s pretty much what we have been running. And so… Joe Munda - Sidoti & Company: It won’t be...

We feel that we will get back down to that a part of it is getting branded production out of our plant here in Los Angeles and a part of it is using smarter freight delivery. Joe Munda - Sidoti & Company: Okay. And then…

A big picture Joe… Joe Munda - Sidoti & Company: I’m just – I don’t need control but I’m trying to figure it out you’re shipping products from Pennsylvania and how is that going, I know $100,000 I mean on temperature control is not a lot, but you’re shipping products from Pennsylvania to the West Coast. So, I’m just trying to figure out how or what you guys are going to do because you say you’re constrained in the plant in LA.

Alright, so the plant is in constrained when it’s what I’m about to do to. I am freeing up the plant, so it can run approximately twice as fast as it currently is running. Joe Munda - Sidoti & Company: So, then you can move what you have in Pennsylvania back to LA?

No, we just don’t have to shift from Pennsylvania. So, if a customer orders in the – if a customer ordered in the first quarter of this year we have to ship it with temperature controlled equipment from Pennsylvania to LA. Not only do we have the freight, but we have refrigerator freight on top of it. So, there was a $100,000 just in refrigerated access costs over normalized freight from Pennsylvania. But we wouldn’t have to spend any freight. So, it probably works out to about $3 a case on our 100,000 cases, so there is a $100,000 in freight, refrigerated freight the extra cost, but there is also a couple of $100,000 in just freight in general that we get rid of by running the plant for all of our branded products on the West Coast. Joe Munda - Sidoti & Company: What happens in the summer months you’re not going to need...?

Well, we don’t need refrigerated, but once the plant is up in running fully then we don’t need to ship at all from the East Coast. Joe Munda - Sidoti & Company: Okay.

So, there is huge savings on a per product sale. Joe Munda - Sidoti & Company: Okay and you are at max capacity right now I am guessing?

No, no I think I have mentioned in my dissertation that we were doing somewhere around 50,000 cases and I am going to try to boost it to 100,000 cases a month here by the end of six months, and by the end of three months most of the projects will be done. Joe Munda - Sidoti & Company: Okay. And then you’re hoping and my last question then I’ll hop back in the queue, so the Kombucha is running at $2.5 million a quarter right now?

No, on annualized basis. Joe Munda - Sidoti & Company: Annualized basis and you want that get to $7 million by next year, right?

No, by the end of this year about the fourth quarter we would like to be at like 30,000 cases a month which is approximately $600,000 a month of sales or about $7.2 million. So, that’s kind of our goal feeling level that we’re going to get, but still there is a lot of uncertainty in all of that, but we’re moving in that direction nicely. Joe Munda - Sidoti & Company: By the fourth quarter?

Yeah. Joe Munda - Sidoti & Company: Okay, alright. Thanks guys.

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

Hi, there Chris and Jim. It’s something that I had talked to you before about Dallas pricing, I walk into Trader Joe’s and I go to Whole Foods and I see your four pack of whether it’s the Ginger Brew or the Virgil Root Beer they go for like $4.50 and your Trader Joe pricing is about $3.99 in the West Coast. And I would talk to you about just whether its Phentermines or so many other competition, whether it go Q-Ginger or (indiscernible) Ginger People. They all have pricing of anyway between $6 up to $8. And if you see that you had to ships stuff from the East Coast why wouldn’t you just raise a little bit of your pricing. Why wouldn’t you be a little proactive and say okay this is going to impact my bottom line, I have to increase my costs for shipping it. And just it’s not like you’re going to be even close to the competition even if you raise it by $0.50 to $0.60 a four pack it will go to $4.50 from $3.99 or $4.75. I mean even if you do it temporarily I mean that would have tremendously helped the bottom line for the short-term blip pace and if you are saying that this freight cost was there. But just on the big picture, I think the pricing is a little low for Ginger Brew and Virgil Root Beer being that they are such great quality product with quality ingredients, you are putting fresh Ginger in it, it’s organic, it’s no caffeine and all that sort of stuff. So, any thoughts about raising a little bit of your prices on the core product, whether it’s in Trader Joe’s or in the Whole Foods.

Well, first of all, the price increases etcetera, they are not – it’s not as nimble out there as you think. We probably – if we made a decision today on this phone call to change prices, the price change would probably effect somewhere in August would be way to sooner, but it will probably be September or October. We do look at that, I wouldn’t say that Q Ginger and Phentermines and some of the brands you mentioned are competitors, because if you added all the brands you mentioned up and you times divide 50 you would still not reach one of the Ginger Brew SKUs in volume. So, they are not really they are cute and their price to stay very cute and very small volume. And I guess if you came up with enough of a marketing budget or you might be able to move it to a high volume and have the high margins. But we are also looking to the mainstream and if you go into mainstream and start looking for your four packs around for $4.49 to $3.99. Yes, you’ll start pricing yourself way out of the market. So, we are straddling the natural and the mainstream marketplaces. And for a quarter moving the prices around, it’s very, it’s not very nimble. And I think that you’ll see that we actually our margin did increase although our cost of shipping did go up. I think you will see us improve margins this year, that’s the trend here. I think we already picked up a point in the first quarter and as we better utilize our plan on the West Coast and absorb that factor that fee called unused plant time. We see ourselves being able to shift the usage rate and utilization of the…

Okay, and my next question was about the debt. Have you guys looked at getting something that is a little lower interest rate because that’s about $650,000 a year, that’s something Jim can address that?

Well actually we feel like we are getting a pretty good rate in our current relationship we have been able to decrease it to by about 4%. We just generally feel that we are not at a point where we can go for a regular commercial banking relationship. And personally I feel that we need to have at least three to four quarters of profitability and then we can make the jump in to something that is substantially lower. At this time, we haven’t seen anything available that would be substantially lower than what we have. And we have an excellent relationship with our lender. They have been very liberal with us as far as allowing the term loan and allowing our collateral base to be fairly broad and so there are trade offs but we are looking to that point where we could be eligible for a better relationship. And it will probably coincide pretty much with the term of the loan that we currently have.

Now the outstanding shares as of this quarter was $12.3 million?

Correct.

And that’s with the forced conversion that happened with one of the support staffs? So, it is still out there that hasn’t been converted or its all factored in?

It’s out there. There is really only a handful of shares.

Do you know often how many shares because they convert into what three...?

It’s four to one.

Four to one.

I don’t know, I think there wasn’t more than 12,000.

12,000 okay, so no more than around 50,000 coming from that side?

Yeah, it is, yeah, there is 10,000 left.

10,000 and also 40,000 left.

Yeah.

We’ll add.

Yeah, the major bump was the Series B and then it stopped to crewing.

At December 31st.

Dividends and we just seem logical to get rid of the overhang.

Got it, now you know in your press release, say you get a distribution of more than 13,000 stores out there, retail and super market. If I were to ask you a rough number on how many of that the Kombucha is already being shift into, what would be that percentage you would think?

Basic one clarification is 13,000 supermarkets that we are in. We are probably in 10,000, 15,000 other accounts around the country.

Okay so about 25,000.

Yeah, there is about...

Potential accounts.

3000 supermarkets in natural foods alone, they have means like Whole Foods, Sprouts, I would include Trader Joe’s in that number.

That’s 10 – 3000.

3000 what we call supermarket by natural food store.

Okay.

And there is about approximately 10,000 natural – supermarkets around the country we are in and those are more mainstream Kroger, Safeway, Publix, Fred Meyers, and all those kind of guys.

Okay. So, I know it’s only two – about 2.5, you said about for this quarter was about 625,000 approximately and revenue from Kombucha.

Right.

And is the promotion being done the same way was done the previous quarter or it’s a less aggressive now and it’s on a standalone basis?

It’s less aggressive and the first quarter definitely there is lot of pipeline sale and there is a lot of pretty heavy trial going on just people trying the product. It’s more into a steady group and starting to pickup as a summer months are warming up here and then of course we have into that. We are still many of the chains were still just giving flatted in for the first time and then we have a four new products coming on. And then on top of that, we hired eight new sales people, but we also have a relationship with a marketing company that has a national reach and it’s large in the supermarket and grocery, specialty, natural food trade. So all those should check into prove things and we have some other things we’ll put out press releases on in the next decade that are also potentially very large customers for Kombucha so, it’s – there is a lot of things in the fire that could game change the Kombucha, but it’s on a steady phase of growth here and that we keep a pulse on the marketplace, and I would guess that somewhere around 2,000 accounts right now carry the Kombucha. And I would also guess that of the eight accounts, the large accounts in U.S., approximately a third of them are currently carrying the product. So, we see it, still see a tremendous upside for the Kombucha and we should be considered at our infancy here with what the performance of that product will be.

So, when I see the condensed balance sheet and its discounts of 300,000 and 399,000 respectively for March 2013 and December 2012, so, is that like we will be talking about?

No, those are – that’s our allowance for doubtful accounts and that number is primarily due to the fact that our promotions and allowances come through as deductions from the collection on our AR. So, we make a provision estimating how much those would be. It has very little to do with actual doubtful accounts. It really just has to do with the rate that we are experiencing deductions for promotions and allowances.

So, that would be under cost of goods sold then, cost of tangible goods sold?

Promotions and allowances are actually a deduction from gross sales. So, it’s not shown as a separate cost item.

So, in that $8.1 million, they have already been deducted.

Yeah, that’s our net sales for the quarter.

So…

Yeah, that’s already been deduced, yes.

Okay. So, you don’t, you mean see it so, you ended that Kombucha promotional pricing is already been factored in?

Yeah, it’s had to come off the top line…

Okay, so there is no…

No other way to report that.

Okay, okay and that makes sense. Final question I had was about and this is a big picture where I feel like I’ve said this before that the Ginger Brew and your Virgil I mean I think the Virgil buy was an other best buys you did in 2000 for 4000 and you took it and expanded it and those are like your crown jewels. And I feel like yes, Kombucha is taking all this energy away right now from whether its raw material issues we had last quarter or production and plant capacity and all these things and I feel like just in that is the attention that is given to these two brands that you have the crown jewels of the Virgil and the Ginger Brew I mean they were at a point where they were just starting to produce profits and show attraction and bringing not only the top line which you are growing at 20 some percent, but also showing one or few pennies down to the bottom line. And I feel like are you giving that attention that these are the thing, its like when management takes eye off the ball of the main crown jewels and I always worry about that. And I feel like I’m seeing some of that in the numbers basically where whether it’s a production issue or whether it’s raw material or things like that when there were issues with the label last quarter and manufacturing didn’t slowdown all because of Kombucha. And so and I know when you bring something new online there are hiccups there are growing pains, but can you say something about that basically?

Well, I mean actually it’s a very great point. And we have to justify what we’re doing with Kombucha. And Kombucha has to justify spending that kind of time and attention. And I agree with your assessment, I think that if Kombucha hadn’t come along, we would probably be have shown a very different I’ll say quarter in terms of profitability. So, there has been a bit of spend on just lost gross profits or spending gross profits to get the Kombucha going. And at the end of the year the way the vision for it is you are in the fourth quarter you’re running 30,000 cases a month and you are throwing off 6 to 7 bucks a case of gross profit from it and its catching and it’s moving on its own, its in the mix we don’t have to baby sit it, bottle feed it and its another happy revenue crown jewel like Virgils and Reed’s. If it doesn’t get there I mean if we don’t see a significant growth decent growth in the second quarter here, we don’t see decent growth in the third and fourth and obviously we won’t waste our time with Kombucha and to keep the resources and the attention on it as much. But we’ve to have a brand running at $7 million after effectively one year is pretty healthy for us. And sensing that Kombucha can get to a million cases a year throwing off $5 or $6 a case just like the private label business we do, we look at the gross profit dollar and think of all the things we can do with it. And it has to build – it has to that bet gamble that we are taking right now and Kombucha has to pan out. And…

Our next question is from James Kuzowsky. Please go ahead.

Hey, guys. Thanks for taking my question.

Hey, James.

Hi James.

I just had quick to ask you about the Kombucha, how many cases did you ship in the quarter if you could give me that number?

Jim?

Yeah, sorry.

I normally don’t put out case counts, Chris, would you like me to respond or?

That’s fine.

Okay, 300,000.

Okay excellent.

Wait a minute, he asked you how many cases you sold off Kombucha in the quarter?

300,000 cases will be (indiscernible).

That’s a total for the cases that you guys shipped.

I am sorry 39,000. Pardon me.

I don’t think anyone heard you Jim.

29,000.

Okay, great. And then actually I noticed in your press release that you guys had mentioned a large private label customer and that I don’t think you had talked about it all yet on the call if there is any color that you could give on that or if there is any timeframe that when you can see that contracts at your statements?

That’s a good point. Well, because it’s when we could say it was fun, their answer with smile. We are currently processing the first orders today and I think it’s somewhere between $300,000 or $400,000 in the second quarter, but it’s still the trial and the customer is really large customer and this was just tested out.

Alright, excellent. Thanks a lot.

Thank you.

Our next question is from Michael Rudin. Please go ahead.

Hello. I was wondering are you seeing any of the potential customers you said there we are going to reorganize their shelves in April-May time actually doing it in taking any of the Kombucha product done?

Yes. Some of the accounts we are talking about we have portal into the data. So, we could actually see the scan data as we sell. So, we are in a quarter of the Whole Food stores. And moving into regions steadily around the country and I couldn’t – those are the most difficult accounts once you get approval and you have to get approval of the regional and you have to get approval at each store. But yeah, there is very few accounts that we mentioned that we are not going into. I believe we are going into the Sprouts market at this time. And I have to get my national sales manager on the phone, and I think he had another call here, but I haven’t heard anything to the offices, and I keep somewhat of a pulse on that. So, everything seems to be going normal for the grocery trade, slow but steady.

Okay. And then at the end of ‘12, you had a run-rate I think of 2.5 on the Kombucha and then it’s still the same today, is that correct?

Yeah, it was running about 2.5 during the first quarter and second quarter we are seeing it move higher than that somewhere between 3 and 3.5.

Okay, thank you very much.

There are no more questions at this time.

Alright, well, I want to thank everybody for coming. A copy of the transcript, the recording also be on our website within a day or so and look forward to joining you in other quarter and reporting on our second quarter. Have a good day. Bye.

Thank you, ladies and gentlemen. This concludes your call. You now all disconnect.