Good morning, and welcome to the Reed's 2016 Earnings Conference Call for the period ending December 31, 2016. My name is Cathy, and I will be your conference call operator today. Today's call is limited to one hour. And we'll start with the prepared remarks of Dan Miles, Reed's Chief Financial Officer. Also on the call today, we have John Bello, Reed's Chairman of the Board; and Stefan Freeman, Reed's Interim Chief Executive Officer. Following management's remarks, they will take your questions. As a reminder, this call is being recorded, April 24, 2017. Before we begin today's call, I have a Safe Harbor statement to read to our listeners. I would like to remind our listeners that during this call, management's remarks may contain forward-looking statements that are subject to risks and uncertainties, and that management may make additional forward-looking statements in response to your questions. Additionally, please note, non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC. Non-GAAP financial information is not meant as a substitute for GAAP results, but is included solely for informational and comparative purposes. The company believes that the presentation of non-GAAP financial measures provides useful information to investors regarding the company's financial condition and results of operations. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Legislation Reform Act of 1995. Actual results may differ from those discussed today due to such risks, but not limited to risks relating to 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 United States Securities and Exchange Commission. In addition, any projections as to the company's future performance represent management's estimates as of today, April 24, 2017. 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. Miles, who will begin with the prepared remarks.

Thank you, Cathy. This is Dan Miles, Chief Financial Officer for Reed's Inc. Today, the company issued three press releases. One announced the transition of Chris Reed to the new role of Founder and Chief Innovation Officer of Reed's; and names Stefan Freeman, our operations focused board member to the role of Interim CEO. Our second release announced the $3.4 million financing transaction. And the third press release announced our financial results that we'll discuss. On today's call, joining me, we have John Bello, the Chairman of the Board of Reed's Inc., and Stefan Freeman, our new Interim Chief Executive Officer. Chris Reed wanted to announce directly to you his new role, but he is on a flight to Europe for a conference where Chris will be presenting as a speaker and a panelist. Chris will represent Reed's at the 13th Annual InnoBev Global Conference Congress in Frankfurt, Germany. Chris looks forward to seeing you at the future tradeshows and other beverage industry events. Please stop by and say hello. I'm now going to turn the call over to John and Stefan. When they conclude, I'll go over the 2016 results. At which point, we'll take your questions. John, I'm going to turn the call over to you now.

Thank you, Dan. Hello, all. It's an honor and pleasure to introduce myself to Reed's shareholders and investing partners. Let me start by saluting the past before looking to the future. Chris Reed is a legend and his brands are iconic in the beverage industry. He has pioneered the way non-alcoholic beverages are produced. He was a man ahead of his time in creating all-natural healthier beverages almost 30 years ago, well before the shift to wellness and better-for-you trends became a reality. But those trends are a reality today. The product lines that Chris has created and refined in Reed's Ginger Brews and Virgil's natural lines of carbonated soft drinks will fill the voids created by the decline of sugared preserved sodas offered by the major players: Coke, Pepsi, Dr. Pepper. The future of the non-alcoholic beverage industry belongs to Reed's. Chris' decision to step aside from day-to-day operations at Reed's was discussed when Chris and I spoke about me joining the Reed's board last year. At the time, we talked about its development pipeline and I was beyond impressed. He had concepts in the works that were big, timely and relevant to current consumer consumption trends. The beverage industry is a designer industry. It's mojo is dependent on product concepts that are exciting, new and different. Snapple, AriZona, and my own SoBe that was sold to Pepsi for $370 million reflect that trend. Chris' development portfolio is a treasure trove of exciting new and different ideas that must be cultivated and nurtured. Product development takes time. And Chris realizes that it wasn't practical or possible for him to do it all. We are at a transitional time in the soft drink industry. And I hesitate to call it soda, because Reed's products are so much more than sodas.…

Hey, thanks, John. Good morning and thank you for joining us today. Today is a transitional day for Reed's and I'm very excited to have the opportunity to work with a company that truly brews the best craft beverages in North America. And as John said before, Reed's has great potential in its positioned to build on its craft-brewing heritage to become a leader in the beverage industry in the craft-brewing arena once again. As John mentioned, I joined the board of Reed's late last year and have already started evaluation of supply-chain operations and the opportunities that drive better margins through improved efficiency. This has been my area of expertise in the beverage industry for the last 20 years, where I've worked for Pepsi, Dr. Pepper, and most recently as the Regional Vice President of Manufacturing for Coca-Cola, where I oversaw eight manufacturing facilities located throughout the West Coast. With those facilities, I was accountable for producing 231 million cases and revenue generation of more than $500 million annually. I will take advantage of my past experience in this area to support sales operations, manufacturing, distribution, warehousing, procurement and transportation to drive those efficiencies in the supply chain, which will free up cash for sales and marketing. Now, turning on my focus to Reed's, our first step to turning things around is for management and the board to complete our deep assessment of strengths, opportunities and challenges to deliver strategies and tactics focused on sales, marketing and margins to revive the Reed's brands. I will be working out of the corporate headquarters at the LA plant, which allows hands on assessment of our current situation. And being in the office will give me additional insight into the day-to-day operations that are not visible at the board level. I look…

Thanks, Stefan. We'll talk about the financials here and then get to your questions. I'm sure you've got many. So feel free to hold those until I get done with the financials and then we'll take your questions. Gross sales for all of Reed's products decreased 7% to $46 million for the year ended December 31, 2016 from $50 million in the prior year. As in the past, we've used the eight-ounce serving size to keep beverage information uniform. Our total sales volume for all beverages decreased 5%. The Reed's ginger based beverages increased 0.5%. Reed's variety beverages were up 4% and net private label beverages were up 0.5%. Virgil's decreased 10%, and Reed's Kombucha decreased 54%. Our gross dollars for all beverages decreased 6%. Reed's Ginger based beverages increased 2%. Reed's variety beverages were up 4%. Net label beverages were also up 4%. Virgil's decreased 10% in line with the volume, while Reed's Kombucha also in line with the volume decreased 54%. Gross sales were unchanged at $12.16 per eight-ounce case. Sales were down an average of 9% in all selling channels. All customers representing 1% of sales in 2015 were still customers in 2016. We believe that that fact, we are still in all of our major accounts, yet with the declining volume this represents consumer preference away from all sugar sodas including natural based products. In response to the general consumer trends, the company research and development efforts have focused on natural alternatives that have 12 calories per 12-ounce serving. We are in tests in the marketplace that have successfully proven the technical viability and expect these to have these offerings available in the public as soon as practical. Gross sales of such items such as the non-beverage item, such as candy, packaging and mail order were…

Thank you. [Operator Instructions] And our first question comes from the line of Mitch Pinheiro with Wunderlich Securities. Please proceed with your question.

Yes, hi, good afternoon.

Hi, Mitch, this is Dan.

Yes, hi, Dan. I guess, first, I guess, I want to start big picture here, maybe a question for John or Stefan or both. So it's going to take time to get back on track, is I think, John, you may have said, to get back your shelf space, improve operating margins. Okay, what kind of - like what are you thinking in terms of timeline? I mean, are we talking - when do we see tangible improvements, six months, a year and six months? And what would be the biggest issues around - what is the number one challenges that that you have to overcome?

I'm happy to take that question. This is John. I've been very involved in the sales side of this since November when I came onboard. I'm very impressed with the sales team. It's been somewhat handcuffed by lack of resources and some supply issues. Once supply is up and going, and we can ship full loads, I think you're going to see a fairly - I won't say rapid improvement, but as we go into the sales season this year, I think you're going to see some - an uptick and a reclaiming of a lot of our shelf space. Our core brands are doing great in terms of Virgil's, in terms of Reed's, where we've had a decline. It's basically in the Kombucha, which requires a re-launch. It's a platform we should be focused on. I think the biggest thing that we need to do before we really turn on the spigot is to get our margins in line with pricing and with cost of goods. We're selling a lot of product, but the margins are inhibiting. And we're not producing the cash flow that we should be. So the first thing we're going to do is basically get cost down, take pricing where we think we can and apply those. It will take three to six months for those pricings to reach us to retail and for us to realize the benefit. So I would say that throughout the course of this year you'll see an uptick. I'm exciting about it and we're already starting to see some life in the brand.

But when it comes to cost saves, you've done - Reed's has taken out a fair amount of cost over the last year-and-a-half. And so you still think there is a lot more to do, I mean, significant…?

Yes, just in shipping, just in shipping. We've been shipping product all around the country. And just improving, putting production where our business is will save a ton of money with that. It's significant and that hasn't occurred yet.

Okay. But would you take - so you're going to be saving a lot of money. How much needs to be reinvested on the sales side, all of it?

I think that's a fluid number.

Okay.

I think we want to upgrade the sales force or expand it. We are competing with major sales forces out there that are in there, chipping away at our space. We need to get our distributors focused and excited about the product with the improved margins for us that their margins will improve as well. And I think you will see a lot more focus and attention to the brand. In addition to that, I just mentioned two channels of trade: the up and down the street channel, which we have no involvement in; and the on-premise liquor store channel, which frankly, our competition, they made their way into the marketplace through that channel. And Reed's got its start in the natural channel. And we are yet to really take advantage or exploit this explosion in mixed beverages for ginger products. And we are already working on that. We tested 7-Eleven and we've already opened up a couple of new liquor distributors. So that's - we are going to get some increased volume from there. But that volume needs to be profitable, and I think that's our first priority to make sure that that happens.

Okay. And then, when you look - any updates from - and maybe where on the priorities does fountain beverage, where does that fall; and any update on how the testing has gone?

Dan, you want to talk to that?

Yes, we have, Mitch, we have put out the fountain in the marketplace. And when I said we improved the technical viability of it, the customers need to develop what is their marketing strategy around those new offerings. While they do that we are continuing to look at not only the products we develop for them, but how do you roll that out further into the marketplace. And that's where I talked about the 12 calories per 12 ounce offerings. To what John talked about earlier, we need to go to the marketplace with that, with the right set of financials, so that we can appropriately execute in the marketplace with solid marketing dollars behind that. We are - with the latest fund raising, we believe we are in the place to do that.

Yeah, let me just comment on the fountain, a very complicated business, a different business for us. Not in our mainstream right now. We think there is a lot of opportunity there based on the whole issue with sugar, with the mainstream beverage companies. We are working on that. Again, you need resources in order to do it right. And the last thing you want to do is do it wrong. So we are going to take our time and energy to make sure that that's done in a way that's productive and works. And we got to test that - beta test that is scalable and that we can rollout. The new products introduction that I think is important for us is reduced calorie, all natural, sweetened systems that frankly Chris has perfected. Best I've seen in my time in this business, and that's a focus that we are going to accelerate, because I think that's where the opportunity is in this as the market begins to - or has created for sugared beverages. And even non-nutritive sweeteners like aspartame and sucralose.

And when does low calorie, when should we begin to see that?

I think we're six months off from that.

Okay.

Because we really want to do that thing right from a packaging standpoint, a positioning standpoint, and make sure the flavor system can in fact be manufactured and then introduce it. We have a plan to do that in a way that will work near-term - mid-term and long-term. Again, we don't want to hurry something that is not going to - that we are not going to do right.

Okay. And then, I guess, just last question focusing more on the near-term here. Dan, if I did the math right, was revenue down 25% in the first - in the fourth quarter?

Yes, 26.2% to be exact.

26%, okay. And so I mean that's a big drop. I mean, that's like - how do you explain that?

In the - well, we matched up October to October. October 2015 as you know is our record month for the company as we came out of the 2015 supply chain interruption. So we went up and we know going into the fourth quarter we had a headwind.

Okay.

The unexpected headwind was in the Virgil's brand. We've been working on it. And that, we believe is reflective, as I kind of highlighted somewhat, is that they consumer preference to it. So we took large hits into the Virgil's brand itself. We believe we are repositioning as John says to come out, and continue back into its growth into 2017. We are optimistic we'll be there in 2017. But as I indicated a little bit of the outlook, into 2017 there is headwind. Our Reed's brands continues to maintain and hold their place.

I didn't quite understand that on Virgil's.

Virgil's?

Yes, let me just ask a question, did you asked quarter-to-quarter, first quarter versus last quarter last year?

No, fourth quarter to fourth quarter.

Yes, was there any private label impact in that, Dan?

Yes, there is private label. There is private label in volume, Kombucha in price, but Virgil's that had both of those elements. Virgil's was the biggest headwind in the fourth quarter.

And it was a competitive issue?

I think it was a consumer issue. I think it's really the net effect of the sugary flavors. It's down across everyone.

Okay.

But Virgil's has come back in the first quarter this year, both Virgil's and Reed's ginger products have been consistent and coming back. Where we have any issues are Kombucha and private label. And we don't - bottom line, we don't want to be in the private label business. That doesn't help our brand building unless it makes sense. It's all…

Yes. And then I guess this - okay, thanks, very helpful color. And then, just lastly so is that - in terms of your first quarter guidance that's what - it's sort of Virgil's issue in the first quarter, because that's still a pretty meaningful decline in Q1 on a revenue basis?

No. The first quarter - as I said, we maintain ourselves with Virgil's and with Reed's where the big issue is, is the Kombucha…

Okay.

…and private label. We lost the big private label account. So that doesn't have brand impact.

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

[Operator Instructions] And our next question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

Thanks. Yes, just a follow-up on one of those points and then I have a couple of other questions. So the private label, the large private label contract you lost, when did you lose that? Did that impact both the fourth quarter and the first quarter or just the first quarter?

The private label is led by two major manufactures. And both of them had slightly different offerings, one had Kombucha and the other have their own soda. We continue to work with the soda, private label one. And while they also, like ourselves, had tremendous headwinds in the fourth quarter and a little bit into the first quarter of this year. They seem to be recovering in their soda offerings. The private label Kombucha is gone to yet another manufacturer, so that business is dead and we have a headwind to push on that. But it will dissipate and be pretty much eliminated in year-over-year comparisons by the third quarter.

Okay. I guess a question somewhat discussed, but some of that business you may not care about, losing too much, because it might be non-brand building and low margin on the private label side, but it's being stabilized. What do you think your quarterly or annual revenue run rate should be as we move out of the first quarter?

The first quarter is always our toughest quarter. It's just like anybody in the beverage world. We should - and we have expectations of approaching last year's numbers, if not, exceeding them. And that's, Anthony, there is a lot of forecasting into that. We believe that the new focus on sales and marketing has the potential to really accelerate that area. But at a minimum, the pricing for our existing sales with the continued reduction in price improvement on the COGS side, we believe we'll generate the margins that we've talked about, approaching 30% for the year along with the stable sales base, if it does not grow will turn as back to the profitability this year at the latest. Now, the question really gets to be how much can we grow on top of that. And I'm excited with the new team coming on board that we will be able to grow and potentially get back to the $50 million gross sales in the future sometime early as next year possibly.

Okay. So you expect to be profitable for the year in 2017, possibly getting up to $50 million in sales starting in 2018. And then the gross margin getting up to 30% is that by the end of the year, so exiting 2017 at approximately 30% gross margin?

Yes, exiting the year, but not for the year at 30%, but exiting the year at 30%. We have very significant cost improvement plans that are in the final stages of being implemented that will drive the COGS side. And as John highlighted in the areas, where the appropriate pricing opportunities are, we are going to exploit those.

Okay. And then lastly on the - well, I got a couple of other questions. But on the facility upgrade, is there just - is that almost done or is there just a little bit more left and when should that be complete?

Well, here is what I'll tell you, we made significant investment in the plant infrastructure. And that infrastructure improvement was really driven around making sure that we have great quality in the products that we produce here. And also, we are continuing to vet out some of the co-manufacturing to make sure that we get it close to our customer base as possible. And that's something that our COO, Mark Beaton is working on. This is Stefan by the way. And he continues to look at the different co-manufactures that are present out there to make sure that as we start looking at where our volume is, then we can get it close as possible to that customer. So the plant is running well right now. He's delivering what we need to meet our product demand for our customers. And we continue to revisit every single opportunity that we have. But for right now, he has what he needs to get the job done.

Okay, Stefan. So that's helpful. And just if you could clarify the fountain soda opportunity, so originally that opportunity with a large fast casual was for your standard offerings. And I understand the move towards reduced calorie and all natural reduced calorie offering. Is that particular fast casual that's testing your product, requiring that the reduced calorie be part of that offering before moving forward or potentially moving forward for a large national rollout or is that separate from their decision going forward?

Anthony, I can answer that. This is Dan. The fast casual along with the other fountain opportunities we have said are all looking for reduced calories. So they have looked at a reduced calorie offering and it is part of our presentation. That's already done.

Okay. So when the comment was made that it's six months away, is it six months away from perfecting that drink and being able to producing in a large enough quantity to satisfy this large fast casual or just…?

No, let me clarify that. We are done. We've proven the technical capability. It is more back to our customers and potential customers to looking at their operation and seeing how it folds into their servings and their menu offerings.

Okay…

It's not an easy switch for them.

Okay. So it's more on the customer side.

So we are working with them to help them there.

Got it. So it's on the customer side. But Reed's is ready with a reduced calorie all natural beverage that's ready to go as soon as the customer is ready to move forward?

Yes. I believe if we - if they cut us a purchase order, we would be delivering in very, very short periods of time.

Okay, great.

The technical part is done.

Okay. All right. Thanks, guys.

And our next question comes from Bill Smith with William Smith & Company. Please proceed with your question.

Hi, thank you. Could you talk maybe a little bit about your new investors, the Raptor/Harbor Reeds fund? And is it strictly a financial investment to this group or would there be some type of a strategic component as well?

Hey, Bill. This is Stefan. But I think John is the best one to answer that question.

Yes, happy to answer the question. I think they are not a strategic player per se, but I think their investment is strategic, meaning that it is long-term. And I think they have had - and I worked with this group before on other investments. I know the people. I know their capacity. And I know their interest in consumer products. And they're very excited about Reed's and the potential for Reed's. And they will be there when we need them, and it's just not a financial place per se.

Okay. And, John, did you make the introduction to them since you had experience with them in the past? Is that how Reed's - they came to Reed's?

Yes, I do.

Okay. Thank you.

And our next question comes from the line of Gary Greenberg [ph], and he is a private investor. Please proceed with your question.

Yes, thank you. Yes, I also had some questions on this new investment. What are the details? I mean, you say they are going to - $3.4 million I think you said. Do they get stock or what is the agreement with them?

Hi, this is Dan. Thank you for the question. We released all the press earnings and there is an 8-K that really goes into the detail of it. But basically, it is a debt financing with a convertible note. So at the option of the holders of the note they can covert at a set price. But it is quite frankly a debt infusion for the company, where it's non-cash, so cash is not impacted by the direction of the cash coming into the company, which will free up our opportunities to invest. We have a little bit of working capital use upfront, but the majority of it goes towards investment in sales and marketing.

Okay. I just want to make some suggestions as a long-term shareholder. I've been investing 10 years I think since the beginning when Chris first went public. And I think one of the problems the company has had is keeping the investment community updated, and timely reports like you haven't reported since last October, and here it is already at the end of April, the first quarter. You're already into the second quarter. So I think it will be - for the investment community and not only individual investors, but to make more timely reports and to keep the investment community more updated on what you're doing, because it's continuously been going on for years. I know you just started, but we've been here about this soda getting in restaurants, for I think three, four years. And it's supposed to be Virgil, now it's not going to Virgil, it's going to be another type of soda. So I wish you good luck and - but I hope you do keep us more informed than there has been in the past.

Hey, Gary. This is Stefan Freeman. What I will tell you, and I'll give you my personal pledge is that we will make sure that we're transparent and we keep everyone informed as to what this company is doing in the right amount of time, so as to you can manage your portfolio.

I appreciate that. Thank you. Thank you for answering my questions.

You're welcome.

And Mr. Miles, I will now turn the call back over to you.

All right. And thank you very much, Cathy, and all the investing community and friends of Reed's. I want to thank you all for listening into our 2016 earnings release. We'll be getting together very shortly within the next couple of weeks to talk about the first quarter. We've given you a little bit of a preview of it. We look forward to having that at the time to discuss with you the opportunities, and further how we done and responded to you with all the changes that we announced today. We'll have a little more clarity on that. I look forward to talking to you in two weeks. Thank you very much and talk to you then. Good day.

Thank you, ladies and gentlemen. That does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.