Reed’s (REED) Conference Call.

We anticipate, by the coming weeks, some announcements regarding the details of these initiatives. We believe that these major initiatives will provide needed capital to complete the transition from a manufacturing entity to a brand-focused sales organization.

In the prior call — in the prior quarter call, we announced the new sales focus. Here are the vary initial results. Since 19 — since 2016, the company has had sales and production of 111 separate SKUs. We will now focus on 2 brands: Reed’s and Virgil’s, with 28 SKUs. We define these as our core. Our third quarter 2017 results reflect the first price increase in 7 years, which compress the volume that led to core product increase in gross revenue as measured by 12-ounce cases of SKUs by $0.43 in the quarter just completed.

Our total portfolio volume, the rate of decline slowed to 12.7% in the quarter from a decrease of 16% in the year before. Our total gross revenue rate of decline slowed to 10.8% in the third quarter over the same quarter in the prior year as compared to 13.8% in the 9 months ended September 30. Our core brands represent 80% of the volume and also increased the selling price of 43% — of $0.43 per case while the COGS decreased $0.11 per 12-ounce case.

Total discounts as a percentage of revenue increased 0.9% versus the same quarter in the prior year and increased 2.2% versus year-to-date period in the prior year. It should be noted that discounts are not tracked by SKU but by customer, and therefore, are not reported on a core/non-core classification.

Cost of goods sold for all products declined in the quarter 12.3% while non-core products cost of goods sold declined 52% versus the same quarter in the prior year. Year-to-date cost of goods sold for products declined, in the third quarter, 14.8%. And non-core products cost of goods sold declined 54%. Cost of goods sold for core products declined 5.4% in the third quarter and 7% to date over the same period in the prior year.

Once again, it should be noted that idle plant is not calculated by SKU and is therefore not reported on a core/non-core classification. Net margin declined 4.4% and 4.9% over the same quarter and year-to-date periods versus the prior year, which was driven primarily by idle plant charges.

Overall expenses during the third quarter increased 88% due to the impairment charge in the quarter. Delivery expenses were up 24% versus the same year prior period, which were due to a higher number of transports from East to West Coast during the quarter.

General and administrative expenses are up 257%, which really reflects the $2 million impairment charge, higher filing fees for the increased warrants and stock and the timing of the shareholder meeting that, last year, was in the fourth quarter, and this year, is in the third quarter.

Sales expenses decreased 9.8% and 19.5% over the same periods in the premier — prior year, primarily driven by lower employee cost and third-party broker fees.

Interest and warrant liability expenses grew 347% over the same time period in the prior year, reflecting the change in fair value of warrant liabilities. And finally, it should be noted here, that essentially all warrant derivative liabilities have been extinguished, and therefore, fluctuation in our financials from activity on these warrant equities should be minimal moving forward.

Therefore, the operating loss increased 600% in the third quarter and 168% year-to-date, reflecting the impairments and the warrant-related cost. We believe that focusing on the core brands and eliminating the risks associated with our own productions capabilities will lead the company to faster sales growth and better margins. We look forward to updating you on our progress as the situation is evaluated by third-party experts.

I will now turn you over to Val Stalowir, our Chief Executive Officer.

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Valentin M. Stalowir, Reed’s, Inc. – CEO & Director [3]

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Hi. Thanks, Dan. I’d like to report that management continues to make progress to improve the company’s overall performance. And some of the initiatives underway have begun to deliver some positive impact on the business. The current priority really is very clear, it’s to significantly improve our current net and gross margins and to reaccelerate growth on the core brands.

To that end, as Don — as Dan pointed out, we’ve reduced the company’s SKUs down to 28 versus 4x that, similar period prior year, so we can really focus on our capital and our sales resources on getting that shelf placement and focusing volume growth on those core items. This renewed focus on Reed’s and Virgil’s brands has not only slowed the core sales declines we saw earlier in the year but we actually saw volume growth year-on-year for the core brands in July, September. And at same trend continued in October.

The quarter would have been up if we didn’t have a price increase that hit us in August. And it was really a necessary price increase. The company has not taken a price increase in over 7 years while there were significant increases in input cost. So — and what we feel good about is that, given the volume increases in September, October, we feel that the market has fully absorbed this needed price increase to improve our margins. We’ll continue looking at the availability to continue taking more pricing as we move forward into next year and the year after to narrow the gap on the cost of goods increases that we’ve experienced earlier in the years.

We have a number of initiatives underway that will continue to drive material improvements in our gross margins. That’s the big story here. We need to improve margins to improve profitability, and thus, to reinvest in the brand development and accelerated growth programs that we need to build large, successful brands.

One of the major initiatives we’re about to conclude and announce is a company shift from broker-purchased glass supply, which comprises the single-largest input expense to our cost of goods, to a new and direct glass supply contract with a leading glass manufacturer, which we believe will drive between 4 and 6 gross margin points of improvement. Gross margin will further be improved by taking advantage of the newly negotiated contract with third-party logistics, which we believe will drive also between 4 and 6 gross margin points of improvement. The signing and the details of both of these new contracts will be announced shortly.

And that’s the general theme for this call. There’s a lot of work the team has put in, and now we’re about to be concluding a number of relationships and contracts that will improve the performance of the company, which we’ll be announcing over the coming few weeks.

The company continues to explore additional improvements to its net margin and explore to potentially reposition the company operationally to further outsource the manufacturing of its products. As such, the company’s in the process of evaluating the current production capabilities of the company, which may allow us to invest a greater portion of our capital into sales and marketing investments.

We feel there is significant upside in margin improvement related to our current production model and we’re currently negotiating and engaging with a professional services company with deep experience in the beverage space to lead the evaluation of the company’s strategies and options and recommend the best path forward. Again, this relationship and the details will be announced shortly.

We believe that the combination of all these efforts in terms of the glass, the improved logistics and looking at our overall self-production model will drive significant improvements to the company’s net margins, improve company’s profitability and will generate the additional funding needed to reinvest in building the brands and reaccelerating the brand growth.

Now moving from a focus of our operational improvements to our major initiatives that we believe will drive accelerated growth of the core brands. A major opportunity is distribution. We are in over 20 — somewhere between 20,000 and 25,000 retail doors and we know there are well over hundreds of thousands of doors we’re not currently in.

To that end, we’re currently negotiating 2 new broker relationships that will drive significant customer relationships and feet on the street to open new doors and also improve our in-store performance in the doors we’re currently in. Again, those 2 new broker partnerships will be announced shortly.

We’re also moving forward with penetrating our licensed accounts. This is an area that our competition has spent a lot of time and focus on, and that’s where we have to ramp up or focus in terms of on-premise. There are 40,000 liquor stores, 60,000 bars and hundreds of thousands of restaurants and that should be selling our Reed’s — our best-in-class Reed’s Ginger Beer and be part of — every Moscow mule that’s poured should be using a Reed’s product. So that is a — we’re currently negotiating with a number of new licensed accounts. And again, those relationships will be announced in the coming weeks and months.

In terms of new product launches, I’m happy to report that we’re on track to launch our new Virgil’s refreshed branding on all our glass packaging in January as well as our new 2.0 all-natural 0-sugar 0-calorie line of Virgil’s products. They come in 6 flavors: Root beer, Black Cherry, Cream, Cola, Orange and Lemon Lime.

We’ll also be in a position to launch the ZERO sugar line in February in 12-ounce cans. And that came directly from retail accounts. We’ve sampled a handful of large leading retail channel distributor — I mean, retailers. And so far, the reviews have been really strong. They can’t believe sort of the competitive set when they taste the competitive set versus ours. They’ve been very well received, and strong interest has been shown to bring those — this new product line in. And there was absolutely an interest in having it come in the can form.

The brand refresh on Reed’s line, along with a ZERO or lower-sugar Ginger Beer product is also on track to be available some time in Q2 of 2018. And we’ll also be launching a can version of our Reed’s line to target on-premise channel and certain convenience store placements.

Quick update on the natural fountain test. That test continues to do well. We just had a recent meeting with our fast casual partner. They’ve expressed an interest to expand — to increase the level of marketing support for the brand, that — given that the product has now performed and surpassed over all the product and consumer acceptance hurdles that they had set out for. So there’ll be more to report as this relationship continues to develop.

And so I’ve thrown a lot out there. In order to really complete this turnaround plan, to continue driving improvements in the company’s net margins and profitability and to really ensure we’re going to drive accelerated growth on the core brands, the company will require additional capital to successfully execute all of these improvements.

The company recently announced its plans to conduct a rights offering in order to release the required capital, to strengthen the balance sheet and support the company’s sales and marketing efforts. The specifics of the rights offering, along with the investment banking resources that will lead the process, will be announced this week.

So in summary, there’s a lot of progress to be announced in the coming weeks, and our plan is to keep everyone informed, to press-release the development and then actually set up and host business update calls so that we can field your questions as these developments occur.

And I think that’s it for now. And we’ll — happy to take some questions.

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Daniel V. Miles, Reed’s, Inc. – CFO & Principal Accounting Officer [4]

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So Scott, we’ll turn it back to you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Anthony Vendetti with Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division – Executive MD of Research & Senior Healthcare Analyst [2]

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So I just wanted to follow-up on the plans for the L.A. plant. Are you planning on closing that and going to — and go to the — just a co-packer model? Or — and if so, what’s the timing of that?

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Valentin M. Stalowir, Reed’s, Inc. – CEO & Director [3]

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So we’ve been really focused on improving our margins. And one of the driving factors of depressing our gross margin is our significant idle plant cost. So at this point, we have internally developed some improvement options, but we’re also about to engage a professional services company that has done this for decades, knows the beverage space. And we’re going to bring them in to help us evaluate what is going to be the best use of this, all of the operational assets we’ve invested here: The plant, the new equipment that we purchased to put into the plant as well as some of our non-core businesses. So too early to tell exactly what the future is. I think obviously, the best use would be for a continuation of production here, potentially as a co-packing relationship for us. But at this point, I think it’s just too early to say where, what the future is until we’ve done a thorough analysis with this expert group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division – Executive MD of Research & Senior Healthcare Analyst [4]

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Sure, that’s fair. And then just a little more detail on the $2 million impairment charge. What does that entail?

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Valentin M. Stalowir, Reed’s, Inc. – CEO & Director [5]

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Sure.

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Daniel V. Miles, Reed’s, Inc. – CFO & Principal Accounting Officer [6]

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Anthony, the $2 million charge was, as we go through the process of looking at our assets and what is the core and what wasn’t, we were concerned that expanding the plant at this time would probably be not be in the best interest, it might not be in the long-term vision. Therefore, when we made that decision, we knew we had to look at the value of the assets that had not yet been installed. So we did our best estimate on to what would be the resale value of brand-new equipment. And we took a $2 million out of the — about 40% impairment charge against that equipment. Will we use that equipment in the future? How we will use it? Will somebody else use it? We don’t know. But we did know that at the time we were making the decisions on how we move forward, expanding the plant to triple the speed here was probably a not a good allocation of future capital.

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Valentin M. Stalowir, Reed’s, Inc. – CEO & Director [7]

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Yes. I mean, when we looked at this, if we couldn’t say we were doing it for sure, which right now we’re not sure. We want to go through the process of seeing what the best uses will be, what the future is going to be based on all of the options that potentially exist to us. If we couldn’t answer yes, we’re definitely installing, then we took the conservative position of, well, then we can’t say we are, and thus, we need to recognize an impairment. At the end of the day, there could be a scenario where that equipment is purchased and is not impaired and is installed here or elsewhere. But we want to be conservative from that standpoint and take the impairment now.

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Anthony V. Vendetti, Maxim Group LLC, Research Division – Executive MD of Research & Senior Healthcare Analyst [8]

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Okay, understood. And then just lastly, is there going to be accrued interest and amortization about $275,000 every quarter? Should we model that?

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Daniel V. Miles, Reed’s, Inc. – CFO & Principal Accounting Officer [9]

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Yes. Yes, there is. The interest would be unpaid relative to the note. It is in the sources of uses on the S-1 to retire most of the other debt and replace it with more market-based rates.

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Operator [10]

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(Operator Instructions) Our next question is from Gerry Khermouch with Beverage Business Insights.

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Gerry Khermouch, [11]

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And I was wondering, when you talk about getting things down to very compact 28 SKUs, does that mean you have formally discontinued any brands, whether they be Culture Club Kombucha or China Cola? Or are they just kind of on hold for now?

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Valentin M. Stalowir, Reed’s, Inc. – CEO & Director [12]

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Yes. Absolutely. We’re not putting any focus our efforts on those brands at this point. We’re selling out whatever inventory is left and we don’t plan on producing any additional inventory of those brands.

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Operator [13]

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(Operator Instructions)

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Daniel V. Miles, Reed’s, Inc. – CFO & Principal Accounting Officer [14]

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Scott, I think that’s it for us.

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Operator [15]

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Okay, very good. There’s no further questions. I’ll now turn it back to you for closing remarks.

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Daniel V. Miles, Reed’s, Inc. – CFO & Principal Accounting Officer [16]

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Thank you very much, investors and interested parties, for listening to our quarterly announcement. As Val reiterated here, the future is going to have a lot of very, very interesting and helpful information for you in the next few weeks. We are completing up some very, very significant and positive changes for the company. And we believe that we will return to the top of the craft soda business in a very, very short time, both from a financial perspective and a continued volume beverage. Thank you again very much. Look forward to talking to you very soon.

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Operator [17]

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