NewAge, Inc.
Q3 2017 Earnings Call Transcript

Published: 14 Nov 2017

[Operator:]

Good morning. Welcome to the New Age Beverages’ Third Quarter 2017 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chuck Ence. Please go ahead.

[Chuck Ence:]

Thanks, Brian. Welcome everyone to our third quarter results conference call. I would like to remind everyone that this conference call may contain certain forward-looking statements reflecting management’s current expectations regarding future results of operations, economic performance, financial condition and achievements of the company. Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties. I would like to get right into our results for the third quarter and for the nine months ending September 30, 2017. The transcript of which will be available on the company's website, within the Investor Section at www.newagebev.us. For the third quarter the company delivered consolidated gross revenue of $16.8 million versus $15.8 in the prior year. Subtracting discounts and billbacks, at the net revenue level, the company achieved $15.1 million versus $13.5 million in the prior year, and increase of 12%. Net Sales as a percent of gross, was significantly better than prior year, and we expect net sales to be around 90% of gross sales for the foreseeable future. For the nine months ending September, consolidated gross revenue was $44.3 million versus $16.3 million in the prior year and consolidated net sales were $40.9 million versus $14.8 million, increases over prior year of over 1,700%. Within our operating units, The DSD Division had another outstanding quarter delivering 731,000 cases. Through the first nine months of the year, this Division has had record performance in eight of those nine months, and is up 6% organically versus a very strong prior year. In addition to being a test bed for all New Age’s internal innovative products and a source of visibility for anything new or new emerging trends in beverages, this Division is a positive cash generator as a standalone entity to fund New Age’s growth and diversification. The International Division also contributed well in the quarter and is quietly becoming a more important part of the company. Expansions of core brands in major grocery and convenience retailers in Canada, and Marley brand expansions in Latin America both significantly contributed. Búcha for example was up 108% in Canada, and outside of Canada, XingTea was up 115%, more than double in the third quarter versus prior year. The US Division is also now starting to pick up steam and added more than 15,000 points of sale in the latter part of the quarter, and is in the process of a number of new brand roll-outs with major -- mostly new customers that are envisioned to have a material impact on the business. Under the leadership of Mike Cunningham, the new Senior Vice President of Sales, the core brands, have now stabilized and established a new basis for growth with profitable customer relationships committed to building these brands together with New Age. In gross profit, the firm delivered $4.8 million for the third quarter ended September versus $3.6 million in the same period in the prior year, or up 33%. This equates, in gross margin percent to 31.9% of net sales versus 28.4% in the prior quarter and versus 26.7% in the prior year. The 3.5 points of continued gross margin improvement is a result of concerted efforts on mix enhancement and overall cost of goods sold reduction. Importantly, however, the increase in gross margin is before any of the impact of the shift in Coco-Libre sourcing, which will impact primarily starting in Q1 of 2018 and represents a more than 30% improvement in cost of goods sold on this important component of the New Age business. Gross profit as a percent of net revenues on a year-to-date basis was 28.8% versus 26.9% for the nine months ended September 2016, reflective of the same impacts and focus as previously mentioned. Total operating expenses for the third quarter were $4.4 million or 28.9% of net sales versus $2.7 million or 19.7% in the same quarter last year. The increase of $1.7 million versus prior year resulted from investments in people and systems on the commercial and operations sides of the business, and a significant increase in sales and marketing expenditure. Those investments are already delivering with more than 15,000 new points of distribution achieved in the latter part of Q3, and another more than 15,000 already achieved in the month of October. While the expenditure curve has impacted us in Q3, the revenue curve does not impact the income statement until Q4, but we do not manage the business on a quarter-to-quarter basis, and frankly, never will. Year-to-date OpEx expenditures were $10.9 million or 26.6% versus $5.1 million or 34.5% for the nine months ended September 2016, a 7.9 point improvement versus prior year. As a result of the organization moves and sales and marketing investments, net loss for the quarter was $479.8 thousand or minus $0.02 per share versus a small gain in the three months of the prior year. Net income for year-to-date is $1.31 million, a reversal versus a loss of $2.1 million for the nine months ended September 2016. EBITDA for the third quarter was minus $186,000 and adjusted EBITDA was minus $131,000 when taking out the one-time non-recurring expenses associated with acquisitions and acquisition integration. Year-to-date EBITDA was $2.2 million and adjusted EBITDA reached $2.7 million. There have been a number of other one-time expenses associated with the acquisitions, transitions, integrations, legal fees and other impacts associated with the uplist onto the NASDAQ and the acquisitions and absorptions of Coco-Libre, Marley and Premier Micronutrient Corporation throughout the year that are all non-recurring, we have just absorbed these in overall OpEx versus breaking them out separately. Shifting to the balance sheet, we now have current assets of $18.3 million versus liabilities of $7.0 million, not including the $1.2 million Marley contingent liability that has no corresponding current assets entry. From a total assets standpoint, we now have $69.2 million in assets versus total liabilities of $13.2 million, again excluding the Marley contingent liability, leading to a total of $55 million of shareholders’ equity. We have not yet completed the valuations of the Coco-Libre acquisition and intangibles, the Marley acquisition and intangibles, and importantly, the PMC acquisition with its 13 patents and related studies and trials. When completed we expect this to have a significant positive impact on the total assets of New Age. From the cash flow statement, we generated positive net income for the first nine months of $1.3 million. Our working capital ratio of 2.7 when dividing current assets of $18.3 million by our current liabilities of $6.9 is respectable and the overall adjusted EBITDA of positive $1.7 million year-to-date still makes us the only public small-cap beverage company to show a profit of any sort. Yes, we unapologetically had a one-time gain earlier in the year from an asset sale, and we expect to continue to occasionally have these benefits to support the overall health of the Company. We are using our free cash, we think intelligently to increase our inventories consistent with increased demand, and investing in the infrastructure and organic growth activities including new brands coming on stream now to take the business to the next level. So, summarizing the most germane points of our financial results; number one, topline continues to grow up 12% for the quarter in net sales and up more than 1,700% year-to-date. Number two, gross margin is increasing rapidly and methodically, gross margin increased to 31.9% for the quarter and now -- and is now up 4 points in the past two quarters. Number three, investments of $1.5 million incremental in the quarter in operations, sales and marketing, to expand distribution, and support the larger scale business with more sophisticated and demanding customers. Number four, adjusted EBITDA of minus $131,000 for the quarter, reflective of the investments, but up $2.7 million year-to-date, the only public small-cap that is profitable. And number five, the balance sheet $69.2 million assets versus just $13.2 million of liabilities, with the working capital ratio of 2.7 of current assets over current liabilities. And with that, I would like to pass it over to Brent and the team to give you an update on performance versus our strategic initiatives.

[Brent Willis:]

Thanks, Chuck. My only additional commentary on our financial performance from what Chuck reviewed is that we are right about where I expected us to be at this point in our journey on our balance sheet, income, statement, and cash flow schedule. I am pleased with our cash flow and working capital leverage ratios, the de minimis debt, the super clean cap table, and the growth in topline and improvement in gross margin. Would we like more scale, of course. Would we like to be making more money, of course. But we do not manage the business on a quarter-to-quarter basis, as Chuck mentioned, not now and never will, and we will continue to make those decisions or investments to build on our platform and position the company to deliver superior return for shareholders. I joined the company almost 18 months ago, when it was a small little craft brewery and Kombucha Company doing $2 million a year in revenue and losing $2 million a year in income. In those five quarters since I started and we began our journey, we have made real, substantive progress. First, we acquired Xing. Second, we integrated Xing and Búcha, and then in the next quarter we used that base to uplist onto the NASDAQ and establish the right financial platform for the company. Then in the Q2 2017, we acquired three more companies to give us the brands and the penetration into the segments in which we wanted to compete. And in this last quarter we fully integrated those acquisitions and prepared for the next wave of growth, building on those acquired platforms. That’s it. We have been at it five quarters and versus where we envisioned we would be when we first developed our roadmap, we are right where we predicted and where we said we’d be, actually ahead of pace. Our next set of milestones mostly centered on organic growth are tough, but it’s not like the uplist onto the NASDAQ, the acquisitions, the integrations, the building of our financial platform, our business platform, creation of our systems and our processes or the building of our supply chain, R&D, our sales force, our retail and distribution relationships, and our organization and team, was that easy, each one of them individually was real, real work. 12 months ago there were four people in sale. Now, there is a national sales force that I would put up against any small cap beverage company. 12 months ago there was not one person in marketing, not one, for CPG company. Now there is a full team, across brand management, digital, social, creative and design, experiential and trade marketing, to forming the foundation of becoming a consumer led brand driven company. A year ago there's never been a single inventory ABC analysis ever done, ever, or benchmarking of product input costs, shipping costs or any costs for that matter. 12 months ago there was no HR, no performance management system and no people development or established culture, and 12 months ago the company had more than $20 million of debt, no new products in the pipeline, one channel of distribution, essentially one brand, that had not been invested in than three years. Now it is a different day. But in truth, what I see us is having accomplished after that work over the past 15 or so months, is the creation of a solid platform, a new point of demarcation. So what are we going to do with that or on that platform? Well, we have already provided that answer and it is written on our roadmap that we have published when we began our plan. In that roadmap, this phase of our trajectory included doubling down with existing customers, expanding the new customers, strengthening sales capability, implementing pervasive marketing, beginning international expansion and accelerating innovation. And we are still executing against two additional components of that roadmap overhauling our brands and penetrating new channels. Since acquiring and integrating the companies to build the platform of brands, we have been working diligently to first re-architect those brands, and second, launch innovative offerings on those strengthen platforms. It’s very easy to say but very tricky to do, right? But so far, I would say so good with both the recreation of Marley, a global brand that was highly under leveraged. Búcha, that was not distinct enough -- distinctive enough in its functional points of difference or Coco-Libre also, that was also just not differentiated enough. You have to get the brand propositions right first such as our competitive and resonate with consumers and then you have to get them off the shelves and then you have to drive consumer takeaway to pull them of the shelf. In the beverage industry across all companies all sectors from the $50 billion companies to the $500,000 companies, there are really only two metrics that matter. Some of the more sophisticated ones may try and get creative with terms like revenue management or bottler system management or other that basically this business comes down to number one, points of distribution and the second metric is sales per point of distribution. Honestly, everything else is a distraction. To share what is transpiring in sales with New Age, I'd like to ask Terry Sperstad, the SVP of Key Accounts and a former Senior Executive with Coca-Cola and Red Bull to talk about some of the impacts. Terry?

[Terry Sperstad:]

Thank you, Brent. For New Age and it’s previously mentioned by Chuck, in fact that we added more than 15,000 points of sale in the later part of Q3, and already in Q4 added another 15,000 is a very big deal. Historically, New Age was only strong in the West, and no consumer, retailer or distributor, east of Colorado had ever really even heard of XingTea for example. We defined key account expansion as one of the major pillars of growth for the group. We are starting to see the results now materialize. Excuse me, mind you, many of the shelf set decisions for the major retailers are made in August. What this means is that we have to hustle for all this year, because the decisions for brands on shelf were made in August of 2016, we essentially just getting started. Excuse me, so we have had to definitely street fight this year because the timing for retail shifts are excruciatingly slow. That being said, we have indeed this year already penetrated more than 10 of the top 100 global retailers including 7 Eleven, Loblaw’s, Sobeys, Circle K, HEB, Ahold, Sprouts, BJ’s, Whole Foods, Spartan Nash, Jumbo and others, and we still have wide open runway in front of us. In the past 90 days, we have added more 30,000 points of distribution for our brands, impacts has set us up well for Q4 and 2018 and are in the word material. We still have a number of major opportunities that we are working on closing, but the reality is, there is not one national retailer that overtook position with New Age historically and not one that ever really even heard of us, aside from a small regional niche. And frankly, not important or strategic business from them and the few markets in the West, that has all fundamentally changed, now there is not a single distributor, retailer or competitor for that matter, that doesn't know who know it is, and frankly, doesn’t see that we've created only, the only one stop shop of healthy functional beverages. Let me tell you, retailers and distributors are very risk at first these days and they did not want to work with small underfunded single new brand companies that can’t properly work with them and invest in their brands. That might have been New Age 12 months ago, but no more. That from the distribution side in traditional grocery and convenience. The recent partnership with Advantage Solutions and Daymon Worldwide are beginning to bear real fruit and we see significantly, significantly, excuse me, more to come from these relationships and expanding roster direct relationships, and a new focus for major DSD partners now that we are much more relevant with them. But that is just to start some of our activities in traditional retail channels. We are equally excited about e-commerce, channels penetration and the new partnerships to expand the food service, workplaces and other alternative channels. The new preferred brand partnerships with Dot Foods, $7 billion company, with tremendous reach to food service, universities, hospitals and other channels and USG that has more 1 million vending outlets and services more than 75,000 workplace locations every day are in a word material. I could go on and if Brent would let me, I would, and suffice to say, we are starting to hit on all cylinders in sales and distribution, we still have a massive amount of opportunity in front of us and are focused on executing and closing distribution opportunities, what now is a portfolio of brands that every customer in the country now wants and every competitor wish they have.

[Brent Willis:]

Thanks, Terry. The next metrics in the beverage industry that matters is sales per point of distribution. Two of our newest offerings are shelf-stable Búcha Live Kombúcha and Marley Mate that is just rolling out in distribution now are exceeding expectations. We made our Kombúcha shelf-stable with nine month to shelf life so we can penetrate convenience and gain more multi-location off-shelf placement in traditional grocery and that is really materializing and turned out to be a very good decision for the company. For example, in our major -- our first major convenience outlet penetration, we're doing volume per outlet of more than 20 units per store per week. The threshold requirement for example is 2. In our newest launch Marley Mate, we are also exceeding expectations. Although, authorized the difference between authorization and distribution and placement on shelf are two different things. It takes time and focus and all the efforts of Terry and Mike Cunningham and their teams, but even though we are still in the initial stages of this brand development and rollout. We are outperforming the major competitor in this segment by more than 60%. In fact that makes our retail partners very happy. Marley Mate is now also beginning to rollout through McLane’s distribution, a $48 billion company. In this rollout coupled with our merchandising at the point-of-sale and our consumer marketing pull-through activities will continue to drive this brand to be a real winner in the market. Even though lot has been made of our communication that we expected and intended to be on an $80 million run rate for the year, we believe some of this has been misconstrued or misunderstood. Here is the math, however, take our reported revenue for the year, including the $16.8 million for Q3 and then we add in the run rate components, number one, the full year impact on a pro forma basis of the acquired companies that came in at different times in the year, and number two, these impacts that we've been talking about in Q4 with the new products in distribution when you add those things together we get to our target, given Q4 is seasonally 21% of our business that revenue extract -- extrapolated entering next year gets us to a target or our incremental distribution that Terry just talked about and our broader portfolio in that distribution also gets us to our target that forms the basis of our business plan for 2018. We have a number of other upsides coming from our newest offerings Aspen Pure Probiotic, PediaAde or our Coco-Libre Sparkling that is rolling out the stores in the end of November. This product is fantastic, with 100% coconut water and natural foods, no added sugar and only 30 calories per serving. Marley Mate, the Búcha shelf-stable, the PediaAde, Aspen Pure Probiotic and the Coco-Libre Sparkling are just a few examples of innovation, but this vector is becoming a hallmark of the company with consumers, retailers and distributors. The brand, the innovation and the incremental distribution are all great, but as mentioned, the work we've done over the past 12 months on our systems, our business foundation, our supply chain and the team, are all underpin being able to execute against those growth initiatives. Driving organic focus and organic growth has been the focus for this call. But I would like to make one comment on our external growth pillar and acquisitions. Yes, we could have been well over $100 million in revenue right now and we added in some of the acquisitions that we took a hard look at. We would been – we would have been an accretive, absolutely. In shareholders best interest, we believe absolutely. We have to say no, even with accretion levels above 20%, which is fantastic. But we said no, because where the value of our equity is right now, we don't believe we have a currency and would have created dilution that we were not willing to accept. So until such time to where our stock is similarly valued to its peers, we don't see significant acquisitions on the horizon that we will be able to execute and as such see no reason to use or sell any equity to fund them, instead we are focusing on a plethora of organic growth opportunities and the initiatives mentioned and expect to fund the expansion of those brands out of existing working capital. We are focused today on the platform that we've built over the past five quarters, a platform that we believe has tremendous amount of potential and on which we are confident, we can continue to grow our business well and deliver superior return for shareholders. This is what New Age is all about, a platform of healthy functional brands, all in trend with consumers, with the execution capabilities to capture their full potential, building that platform and then leveraging it and growing it is the proposition and it doesn't fully materialize in five quarters, any expectation that it would is naïve or was naïve. What we have done so far is converted a vision, frankly, in a very short period of time to now visibility, with clarity of what exactly is needed to execute to achieve our objectives. We made important investments in the third quarter to build the business without which achievement of our longer term objectives might have become constrained. Our revenue was up more than 1500% year-to-date, our adjusted EBITDA year-to-date is $2.7 million and our gross margins are improving significantly. Our platform is getting stronger and our new brands and retail penetration across all channels provides tremendous upside for New Age going forward. And with that, I'd like to open it up to questions.

[Operator:]

[Operator Instructions] Our first question comes from David Bain with ROTH Capital. Please go ahead.

[David Bain:]

Great. Thanks. Thanks for all that detail. Appreciate it. I know you don't give quarterly guidance, but, Brent, backing into some of the detail you just gave, so despite weaker December seasonality, we should see close to 20% quarter-over-quarter topline growth, that I get that right?

[Brent Willis:]

I didn't really look at the quarter-to-quarter topline growth, David. I just looked at -- and frankly, the way we look at our numbers is just our number of accounts and then our number of doors and our sales per point of distribution. When you calculate that and you calculate the revenue, we get to a level for Q4 that is unlike any other Q4 that we've ever delivered, just because it takes time for these things to happen, it takes time to get the retail penetration and the new brand are just kind of rolling out now. The Q4 looks great for us. I don't -- and when you extrapolate that out that gets us to a really solid basis for our business plan for next year. So I didn’t really calculated what that represents versus prior year, but versus prior quarters, and honestly, versus any other Q4 history looks fantastic and October has already started out strong.

[David Bain:]

Okay. Great. And then, I understand the additional $1.7 million of cost for sales and marketing and distribution for this quarter, given all the new brands and everything, and that’s for the benefit beginning really this quarter. Are those expenses also going to drop in 4Q or does they stay and we get the revenue benefit beginning sort of today?

[Brent Willis:]

I would say, yes, some will reduce.

[David Bain:]

Some.

[Brent Willis:]

But we will – we will get the benefit on the revenue curve in Q4, and frankly, throughout all of 2018. So that's kind of how we are building the P&L. We will start to get some more efficiencies, because we made – wasn’t just sales and marketing investment, it was sales, marketing, people and some other capability investments that we made, some of which will continue. But on a go-forward basis, I think, for the foreseeable quarters OpEx at 25% of net sales, we just say that’s a better fair number, Chuck, 25%, 26% of net sales for the foreseeable future -- for the foreseeable quarters, will be a good benchmark on a higher revenue.

[Chuck Ence:]

I do agree. That’s a good benchmark.

[Brent Willis:]

Yes.

[David Bain:]

Okay. And then final one and I might have to hop back in the queue. But can we get an idea pro forma portfolio organic growth, understanding that growing that is a big reason for the 3Q investments that you just talked about or maybe a better question is, targeted organic growth for 4Q and trend so far in the quarter?

[Brent Willis:]

Again on the organic growth for Q4, we didn't really look at it that way and so I don't want to guess is to what the number is. It’s – we just look at the absolute and the revenue per -- that we are getting on a by account basis, on a by brand basis. The good news is, we now have that visibility on really almost a day to day basis that we've never had that, A, level of distribution and B, volume per point of distribution outlet visibility that we are now inculcating into our daily dashboards. We would still guide to 7% to 10% organic topline revenue growth for our business model and for 2018. But still honestly, David, with all of the moving part of the business of, all right, where are we with our core brand, where are we with our new brands within the core platforms, it’s too much of a moving target to give -- to draw any rational conclusions from that will help financial models or help investment models. I think the most that we will help is guiding to 7% to 10% topline organic revenue growth and that's a good – I would say, good starting point.

[David Bain:]

Okay. And I'm sorry, but just in sales distribution just to your point, I mean, that’s not going to dilute despite the large uptick in distribution points over time?

[Brent Willis:]

Honestly, we still have such upside runway in front of us that really just taking share and sourcing volume from already other big existing sources of volume out there as consumers’ transition away from less healthy or less better for you options. So as we expand distribution we start to see dilution or less volume per outlet. I really doubt it, because at least not for the next three years or four years before where at level of penetration where consumers can really choose the portfolio of our brands across all sorts of different channels and you might start to get some cannibalization there. We are at least three years, four years, maybe even 10 years away before we are at that point. We have all this, frankly, super high return on investment distribution growth in front of us and across all the investments that you can make. Distribution expansion is one of the highest ROI investments you can make across anything at your disposal. So, I think, we have got at least three year, four year, maybe even 10 years of growth before we start to see any cannibalization.

[David Bain:]

Okay. Great. Thank you.

[Operator:]

Next question comes from Rommel Dionisio with Aegis Capital. Please go ahead.

[Rommel Dionisio:]

Thanks very much. Let’s talk about some gross margins, I wonder if you could just provide little more granularity there on a couple of points you referenced in the 10-Q, specifically, I also get decrease sales and product mix, but when you talk about production efficiencies and processes, which like low overall manufacturing costs, as well as value engineering on some of the key brands and package. Could you just -- so walk me who that sort of means in Lehman terms on a product by product basis? Thanks.

[Brent Willis:]

Yeah. It’s a great question. And from a cost engineering of all of the product costs that we had in the company, I mean, it’s a lot of work and if a lot of work on the by SKU basis and a by brand basis and the first easy way to grow your gross margin or easier way to grow your gross margin as you launch new products or you add components into the portfolio that have a significantly higher gross margin. So that's the mix shift piece. And Marley started with about a 40% gross margin, Coco-Libre started with about a 40% gross margin. So as those two components become much more important part of our overall mix, it moves up the gross margin percentage by default and that's without any reengineering or value engineering of what you started with the XingTea. XingTea was more in the low 20s from the gross margin standpoint, primarily because historically we were not in microeconomic terms the price maker. We were a price taker and the big competitor in similar size can do that, set the price at retail at $0.99 and given we have a different product, it’s got no high-fructose corn syrup, that's actually get 10 times more teas. It’s got all sorts that is award-winning and no artificial flavors and is natural in terms of all of its ingredients, it’s the higher cost product to make and as a result, but because our price was fix, you stuck at that low 20% gross margin. So we have to do all sorts of work with retailers to move up the entry price point in the category, which we are doing with some of the major convenience retailers in the country. But then you have to look at what can you fundamentally change that you are no longer a price maker and you move into, sorry, no longer a price taker and you move into being a price taker or you're not at the mercy of whatever a price maker decides to do. So there's pricing activities that you need to do, packaging activities you need to do and that's in addition to working with all the manufacturers, harmonizing that, harmonizing the ingredients, leveraging your suppliers and those kinds of things. But if we go through all of the components to get to a total of 40% gross margin and I kind of give you the roadmap there from our current, let's say, 30% gross margin or 28.8% gross margin on a year-to-date basis, you get 4.1 points of improvement from mix, you get about 2.6 points of improvement from value engineering. From aligning our 10 different manufacturers across the country we get about 2.3 points and then from scale and purchasing leverage across harmonizing or purchasing of tea and sugar and citric acid and those kinds of things, you get about 1.7 points. So that’s the roadmap of how to get from 28% to 40%, which is in our sites, and as I said, we have kind of move the company from vision to visibility and that’s the visibility we have on a by brand, by SKU, by product basis across the different components that we have to get to get you an average of 40% gross margin.

[Rommel Dionisio:]

Okay. Great. That's very helpful. Thanks very much.

[Operator:]

Next question comes from John Harrod with Harrod & Associates. Please go ahead.

[John Harrod:]

Brent, given that the company is so young, really only five quarters old and so far from what I can see margin wise, no one in the industry has accomplished anywhere near what you guys have in such a short period of time. So what your opinion is behind the dramatic drop in the stock price over the past few months, especially since raising capital isn't even on the table for day-to-day operations?

[Brent Willis:]

It’s a good question, John, and I really don't want to answer, because, look, if I'm an investor in this company and I am and all management is tied to growth in the value of our equity. If I'm an investor I want management focused on driving the performance of the business, full stop. And even though it's easy to look at the stock on a second by second basis, on a day-to-day basis or week to week basis, a month to month basis or a quarter by quarter basis, I don't look at it, frankly, I look at the sales, I look at the sales per point of distribution. I look at the number of outlets and those are the metrics that we focused on and as an investor I think that's what we want management focused on driving the performance of the company and building this platform. You are right we are only five quarters old. We are a brand new in my view, young company that has executed well done what we said we are going to do and perform well from a very set of humble beginning. So accomplishing what we are intended to accomplish doesn’t happen in five quarters. But we have the platform and we have a very, very good company with a strong commercial leadership team, stronger brands that are getting stronger every day, R&D, innovation, supply chain, virtually every aspect of this company that wasn't residence in the company a year ago. So what we have as investors here is a tremendous platform that we can grow. That's what we own and that is what is going to tell all the day over the long-term in terms of value of our investment. It isn’t short-term fluctuations where the vulgarities or vagaries of what shorts might do in those kind of things even though it successor and we see it on a day-to-day basis. Our focus is on driving performance, driving operating performance and marshaling our resources to provide the best value for shareholders over the long-term by building an outstanding and differentiated company, in terms of one that is metric driven and performance-oriented and everything that it does. So, yes, we don't like looking at the stock price and the decline over the past six months. We don't believe it has anything to do with operations and what we've executed and delivered over the past six months and as a result all we are going to do is just keep our head down focus and perform, full stop.

[John Harrod:]

Thanks, Brent. Good luck.

[Operator:]

Next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

[Anthony Vendetti:]

Thanks very much. I just wanted to talk a little bit about the quarterly revenue, so Marley came on and was it timing, Brent, or what would you attribute a little bit lower revenue than I think we were expecting, was it timing of some distribution deals, some point of sales, what was it specifically? And I know the guide is 7% to 10% organic growth, was it a little bit light this quarter for any reason?

[Brent Willis:]

Great question, Anthony, as always. And look, we acquired Marley franchise at the time for 3 million shares, that at the time when we -- Japan run deal, we price that $1.50 a share and then they provided a $1 million of investment for us to drive the business. That's when we originally kind of took over the brand in November of 2016. That’s number one. Number two, the brand wasn't really that healthy and the packaging for me was all wrong, some of the Marley Mellow Mood product is fantastic from a product standpoint, but just was not connecting with consumers from a graphic standpoint, from a product formulation standpoint, from kind of anything, from an execution standpoint. So that’s number one, the brands were really that healthy. But why we do this? We did it for the financial reasons that we mentioned, but also because Marley overall has got $74 million Face – 75 million Facebook followers and is a high potential global brand. And so from that base we re-architect it. As you see what we've done with Marley Mate and we have already communicated what we are about to do with Marley Cold Brew really connects with retailers, really connects with consumers and we build on that franchise. And the existing pieces, the One Drop Coffee and the Mellow Mood are smaller and there are sort of holding their own and stabilize or they are holding their own now and they have stabilized and they are no longer declining versus prior year and actually in these past couple of months have actually grown slightly versus prior year, that it’s from a smaller base than they were last year. We walked away from some unprofitable customers and customers where we knew we wouldn’t be able to keep that shelf space. So now we have that base of that franchise. What I like it to be $8 million to $10 million, yes. Is it more $6 million to $8 million base, yes. And that's just the reality of what we bought. But we didn't buy it for it’s existing base, we bought it for its platform of what we could do with it globally on which we are demonstrating now with Marley Mate and Marley Cold Brew and potentially some other things. So that's question one of what you articulated. Did we expect more revenue growth in the quarter? That really -- it's still our highest revenue growth we've ever had as an enterprise. It is above Q2 and Q2 is typically a slight -- our biggest actual quarter and then slightly below that is Q3. We actually outperformed Q2 of last year, sorry, Q2 of this year. So we expected maybe a, I don't know, maybe a little bit more in this quarter. Had we maintain some of those unprofitable Marley customers or unprofitable Coco-Libre customers, we could had more, but there is just no sense in that, I would rather take the right base on these businesses and build from that platform. So as it relates to the 7% to 10% growth for next year kind of the last part of your question is, look, if we execute we can significantly blow that number away. Of course, our business plans are all geared towards blowing that number away, but on the core businesses we think we have a solid foundation now. We have a right base and on that base we are launching all of these new products that reconnect all these brands, whether it’s Marley, Coco-Libre, Xing or Búcha with consumer. So that’s really the model and it just happened on the quarter basis. Remind you, we bought these companies in Q2 and it takes time to integrate, supply chain, people, all the things which we did in Q3 and now in Q4 all the new products are launching. So as I mentioned, with that way we expected to be and we can’t do all these things overnight.

[Anthony Vendetti:]

Okay. And just – so just to follow-up, Brent, it sounds like you finished the rebranding, repackaging of Marley, you got rid of some of the accounts that were unprofitable in Marley, as well as Coco-Libre and that's why you're pretty optimistic about the fourth quarter and then 2018, correct?

[Brent Willis:]

Yes, sir. We said that.

[Anthony Vendetti:]

Okay. And then last, also you are launching PediaAde that looks like a big market opportunity. Can you talk a little bit about how that launch is going or how you expect that to rollout, timeframe for that and then anything on the surgical products?

[Brent Willis:]

I am going to ask Terry to talk about it, so we can hold them accountable to anything that he says to all the investors, so, Terry, but I am really excited about PediaAde and the Health Sciences stuff. I don't want to communicate anything on the Health Sciences stuff yet even though we have some powerful news to share, until it’s executed, until it’s in the major health provider, I don't want to say anything yet. So I want to see it there on the shelf and in the hospitals before we say anything, but on PediaAde we are really just rolling now. But let me pass it over to Terry and he can you a bit of insight of what all the retailers are saying and where we are.

[Terry Sperstad:]

Thank you. Yeah. First of all, it’s phenomenal product compared to the competition out there. There is no comparison. And as we like to say you probably wouldn’t give the competitive products even to your kids. So and that’s what we say – same way it has been received by the retailers out there. It’s already been presented to Targets, it’s already been presented to CVS, Walgreens, meetings at the end of this month and the feedback is very positive, people love the taste of product, they love the formula of the product and I see some great thing is coming out of all those major retailers that are really the right avenues for the brand any way. So they are going to start to see some activity in the convenience channels as well, but I think, it's really going to be big in the drug and mass channel. So we are pretty excited about where it’s going and there is no competition.

[Brent Willis:]

And timing wise, I think, it is – it will take time and many of the resellers are considering that expansion now, but it will be first quarter before we see it out, before we are fully making the product, frankly, and we see it out in broad scale retail before, we start to see the impact, but very good margin on that product, and again, as you mentioned, Anthony, a significantly less competitive intensity.

[Anthony Vendetti:]

Okay. Great. And then just a quick financial question, you mentioned total operating expense should be about 25% to 26% of revenues. This quarter we calculated around 29%, advertising promotion was 7.8% or so. Should that come down by, I know, you addressed a little bit earlier in the call, but should that stay around the same for the fourth quarter and then come down a little bit as a percent of revenues but stay at the same around $1 amount going forward or was it just a major pick up in the third quarter and should trend down a little bit?

[Brent Willis:]

I think it’s going to trend down a little bit. But I'd rather be conservative for the time being, Anthony, for the fourth quarter at the, more like the 26% to 27% of net revenue for Q4. But there were some one-time from operations and people standpoint and the marketing expenditures, as you mentioned, plus some sales and distribution expenditures as you mentioned, but over time for 2018 particularly we are just in our finalization of business plan timing right now. But for 2018 that’s we guided to 25%, I would say no more than 26% of net sales. So, from an absolute standpoint, I haven't -- I don’t want to guess, but I know from a percentage standpoint 25% to 26%. But we really don't think we need more components of the organization really across sales, marketing, finance, operations, HR, really some little moment here and there. So we don't like – our headcount plan for next year on 150 person base company is, I don't think we've guide more than five additional headcount plan for the entire year in different areas of the company. So that's absolute number should come down, but percentagewise should get down to our normalized rate.

[Anthony Vendetti:]

Okay. Great. That's helpful. Thanks very much.

[Operator:]

This concludes our question-and-answer session. I'll turn the conference back over to Brent Willis for any closing remarks.

[Brent Willis:]

That’s it. I mean, we are about where I – we intended to communicate [Technical Difficulty] (54

[Operator:]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.