Newage Inc (NBEV) 2017 Q3 法說會逐字稿

Good morning, and welcome to the New Age Beverages Third Quarter 2017 Results Conference Call.

(Operator Instructions) Please note, that this event is being recorded.

I would now like to turn the conference over to Chuck Ence.

Please go ahead.

Thanks, Bryan.

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 conditions and achievements of the company.

Forward-looking statements, specifically those concerning future performance, are subject to certain risks and uncertainties.

I'd like to get right into our results for the third quarter and for the 9 months ending September 30, 2017, the transcript of which will be available on the company's website within the Investors section at www.newagebev.us.

For the third quarter the company delivered consolidated gross revenue of $16.8 million, versus $15.8 million in the prior year.

Subtracting discounts and billbacks at a net revenue level, the company achieved $15.1 million versus $13.5 million in the prior year, an increase of 12%.

Net sales as a percent of gross revenue were significantly better than prior year, and we expect net sales to be around 19% of gross sales for the foreseeable future.

For the 9 months ending September, consolidated gross revenue was $44.3 million versus $16.3 million in the prior year from consolidated net sales of $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 9 months of the year, this division has had record performance in 8 of those 9 months and is up 6% organically versus a very strong prior year.

In addition to gain a testbed for all New Age's internal innovative products and a source of visibility for anything new or newly emerging trends in beverages, this division is a positive cash generator as a stand-alone 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 brands expansion in Latin America both significantly contributed.

Búcha, for example, was up 108% in Canada and outside of Candida, XingTea was up 115%, more than double in the third quarter versus prior year.

The U.S. division has 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 of on mix enhancements 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 percentage of revenues on a year-to-date basis was 28.8% versus 26.9% for the 9 months ended September of 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 mix 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 operation 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 9 months ended September 2016, a 7.9-point improvement versus prior year.

As a result of the organization moves in sales and marketing investments, net loss for the quarter was $479,800 or minus $0.02 per share versus a small gain in the 3 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 9 months ended September 2016.

EBITDA for the third quarter was minus $186,000 and adjusted EBITDA was minus $131,000 when taking out the onetime nonrecurring 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 onetime expenses associated with the acquisitions, transitions, integrations, legal fees and other impacts associated with the uplist on to the NASDAQ and the acquisitions and absorptions of Coco-Libre, Marley and Premier Micronutrient Corporation.

Throughout the year that are all nonrecurring, 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 asset entry.

From a total asset's 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 these 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 9 months of $1.3 million.

Our working capital ratio of 2.7, when dividing current assets of $18.3 million by our current liability of 6.9, is respectable.

And the overall adjusted EBITDA of positive $1.7 million year-to-date still makes us the only public's small cap beverage company to show a profit of any sort.

Yes, we unapologetically had a onetime 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 the increased demand and investing in 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 a our financial results.

Number one, top line continues to grow, up 12% for the quarter and net sales to 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 is now up 4 points in the past 2 quarters.

Number three, investments of $1.5 million incremental, in the quarter, in operations, sales and marketing to expand distribution and support the largest scale business with more sophisticated and demanding customers.

Number four, adjusted EBITDA of minus $131,000 for the quarter reflective of the investments have been 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 a working capital ratio of 2.7 current assets over current liabilities.

And with that, I'd like to pass it over to Brent and the team to give you an update on the performance versus our strategic initiatives.

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 with de minimus debt, a superclean cap table and the growth in top line 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'll continue to make those decision 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 the small a little craft brewery and Kombucha company doing about $2 million a year in revenue and losing $2 million a year in income.

In those 5 quarters since I started and we began our journey, we had 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 on to the NASDAQ and established the right financial platform for the company.

Then in the second quarter of 2017, we acquired 3 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've been at it 5 quarters and versus where we envisioned we would be, when we first developed our road map.

We are right where we predicted and where we said we'd be, actually ahead of the pace.

Our next set of milestones, mostly centered on organic growth, are tough.

But it is not like the uplist on to 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, our R&D, our sales force, or 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 4 people in sales.

Now there's 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 a CPG company.

Now there is a full team across brand management, digital, social, creative and design, experiential and trade marketing that formed 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 systems, 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, in 3 years.

Now it is a different day.

But in truth, where I see us as 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 we are going to do with that, or on that platform?

Well, we have already provided that answer and it is written on our road map that we have published when we began our plan.

In that road map, 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're still executing against 2 additional components of that road map, overhauling our brands and penetrating new channels.

Since acquiring and integrating the companies to build the platform of our brands, we have been working diligently to first re-architect those brands and second, launch innovative offerings on those strengthened 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 underleveraged, Búcha that was not distinctive enough in its functional points of difference, or Coco-Libre also, that was also just not differentiated enough.

We have to get the brand propositions right first, such as they are competitive and resonate with consumers, and then you have to get them on the shelves and then you have to drive consumer takeaway to pull them off the shelves.

In the beverage industry, across all companies, all sectors from the $50-billion companies to the $500,000-companies, they are really only 2 metrics that matters.

Some of the more sophisticated ones may try and get creative with terms like revenue management or bottler system management or other, but basically, this business comes down to number one, points of distribution and the second metric is sales for point of distribution.

Honestly, everything else is a distraction.

But 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?

Thank you, Brent.

And for New Age and as previously mentioned by Chuck, the fact that we've added more than 15,000 points of sale on the latter part of Q3 and are already in Q4, we've 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 even heard of XingTea, for example.

We define key account expansion as one of the major fillers of growth for the group.

We are starting to see results now materialize.

Mind you, many of the shelf set decisions for the major retailers were made in August.

What this means is that we have to hustle from all this year because of the decisions, the brands on the shelf were made in August of 2016, and we essentially just getting started.

So we 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, Sobey's, Circle K, H-E-B, Ahold's, Sprouts, BJ's, Whole Foods, SpartanNash, Jumbo and others.

And we still have wide open runway in front of us.

In the past 90 days, we have added more than 30,000 points of distribution for our brands, impacts that set us up well for Q4 and 2018 are, in a word, material.

We still have a number of major opportunities that we're working on closing, but the reality is, there is not one national retailer that ever took a position with New Age, historically.

And not one that ever really even heard of us, a size from a small regional niche.

And frankly, not important, our strategic business from them in a few markets in the West.

That has all fundamentally changed.

Now there's not a single distributor, retailer or competitor for that matter that doesn't know who New Age is.

And frankly, doesn't see that we have created the only one-stop shop of healthy functional beverages.

Let me tell you, retailers and distributors are very risk averse these days and they do not want to work the small under-funded, single new-brand companies.

They can't properly work with them and invest in their brands.

That might have been New Age 12 months ago, but no more.

That's on 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 more to come from these relationships and expanding roster of direct relationships and a renewed focus from major DSD partners now that we are much more relevant for them.

But that is just the start of some of our activities in traditional retail channels.

We are equally excited about e-commerce, channels of penetration and the new partnerships to expand a foodservice, workplaces and other alternative channels.

The new preferred brand partnerships with Dot Foods, a $7 billion company, with tremendous reach to foodservice, universities, hospitals and other channels and USG that has more than 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, but 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 our focus on executing and closing distribution opportunities on what now is a portfolio of brands that every customer in the country now wants and every competitor wished they have.

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 Kombucha and Marley Mate, that is just rolling out in distribution now, are exceeding expectations.

We made our Kombucha shelf-stable with 9 months of shelf-life so we could 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 requirements, for example, is 2.

In our newest launch, Marley Mate, we are also exceeding expectations.

All though, authorized the difference between authorization and distribution and placement on shelf are 2 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%, a fact that makes our retail partners very happy.

Marley Mate is now also beginning to roll out through McLane's distribution, a $48-billion company.

And 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 a 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 company 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 and distribution.

When you add those things together, we get to our target.

Given Q4 is seasonally 21% of our business, that revenue extrapolated, entering next year, gets us to our 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 upsides coming from our newest offerings, Aspen Pure Probiotic, PediaAde or our Coco-Libre sparkling that is rolling out for stores in the end of November.

This product is fantastic with 100% coconut water and natural fruits, no added sugar and only 30 calories per serving.

Marley Mate, the Búcha shelf-stable, the PediaAde, the 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 brands, 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 and supply chain and the team all underpinned being able to execute against those growth initiatives.

But driving organic focus and organic growth is the unique focus for this call.

But I would like to make one comment on our external growth pillar in acquisitions.

Yes, we could have been well over $100 million in revenue right now had we added in some of the acquisitions that we took a hard look at.

Would they have been accretive?

Absolutely.

In shareholders' best interest?

We believe, absolutely.

But we had to say no, even with the 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 the currency and it 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've focused today on the platform that we had built over the past 5 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 returns for shareholders.

This is what New Age is all about, a platform of healthy functional brands on trend with consumers, with the execution capabilities to capture their full potential, building that platform and then leveraging it and growing it with a proposition, and it doesn't fully materialize in 5 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 1,500% 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 Instructions) Our first question comes from David Bain with Roth Capital.

I know you don't give quarterly guidance, but Brent, backing into some of the details you just gave.

So despite weaker December seasonality, we should see close to 20% quarter-over-quarter top line growth, did I get that right?

I didn't really look at the quarter-to-quarter top line 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 get the retail penetration.

And the new brands are just kind of rolling out now.

So Q4 looks great for us.

Though -- 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 quarter's and, honestly, versus any other Q4 in history, it looks fantastic.

And October's already started off strong.

Okay, great.

And then, I understand the additional $1.7 million of costs for sales in marketing and distribution for this quarter, given all the new brands and everything, and that sort of benefit beginning really this quarter.

Are those expenses also going to drop in 4Q?

Or do they stay and we get the revenue benefit, beginning sort of today?

I would say some will reduce, but we will get the benefit on the revenue curve in Q4 and frankly, throughout all of 2018.

So that's kind of how we're building the P&L.

We'll start to get some more efficiencies because we made -- it wasn't just sales and marketing investment, it was sales, marketing people and some other capability investment 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, would you say that's about a fair number, Chuck, 25%, 26% of net sales for the foreseeable future -- or for this foreseeable quarters will be a good benchmark on a higher revenue?

I do agree.

That's a good benchmark.

Okay.

And then final one and I might have to hop back into queue, but can we get an idea of 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 trends so far in the quarter?

Again, on the organic growth for Q4, we didn't really look at it that way.

And so I don't want to guess as to what the number is.

It's -- we just looked at the absolute and the revenue curve that we're getting on a by-account basis, on a by-brand basis.

The good news is we have now that visibility on really almost a day-to-day basis.

And we've never had that, a, level of distribution; and b, volume per point of distribution outlet visibility that we're now implicating into our daily dashboards.

We would still guide to 7% to 10% organic top line revenue growth for our business model and for 2018.

But still, honestly, David, with all of the moving parts of the business of -- all right, where are we with our core brands?

Where are we with our new brands within that 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 will help is guiding to a 7% to 10% top line organic revenue growth.

And that's a good, I would say, a good starting point.

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

Honestly, we still have such upside runway in front of us.

The -- where we just taking share and sourcing volume from already other big existing sources of volume out there is consumers' transition away from less healthy or less better-for-you options so -- as we expand distribution, where we start to see dilution or less volume per outlet, I really doubt it because at least not for the next 3 or 4 years.

Before we're at a level of penetration where consumers can really choose the portfolio of our brands across all sorts of different channels and you might to start to get some cannibalization there.

We're at least 3, 4, maybe even 10 years away before we're at that point and 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 those highest ROI investments that you can make across anything at your disposal.

So I think we've got at least 3 or 4 maybe even 10 years of growth before we start to see any cannibalization.

Next question comes from Rommel Dionisio with Aegis Capital.

Nice progress on gross margin.

I wonder if you could just provide one more granularity though on a couple of points you refenced in the 10-Q.

Specifically, I obviously you had increased sales and the product mix.

But when you talk about production efficiencies and processes, which lead to lower overall manufacturing cost as well as value engineering on some key brands and packages.

Could you just sort of walk me through that sort of means in layman's terms on a product-by-product basis?

Yes.

It's a great question.

And from a cross-engineering of all of the product costs that we have in the company, I mean it's a lot of work.

And it's a lot of work on a 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 is you launch new products or you add components into the portfolio that have the significantly higher gross margin.

So that's the mix shift piece.

And Marley started with above 40% gross margin.

Coco-Libre started with above 40% gross margin.

So as those 2 components become much more important parts of our overall mix, it moves the gross margin percentage by default.

And that's without any reengineering or value engineering of what you started with XingTea.

XingTea was more in the low 20s from a gross margin standpoint, primarily because historically, we were not, in microeconomic terms, the price maker.

We were a price taker.

And a big competitor and similar size can do that set the price at retail at $0.99.

And given we have a different product that's got no high-fructose corn syrup that's actually got 10 times more tea, that's got all sorts -- that is award-winning and no artificial flavors and is natural in terms of all of its ingredients, it's a higher-cost product to make and as a result, but because their price was fixed, you're stuck at that low 20% gross margin.

So you have to do all sorts of work with retailers to move up the entry price point in the category, which we're doing with some of the major convenience retailers in the country.

But then you have to look at what can you fundamentally change so that you no longer a price maker and you move into -- sorry, no longer a price taker and you move into being a price taker where you're not at the mercy of whatever a price maker decides to do.

So there's pricing activities you're going to need to do, packaging activities that 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 kind of things.

But if we go through all of the components to get to a total 40% gross margin and I kind of give you the road map there, far more accurate, let's say 30% gross margin or 28.8% gross margin on a year-to-date basis, you'll get 4.1 points of improvement from mix.

You'll get about 2.6 points of improvements from value engineering.

From aligning our 10 different manufacturers across the country, we get about 2 points, 3 points.

And then from scale and purchasing leverage across harmonizing or purchasing of tea and sugar and citric acid, getting those kinds of things, we will get about 1.7 points, so that's the road map of how to get from 28% to 40%, which is in our sites.

And as I said, we've kind of moved 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 to an average of 40% gross margin.

Next question comes from John Aaroe with Aaroe & Associates.

Brent, given that the company is so young, nearly only 5 quarters old.

And so far from what I can see, margin lines, no one in the industry has accomplished anywhere near what you guys have in such a short period of time.

So what are your opinion is behind the dramatic drop in the stock price over the past few months especially, since raising capital.

Is it even on the table for day-to-day operations?

That'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, a 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 from a 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 they're moving in this platform.

You're all right.

We are only 5 quarters old.

We are brand new, in my view, young company that has executed well.

Done what we said we're going to do and performed well from very set of humble beginnings.

So accomplishing what we're intending to accomplish.

It doesn't happen in 5 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 resident 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 the day over the long term in terms of value of our investment.

It isn't short-term fluctuation with the vulgarities or vagaries of which shorts might be in those kinds of things even though it upsets us 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 in everything that it does.

So yes, we don't like looking at the stock price and the decline over the past 6 months.

We don't believe it has anything to do with operations.

And we've executed and delivered over the past 6 months and as a result, all we're going is just keep our head down, focus and perform, full stop.

Next question comes from Anthony Vendetti with Maxim Group.

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 with it -- was it timing of some distribution deal, some point of sales?

What was this specifically?

And I know the guide is 7% to 10% organic growth.

Was it a little bit like this quarter for any reason?

Great question, Anthony, as always.

Look, we acquired the Marley franchise at the time for 3 million shares that at the time when we shook hands on the deal with a price tag, $1.50 a share, and then they provided a million dollars of investment for us to drive the business.

That's when we originally tend to kick 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 for kind of anything from an execution standpoint.

So that's number one, the brands weren't really that healthy.

But why do we do this?

We did it for the financial reasons that we mentioned, but also because Marley overall has got 74 million -- 75 million Facebook followers and is a high-potential global brands, so from that base we re-architect it as you see what we've done with Marley Mate and we've already communicated what we're about to do with Marley cold brew really connects with retailers, really connects with consumers and we build on that franchise.

The existing pieces, the one-drop coffee and the Mellow Mood are smaller.

They're sort of holding their own and stabilized or they are holding their own now and they have stabilized and they're no longer declining versus prior year and actually in these past couple of months, it actually grown slightly versus prior year.

But 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.

Would I like it to be $8 million to $10 million?

Yes.

Is it more $6 million to $8 million space?

Yes.

And that's just a reality of what we bought.

But we didn't buy it for its 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?

Not really.

It's still our highest revenue growth we've ever had as an enterprise.

It was above Q2, and Q2 was typically a slight -- or 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 maintained some of those unprofitable Marley customers or unprofitable Coco-Libre customers.

We can have more but maybe just no sense in that.

I'd rather get 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 can significantly below 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're launching all of these new products that we connect all these brands weather its Marley, Coco-Libre, Xing or Kombucha with consumer.

So that's really the model and just like what happened on that quarter basis, mind you, we've bought these companies in Q2, and it takes time to integrate supply chain people, all those things, which we did in Q3 and now in Q4 all the new products are launching.

So as I mentioned, we are at that where we expected to be and you can't do all these things overnight.

Okay.

And just -- so just a follow-up, Brent.

It sounds like you finished the rebranding, repackaging of Marley.

You've gotten rid of some of the accounts that were unprofitable, Marley as well as Coco-Libre.

And that's why you're pretty optimistic about the fourth quarter and then 2018, correct?

Yes, sir.

Couldn't have said it any better.

Okay.

And then, last, also, you're launching PediaAde, I think 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 roll out, time frame for that and then anything on the surgical products?

I'm going to ask Terry to talk about it so we can hold him accountable to anything that he says to all these investors?

So this is how we roll, but I'm 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 when I see it there on the shelf and in the hospitals before we say anything bit on PediaAde, we are really just rolling now, but when we pass it over to Terry and he can give you a bit of insight of what other retailers are saying and where we are.

Yes, first of all, it's phenomenal product compared to the competition out there.

There's no comparison.

And as we like to say, you probably wouldn't give it, competitive products even to your kids so -- and that's same way it's been received by the retailers out there.

It's already been presented to Target.

Target then presented it to CVS.

Walgreens' meeting is at the end of this month.

And the feedback is very positive.

People loved the taste, the product.

They love the formula of the product.

And I see some great things coming out all those major retailers that are really the right avenues for the brand anyway.

So there is starting to see some activity in the convenience channels as well, but I think it's really going to be great in drug in mass channels.

So we are pretty excited about where it's gone.

And there is no competition.

And timing wise, I think it is -- it will take time.

Many of the retailers are considering that expansion now.

But -- and it will be first quarter before we see it out, before we're making the product, frankly, and we see it out in broadscale 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.

Okay, great.

And then just a quick financial question.

You mentioned total operating expenses 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 -- I know it was 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 dollar amount going forward?

Or was it just a major pickup in the third quarter and should trend down a little bit?

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 as we more like the 26% to 27% in that revenue for Q4.

But there were some onetime from operations and people standpoint and the marketing expenditures as you mentioned.

Put some sales and distribution expenditures, as you mentioned, but over time for 2018 particularly, we're just in our finalization of business plan timing right now.

But for 2018, that's -- we would guide you to the 25 to 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 small movements here and there.

So we don't -- our headcount plan for next year on a 150-person base company is -- I don't even think we've gotten more than 5 additional headcount plan for the entire year in different areas of the company.

So that absolute numbers should come down but percentage-wise should get down to our normalize rates.

This concludes our question-and-answer session.

I would turn the conference back over to Brent Willis for any closing remarks.

That's it.

I mean, we're about where we intended to communicate we would be.

We're pleased with our platform and we're just going to execute, keep our heads down and keep driving the business.

And if we do that, we believe we're going to drive superior return for all of our valued shareholders and management that is in the exact same boat as shareholders that I believe growth in the equity in the term.

Thank you very much and appreciate the continued confidence and support.

The conference has now concluded.

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