PROSPECTUS
SUMMARY
This
summary highlights information found in greater detail elsewhere in this
prospectus. Prior to making an investment decision, you should read the entire
prospectus carefully; including the section entitled “Risk Factors” beginning on
page 3.
About
Our Company
We
are a
growing developer, manufacturer, marketer, and seller of New Age beverages,
as
well as candies and ice creams. “New Age Beverages” is a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports
drinks
and water. We currently offer 14 beverages, 2 candies, and 3 ice creams.
We
sell
the majority of our products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree,
in
Canada. Historically, most of our beverages were sold in the natural food
industry.
Our
current business strategy is to maintain a firm marketing focus in the natural
food marketplace while building a national direct sales and distribution
force
to take our proven products into mainstream market and distribution channels.
We
believe that the proceeds of this offering may greatly accelerate the success
of
this business strategy by providing working capital to finance an expanded
sales
and distribution network.
At
this
time, we produce our carbonated beverages at two facilities. Our Brewery
in Los
Angeles handles the western half of the United States and we have a contract
with The Lion Brewery, Inc., a packing, or co-pack, facility in Pennsylvania
for
the eastern United States. Our Ginger Juice Brews are co-packed for us in
Northern California. Our ice creams are co-packed for us at a dairy in upstate
New York.
We
have a
national network of natural and specialty food distributors in the United
States
and Canada. We also have mainstream beverage distributors in select markets.
In
Southern California, we have our own direct distribution in addition to other
local distributors. We currently rely upon one retailer for between 10-15%
of
our aggregate gross revenues. If we were to lose this retailer, our operations
would be materially effected.
We
currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both
sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced
by the
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits
to
maintain store and distributor relationships. In the future, we intend to
integrate both our distributions and sales forces.
In
December 2000, we purchased an 18,000 square foot warehouse, the Brewery,
at 13000 South Spring Street, Los Angeles, California 90061, in an
unincorporated area of Los Angeles County near downtown Los Angeles. This
facility serves as our principal executive offices, our West Coast bottling
plant, and our Southern California warehouse facility. Our telephone number
is
310.217.9400.
We
have
not generated a profit during our last two fiscal years and there is no
assurance that we will develop profitable operations in the future. Our net
operating loss for the calendar year 2004 was $479,371 and for 2003 it was
$771,997. We are offering a maximum of 2,000,000 of our shares. In the event
the
maximum amount of this offering is sold, then the shares sold will represent
29%
of the then outstanding common stock and Christopher Reed and his family
members
will own 54.3% of our outstanding common stock.
This
offering is a best efforts offering through our underwriter, Brookstreet
Securities Corporation. While there is no assurance, our underwriter currently
intends to apply for quotation of our common stock upon the Over the Counter
Bulletin Board (“OTCBB”) quotation system. This will require that we complete
certain filings and disclosures of information to the National Association
of
Securities Dealers and to the OTCBB itself. Our shares are currently not
traded
on the public securities markets and even if our shares of common stock become
quoted on the OTCBB, there is no assurance that an active public market for
our
shares of stock will be established.
Our
Internet address is www.reedsgingerbrew.com.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
The
Offering
Common
Stock being offered
|
|
|
2,000,000
shares
|
|
Offering
Price
|
|
|
|
|
Common
stock outstanding:
|
|
|
|
|
Prior
to this offering
|
|
|
4,988,591
shares
|
|
After
this offering:
|
|
|
|
|
if
200,000 shares are sold
|
|
|
5,188,591
shares
|
|
if
1,000,000 shares are sold
|
|
|
5,988,591
shares
|
|
if
all 2,000,000 shares are sold
|
|
|
6,988,591
shares
|
|
Use
of Proceeds
We
plan
to use the net proceeds to hire additional sales representatives, launch
new
products, pay for retail slotting, expand our brand advertising, update our
West
Coast production facility, the Brewery, to purchase fully-branded coolers,
in-store displays, and hire a chief operating officer, and for working capital.
Summary
Financial Information
The
following historical financial information should be read in conjunction
with
the audited financial statements and the notes to those statements and the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this prospectus. The statements
of operations with respect to the years ended December 31, 2004 and
2003,
and the balance sheet data at December 31, 2004 are derived from,
and are
qualified by reference to, the audited financial statements included elsewhere
in this prospectus. The historical results are not necessarily indicative
of
results to be expected for any future periods.
Statements
of Operations Data:
|
|
Three
Months
Ended
March 31,
|
|
Years
Ended
December 31,
|
|
|
|
2005
(Unaudited)
|
|
|
|
|
|
|
2004
|
|
|
2003
|
|
Sales
|
|
$
|
1,817,336
|
|
$
|
1,713,340
|
|
|
$
|
8,978,365
|
|
$
|
6,781,776
|
|
Gross
profit
|
|
|
331,049
|
|
|
410,670
|
|
|
|
1,875,328
|
|
|
1,319,571
|
|
Selling,
general and administrative expenses
|
|
|
501,225
|
|
|
372,186
|
|
|
|
1,946,667
|
|
|
1,414,148
|
|
Income
(loss) from operations
|
|
|
(170,176
|
)
|
|
38,484
|
|
|
|
(71,339
|
)
|
|
(94,577
|
)
|
Net
Loss
|
|
|
(241,386
|
)
|
|
(21,455
|
)
|
|
|
(479,371
|
)
|
|
(771,997
|
)
|
Net
Loss per share, basic and diluted
|
|
|
(0.05
|
)
|
|
(0.01
|
)
|
|
|
(0.10
|
)
|
|
(0.16
|
)
|
Weighted
average shares used to compute net loss per share
|
|
|
4,726,091
|
|
|
4,726,091
|
|
|
|
4,726,091
|
|
|
4,724,488
|
|
Balance
Sheet Data:
|
|
|
March
31, 2005
(Unaudited)
|
|
|
December
31, 2004
|
|
Total
assets
|
|
$
|
5,063,121
|
|
$
|
5,098,403
|
|
Current
liabilities
|
|
|
3,064,585
|
|
|
2,834,589
|
|
Long-term
liabilities, less current portion
|
|
|
1,270,222
|
|
|
1,294,114
|
|
Stockholders’
equity
|
|
|
728,314
|
|
|
969,700
|
|
RISK
FACTORS
An
investment in our common stock is very risky. You should carefully consider
the
risk factors described below, together with all other information in this
prospectus, before making an investment decision. The trading price of our
common stock could decline due to any of these risks, and you could lose
all or
part of your investment. You also should refer to the other information set
forth in this prospectus, including our financial statements and the related
notes.
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain operations as
presently set forth in our business plan.
As
of
December 31, 2004, we had an accumulated deficit of $2,403,638. For the years
ended December 31, 2004 and 2003, we incurred losses from operations
of
$71,339 and $94,577, respectively. As
of
March 31, 2005, we had an accumulated deficit of $2,645,024. For the three
months ended March 31, 2005, we incurred losses from operations of $170,176
and
in the three months ended March 31, 2004, we experienced a profit from
operations of $38,484. If we are not able to begin to earn an
operating profit at some point in the future, we eventually may have
insufficient working capital to maintain our operations as we presently intend
to conduct them. In addition, we may not be able to contribute profit from
operations toward the expansion and other business plans discussed in this
prospectus.
The
beverage business is highly competitive.
We
compete for distributors, shelf space, and customers primarily with other
New
Age beverage companies including:
· |
Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury Schweppes)
|
· |
Henry
Weinhard (owned by Phillip Morris)
|
Several of our competitors and potential competitors have financial
resources greater than ours, and Pepsi, Cadbury Schweppes, and Phillip Morris
have substantially greater financial resources than ours. These greater
resources permit our competitors to implement extensive advertising and
promotional programs, which we have not been, and may not be, able to match.
As
competitors enter the field, our market share may fail to increase or may
decrease despite our efforts to continue to produce superior products with
higher quality ingredients and a brewing process that we believe remains
a trade
secret.
See
“Business —
Competition.”
Competitors
in the soft drink industry include bottlers and distributors of nationally
advertised and marketed products as well as chain store and private label
soft
drinks. The principal methods of competition include brand recognition, price
and price promotion, retail space management, service to the retail trade,
new
product introductions, packaging changes, distribution methods, and advertising.
The
loss of our largest retailer would substantially reduce revenues.
During
2003, Trader Joe’s accounted for approximately 15% of our sales in 2003 and for
14% of our sales in 2004. The loss of Trader Joe’s as a retailer would
substantially reduce our revenues unless and until we replaced that source
of
revenue.
Any
decrease in the supply of ginger, other key ingredients or finished products,
or
increase in the prices of such ingredients, could significantly increase
our
costs, and thereby reduce our profits.
We
depend
upon an uninterrupted supply of ginger and certain other ingredients, a
significant portion of which we obtain overseas, principally from China and
Brazil. We obtain almost all of our crystallized ginger from Fiji and our
Ginger
Chews from Indonesia. Any decrease in the supply of these ingredients or
increase in the prices of these ingredients as a result of any adverse weather
conditions, pests, crop disease, interruptions of shipment or political
considerations, among other reasons, could substantially increase our costs
and
adversely affect our financial performance.
The
loss of any of our third-party suppliers or service providers could impair
our
operations and substantially reduce our financial results.
We
rely
on third parties, called co-packers in our industry, to produce some of our
beverages, to produce our glass bottles and to bottle some of our beverages.
The
loss of our third-party suppliers or service providers could impair our
operations and adversely affect our financial performance.
The
loss of our third-party distributors could impair our operations and
substantially reduce our financial results.
We
depend
in large part on distributors to distribute our beverages and other products.
Most of our outside distributors are not bound by written agreements with
us and
may discontinue their relationship with us on short notice. Most distributors
handle a number of competitive products. In addition, our products are a
small
part of our distributors’ businesses. The loss of our third-party beverage
distributors could impair our operations and adversely affect our financial
performance.
Our
manufacturing process is not patented.
None
of
the manufacturing processes used in producing our products are subject to
a
patent or similar intellectual property protection. Our only protection against
a third party using our recipes and processes is confidentiality agreements
with
the companies that produce our beverages and with some of our employees.
If our
competitors develop substantially equivalent proprietary information or
otherwise obtain access to our knowledge, we will have greater difficulty
in
competing with them for business, and our market share could decline.
We
regard
the protection of our trademarks, trade dress, and trade secrets as critical
to
our future success. We have registered our trademarks in the United States.
We
also rely on a combination of laws and contractual restrictions, such as
confidentiality agreements, to establish and protect our proprietary rights,
trade dress, and trade secrets. However, laws and contractual restrictions
may
not be sufficient to protect the exclusivity of our intellectual property
rights, trade dress, or trade secrets. Furthermore, enforcing our rights
to our
intellectual property could involve the expenditure of significant management
and financial resources. See “Business — Proprietary Rights.”
We
face risks associated with product liability claims and product recalls.
Other
companies in the beverage industry have experienced product liability litigation
and product recalls arising primarily from defectively manufactured products
or
packaging. We maintain product liability insurance insuring our operations
from
any claims associated with product liability and we believe that the amount
of
this insurance is sufficient to protect us. We do not maintain product recall
insurance. While we have to date not experienced any product liability or
product recall claims, there is no assurance that we will not experience
such
claims in the future. In the event we were to experience a product liability
or
product recall claim, our business operations could be materially and adversely
effected.
If
we are not able to retain the full-time services of Christopher J. Reed,
it will
be more difficult for us to manage our operations and our operating performance
could suffer.
Our
business is dependent, to a large extent, upon the services of Christopher
J.
Reed, our founder, President, Chief Executive Officer, Chairman of the Board,
and Chief Accounting Officer. We depend on Mr. Reed’s creativity and leadership
in running or supervising virtually all aspects of our day-to-day operations.
We
do not have a written employment agreement with Mr. Reed. In addition, we
do not
maintain key person life insurance on Mr. Reed. Therefore, in the event of
the
loss or unavailability of Mr. Reed to us, there can be no assurance that
we
would be able to locate in a timely manner or employ qualified personnel
to
replace him. The loss of the services of Mr. Reed or our failure to attract
and
retain other key personnel over time would jeopardize our ability to execute
our
business plan and could have a material adverse effect on our business, results
of operations and financial condition.
Our
Chief Executive Officer may lack the experience and formal training to serve
as
our Chief Financial Officer.
Our
company does not employ a Chief Financial Officer among its executive staff.
Given the absence of formal financial training in our Chief Executive Officer’s
education and the increasing complexity of accountancy and cash management
for
reporting companies, CEO Chris Reed’s lack of knowledge in this area may affect
the future results of our operations.
We
need to manage our growth and implement and maintain procedures and controls
during a time of rapid expansion in our business.
The
cost
of manufacturing and packaging our products is approximately 80% of our
aggregate revenues. This gross margin places pressure upon our cash flow
and
cash reserves when our sales increase. As we experience significant growth,
such
an expansion has placed, and is expected to continue to place, a significant
strain on our management, operational and financial resources. Such growth
will
require improvements in our operational, accounting and information systems,
procedures and controls. If we fail to manage this growth properly, it could
divert our limited management, cash, personnel, and other resources from
other
responsibilities and could adversely affect our financial performance.
Our
management has broad discretion in the application of the net proceeds from
this
offering.
Our
Board
of Directors and management presently intend to utilize a substantial portion
of
the net proceeds of this offering for the specific purposes set forth in
“Use of
Proceeds.” However, we have broad discretion with respect to redirecting the
application and allocation of the net-proceeds of this offering in light
of
changes in circumstances and the availability of certain business opportunities.
As a result, any return on investment to investors will be substantially
dependent upon the discretion and judgment of our management with respect
to the
application and allocation of the net proceeds of the offering. See “Use of
Proceeds.”
We
have operated without independent directors in the
past
We
have
not had two independent directors through a large portion of our history.
This
means that the material agreements between related parties have not been
negotiated with the oversight of independent directors; this means that most
agreements into which we have entered were at the absolute discretion of
the
majority shareholder, Chris Reed. Please see the “Certain Relationships and
Related Transactions” section for specific details of these
transactions.
Risks
Relating to This Offering
It
may be a conflict of interest for Peter Sharma III to hold a position on
the
Board of Directors, while also being a primary selling agent, supervised
by a
separate broker/dealer, as well as being indebted to the
issuer.
As
a
director, Mr. Sharma has a fiduciary responsibility to our shareholders.
Mr.
Sharma’s position with Brookstreet Securities Corporation and his financial
indebtedness may compromise his ability to make decisions in the best interest
of our shareholders.
We
have previously been unsuccessful in a prior public
offering
We
have
previously tried to raise money in a public offering. This offering was declared
effective on December 31, 2002 and was subsequently withdrawn on March 27,
2003. It
was
and is the our opinion that the adverse market conditions referred to in
our
Application For Withdrawal were directly affected by lead up to and initiation
of war in Iraq and the ensuing public uncertainty and market downturn; thus
we withdrew the offering due to what we perceived as poor market
conditions for a public offering in the economic climate surrounding
the
2003 Iraq War.
We
determined the offering price for the shares being offered arbitrarily. The
market price for the common stock after the offering may vary from the offering
price.
Prior
to
this offering, there was no public market for our common stock. We arbitrarily
determined the offering price for the shares being offered. The price bears
no
direct relationship to our assets, earnings, book value, or other such criteria
of value. For this reason, the market price after the offering may vary from
the
initial offering price.
There
is not yet a public trading market for our securities and if a market develops
for our securities, it could be limited, sporadic, and highly volatile.
We
cannot
assure you that an active market for our shares will be established or
maintained in the future. It is the intention of our underwriter to apply
for
quotation of our common stock on the Over The Counter Bulletin Board quotation
system (the “OTCBB”). The OTCBB is not a national securities exchange, and many
companies have experienced limited liquidity when traded through this quotation
system. Therefore, if you purchase shares of our common stock and later decide
to sell the shares, you may have difficulty selling the shares. Even if a
market
for our common stock is established, stockholders may have to sell our stock
at
prices substantially lower than the price they paid for it or might otherwise
receive than if a broad public market existed.
Since
there is no minimum number of shares which must be subscribed for before
we can
use the proceeds from sales, our expansion plans will be affected by the
number
of shares actually sold.
The
speed
with which we implement our expansion plans will depend, to a large degree,
on
the amount of funds available for expansion. Such funds may be provided by
the
sale of common stock in this offering, our existing lines of credit, and
revenues from sales, future loans or otherwise. If we sell less than all
the
shares in this offering, our ability to implement the expansion plans described
under “Use of Proceeds” and elsewhere in this prospectus could be delayed,
depending on the amount of other funds available to us for such purposes.
You
will experience immediate and substantial dilution in this offering.
The
initial public offering price is substantially higher than the net tangible
book
value of each outstanding share of common stock. Purchasers of common stock
in
this offering will suffer immediate and substantial dilution. The dilution
will
be $3.00 per share, or approximately 75%, in the net tangible book
value of
the common stock from the public offering price if all 2,000,000 shares
being offered are sold. The dilution will be $3.45 per share (86%)
if only
1,000,000 shares (50%) are sold, and $3.94 per share (98%)
if only
200,000 shares (10%) are sold. See “Dilution.”
Our
ability to obtain needed additional financing is uncertain.
We
currently believe that our available cash resources, combined with the net
proceeds from this offering and cash flow from operations, will be sufficient
to
meet our anticipated working capital and capital expenditure requirements
for at
least 12 months after the date of this prospectus. We may need to
raise
additional funds to respond to business contingencies, which may include
the
need to:
·
|
fund
more rapid expansion
|
·
|
fund
additional marketing expenditures
|
·
|
enhance
our operating infrastructure
|
·
|
respond
to competitive pressures
|
·
|
acquire
other businesses
|
We
cannot
assure you that additional financing will be available on terms favorable
to us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Our
ability to implement our full business expansion plan is largely dependent
upon
the outcome of this offering. Assuming no funds from this offering were
available, over the next 12 months, we would be able to launch the
750 ml. champagne bottles for approximately three to five of our products,
including our Reed’s Ginger Brew and swing-lid bottles for approximately two of
our products. In addition, we would be able to hire approximately two additional
sales representatives. Other elements of our expansion plan might have to
be
curtailed or delayed unless we could find alternative external sources of
working capital.
Future
financings could adversely affect your ownership interest and rights in
comparison with those of other security holders.
Our
board
of directors has the power to issue additional shares of common or preferred
stock without stockholder approval. If additional funds are raised through
the
issuance of equity or convertible debt securities, the percentage ownership
of
our existing stockholders will be reduced, and these newly issued securities
may
have rights, preferences, or privileges senior to those of existing
stockholders, including, those persons acquiring shares in this offering.
If
we
issue any additional common stock or securities convertible into common stock,
such issuance will reduce the proportionate ownership and voting power of
each
other stockholder. In addition, such stock issuances might result in a reduction
of the book value of our common stock.
Because
Christopher J. Reed controls a majority of our stock, he can control the
outcome, or greatly influence the outcome, of all matters on which stockholders
vote.
Christopher
J. Reed, our President, CEO, Chairman of the Board, and Chief Accounting
Officer
currently owns approximately 64% of our outstanding voting stock. If all
the
shares in this offering are sold, Mr. Reed will own approximately 46% of
our
outstanding voting stock. If 1,000,000 shares in this offering (50%)
are
sold, Mr. Reed will own approximately 53% of our outstanding voting stock,
and
if only 200,000 shares in this offering (10%) are sold, he will own
approximately 62% of our outstanding voting stock. Therefore, Mr. Reed will
be
able to control the outcome, or greatly influence the outcome, on all matters
requiring stockholder approval, including the election of directors, amendment
of our certificate of incorporation, and any merger, consolidation or sale
of
all or substantially all of our assets or other transactions resulting in
a
change of control of our company. See “Principal Stockholders.”
A
substantial number of our shares will be available for sale in the public
market
after the offering and sales of those shares could adversely affect our stock
price.
Sales
of
a substantial number of shares of common stock into the public market after
this
offering, or the perception that such sales could occur, could substantially
reduce our stock price in any public market, and could impair our ability
to
obtain capital through an offering of equity securities. After this offering,
we
will have 6,988,591 shares of common stock outstanding if all
2,000,000 shares in this offering are sold, 5,988,591 shares
of common
stock outstanding if 1,000,000 shares in this offering (50%) are sold,
and 5,188,591 shares of common stock outstanding if
200,000 shares in this offering (10%) are sold. All the shares of
common
stock sold in this offering will be freely tradable without restriction or
further registration required under federal securities laws.
Of
the
shares of our common stock currently outstanding, 4,539,916 shares
are
“restricted securities” under the Securities Act of 1933, as amended. Some of
these “restricted securities” will be subject to restrictions on the timing,
manner, and volume of sales of such shares. See “Shares Available For Future
Resale.”
Our
common stock may become subject to “penny stock” regulations that may affect the
liquidity for our common stock.
Our
common stock may become subject to the rules adopted by the Securities and
Exchange Commission, or SEC, that regulates broker-dealer practices in
connection with transactions in “penny stocks.” Penny stocks are generally
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on the NASDAQ
Stock Market, provided that current price and volume information with respect
to
transactions in such securities is provided by the exchange or system).
The
penny
stock rules require that a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the SEC, which contains the following:
· |
a
description of the nature and level of risk in the market for
penny stocks
in both public offerings and secondary trading
|
· |
a
description of the broker’s or dealer’s duties to the customer and of the
rights and remedies available to the customer with respect to
violation to
such duties or other requirements of Securities’ laws
|
· |
a
brief, clear, narrative description of a dealer market, including
“bid”
and “ask” prices for penny stocks and significance of the spread between
the “bid” and “ask” price
|
· |
a
toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or
in the
conduct of trading in penny stocks, and
|
· |
such
other information and is in such form (including language, type,
size and
format), as the Commission shall require by rule or regulation.
|
Prior
to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:
· |
the
bid and offer quotations for the penny stock
|
· |
the
compensation of the broker-dealer and its salesperson in the
transaction
|
· |
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of
the market
for such stock
|
· |
the
liquidity of the market for such
stock, and
|
· |
monthly
account statements showing the market value of each penny stock
held in
the customer’s account.
|
In
addition, the penny stock rules require that prior to a transaction in a
penny
stock not otherwise exempt from those rules, the broker-dealer must make
a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock such as our common stock if
it is
subject to the penny stock rules.
(The
rest of this page left blank intentionally)
FORWARD
LOOKING STATEMENTS
Some
of
the statements made in this prospectus, including certain statements made
under
“Prospectus Summary,”“Risk Factors,”“Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business” constitute
forward-looking statements.
In
some
cases, you can identify forward-looking statements by terminology such as
“may,”“will,”“should,”“could,”“expects,”“plans,”“anticipates,”“believes,”“estimates,”“predicts,”“potential,”
or “continue” or the negative of such terms or other comparable terminology.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors
that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievement expressed or implied by such forward-looking
statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside the control of the Company, involve a
number
of risks, uncertainties and other factors that could cause actual results
and
events to differ materially from the statements made, including, but not
limited
to, the following:
|
· |
The
Company’s ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
|
· |
Decreased
demand for our products resulting from changes in consumer preferences;
|
· |
Competitive
products and pricing pressures and the Company’s ability to gain or
maintain its share of sales in the marketplace;
|
· |
The
introduction of new products;
|
· |
The
Company’s being subject to a broad range of evolving federal, state and
local laws and regulations including those regarding the labeling
and
safety of food products, establishing ingredient designations
and
standards of identity for certain foods, environmental protections,
as
well as worker health and safety. Changes in these laws and regulations
could have a material effect on the way in which the Company
produces and
markets its products and could result in increased costs;
|
· |
Changes
in the cost and availability of raw materials and the ability
to maintain
our supply arrangements and relationships and procure timely
and/or
adequate production of all or any of the Company’s
products;
|
· |
The
Company’s ability to penetrate new markets and maintain or expand existing
markets;
|
· |
Maintaining
existing relationship and expanding the distributor network of
the
Company’s products;
|
· |
The
marketing efforts of distributors of the Company’s products, most of whom
also distribute products that are competitive with the Company’s
products;
|
· |
Decisions
by distributors, grocery chains, specialty chain stores, club
stores and
other customers to discontinue carrying all or any of the Company’s
products that they are carrying at any
time;
|
· |
The
availability and cost of capital to finance the Company’s working capital
needs and growth plans;
|
The
effectiveness of the Company’s advertising, marketing and promotional programs;
· |
Changes
in product category consumption;
|
· |
Economic
and political changes;
|
· |
Consumer
acceptance of new products, including taste test comparisons;
|
· |
Possible
recalls of the Company’s products; and
|
· |
The
Company’s ability to make suitable arrangements for the co-packing of
any
of its products.
|
Although
we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements.
(The
rest of this page left blank intentionally)
USE OF PROCEEDS
Estimated
net proceeds from this offering, based on an offering price of $4.00 per
share
and after deducting a 6% sales commission, a 1% lead underwriter’s concession, a
3% non-accountable broker expense allowance and other offering expenses
estimated to range from approximately $200,000 to $275,000, will range from
$0
to $6,853,985, depending upon the number of shares we sell in this offering.
The
offering is being made on a best efforts basis, and we do not know how many
shares, if any, will be sold in this offering.
The
primary purposes of this offering are to obtain additional capital, create
a
public market for our common stock, and facilitate future access to public
capital markets. In general, we intend to use the net proceeds from this
offering to increase working capital, hire additional sales representatives,
and
launch new products. Depending upon the amount raised in this offering, we
also
plan to purchase and place coolers, in-store displays and other marketing
tools;
expand brand advertising, fund supermarket slotting fees where applicable,
provide for improvements to our West Coast production facility, the Brewery,
and
hire a chief operating officer.
We
presently expect to use the estimated net proceeds from the offering
substantially as set forth in the table below, if the numbers of shares
indicated are sold in the offering:
Proposed
Use
|
|
Estimated
Amount
if
200,000 Shares
are
Sold
(10%
of Total)
|
|
Estimated
Amount
if
1,000,000 Shares are Sold
(50%
of Total)
|
|
Estimated
Amount
if
2,000,000 Shares are Sold
(100%
of Total)
|
|
Gross
Offering Receipt
|
|
$
|
800,000
|
|
|
|
|
$
|
4,000,000
|
|
|
|
|
$
|
8,000,000
|
|
|
|
|
Underwriters’
Compensation
|
|
|
80,000
|
|
|
|
|
|
400,000
|
|
|
|
|
|
800,000
|
|
|
|
|
Offering
Expenses
|
|
|
271,015
|
|
|
|
|
|
296,015
|
|
|
|
|
|
346,015
|
|
|
|
|
Net
Proceeds
|
|
|
448,985
|
|
|
(100
|
)%
|
|
3,303,985
|
|
|
(100
|
)%
|
|
6,853,985
|
|
|
(100
|
)%
|
Additional
Sales Representatives
|
|
|
250,000
|
|
|
(56
|
)%
|
|
900,000
|
|
|
(27
|
)%
|
|
2,100,000
|
|
|
(31
|
)%
|
New
product launches
|
|
|
100,000
|
|
|
(22
|
)%
|
|
250,000
|
|
|
(8
|
)%
|
|
375,000
|
|
|
(6
|
)%
|
Retail
Slotting
|
|
|
0
|
|
|
(0
|
)%
|
|
750,000
|
|
|
(23
|
)%
|
|
1,500,000
|
|
|
(22
|
)%
|
Brand
Advertising
|
|
|
0
|
|
|
(0
|
)%
|
|
750,000
|
|
|
(23
|
)%
|
|
1,500,000
|
|
|
(22
|
)%
|
Cooler
and in-store displays
|
|
|
31,985
|
|
|
(7
|
)%
|
|
248,985
|
|
|
(8
|
)%
|
|
568,985
|
|
|
(8
|
)%
|
Chief
Operating Officer
|
|
|
0
|
|
|
(0
|
)%
|
|
100,000
|
|
|
(3
|
)%
|
|
100,000
|
|
|
(1
|
)%
|
West
Coast Brewery
|
|
|
0
|
|
|
(0
|
)%
|
|
150,000
|
|
|
(4
|
)%
|
|
150,000
|
|
|
(2
|
)%
|
Working
Capital
|
|
|
67,000
|
|
|
(15
|
)%
|
|
155,000
|
|
|
(4
|
)%
|
|
560,000
|
|
|
(8
|
)%
|
Total
Estimated Net Proceeds
|
|
$
|
448,985
|
|
|
(100
|
)%
|
$
|
3,303,985
|
|
|
(100
|
)%
|
$
|
6,853,985
|
|
|
(100
|
)%
|
Additional
Sales Representatives. We
will
be able to hire from two to approximately 30 new sales representatives,
depending upon the net proceeds of this offering.
New
Product Launches. We
will
be able to launch from between five and approximately 20 new products,
by which
we mean SKUs, depending upon the net proceeds of this offering. Over the
next 12
- 24 months we plan to launch as many as six new SKUs in the Ginger Brew
line,
five new SKUs in the Virgil’s line, four new China Cola SKUs, three new frozen
confections, and two new candies.
Retail
Slotting. We
plan
to place our products in up to 30,000 new stores. Some stores, particularly
chains, require slotting fees to place product on store shelves. Currently,
we
do not pay slotting fees to place a majority of our products in stores.
However,
in the future, we may have to pay slotting fees, depending upon the type
of
stores and chains where we place our products. See “Business — Our Primary
Markets — Mainstream Supermarkets.”
Brand
Advertising. We
plan
to use strategic consumer and trade targeted advertising to build brand
awareness, and support existing and new product placements. Our advertising
plans include print ads in magazine and newspapers, public relations events
and
consumer event sponsorships at which we offer samples of our products.
Cooler
and In-store Display Programs. Our
marketing plans include placing up to 2,000 Reed’s branded refrigerated coolers
and Reed’s branded in-store displays, which we call Kegerators, throughout the
United States and, to a lesser degree, in Canada. We consider coolers and
in-store displays to be efficient and proven marketing tools.
West
Coast Brewery. Depending
upon the net proceeds of this offering, we intend to purchase packaging
automation equipment for the Brewery. This will allow us to increase production
capacity and reduce overall time that our products can be in production,
while
decreasing labor costs.
In
June 2005, we entered into a revolving loan and
security agreement pursuant to which we are able to borrow up to $1,900,000.
See
“Management’s Discussion and Analysis and Results of Operations — Liquidity
and Capital Resources.” We intend to use a portion of any funds borrowed
pursuant to this loan agreement, in addition to the proceeds from the sale
of
the shares in this offering, for the uses described above.
If
fewer
than all 2,000,000 shares are sold in this offering, we will reduce
or
eliminate some proposed uses as described in the table above. The speed
with
which we expand our marketing and advertising for our products, and the
number
of products we offer to the public, depends in large part on the number
of
shares of common stock sold in this offering. If only a limited number
of shares
are sold, our expansion plans will take substantially longer to implement.
If
fewer
than 200,000 shares are sold, we will use most of the money to hire additional
sales representatives.
Assuming
no funds from this offering were available, over the next twelve months,
we
would be able to launch the 750 ml. champagne bottles for approximately
three to five of our products, including our Reed’s Ginger Brew and swing-lid
bottles for approximately two of our products. In addition, we would be
able to
hire approximately two additional sales representatives. Other elements
of our
expansion plan might have to be curtailed or delayed unless we could find
alternative external sources of working capital.
We
cannot
assure you that the above dollar amounts will be specifically allocated
as set
forth in the foregoing table. Our management has discretion in the application
of the actual net proceeds of the offering. Allocation of net proceeds
is
further subject to future events including changes in general economic
conditions, changes in our strategy and our response to competitive pressures
and consumer preferences associated with the products we sell. Pending
ultimate
application, the net proceeds will be invested in an interest-bearing bank
account or government securities.
The
“Use
of Proceeds” budget as laid out in the foregoing table represents our best
estimate as to the amounts that will be spent on each category of expenditure
listed. As we evaluate the effectiveness of each of the different expense
categories to grow the business profitably, we expect to modify these amounts
to
use these funds most effectively. We may find that our sales representatives
are
selling mostly our core brands and do not need or want more new product
launches
but that funds are better used in purchasing more displays to fuel their
sales
activities. We may find that in-store displays create more cost effective
advertising than straight brand advertising. The evaluation of the use
of funds
is an ongoing, interactive function of management.
DIVIDEND
POLICY
We
have
never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends. We currently intend to retain future
earnings,
if any, to finance operations and expansion of our business.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock beginning on June 30, 2005
in either
cash or additional shares of Series A preferred stock in our discretion.
See
“Description of Our Securities — Preferred Stock.”
(The
rest of this page left blank intentionally)
CAPITALIZATION
AS OF MARCH 31, 2005
The
following table sets forth our capitalization as of March 31, 2005
and as
adjusted to reflect the sale by us of 2,000,000 shares of common
stock in
this offering and the application of the estimated net proceeds, assuming
an
offering price of $4.00 per share, after deducting underwriter commissions
and
estimated offering expenses. The table also shows the effect if only
50% and 10%
of the offering is completed. The information in the table below is
qualified
by, and should be read in conjunction with, our audited financial statements
and
related notes appearing elsewhere in this prospectus. The following
table
assumes that the underwriter does not exercise its over-allotment option
and
excludes the following shares:
· |
17,500 shares
of common stock issuable upon exercise of outstanding options
issued by us
under our 2001 Stock Option Plan at a weighted average
exercise price of
$3.21;
|
· |
482,500
additional shares of common stock reserved for future issuance
under our
2001 Stock Option Plan;
|
· |
55,000
shares of common stock issuable upon exercise of outstanding
options,
other than outstanding options issued under our 2001 Stock
Option Plan, at
a weighted average exercise price of $2.43;
|
· |
848,876 shares
of common stock issuable upon exercise of outstanding warrants
at a
weighted average exercise price of $1.94; and
|
· |
200,000
shares reserved for future issuance under the underwriter’s warrant.
|
· |
126,485
of common stock upon conversion of
debt.
|
· |
235,760
of common stock issued upon conversion of preferred
stock.
|
|
|
March
31, 2005
As
adjusted (Based on % of offering completed)
|
Current
Liabilities:
|
|
|
Actual
|
|
|
10%
|
|
|
50%
|
|
|
100%
|
|
Current
portion of long-term debt
|
|
$
|
106,469
|
|
$
|
106,469
|
|
$
|
106,469
|
|
$
|
106,469
|
|
Lines
of credit
|
|
|
1,609,876
|
|
|
1,609,876
|
|
|
1,609,876
|
|
|
1,609,876
|
|
Total
current liabilities
|
|
|
1,716,345
|
|
|
1,716,345
|
|
|
1,716,345
|
|
|
1,716,345
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,017,864
|
|
|
1,017,864
|
|
|
1,017,864
|
|
|
1,017,864
|
|
Notes
payable to related parties
|
|
|
252,358
|
|
|
252,358
|
|
|
252,358
|
|
|
252,358
|
|
Total
Long-term liabilities
|
|
|
1,270,222
|
|
|
1,270,222
|
|
|
1,270,222
|
|
|
1,270,222
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock — par value $.0001 per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized —
11,500,000 shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding — 4,726,091 shares
|
|
|
472
|
|
|
492
|
|
|
572
|
|
|
672
|
|
Additional
paid-in capital
|
|
|
2,783,464
|
|
|
3,232,429
|
|
|
6,087,349
|
|
|
9,637,249
|
|
Preferred
stock
|
|
|
589,402
|
|
|
589,402
|
|
|
589,402
|
|
|
589,402
|
|
Accumulated
deficit
|
|
|
(
2,645,024
|
)
|
|
(
2,645,024
|
)
|
|
(
2,645,024
|
)
|
|
(
2,645,024
|
)
|
Total
stockholders’ equity
|
|
|
728,314
|
|
|
1,177,299
|
|
|
4,032,299
|
|
|
7,582,299
|
|
Total
Capitalization
|
|
$
|
3,714,881
|
|
$
|
4,163,866
|
|
$
|
7,018,866
|
|
$
|
10,568,866
|
|
DILUTION
Our
net
tangible book value at March 31, 2005 was $(370,353), or $(0.08) per share.
Our
net tangible book value per share is determined by subtracting the total
amount
of our liabilities from the total amount of our tangible assets and dividing
the
remainder by the weighted average number of shares of our common stock
outstanding.
The
as
adjusted net tangible book value after this offering will be $6,703,587,
or
$1.00 per share, after deducting estimated expenses of this offering, if
all the
shares in this offering are sold at an assumed offering price of $4.00 per
share. Therefore, purchasers of shares of common stock in this offering
will
realize a minimum dilution of $3.00 per share, or about 75% of their
investment. If fewer than all shares offered hereby are sold, the dilution
will
be greater; at 200,000 shares sold, the dilution is 98% and at 1,000,000
shares
sold, the dilution is 86%. The following table illustrates this dilution,
assuming 200,000 shares are sold, 1,000,000 shares are sold, and
2,000,000 shares in this offering are sold:
|
|
|
If
200,000 Shares are Sold
|
|
|
If
1,000,000 Shares are Sold
|
|
|
If
2,000,000 Shares are Sold
|
|
Offering
Price per Share
|
|
$
|
4.00
|
|
$
|
4.00
|
|
$
|
4.00
|
|
Net
tangible book value per common share at March 31, 2005
|
|
|
(0.08
|
)
|
|
(0.08
|
)
|
|
(0.08
|
)
|
Increase
per common share attributable to new investors
|
|
|
0.14
|
|
|
0.63
|
|
|
1.08
|
|
Net
tangible book value per share of common stock after the
offering
|
|
|
0.06
|
|
|
0.55
|
|
|
1.00
|
|
Dilution
per share of common stock to new investors
|
|
$
|
3.94
|
|
$
|
3.45
|
|
$
|
3.00
|
|
Percentage
of dilution per share of common stock to new investors
|
|
|
98
|
%
|
|
86
|
%
|
|
75
|
%
|
During
the five years prior to the date of the prospectus, we sold shares of common
stock for prices ranging from $1.00 to $4.00 per share.
Additional
dilution, not reflected in the foregoing table, will result to the extent
that
outstanding options and warrants to purchase our common stock are exercised
or
convertible debt or our Series A convertible preferred stock is
converted
into shares of our common stock.
As
of
March 31, 2005, we had outstanding options and warrants to purchase an
aggregate
of 921,376 shares of common stock at a weighted average exercise
price of
$2.04 per share.
As
of
March 31, 2005, we had outstanding an aggregate $257,111 of convertible
debt,
including accrued and unpaid interest, to purchase an aggregate of
126,485 shares of common stock at a weighted average exercise price
of
$2.03 per share.
As
of
March 31, 2005, we had 58,940 shares of preferred stock outstanding, which
can
be converted into 4 shares of the Company’s common stock, or 235,760 shares of
common stock at $2.50 per share of common stock.
We
have
not issued and will not issue options or warrants with an exercise price
less
than 85% of the fair market value of the underlying common stock on the
day of
the grant.
(The
rest of this page left blank intentionally)
Comparative
Data
The
following charts illustrate the pro forma proportionate ownership of our
common
stock upon completion of the Offering if 10%, 50%, and 100% of the Offering
is
sold. These charts compare the relative amounts paid, by the present
shareholders, and by investors in this Offering, assuming no changes in
net
tangible book value other than those resulting from the Offering.
If
10% of
Offering
sold
(200,000
shares)
|
|
|
Shares
Purchased
|
|
|
Percentage
|
|
|
Total Consideration
($)
|
|
|
Percentage
|
|
|
Average
Price
per
Share Paid ($)
|
|
Existing
Shareholders(1)
|
|
|
4,988,591
|
|
|
96.1
|
%
|
|
2,789,186
|
|
|
77.7
|
%
|
|
0.56
|
|
New
Investors
|
|
|
200,000
|
|
|
3.9
|
%
|
|
800,000
|
|
|
22.3
|
%
|
|
4.00
|
|
Total
|
|
|
5,188,591
|
|
|
100
|
%
|
|
3,589,186
|
|
|
100
|
%
|
|
|
|
If
50% of
Offering
sold
(1,000,000
shares)
|
|
|
Shares
Purchased
|
|
|
Percentage
|
|
|
Total Consideration
($)
|
|
|
Percentage
|
|
|
Average
Price
per
Share Paid ($)
|
|
Existing
Shareholders(1)
|
|
|
4,988,591
|
|
|
83.3
|
%
|
|
2,789,186
|
|
|
41.1
|
%
|
|
0.56
|
|
New
Investors
|
|
|
1,000,000
|
|
|
16.7
|
%
|
|
4,000,000
|
|
|
58.9
|
%
|
|
4.00
|
|
Total
|
|
|
5,988,591
|
|
|
100
|
%
|
|
6,789,186
|
|
|
100
|
%
|
|
|
|
If
100% of
Offering
sold
(2,000,000
shares)
|
|
|
Shares
Purchased
|
|
|
Percentage
|
|
|
Total Consideration
($)
|
|
|
Percentage
|
|
|
Average
Price
per
Share Paid ($)
|
|
Existing
Shareholders(1)
|
|
|
4,988,591
|
|
|
71.4
|
%
|
|
2,789,186
|
|
|
25.8
|
%
|
|
0.56
|
|
New
Investors
|
|
|
2,000,000
|
|
|
28.6
|
%
|
|
8,000,000
|
|
|
74.2
|
%
|
|
4.00
|
|
Total
|
|
|
6,988,591
|
|
|
100
|
%
|
|
10,789,186
|
|
|
100
|
%
|
|
|
|
(1)
Based on
the capital contribution from inception to June 30, 2005
As
an
historical reference, we here provide a chart recording all issuance of
options
and warrants:
Table
of
Options issued with price and date:
Year
Issued
|
Option
Strike Price issued
|
Highest
Price Paid for Common Shares
|
1991
|
0.02
|
0.27
|
1992
|
1.00
|
1.00
|
2000
|
2.00
|
2.00
|
2001
|
3.00
|
3.00
|
2002
|
6.00
|
6.00
|
For
historical reference and analysis, we provide here a reference table of
all
issuance of common and preferred shares by Reed’s, Inc. (formerly known as
Original Beverage Corp.) in chronological order, beginning with issue of
our
founder’s shares in 1991.
Historical
Table of Stock Issuance for Reed’s, Inc. (fka Original Beverage
Corp.)
|
|
Type
of Issuance
|
|
|
Class*
|
|
|
#
of Shares Issued
|
|
|
Price/Share
|
|
|
Year
of Issue
|
|
Founder’s
Stock
|
|
|
C
|
|
|
3,200,000
|
|
|
0.0001
|
|
|
1991
|
|
Initial
Seed Investor (R.T. Reed, Sr.)
|
|
|
O
|
|
|
262,500
|
|
|
0.020
|
|
|
1991
|
|
Private
Investment
|
|
|
C
|
|
|
187,500
|
|
|
0.267
|
|
|
1991
|
|
Private
Investment
|
|
|
C
|
|
|
50,000
|
|
|
0.750
|
|
|
1993
|
|
Private
Investment
|
|
|
C
|
|
|
10,000
|
|
|
1.500
|
|
|
1996
|
|
Exempt
Private Placement
|
|
|
C
|
|
|
142,100
|
|
|
1.500
|
|
|
1999
|
|
SCOR
Direct Public Offering
|
|
|
C
|
|
|
450,275
|
|
|
2.000
|
|
|
2000
|
|
Exempt
Private Placement (existing shareholder)
|
|
|
C
|
|
|
250,000
|
|
|
2.000
|
|
|
2000
|
|
Note
Conversion Options (1991) Exercise
|
|
|
C
|
|
|
200,000
|
|
|
0.750
|
|
|
2000
|
|
Warrant
(1991) Exercise
|
|
|
C
|
|
|
37,500
|
|
|
1.000
|
|
|
2000
|
|
Employee
Bonus Grants
|
|
|
C
|
|
|
1,500
|
|
|
2.000
|
|
|
2000
|
|
China
Cola Acquisition
|
|
|
C
|
|
|
130,000
|
|
|
2.000
|
|
|
2000
|
|
Options
(1991) Exercise
|
|
|
C
|
|
|
20,000
|
|
|
1.000
|
|
|
2001
|
|
Employee
Bonus Grants
|
|
|
C
|
|
|
14,500
|
|
|
2.000
|
|
|
2001
|
|
Vendor
Payment
|
|
|
C
|
|
|
3,200
|
|
|
2.000
|
|
|
2001
|
|
Exempt
Private Placement (existing shareholder)
|
|
|
C
|
|
|
500
|
|
|
3.000
|
|
|
2001
|
|
Loan
Conversion Option (1991) Exercise
|
|
|
C
|
|
|
8,889
|
|
|
1.125
|
|
|
2001
|
|
Loan
Conversion Option (1992) Exercise
|
|
|
C
|
|
|
11,877
|
|
|
1.500
|
|
|
2001
|
|
Exempt
Private Placement (existing shareholder)
|
|
|
C
|
|
|
3,750
|
|
|
4.000
|
|
|
2001
|
|
Employee
Bonus Grants
|
|
|
C
|
|
|
1,500
|
|
|
3.333
|
|
|
2003
|
|
Exempt
Private Placement (existing shareholder)
|
|
|
C
|
|
|
3,000
|
|
|
3.500
|
|
|
2003
|
|
Exempt
Private Placement (existing shareholders)
|
|
|
‡Pr
|
|
|
‡33,440
|
|
|
‡10.000
|
|
|
2004
|
|
Corporate
Note (2001) Conversion Exercised
|
|
|
‡Pr
|
|
|
‡25,500
|
|
|
‡10.000
|
|
|
2004
|
|
Avg.
share price excluding founder’s shares and initial seed, including
conversion of Pr -- $1.81/share
|
‡
Series A Preferred at $10 par value convertible to 4 common
shares
|
*
Type of share issued C=Common, Pr=Preferred, O=Option
**On
May 31, 2005 these options were exercised and converted to
shares of
common stock
|
(The
rest of this page left blank intentionally)
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this prospectus.
Except for historical information, the following discussion and analysis
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “Forward Looking Statements,” beginning at
page 8 of this prospectus.
Overview
We
develop, manufacture, market, and sell “alternative” or “New Age” beverages and
assorted foods. We currently manufacture, market and sell six unique product
lines:
· |
Virgil’s
Root Beer and Cream Sodas
|
· |
Reed’s
Ginger Juice Brews
|
· |
Reed’s
Ginger Ice Creams
|
We
currently distribute and sell our products through a network of natural,
gourmet, and independent distributors, as well as through our growing in-house
direct sales and distribution team, throughout the United States and, to
a
lesser extent, in Canada. In 2003, we implemented direct sales to several
large
national retail accounts. These accounted for approximately 19% of our
gross
sales in 2003 and approximately 22% of our gross sales in 2004. In addition,
in
2003 we created our own distribution system in southern California. This
accounted for approximately 1% of our gross sales in 2003 and approximately
4%
of our gross sales in 2004. The following table shows a breakdown of net
sales
with respect to the distribution channel.
Distribution
Channel
|
|
2003
sales
|
|
Percentage
sales
|
|
2004
sales
|
|
Percentage
sales
|
|
Direct
sales to large retailers
|
|
$
|
1,286,365
|
|
|
19
|
%
|
$
|
1,983,598
|
|
|
22
|
%
|
Our
local direct distribution
|
|
$
|
90,121
|
|
|
1
|
%
|
$
|
395,601
|
|
|
4
|
%
|
Natural,
Gourmet and Mainstream distributors
|
|
$
|
5,405,290
|
|
|
80
|
%
|
$
|
6,599,166
|
|
|
74
|
%
|
Total
|
|
$
|
6,781,776
|
|
|
100
|
%
|
$
|
8,978,365
|
|
|
100
|
%
|
New
products, or SKUs, that we launched in 2003 include a 5-liter “party keg”
version of our Virgil’s Root Beer and Virgil’s Cream Soda in 12-ounce long neck
bottles. Both of these high-margin items continue to contribute to growth
of our
sales for 2003 and 2004.
In
2003,
we expanded our marketing from our historical focus on natural and gourmet
foods
to include more mainstream markets. These efforts include selling our products
directly to large retail accounts, primarily Costco, BJ Wholesale,
and Cost
Plus World Markets. In addition, through our current North American natural
and
gourmet distributors, we have focused sales to the natural food section of
mainstream supermarket chains. This has resulted in our products now being
sold
in Safeway, Kroger’s and numerous other national supermarket chains. Our local
distribution in southern California is placing our products directly into
accounts locally, including Ralph’s, Bristol Farms, and many independent
accounts.
We
gauge
the financial success of our company by a number of different parameters.
Because our industry typically values companies on a top-line basis, one
of our
main company goals is to increase net sales. We continue to increase net
sales
each year. Net sales have increased from $6.2 million in 2001 to
$6.4 million in 2002 to $6.8 million in 2003. In 2004 sales
grew to
$9.0 million. We believe that the increase in net sales comes from three
sources: successes in our new local distribution, increases in our core business
and our new direct sales to large retailers.
Almost
as
important as increasing our net sales are increasing our gross margins. We
continue to work to reduce costs related to production of our products. In
2002,
we purchased and outfitted a West Coast production facility, the Brewery,
in
part to help reduce both production costs and freight costs associated with
our
West Coast sales. Gross profits declined after the construction of the Brewery.
Gross margins decreased from 24.8% in 2002 to 19.5% in 2003. We believe that
the
inefficiencies commensurate with a start-up period for the Brewery have been
a
principal cause of the decline of our gross margins in 2003. Gross margins
recovered to 20.9% in 2004, we believe that this increase in gross margin
is
because of the Brewery attaining greater functionality and efficiencies.
As the
Brewery continues to become more fully operational, we believe that we will
see
greater margin improvements due to freight and production savings. We expect
to
have the Brewery fully functional by the end of 2005. The following table
shows
the progress of productions at the Brewery and the savings being
generated:
Year
|
|
|
Cases
of candy
produced
at
new
brewery
|
|
|
Candy
production
savings
($)
|
|
|
Cases
of beverages
produced
at
new
brewery
|
|
|
Freight
savings
beverages
($)
|
|
|
Total
savings
($)
|
|
2002
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
|
2003
|
|
|
33,514
|
|
$
|
33,514
|
|
|
16,835
|
|
$
|
22,390
|
|
$
|
55,904
|
|
2004
|
|
|
31,278
|
|
$
|
31,278
|
|
|
113,816
|
|
$
|
151,372
|
|
$
|
182,650
|
|
In
addition, through the Brewery, we have increased our capability to offer
specialty beverage packaging options not typically available in the marketplace,
such as our new 5-liter party keg line and our new 750 ml. champagne
bottle
line. We also intend to manage general and administrative and selling expenses,
in order to improve our profitability.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks, and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices
- As oil
prices continue to rise, our freight rates, which run at approximately 8%
of net
sales, have been increasing. We currently see freight rates increasing by
an
additional 5% to 10% in the near term. On the other hand, we expect that
the
Brewery will counter this trend, at least in part, by reducing our need for
cross-country freight services.
Low
Carbohydrate Diets and Obesity
-
Consumers have been demanding lower carbohydrate products. This trend did
not
seem to affect our sales growth in 2004. We are watching this trend closely
and
have started developing low-carbohydrate versions of some of our beverages.
Distribution
Consolidation
- The
trend towards continued consolidation of the beverage distribution industry
through mergers and acquisitions has inspired us to start our own direct
distribution locally in southern California and to go to large national
retailers. Consolidation among natural foods industry distributors has not
had
an affect on our sales. However, this consolidation may limit the distributor
options outside natural foods to service mass-market food accounts.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns
in mind.
We feel this trend toward more natural products is one of the main trends
behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our products are designed with this consumer demand in mind,
also.
Supermarket
and Natural Food Stores
- More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of
this
trend, our products are now available in supermarkets throughout the United
States. Supermarkets can require that we spend more advertising money and
they
sometimes require slotting fees. We continue to work to keep these fees
reasonable. Slotting fees in the natural food section of the supermarket
are
generally not as expensive as in other areas of the store. See the “Business”
section regarding supermarket marketing.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate. There is an increase in the
sophistication with respect to beverage packaging design. While we feel that
our
current core brands still compete on the level of packaging, we continue
to
experiment with new and novel packaging designs such as the 5-liter party
keg
and 750 ml champagne style bottles. We have further plans for other innovative
packaging designs. See the business section for new product
developments.
Cash
Flow Requirements
- Growth
of our company will depend on the availability of additional capital infusions
to finance. We have a financial history of losses and are dependent on
non-banking sources of capital, which tend to be more expensive and charge
higher interest rates. Any increase in costs of goods will further increase
losses and will further tighten cash reserves. We feel that we could raise
prices to offset this problem if it occurs. We haven’t increased our prices
since inception and we feel that the market has been increasing in terms
of
beverage prices in the last ten years.
Packaging
or Raw Material Price Increases
- An
increase in packaging or raw materials could be adverse to our cash flow
and
income. We have not had a significant increase in any of these costs for
many
years but the effect of the US dollar dropping in value with respect to other
major world currencies and rising fuel prices could possibly increase costs
of
the raw materials and packaging making up the cost of goods manufactured.
We
continue to search for packaging and production alternatives to reduce our
cost
of goods.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. GAAP
requires us to make estimates and assumptions that affect the reported amounts
in our consolidated financial statements including various allowances and
reserves for accounts receivable and inventories, the estimated lives of
long-lived assets and trademarks and trademark licenses, as well as claims
and
contingencies arising out of litigation or other transactions that occur
in the
normal course of business. The following summarize our most significant
accounting and reporting policies and practices:
Trademark
License and Trademarks. Trademark
license and trademarks primarily represent the costs we pay for exclusive
ownership of the Reed’s® trademark in connection with the manufacture, sale and
distribution of beverages and water and non-beverage products. We also own
the
Virgil’s® trademark and the China Cola® trademark. In addition, we own a number
of other trademarks in the United States as well as in a number of countries
around the world. We account for theses items in accordance with SFAS No.
142, Goodwill, and Other Intangible Assets. Under the provisions of
SFAS No. 142, we do not amortize indefinite-lived trademark licenses
and
trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by
the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified
during
the years ended December 31, 2004 or 2003.
Long-Lived
Assets. Our
management regularly reviews property, equipment and other long-lived assets,
including identifiable amortizing intangibles, for possible impairment. This
review occurs quarterly or more frequently if events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. If there
is
indication of impairment of property and equipment or amortizable intangible
assets, then management prepares an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset
and
its eventual disposition. If these cash flows are less than the carrying
amount
of the asset, an impairment loss is recognized to write down the asset to
its
estimated fair value. The fair value is estimated at the present value of
the
future cash flows discounted at a rate commensurate with management’s estimates
of the business risks. Quarterly, or earlier, if there is indication of
impairment of identified intangible assets not subject to amortization,
management compares the estimated fair value with the carrying amount of
the
asset. An impairment loss is recognized to write down the intangible asset
to
its fair value if it is less than the carrying amount. Preparation of estimated
expected future cash flows is inherently subjective and is based on management’s
best estimate of assumptions concerning expected future conditions. No
impairments were identified during the years ended December 31, 2004 or
2003.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
consolidated balance sheet, as well as net income, could be material.
Management’s assumptions about cash flows and discount rates require significant
judgment because actual revenues and expenses have fluctuated in the past
and we
expect they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising.
We
account for advertising production costs by expensing such production costs
the
first time the related advertising is run.
Accounts
Receivable. We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for
bad
debts is estimated and recorded which reduces the recognized receivable to
the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad
debt
charges are recorded based on our historical losses and an overall assessment
of
past due trade accounts receivable outstanding.
Inventories.
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review
our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the product(s) concerned and production requirements. Demand
for
our products can fluctuate significantly. Factors that could affect demand
for
our products include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in cancellations of
advance
orders or a reduction in the rate of reorders placed by customers. Additionally,
our management’s estimates of future product demand may be inaccurate, which
could result in an understated or overstated provision required for excess
and
obsolete inventory.
Income
Taxes. Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for
the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the
value
of our deferred tax assets. If our management determines that it is more
likely
than not that these assets will not be realized, we will reduce the value
of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the
value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact of
the
adoption of SFAS 151, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued
in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that
begins
after June 15, 2005. The Company has evaluated the impact of the adoption
of
SFAS 123(R), and does not believe the impact will be significant to the
Company's overall results of operations or financial position.
We
do not
believe that the adoption of the above recent pronouncements will have a
material effect on our consolidated financial position or results of operations.
Results
of Operations
Three
Months Ended March 31, 2005 Compared to Three Months Ended March 31,
2004
Net
sales increased by $103,996, or 6.1%, to $1,817,336 in the first three
months of
2005 from $1,713,340 in the first three months of 2004. The net sales increase
was primarily the result of sales growth of existing products (2.4%), and
new
products (3.7%). Existing product growth came from the Virgil’s Root Beer 12
ounce bottle sales (1.5%) and from the core Reed’s Ginger Brew products (0.9%)
consisting of Reed’s Original, Reed’s Extra and Reed’s Premium Ginger Brew.
While we keep limited data on the following, we believe these existing
product
sales increases were due to increased sales in existing outlets and the
expansion of the number of outlets carrying these products. New product
growth
came from the 5-liter Virgil’s Root Beer party keg (2.8%) and from the new
Virgil’s Cream Soda (0.9%). These new product launches did not employ any
special promotional discounts above and beyond our normal promotional activity
for any of our products. Sales of these new items have continued to be
steady
and growing.
As a percentage of net sales, gross profit decreased to 18.2% in the first
three
months of 2005 from 23.9% in the first three months of 2004. This decrease
was
due to increased freight expenses (1.7%) due to higher fuel costs, increased
customs expenses (0.5%) due to increased importations of products and packaging
material, increased depreciation as a percentage of sales (0.5%) and increased
promotional expenses (3.0%), reducing our net sales by reducing the amount
charged for our products during promotions. We expect future
quarters will
benefit from these increased promotional expenses.
Selling expenses increased by $148,900 or 107.7% to $287,145 in the first
three
months of 2005 from $138,245 in the first three months of 2004 and increased
as
a percentage of net sales to 15.8% in the first three months of 2005 from
8.1%
in the first three months of 2004. The increase in selling expenses was
primarily due to increased sales wages due to a larger sales force (a 44.1%
increase). Other contributing factors were; more commissions due to increased
number of outside sales brokers (7.2%), increased selling expenses due
to the
larger sales force (12.5%) and increased promotional expenses in the form
of
demos (36.5%). Selling expenses increased as we gear up for more aggressive
growth with the expected public offering in the third quarter of this year.
The
rate of increase of our annualized selling expenses is not expected to
continue.
We will monitor our selling expenses in relation to our future realized
sales
and will make adjustments as management deems necessary.
General and administrative expenses decreased by $19,861 or 8.5%, to $214,080
in
the first three months of 2005 from $233,941 in the first three months
of 2004
and decreased as a percentage of net sales to 11.8% in the first three
months of
2005 from 13.6% in the first three months of 2004. The decrease in general
and
administrative expenses was primarily due to the shifting of some of our
previously categorized general and administrative expenses to selling expense
and cost of sales and not the result of specific action to reduce general
and
administrative expenses. The shifting of selling expenses became necessary
as
our sales force expanded. As our production facility became functional,
we
shifted certain costs previously categorized as general and administrative
to
cost of sales. Until product produced from our production facility was
able to
be sold, the costs associated with the facility were charged to general
and
administrative expenses. Likewise, certain costs which were categorized
in 2004
as general and administrative were shifted to selling expenses in 2005
as it
became clearer these costs were associated with selling efforts.
Interest expense was $71,210 in the first three months of 2005, compared
to
interest expense of $59,939 in the first three months of 2004. We had higher
interest expense in 2005 due to increased borrowing and an increase in
the prime
lending rate on our receivable line of credit with our lender, Bay Business
Credit.
In
summary, our net loss expanded in the first quarter of 2005, as compared
to the
first quarter of 2004, primarily due to reduced margins resulting from
management’s decision to aggressively promote product growth, it anticipates
will occur in future quarters, and to expand its sales forth to help promote
revenue growth.
Twelve
Months Ended December 31, 2004 Compared to Twelve Months Ended
December 31, 2003
Net
sales
increased by $2,196,589, or 32.4%, to $8,978,365 in 2004 from $6,781,776
in
2003. The net sales increase was primarily the result of sales growth of
existing products (13.5%), and new products (18.9%). Existing product growth
came from the Virgil’s Root Beer 12 ounce bottle sales (5.6%) and from the core
Reed’s Ginger Brew products (7.9%) consisting of Reed’s Original, Reed’s Extra
and Reed’s Premium Ginger Brew. While we keep limited data on the following, we
believe these existing product sales increases were due to increased sales
in
existing outlets and the expansion of the number of outlets carrying these
products. New product growth came from the 5 liter Virgil’s Root Beer party keg
(13.7%) and from the new Virgil’s Cream Soda (5.2%). These new product launches
did not employ any special promotional discounts above and beyond our normal
promotional activity for any of our products. Sales of these new items
have
continued to be steady and growing.
In
2004,
we incurred $400,000 of promotional expenses due to deals offered by our
sales
force in the sale of our products. This represented about 4.3% of gross
sales.
In 2003, they were $240,000 and about 3.4% of gross sales. These deals
are
accounted for as a direct reduction of sales. These percentage rates are
in line
with our historical rates and we do not anticipate them changing significantly.
These promotional expenses are monitored and kept in a certain
range.
As
a
percentage of net sales, gross profit increased to 20.9% in 2004 from 19.5%
in
2003. This increase was due to reduced ingredient expenses (0.2%), reduced
warehouse expenses (0.3%) as a result of the West Coast brewery reducing
the
need for outside warehouse services, reduced depreciation as a percentage
of
sales (0.5%) and reduced production costs (2.2%) associated with savings
generated from the West Coast brewery continuing to come on line. These
increases were offset by higher freight costs (-1.8%) due to increased fuels
costs being passed on to the company.
Selling
expenses increased by $136,085 or 20.7% to $791,975 in 2004 from $655,890
in
2003 and decreased as a percentage of net sales to 8.7% in 2004 from 9.7%
in
2003. The increase in selling expenses was primarily due to increased sales
wages due to a larger sales force (19.5%) and more commissions due to increased
number of outside sales brokers (18.7%) offset by reduced selling expenses
(-8.4%) and reduced promotional expenses (-10.2%). Selling expenses reduced
due
to cheaper telephone services and increased coordination between the company’s
two sales forces to reduce duplicity in travel needs. Promotional expenses
reduced because the company reduced trade shows and advertising expenses.
The
focus of our marketing is shifting to more in store promotions and more direct
selling than trade show selling.
General
and administrative expenses increased by $316,277 or 41.7%, to $1,074,536
in
2004 from $758,258 in 2003 and increased as a percentage of net sales to
12.0%
in 2004 from 11.2% in 2003. The increase in general and administrative expenses
was primarily due to in to increased payroll expenses (23.1%) due to a larger
staff to handle the increased business, increased transportation expenses
(17.3%) due to the expansion of the local direct distribution, increased
depreciation expenses (9.0%) due to equipment being used for local distribution,
increased tax expenses (10.1%) due to the company paying state franchise
taxes
for two years. The remaining expense increases (40.5%) were spread evenly
over
the other expenses categories and were a direct result of the increased sales
during 2004.
Legal
Defense costs for 2004 were $80,156. These expenses were pursuant defense
versus
a lawsuit brought against us by a consultant alleging funds due him from
us. We
mounted a successful defense in this action. We filed a post trial motion
for
attorney fees and costs and were awarded $64,895. The case is in appeal and
we
project that we may incur additional legal expenses up to $35, 000 over the
next
12 months in pursuit of further defense in this case.
Interest
expense was $250,738 in 2003, compared to interest expense of $255,033 in
2004.
We had slightly higher interest expense in 2004 due to increased borrowing
on
our receivable line of credit with our lender, Bay
Business Credit.
In
addition, in 2003, we expensed $426,546 for a public offering of our common
stock, which offering was withdrawn. We filed the registration statement
for the
offering on October 25, 2001; it became effective on December 31, 2002;
it was
withdrawn on March 26, 2003. We did not complete the offering. We had a
nine-month window to sell shares and because the initial stock sales were
slow
and the stock market was depressed due to the Iraq war we withdrew the
offering.
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Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through private sales of common
stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations.
As
of
March 31, 2005, we had a working capital deficit of $1,028,559, compared
to a
working capital deficit of $593,450 as of December 31, 2004. This
increase
in our working capital deficit was primarily attributable to losses from
operations, a decrease in accounts receivable, an increase in accounts payable
and an increase in accrued expenses.
As of March 31, 2005, cash was $33,160, compared to $42,488 as of
December 31, 2004. Net cash provided by operating activities was
approximately $135,465 for the three months ended March 31, 2005. This
amount
arose from cash collections on accounts receivable an increase accounts
payable
and accrued expenses, offset with our loss from operations.
We
used
$37,001 in investing activities for the three months ended March 31, 2005,
primarily for the purchase of equipment for our West Coast Brewery.
Cash
flow
used in financing activities was $107,792 for the three months ended March
31,
2005 as a result of a pay-off of one of our non-related party unsecured
loans
and an increase in our deferred offering expenses.
We do not have any current material commitments for capital expenditures.
On June 25, 2005, we changed our primary lender. As a result we
have
increased our revolving line of credit availability from $1,100,00 to
$1,910,000. In addition, long term debt financing with our previous lender
has
been refinanced with our new lender. We were successful in securing these
credit
facilities at an interest rate of Prime plus 2.75% as opposed to interest
rates
with our pervious lender which ranged from Prime plus 9% to Prime plus
12%.
This revolving line of credit is secured by all of our assets, including
real
estate, accounts receivable, inventory, trademarks and other intellectual
property and equipment. The credit facility does not impose any financial
covenants on us.
During
the next six months, we expect to reduce our raw materials inventory by
approximately $150,000. We built up this inventory by purchasing beverage
bottles in a foreclosure proceeding of an unrelated
party.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
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BUSINESS
Background
We
are a
growing developer, manufacturer, marketer, and seller of New Age beverages,
as
well as candies and ice creams. New Age beverages is a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports
drinks,
and water.
We currently offer 14 beverages, including six varieties of Reed’s Ginger Brews,
Virgil’s Root Beer and Cream Soda, China Cola and Cherry China Cola, and four
varieties of a new line of non-carbonated ginger brews called Reed’s Ginger
Juice Brews. Our recent products include Reed’s Crystallized Ginger Candy,
Reed’s Crystallized Ginger Baking Bits, Reed’s Ginger Candy Chews, Reed’s
Original Ginger Ice Cream, Reed’s Chocolate Ginger Ice Cream, and Reed’s Green
Tea Ginger Ice Cream.
We
sell
the majority of our products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree,
in
Canada. Historically, most of our beverages were sold in the natural food
industry.
Our
current business strategy is to maintain a firm marketing focus in the natural
food marketplace while building a national direct sales and distribution
force
to take our proven products into mainstream market and distribution channels.
Key elements of our business strategy include:
Historical
Development
In
June
1987, Christopher J. Reed, our founder and CEO, began development of Reed’s
Original Ginger Brew, his first beverage creation. After two years of
development, it was ready for market in June 1989. Initial sales were in
11
southern California stores.
By
1990,
we brought on the next three natural food distributors. Production moved
to a
larger facility in Boulder, Colorado. In 1991, we moved all of our production
to
our co-pack facility in Pennsylvania. We began exhibiting at the national
natural and specialty food trade shows, which brought national distribution
in
natural, gourmet and specialty foods and the signing of our first mainstream
supermarket distributor. Sales topped $500,000.
Also
in
1991, the United States National Association of the Specialty Food Trade,
or
NASFT, and the Canadian Fancy Food Association, or CFFA, both gave us top
honors
as a new product that year. CFFA awarded us “Best Imported Food Product” at
their annual show and Original Ginger Brew was a NASFT “Outstanding Beverage
Finalist” in the United States.
Throughout
the 1990’s, we continued to develop and launch new ginger brew varieties. Reed’s
Ginger Brews reached broad placement in natural foods stores nationwide.
The
major natural food distributors and many specialty food and mainstream beverage
distributors started carrying our beverages. In 1997, we began licensing
the
products of China Cola. In addition, we launched Reed’s Crystallized Ginger
Candy. We have the candy manufactured in Fiji under a proprietary, natural,
non-sulfured process.
In
1999,
we purchased the Virgil’s Root Beer brand from Crowley Beverage Company. The
brand has won numerous gourmet awards. Because the Virgil’s brand is partially
produced under our auspices in Europe, this purchase also secured our entry
into
the European Union for our entire line of products.
In
connection with our acquisition of China Cola in 2000, we agreed to pay the
seller royalties equal to $0.75 per case sold. The minimum payments per
agreement year were $18,750 and the royalties expired on July 1, 2002.
Also
in
2000, we launched Reed’s Original Ginger Ice Cream and two more products: Reed’s
Cherry Ginger Brew and a beautiful designer 10-ounce gift tin of our Reed’s
Crystallized Ginger Candy. In December 2000, we acquired China Cola. Our
sales
broke through the $5 million level, reaching $5.7 million that
year.
In
December 2000, we also purchased an 18,000 square foot warehouse property,
the Brewery, to house our West Coast production facility. The Brewery now
also
houses our executive offices and serves as our southern California warehouse
facility.
In
2001,
we saw the national launch of Reed’s Chocolate Ginger Ice Cream and Reed’s Green
Tea Ginger Ice Cream. We also expanded our confectionary line with two new
candy
products: Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger Candy Chews.
In
2002,
we launched our Reed’s Ginger Juice Brew line, with four flavors of organic
juice blends. In November, we completed our first test runs of Reed’s and
Virgil’s products at the new Brewery and in January 2003, our first commercially
available products came off the Los Angeles line.
We
filed
a registration statement on Form SB-2 offering 3,000,000 shares at $6.00
through
Blue Bay Capital Corp., which was declared effective by the SEC on
December 31, 2002. We withdrew that Registration Statement in March
2003 in
response to our analysis of capital market conditions in the economic climate
surrounding the 2003 Iraq War. We collected $11,160; all moneys collected
were
returned.
We
launched our own direct distribution in Los Angeles in April 2003. In its
first
year, it has successfully opened hundreds of new accounts in stores that
represent a completely new phase of expansion for our sales and distribution
of
our products. These include successes in industrial foodservice, hospitals,
motion picture studios, local “mom and pop” groceries and mainstream supermarket
chains, both large and small. In November, we launched the 5-liter Virgil’s
party keg and sales for that single SKU reached $120,000 in the first month.
This was due to large, initial orders from Costco Club stores in
San Diego, Arizona, New England, and Texas. Market expansion in this
area
continues to accelerate.
In
2004,
we launched Virgil’s Cream Soda, draught Virgil’s Root Beer, and draught Cream
Soda from the Brewery, with installations at the Getty Center in Los Angeles,
Fox Studios and other locations around Los Angeles. In May, our local southern
California direct sales effort landed direct distribution of our products
into
Ralph’s supermarkets. In October 2004, we launched our two newest products:
Virgil’s Cream Soda in a 5-liter keg and Reed’s Spiced Apple Brew in a
750 ml. champagne bottle.
Industry
Overview
Our
beverages are classified as New Age beverages, a category that includes natural
soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks and
water. In just four years, manufacturers’ sales of New Age beverages ballooned
from $8 billion in 1998 to more than $13 billion in 2002. This
represents an average growth of more than 11% per year. In 2004, dollar
sales are expected to reach $15 billion, reflecting average growth
of 7.4%
from 2002. Estimates are that sales will reach more than $18 billion
by
2008. (Source: Business Trends Analysts) The Alternative Beverage category
is a
small portion of the non-alcoholic beverage market, which has annual sales
in
excess of $80 billion.
The
candy
industry in the United States exceeds $23 billion in sales annually
in
2003, of which approximately 40% is non-chocolate candy. The average American
consumes over 25 pounds of candy per year. (Source: National Confectioners
Association)
The
ice
cream industry in the United States generates more than $20 billion
in
annual sales in 2003. (Source: International Dairy Foods Association and
the
United States Dairy Association) The packaged ice cream industry includes
economy, regular, premium, and super-premium products.
Super-premium
ice cream such as Reed’s Ginger Ice Creams is generally characterized by a
greater richness and density than other kinds of ice cream. This higher quality
ice cream generally costs more than other kinds and is usually marketed by
emphasizing quality, flavor selection, texture and brand image. Based on
supermarket sales, super-premium sales in the United States were
$700 million in 2003, or approximately 3.5% of all ice cream sales.
(Source: AC Nielsen Scan Trak) The highest supermarket sales increases
in
2003 were seen by the premium and super-premium higher fat varieties. Sales
of
super-premium ice cream grew by more than 12% in 2003 over 2002. (Source:
International Dairy Foods Association)
Our
Products
We
currently manufacture and sell 14 beverages, two candies, and three
ice
creams. We make all of our products using premium all-natural ingredients.
According to Spence Information Services (SPINS), which is the only sales
information service catering to the natural food trade; Reed’s Brews and
Virgil’s Root Beer currently hold three of the top ten positions based on dollar
sales among all beverages in the natural foods industry with Reed’s Extra Ginger
Brew holding the number 1 position. Our products include:
Beverages
Reed’s
Ginger Brews
Why
ginger? We have found friends and advocates among alternative, holistic,
naturopathic, and homeopathic medical practitioners, dieticians and medical
doctors. This is because our beverages contain a high volume of ginger. A
number
of practitioners have contacted us of their own accord, telling us of their
habit of recommending Reed’s Extra Ginger Brew for their patients as a simple
way to ingest a known level of ginger. Reed’s Ginger Brews contain between eight
and 26 grams of fresh ginger in every 12-ounce bottle.
While
we
make no claim as to any medical or therapeutic benefits of our products,
among
the applications frequently cited in third-party medical studies on ginger
are:
· |
Recommended
use for prevention and relief of motion
sickness,
|
· |
A
preferred alternative to aspirin in heart attack
prevention,
|
· |
A
safe and effective alternative to pharmaceutical anti-ulcer
drugs,
|
· |
Anti-inflammatory
treatment for arthritis,
|
· |
Treatment
for a variety of digestive disorders, including both constipation
and
diarrhea,
|
· |
Natural
therapy for menstrual discomfort, nausea, colds and influenza,
and
|
o |
University
of Minnesota Press and ePress (October, 2003),
|
o |
Vegetarian
Times (Jan. 2004),
|
o |
Hormel
Institute of Phoenix, AZ (Jan. 2004),
|
o |
Common
Spice Or Wonder Drug (Herbal Free Press,
1993)
|
The
United States Food and Drugs Administration (FDA) include Ginger on their
GRAS
(generally recognized as safe) list, however, neither the FDA nor any other
government agency officially endorses or recommends the use of ginger as
a
dietary supplement.
Ginger
ale is the oldest known soft drink. Before modern soft drink technology
existed,
non-alcoholic beverages
were brewed at home directly from herbs, roots, spices, and fruits. These
handcrafted brews were then aged like wine and highly prized for their
taste and
their tonic, health-giving properties. Reed’s Brews are a revival of this home
brewing art and we make them with care and attention to wholesomeness
and
quality, using the finest fresh herbs, roots, spices, and fruits. Our
expert
brew masters brew each batch and age it with great pride.
We
believe that Reed’s Ginger Brews are unique in their kettle brewed origin among
all mass-marketed soft drinks. We use no refined sugars as sweeteners.
Our
products differ from commercial soft drinks in three particular characteristics:
sweetening, carbonation, and coloring. Reed’s Ginger Brews present 20% less
sweetness, for greater adult appeal. Instead of using injected-based
carbonation, we produce our carbonation naturally, through slower, beer-oriented
techniques. This process produces smaller, longer lasting bubbles that
do not
dissipate rapidly when the bottle is opened. We do not add coloring.
The color
of our products comes naturally from herbs, fruits, spices, roots and
juices.
In
addition, since Reed’s Brews are pasteurized, they do not require or contain any
preservatives. In contrast, modern commercial soft drinks generally are
produced
using natural and artificial flavor concentrates prepared by flavor
laboratories, tap water, and highly refined sweeteners. Typically, manufacturers
make a centrally processed concentrate that will lend itself to a wide
variety
of situations, waters, and filling systems. The final product is generally
cold-filled and requires preservatives for stability. Colors are added
that are
either natural, although highly processed, or artificial.
We
currently manufacture and sell six varieties of Reed’s Ginger Brews:
|
Reed’s
Original Ginger Brew was our first creation, and is a Jamaican recipe
for homemade ginger ale using 17 grams of fresh ginger
root, lemon,
lime, honey, fructose, pineapple, herbs, and spices. Reed’s Original
Ginger Brew is 20% fruit juice.
Reed’s
Extra Ginger Brew is the same approximate recipe, with 26 grams
of fresh ginger root for a stronger bite. Reed’s Extra Ginger Brew is 20%
fruit juice.
Reed’s
Premium Ginger Brew is the no-fructose version of Reed’s Original
Ginger Brew, and is sweetened only with honey and pineapple
juice. Reed’s
Premium Ginger Brew is 20% fruit juice.
Reed’s
Raspberry Ginger Brew is brewed from 17 grams of fresh ginger
root, raspberry juice, and lime. It is 20% raspberry juice
and is
sweetened with fruit juice and fructose.
Reed’s
Spiced Apple Brew uses 8 grams of fresh ginger root, the finest
tart German apple juice, and such apple pie spices as cinnamon,
cloves,
and allspice. Spiced Apple Brew is 50% apple juice and sweetened
with
fruit juice and fructose.
Reed’s
Cherry Ginger Brew is the newest addition to our Ginger Brew family,
and is naturally brewed from: filtered water, fructose, fresh
ginger root,
cherry juice from concentrate, and spices. Reed’s Cherry Ginger Brew is
22% cherry juice.
|
|
All
six
of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores
as
singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold in select Costco stores in a special 12-pack. Reed’s Spiced Apple Brew is
now available in a 750 ml. champagne bottle.
Virgil’s
Root Beer
Over the years, Virgil’s has won numerous awards and has a reputation among many
as one of the best root beers made anywhere. Virgil’s Root Beer won the
“Outstanding Beverage” award at NASFT’s International Fancy Food and Confection
Show three times, in 1994, 1996 and 1997. Bon
Apetít magazine
has also named Virgil’s Root Beer “Best Beverage.” Originally brewed in the
north of England, Virgil’s is now produced in the United States and
Germany.
Virgil’s is a premium root beer. We use these all-natural ingredients:
· |
Bourbon
vanilla from Madagascar
|
|
· |
Cinnamon
from Sri Lanka
|
|
· |
Sweet
birch and molasses from the southern United States
|
|
· |
Pimento
berry oil from Jamaica
|
|
· |
Balsam
oil from Peru, and
|
|
We
collect these ingredients worldwide and gather them together at the brewing
and
bottling facilities we use in the United States and Germany. At the breweries,
we combine and brew these ingredients under strict specifications and finally
heat-pasteurize Virgil’s Root Beer, to ensure quality.
We
sell
Virgil’s Root Beer in three packaging styles: 12-ounce bottles in a four-pack,
a
special ceramic-swing-lid Grolsch Beer-style pint bottle, and a 5-liter
self-tapping party keg. We now make Virgil’s available in draught “pony kegs” as
well.
Virgil’s
Cream Soda
We
launched Virgil’s Cream Soda in January 2004 and initial sales have been strong.
We make this product with the same attention to quality that makes Virgil’s Root
Beer so popular.
Virgil’s
Cream Soda is a gourmet cream soda. We use these all-natural ingredients:
· |
Bourbon
vanilla from Madagascar
|
We
brew
Virgil’s Cream Soda the same way we brew Virgil’s Root Beer.
Virgil’s
Cream Soda is currently being sold in 12-ounce long neck bottles in colorful
4-packs and a 5-liter party keg version. We offer Virgil’s Cream Soda in our
draught format as well.
China
Cola
We
consider China Cola to be the best tasting and most natural cola in the
world.
Now sweetened with raw cane, we restored China Cola to its original delicious
blend of imported Chinese herbs, essential oils, and natural spices. China
Cola
contains no caffeine. It comes in two varieties, Original China Cola and
Cherry
China Cola.
Original
China Cola is made from:
Cherry
China Cola is made from the same ingredients as Original China Cola, with
the
addition of natural cherry flavor.
China
Cola and Cherry China Cola sell as singles, in four-packs and in 24-bottle
cases.
Reed’s
Ginger Juice Brews
|
|
In
May
2002, we launched a new line of ginger brews called Reed’s Ginger Juice Brews.
They are 100% juice products that are non-carbonated and brewed from organic
fresh ginger root and sweetened with organic juices. We did this in part
in
response to a strong trend we have seen toward organic ingredients and
non-carbonated beverages in the marketplace. We wanted to extend our ginger
brew
line and believe that these new flavors will cater to the growing market
for
organic non-carbonated beverages.
All
four
of our Reed’s Ginger Juice Brews start with:
filtered
water,
· |
organic
fresh ginger root, and
|
· |
organic
white grape juice from concentrate.
|
Reed’s
Lemon Guava Ginger Juice Brew adds:
· |
guava
juice from concentrate, and
|
· |
lemon
juice from concentrate.
|
Reed’s
Strawberry Kiwi Ginger Juice Brew adds:
· |
organic
strawberry juice from
concentrate, and
|
· |
organic
kiwi juice from concentrate.
|
Pineapple
Orange Ginger Juice Brew adds:
· |
organic
pineapple juice from concentrate,
|
· |
organic
orange juice from
concentrate, and
|
· |
organic
lime juice from concentrate.
|
Reed’s
Cranberry Raspberry Ginger Juice Brew adds:
· |
cranberry
juice from concentrate, and
|
· |
organic
raspberry juice from concentrate
|
Reed’s
Ginger Juice Brews drinks come in a 16-ounce juice bottle as singles
or in cases
of 12 and 24 bottles.
Malibu
Teaz
Under
a
license agreement, we previously sold six different types of Malibu Teaz,
a line
of organic ready-to-drink teas and sweeteners. Under the license agreement,
profits were split equally between Malibu Teaz and us. In 2002, we
entered into discussions to purchase Malibu Teaz but no agreement was reached.
At the end of 2002, we decided not to renew the license and we stopped
selling
Malibu Teaz products.
Reed’s
Ginger Candies
Reed’s
Crystallized Ginger Candy
Reed’s
Crystallized Ginger was the first crystallized ginger on the market in
the
United States to be sweetened with raw cane instead of refined white sugar.
Reed’s Crystallized Ginger is custom-made for us in Fiji.
The
process is an ancient one that has not changed much over time. After harvesting
baby ginger (the most tender kind), the root is diced and then steeped
in large
vats filled with simmering raw cane syrup. Steeping for several days, the
ginger
is then removed and allowed to crystallize into soft, delicious nuggets.
Many
peoples of the islands have long enjoyed these treats for health and pleasure.
We
sell
this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins,
16-ounce re-sealable Mylar bags, and in bulk. We also sell Reed’s Crystallized
Ginger Baking Bits in bulk.
Reed’s
Ginger Candy Chews
For
more
than 100 years, residents of Southeast Asia from Indonesia to
Thailand have
enjoyed soft, gummy ginger candy chews. Individually wrapped, ten to
a ‘Lucky
Strike’ style soft-pack, Reed’s has taken them a step further, adding more
ginger, using no gelatin (vegan-friendly) and making them slightly
easier to
unwrap than their Asian counterparts.
Reed’s
Ginger Candy Chews are made for us in Indonesia from sugar, maltose
(malt
sugar), ginger, and tapioca starch.
We
sell
Reed’s Ginger Candy Chews individually wrapped in soft-packs of ten candies
and
as individually wrapped loose pieces in bulk.
Reed’s
Ginger Ice Creams
We
make
Reed’s Ginger Ice Creams with 100% natural ingredients, using the finest
hormone-free cream and milk. We combine fresh milk and cream with the finest
natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane
sugar to make a delicious ginger ice cream with a super premium, ultra-creamy
texture and Reed’s signature spicy-sweet bite. Our ice creams are made for us,
according to our own recipes, at a dairy in upstate New York. The three
Reed’s
Ginger Ice Creams are:
Reed’s
Original Ginger Ice Cream made
from
milk, cream, raw cane sugar, Reed’s Crystallized Ginger Candy (finest ginger
root, raw cane sugar), ginger puree, and guar gum (a natural vegetable
gum)
Chocolate
Ginger Ice Cream made
from
milk, cream, raw cane sugar, finest Belgian Cocoa (used to make Belgian
Chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane
sugar), chocolate shavings (sugar, unsweetened chocolate, Belgian Cocoa,
soy
lecithin and real vanilla), ginger puree, and guar gum (a natural vegetable
gum)
creating the ultimate chocolate ginger ice cream.
Reed’s
Green Tea Ginger Ice Cream made
from
milk, cream, the finest Green Tea, raw cane sugar, ginger puree, Reed’s
Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar), and
guar gum
(a natural vegetable gum) creating the ultimate green tea ginger ice
cream.
We
sell
Reed’s Ginger Ice Creams in pint containers and cases of eight pints. We plan
to
supply Reed’s Ginger Ice Creams in foodservice volume packaging as
well.
We
plan
to continue expanding the Reed’s Ginger Brew, Reed’s Ginger Juice Brew, Reed’s
Ginger Ice Cream, and Reed’s Ginger Candy product lines. Other Reed’s Ginger
Product concepts and lines are under consideration. We also plan to expand
the
Virgil’s product line into additional new flavors and packaging styles.
Among
the
advantages of our owned and self-operated Brewery are the flexibility to
try
innovative packaging and the capability to experiment inexpensively with
new
product flavors with little risk to our operations or capital. For example,
to
the best of our knowledge, our Brewery is the first plant mass-producing
swing-lid bottled soft drinks in North America; we will soon produce several
of
our beverages in one-liter swing-lid bottles. Our Spiced Apple Brew is
now
available in a 750 ml. champagne bottle and other products are planned
to
be available with this packaging in the near future.
Currently,
we sell a half-liter Virgil’s Root Beer swing-lid bottle that is made for us in
Europe. The new one-liter bottles will be filled at the Brewery, allowing
us to
provide a greater amount of product at a substantially lower price. We
have
received preliminary interest from several large national supermarket chains
for
this product.
Although
we are always working on new products and designs, research and development
expenses in the last two years have been nominal. We do not expect any
significant increases in research and development expenses.
Manufacture
of Our Products
At
this
time, we produce our carbonated beverages at two facilities. Our Brewery
in Los
Angeles handles the western half of the United States and we have a contract
with The Lion Brewery, Inc., a packing, or co-pack, facility in Pennsylvania
for
the eastern United States. The current two-year term of the agreement expires
on
May 31, 2005 and renews automatically for successive two-year terms
unless
terminated by either party. The co-pack facility assembles our products
and
charges us a fee, generally by the case, for the products they produce.
Our
Ginger Juice Brews are co-packed at H.A. Ryder for us in Northern California.
We
supply all the ingredients and packaging. The co-pack facility assembles
our
products and charges us a fee, by the case. Our ice creams are co-packed
for us
at Ronnybrooke dairy in upstate New York. We supply all the flavor additions
and
packaging and the dairy supplies the ice cream base. The co-pack facility
assembles our products and charges us a fee, by the unit produced for us.
We
have half-liter swing-lid bottles of our Virgil’s Root Beer line co-packed for
us at the Hofmark brewery in southern Germany. The co-pack facility assembles
our products and charges us a fee by the unit they produce for us. We do
not
have written contracts with H.A Ryder, Ronnybrooke Dairy or the German
co-pack
facility.
We
follow
a ‘fill as needed’ manufacturing model to the best of our ability and we have no
significant backlog of orders.
Substantially
all of the raw materials used in the preparation, bottling and packaging
of our
products are purchased by us or by our contract packers in accordance with
our
specifications. Reed’s Crystallized Ginger is made to our specifications in
Fiji. Reed’s Ginger Candy Chews are made to our specifications in Indonesia, and
we repackage them at the Brewery in Los Angeles.
Generally,
we obtain the ingredients used in our products from domestic suppliers
and each
ingredient has several reliable suppliers. We have no major supply contracts
with any of our suppliers. As a general policy, we pick ingredients in
the
development of our products that have multiple suppliers and are common
ingredients. This provides a level of insurance against a major supply
constriction or calamity.
We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that the Brewery has ample capacity to handle
increased West Coast business. To the extent that any significant increase
in
business requires us to supplement or substitute our current co-packers,
we
believe that there are readily available alternatives, so that there would
not
be a significant delay or interruption in fulfilling orders and delivery
of our
products. In addition, we do not believe that growth will result in any
significant difficulty or delay in obtaining raw materials, ingredients
or
finished product that is repackaged at the Brewery.
Our
Primary Markets
We
target
a niche in the soft drink industry known as New Age beverages. The soft
drink
industry generally characterizes New Age Beverages as being made more naturally,
with upscale packaging, and often creating and utilizing new and unique
flavors
and flavor combinations. The New Age Beverage segment of our industry has
grown
from $620 million in annual sales in 1989 to over $15 billion
in
estimated annual revenues in 2004 (Source: Business Trend Analysts).
The
New
Age beverage segment is highly fragmented and includes such players as
SoBe
(acquired by PepsiCo), Snapple (acquired by Cadbury Schweppes in 2000),
Arizona
(2003 revenues over $200 million), Hansen’s (2003 revenues over
$110 million) and Jones Sodas (2003 revenues over $23 million),
among
others. (Sources: BevNet, Beverage World, Yahoo Finance, and company filings
made with the SEC.) These brands have the advantage of being seen widely
in the
national market and being commonly well known for years through well-funded
ad
campaigns. Despite our products’ having a higher price, no mass media
advertising and a relatively small presence in the mainstream market compared
to
many of our competitors, we believe that results to date demonstrate that
Reed’s
Ginger Brews and Virgil’s sodas are holding up well among these significantly
larger brands. See “Business — Competition.”
We
sell
the majority of our products in natural food stores, gourmet shops, and
supermarket chains, primarily in the United States and, to a lesser degree,
in
Canada. In addition, we increasingly sell our products in restaurants,
delicatessens, neighborhood grocery markets, movie studios, hospitals and
industrial foodservice locations.
We
believe that our products have achieved a leading position in their niche
in the
fast-growing natural food industry. According to May 2001 data from the
Spence
Information Service, a Nielson Company, or SPINS, our top-selling items
are in
over 90% of natural food stores in the United States. The last time we
purchased
natural foods sales ratings surveys by SPINS, in 2001, we
also
found three of our SKUs leading the top five and five of our SKUs in the
top ten
based on sales.
With
the
advent of large chains like Whole Foods and Wild Oats and specialty merchants
like Trader Joe’s, the natural foods segment continues to grow each year in
direct competition with the mainstream grocery trade.
Our
products are currently placed in approximately 110 Safeway stores in Oregon
and
all 130 Raley’s stores in Northern California. Safeway and Raley’s data
show Reed’s Ginger Brews, with minimal advertising and promotions, performs in
the “middle of the pack” of highly advertised national brands in the New Age
Beverage segment of the market.
We
intend
to build on this success by placing Reed’s, Virgil’s and the rest of our lines
in the New Age section of as many of the nation’s 35,000 supermarkets as
possible.
Our
products are currently in supermarkets throughout the United States and
Western
Canada, including the following:
Supermarket
Chain
|
|
Location
|
Acme
|
|
Pennsylvania
|
AJ’s
|
|
Arizona
|
Albertson’s
|
|
Texas,
Florida & California
|
A&P
|
|
Northeast
|
Bashas
|
|
Arizona
|
Bi-Lo
|
|
South
Carolina
|
Big
Save
|
|
Hawaii
|
Bristol
Farms
|
|
Southern
California
|
Bruno’s
|
|
Alabama
|
Byerly’s
|
|
Minnesota
|
Clemens
Family Markets
|
|
Pennsylvania
|
Costco
|
|
National
|
Dierbergs
Markets
|
|
Missouri
|
Dominick’s
Finer Foods
|
|
Illinois
|
Foodarama
|
|
New
England
|
Food
Emporium
|
|
New
York
|
Food
Lion
|
|
North
Carolina and Virginia
|
Fred
Meyers
|
|
Northwestern
U.S.
|
The
Fresh Market
|
|
North
Carolina
|
Gelson’s
|
|
Southern
California
|
Giant
Eagle
|
|
Pennsylvania
|
Giant
Food
|
|
Maryland
|
Hannaford
Bros.
|
|
Maine
|
Harris
Teeter
|
|
North
Carolina
|
HEB
|
|
Texas
|
Henry’s
|
|
San
Diego
|
Hy-Vee
|
|
Iowa
|
Ingles
Markets
|
|
Southeast
|
Jewel-Osco
|
|
Illinois
|
Kash
n Karry (Sweetbay)
|
|
Florida
|
King
Kullen
|
|
New
York
|
Kroger
|
|
Various
|
Larry’s
Markets
|
|
Seattle
|
Lowe’s
Food Stores
|
|
North
and South Carolina
|
Meijers
|
|
Michigan
|
Overwaitea/Save-On
Foods
|
|
Western
Canada
|
Patrini’s
|
|
San
Francisco
|
Pavilion’s
|
|
Southern
California
|
Publix
|
|
Florida
|
Quality
Food Centers
|
|
Northwestern
U.S.
|
Raley’s/Nob
Hill
|
|
Northern
California
|
Ralph’s
|
|
Southern
California
|
Ramey’s/Price
Cutter
|
|
Missouri
|
Randall’s
|
|
Houston
|
Rice’s
|
|
Houston
|
Safeway
|
|
National
and Western Canada
|
Sam’s
Club
|
|
National
|
Schnuck’s
Markets
|
|
Missouri
|
Sentry
Foods
|
|
Milwaukee
|
Shaw’s
Supermarkets
|
|
Massachusetts
|
Smith’s
|
|
Utah
|
Stater
Brothers
|
|
California
|
Stop
and Shop
|
|
Massachusetts
|
Super
Fresh
|
|
Philadelphia
|
Thriftway
|
|
Pacific
Northwest
|
Tops
Markets
|
|
New
York
|
Trader
Joe’s
|
|
National
|
Treasure
Island
|
|
Chicago
|
Vons
|
|
Southern
California
|
Wegman’s
|
|
New
York
|
Whole
Foods Markets
|
|
National
|
Winn-Dixie
|
|
New
Orleans
|
Supermarkets,
particularly supermarket chains and prominent local supermarkets, often
impose
slotting fees before permitting new product placements in their store
or chain.
These fees can be structured to be paid one-time only or in installments.
We
pursue broad-based slotting in supermarket chains throughout the United
States
and, to a lesser degree, in Canada. However, our direct sales team
in southern
California and our national sales management team have been able to
place our
products without having to pay slotting fees much of the time. However,
when we
have to pay slotting fees for new placement, the slotting fee normally
costs
between $10 and $100 per store per new item placed. We intend
to use a
portion of the net proceeds of this offering to pay slotting fees.
See “Use of
Proceeds.”
Foodservice
On-premise
(restaurant) activity in commercial and non-commercial locations
is an
increasing component of total beverage sales. In recognition of this
trend, we
market aggressively to industrial cafeterias, bars, and restaurants.
Placement
of our products in stadiums, sports arenas, concert halls, theatres,
and other
cultural centers is another long-term marketing priority. In addition,
we plan
to seek placement of our ice creams in restaurants nationwide.
International
Sales
A
limited
market has developed for our products in Europe and Asia, with increasing
activity from our distributor in the Netherlands and increasing purchases
by a
Japanese marketer. Sales outside of North America currently represent
less than
1% of our total sales. Sales in Canada represent about 1.3% of our
total
sales.
The
European Union is an open market for Reed’s with access to that market due in
part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in
Germany. Reaction to the Reed’s brands at Natural Products Exposition Europe in
June 2000 was very positive. In October 2003, in Cologne, Germany at
ANUGA, one
of the world’s largest food shows, our products experienced a broad, positive
reception. We have already had some success in selling our products
in Europe
through a master distributor in Amsterdam and sub-distributors in the
Netherlands, Denmark, the United Kingdom, and Spain. We are currently
negotiating with a Dutch company in Amsterdam for wider European distribution.
American
Trading Corp. in Japan orders our products on a regular basis for distribution
in Japan. We are holding preliminary discussions with other trading
companies
and import/ export companies for the distribution of our products throughout
Japan, China and the rest of Asia. We believe that these areas are
a natural fit
for Reed’s ginger products, because of the importance of ginger in Asian diet
and nutrition.
Distribution,
Sales and Marketing
We
currently have a national network of natural and specialty food distributors
in
the United States and Canada. We also have mainstream beverage distributors
in
select markets. In southern California, we have our own direct distribution
in
addition to other local distributors.
We
plan
to expand our direct distribution into other markets. In addition,
where a
market does not support or lend itself to direct distribution, we intend
to
enlist local mainstream beverage distributors to carry our products.
We
plan
to use a significant portion of the proceeds of this offering toward
hiring the
additional sales people needed to support both the expansion of our
existing
direct distribution and to grow sales through mainstream distributors.
See “Use
of Proceeds.”
Other
New
Age beverages employed this model for growth in their early years before
being
acquired by large beverage concerns. Snapple, SoBe, Arizona Teas, and
Energy
Brands had or have large dedicated sales forces supporting extensive
networks of
beverage distributors. A few New Age beverage companies have put in
place their
own direct distribution, such as Odwala and Fresh Samantha. Which model
we
ultimately favor will depend on results in the marketplace. We anticipate
using
a hybrid of both distribution strategies.
We
currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales.
Both sales
forces consist of sales managers and sales representatives. The natural
food
sales force works mainly in the natural and gourmet food stores serviced
by
natural and gourmet distributors. Representatives are responsible for
the
accounts in their territory and they stay on a focused schedule of
visits to
maintain store and distributor relationships. In the future, we intend
to
integrate both our distribution and sales forces.
It is the job of the in-house sales representative to merchandize
existing
products, to run promotions and to introduce new items. The sales
manager is
responsible for the distributor relationships and larger chain accounts
that
require headquarter sales visits in addition to managing the sales
representatives. We sell directly to our distributors, who in turn
sell to
retail stores. Our representatives maintain the pipeline flow of
our products
from our distributors (our direct customers), to the
We
currently have two sales representatives working alongside our mainstream
distributors. Based upon their results, we anticipate expanding the
number of
direct hired sales representatives to work along side our mainstream
distributors. In addition, we have three sales representatives working
with our
southern California direct distribution services. Based on their results,
we
plan rapidly to hire more of these representatives.
We
are
placing vending machines, in-store draught displays, which we call
Kegerators,
and fully branded coolers in our retail establishments.
We
also
offer our products and promotional merchandise directly to consumers
via the
Internet through our website, www.reedsgingerbrew.com.
One
of
the main goals of our sales and marketing efforts is to increase the
number of
sales people and distributors focused on growing our brands. Our increased
efforts in marketing also will require us to hire additional sales
representatives, and lease additional equipment for Kegerators and
coolers. See
“Use of Proceeds.” We anticipate that as our sales force grows that additional
office support in accounting, production and purchasing will be required.
Marketing
to Distributors
We
market
to distributors using a number of marketing strategies, including direct
solicitation, telemarketing, trade advertising, and trade show exhibition.
These
distributors, who may also have relationships with our competitors,
include
natural food, gourmet food, and mainstream distributors. Direct contact
with the
distributors is by in-house sales representatives. In limited markets,
where
direct representation is too costly, we utilize food brokers and outside
representatives.
Marketing
to Retail Stores
We
market
to stores by utilizing trade shows, trade advertising, telemarketing, direct
mail pieces, and direct contact with the store. For our direct contact,
we have
sales representatives and brokers who visit stores to sell directly in
many
regions. Sales to retail stores are coordinated through our distribution
network
and our regional warehouses. We intend to use a portion of the net proceeds
of
this offering to expand our direct sales force. See “Use of
Proceeds.”
Direct
Sales and Distribution
In
June
2003, we started Direct Sales and Distribution (DSD) to stores in southern
California, using a direct hired sales team and Company owned delivery
trucks.
Our sales representatives work closely with our new route drivers and with
distributors in areas farther away from our West Coast Brewery in Los Angeles.
This effort has increased our product distribution. Early efforts are producing
very encouraging results including placement in most of the supermarkets
in
southern California and other mainstream accounts.
While
we
do not break out sales figures on a regional basis, we can reasonably estimate
that Southern California sales traditionally represent about $1 million
per
annum. The initial indication from our Southern California DSD team suggests
that this amount will increase. The local effort is currently selling at
about
$50,000 per month at the end of year 2004 and at the end of year 2003 the
sales
were averaging around $15,000 per month. This is mostly new business and
outside
our existing markets.
These new direct-distribution accounts also include retail locations
up and down
the street, including many new independent supermarkets, "Mom and Pop"
markets,
Japanese, Korean, Chinese, and Thai markets, foodservice, and delis,
among
others. In addition, direct distribution facilitates our new placements
at
hospitals, the Getty Center in Los Angeles, Fox Studios and other cultural
and
institutional accounts.
In-Store
Draught Displays
As
part
of our new direct distribution, we have started to offer in-store draught
displays, or Kegerators. While we believe that packaging is an important
part of
making successful products, we also believe that our products themselves
need to
be exceptional to survive in today’s marketplace. Our Kegerator is an
unattended, in-store draught display that allows a consumer to sample our
products at an extremely low cost per demonstration. Stores offer premium
locations for these new, and we believe unique, draught displays. Our product
sales in most of these stores have increased significantly from the exposure
of
the premium locations and product taste trials. We intend to use a portion
of
the net proceeds of this offering to increase the number of Kegerators
we place
in stores. See “Use of Proceeds.”
Marketing
to Consumers
We
utilize several marketing strategies to market directly to consumers.
Advertising in targeted consumer magazines such as “Vegetarian Times” and “New
Age” magazine, in-store discounts on the products, in-store product
demonstration, street corner sampling, coupon advertising, consumer trade
shows,
event sponsoring and our website www.reedsgingerbrew.com are all among
current
consumer-direct marketing devices.
New
On-Draught Business
Our
West
Coast Brewery has initiated an on-draught program. The first draught location
we
have installed is at Fox Studios commissaries and restaurants. Sales have
exceeded our expectations and Fox has asked for more installations. Currently,
we are serving Virgil’s Root Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger
Brew on draught. In addition, all of our other carbonated drinks are available
in draught format. We have informal commitments from 50 or more locations
in
southern California, without having made a large marketing effort in this
direction.
Vending
Machines
To
our
knowledge, no other independent soft drink manufacturers, other than Coca-Cola
and PepsiCo, have placed fully branded, back lit vending machines nationwide.
We
believe we are the first natural soft drink manufacturer to create its
own fully
branded, backlit vending machine. We lease the vending machines and then
modify
them to our specifications. Over the next few years, we intend to expand
direct
consumer distribution through placement of these branded vending machines
in
additional locations in the United States and, to a lesser degree, in Canada.
The cost to lease the vending machines is relatively low. We will use a
portion
of the proceeds of this offering to lease, brand and install more vending
machines. See “Use of Proceeds.”
Vending
machines present several advantages. As an outdoor source of product, a
vending
machine acts as a 24 hours a day, 7 days a week point of
purchase.
Using modern cellular technology, we will be able to track performance
of each
machine and the individual products within the machine. For example, this
means
that if Reed’s Extra Ginger Brew were outselling other products, we would see
this in real time and be able to respond by restocking the vending machine
promptly. Such data will also be invaluable as a tracking demographic,
allowing
us to place more of what sells best in a particular neighborhood in a responsive
fashion or, in the case of a low performance location, to relocate the
machine.
Our
vending machine program is currently in development; to date we have placed
one
vending machine in Malibu as a test.
In-store
placements of branded refrigerated coolers by Snapple, SoBe, and Jones
Soda,
among others, have proven to have a significant positive effect on their
sales.
For example, SoBe created its pervasive presence in the mass-marketplace
almost
entirely on a backbone of cooler placements and Jones saw a doubling of
its
business in just 18 months based upon this concept. We are currently
testing our own Reed’s branded coolers in a number of locations.
Competition
Our
premium beverage products compete generally with all liquid refreshments
and in
particular with numerous other New Age beverages, including:
· |
Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury
Schweppes)
|
· |
Henry
Weinhard (owned by Phillip Morris)
|
The
Virgil’s and China Cola lines compete with a number of other natural soda
companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and
Natural Brews.
Many
of
these brands have enjoyed broad, well-established national recognition
for
years, through well-funded ad and other branding campaigns. In addition,
the
companies manufacturing these products generally have greater financial
resources than we do and have greater access to additional financing.
We
believe that our success to date is due in great part to our innovative
beverage
recipes and packaging and use of premium ingredients and a trade secret
brewing
process. We believe that our commitments to the highest quality standards
and
brand innovation are keys to our success.
Reed’s
Crystallized Ginger Candy competes primarily with other candies and
snacks in
general and, in particular, with other ginger candies. The main competitors
in
ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and
Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one
among these brands that is sulfur-free.
Reed’s
Ginger Ice Creams compete primarily with other premium and super-premium
ice
cream brands. Our principal competitors in the ice cream business are
Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of
smaller natural food ice cream companies. Most of these companies have
greater
brand recognition, market share, and access to financing than we do.
We compete with other companies not only for consumer acceptance but
also for
shelf space in retail outlets and for marketing focus by distributors,
most of
whom also distribute other brands with which our products compete.
The principal
methods of competition include product quality and taste, brand advertising,
trade and consumer promotions, pricing, packaging and the development
of new
products.
Our
sales
are less than 1% of the over-all marketplace in the New Age Beverage
Set
Proprietary
Rights
We
own
several trademarks that we consider material to our business, including
Reed’s,
Virgil’s and China Cola. In addition, we consider our finished product and
concentrate formulae, which are not the subject of any patents, to
be trade
secrets.
Our
brewing process is a trade secret. This process can be used to brew
flavors of
beverages other than ginger ale and ginger beer, such as root beer,
cream soda,
cola, and other spice and fruit beverages. We have not sought any patents
on our
brewing processes because we would be required to disclose our brewing
process
in patent applications.
Three
of
our material trademarks are registered trademarks in the U.S. Patent
and
Trademark Office: Reed’s®, Virgil’s®, and China Cola®. Registrations for
trademarks in the United States will last indefinitely as long as we
continue to
use and police the trademarks and renew filings with the applicable
governmental
offices. We have not been challenged in our right to use any of our
material
trademarks in the United States. We intend to obtain international
registration
of certain trademarks under the Berne Convention.
We
sometimes use non-disclosure agreements with employees and distributors
to
protect our proprietary rights.
Government
Regulation
The
production and marketing of our products are governed by the rules
and
regulations of various federal, state, and local agencies, including
the United
States Food and Drug Administration. The Food and Drug Administration
also
regulates the labeling of our products. We have not encountered any
regulatory
action as a result of our operations.
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which
are
estimated to be $30,000 in 2004. This is a standard cost of doing business
in
the soft drink industry.
In
California, and in certain other states where we sell our products,
we are
required to collect redemption values from our customers and remit
those
redemption values to the state, based upon the number of bottles of
certain
products sold in that state.
Employees
We
currently have 30 full-time employees, as follows: one in general
management, nine in sales and marketing support, five in operations
and 15 in
production. We employ additional people on a part-time basis as needed.
We
have
never participated in a collective bargaining agreement. We believe
that the
relationship with our employees is good.
Properties
In
December 2000, we purchased an 18,000 square foot warehouse,
the Brewery,
at 13000 South Spring Street in an unincorporated area of Los
Angeles
County, near downtown Los Angeles. The purchase price of the facility
was
$850,000, including a down payment of $102,000. We financed the balance
of the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a
building
improvement loan for $168,000 from U.S. Bank National Association,
guaranteed by
the United States Small Business Administration. Christopher J. Reed,
our
founder and CEO, personally guaranteed both loans. Both loans have
25-year
terms, with interest at the New York prime rate plus 1%, adjusted monthly,
with
no cap or floor. As of December 2004, the principal and interest payments
on the
two loans combined were $5,926 per month. This facility serves as our
principal
executive offices, our West Coast Brewery, and bottling plant and our
southern
California warehouse facility.
The
property is located in the Los Angeles County Mid-Alameda Corridor
Enterprise
Zone. Businesses located in the enterprise zone are eligible for economic
incentives designed to stimulate business investment, encourage growth
and
development, and promote job creation. The incentives include a tax
credit for
wages paid to a qualified employee, up to $26,895 over a five-year
period; a
credit for the sales or use tax paid or incurred on the purchase of
certain
qualified machinery or equipment; a business expense deduction for
the cost of
qualified property up to $20,000 purchased for exclusive use in the
enterprise
zone; the ability to carry up to 100% of net operating losses over
a maximum of
15 years to reduce the amount of taxable enterprise zone income
for those
years; and certain other financial incentives.
LEGAL
PROCEEDINGS
We
currently and from time to time are involved in litigation incidental
to the
conduct of our business. We are not currently a party to any lawsuit
or
proceeding, which, in the opinion of our management, is likely to have
a
material adverse effect on us.
MANAGEMENT
General
The
following table sets forth certain information with respect to our
directors and
executive officers:
Name
|
|
Age
|
|
Position
|
Christopher
J. Reed
|
|
46
|
|
President,
Chief Executive Officer, Chief Financial Officer and Chairman
of the Board
|
Eric
Scheffer
|
|
37
|
|
Vice
President and National Sales Manager - Natural Foods
|
Robert
T. Reed, Jr.
|
|
49
|
|
Vice
President and National Sales Manager - Mainstream
|
Robert
Lyon
|
|
55
|
|
Vice
President Sales - Special Projects
|
Judy
Holloway Reed
|
|
45
|
|
Secretary
and Director
|
Peter
Sharma III
|
|
45
|
|
Director
|
Mark
Harris
|
|
48
|
|
Independent
Director
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
50
|
|
Independent
Director
|
Michael
Fischman
|
|
49
|
|
Independent
Director
|
Christopher
J. Reed founded
our company in 1987. Mr. Reed has served as our Chairman, President,
Chief
Executive Officer, and Chief Financial Officer since our incorporation
in 1991.
Mr. Reed has been responsible for our design and products including
the original
product recipes, the proprietary brewing process, and the packaging
and
marketing strategies. Mr. Reed received a B.S. in Chemical Engineering
in 1980
from Rennselaer Polytechnic Institute in Troy, New York.
Eric
Scheffer has
been
our Vice President and National Sales Manager - Natural Foods
since May
2001. From September 2000 to May 2001, Mr. Scheffer worked as Vice
President of
Sales for Rachel Perry Natural Cosmetics. Mr. Scheffer was national
sales
manager at Earth Science, Inc. from January 1999 to September 2000,
where he
managed the United States and Canadian outside sales force. Mr. Scheffer
was
national sales manager at USA Nutritionals from June 1997 to January
1999, where
he led a successful effort bridging their marketing from natural
foods to
mainstream stores. He worked for Vita Source as Western sales manager
from May
1994 to June 1997 and was their first sales representative.
Robert
T. Reed Jr. has
been
our Vice President and National Sales Manager - Mainstream
since January
2004. From 1988 through December 2003, Mr. Reed was Vice President
of Strategic
Sales at SunGard Availability Services, during a period that company’s revenues
increased from $30 million to over $1.2 billion, earning
the company a
place in the Fortune 500. Mr. Reed became President of the SunGard
eSourcing,
the managed Internet services provider subsidiary of SunGard Availability
Services, an entity with revenues in excess of $70 million
and over 300
employees. He earned a Bachelors of Science at Mount Saint Mary’s University in
1977. Mr. Reed is the brother of Christopher J. Reed, our Chairman,
President,
Chief Executive Officer, and Chief Financial Officer.
Robert
Lyon has
been
our Vice President Sales - Special Projects since June 2002. In that
capacity,
Mr. Lyon directs our southern California direct sales and distribution
program,
our launch in mainstream markets. Over the past five years, Mr. Lyon
also ran an
organic rosemary farm in Malibu, California, selling bulk to re-packagers.
In
the 1980s and 1990s, Mr. Lyon started a successful water taxi service
with 20
employees and eight vessels of his own design. He also built the
national sales
team for a jewelry company, Iberia. Mr. Lyon holds several U.S. patents.
He
earned a Business Degree from Northwestern Michigan University in
1969.
Judy
Holloway Reed has
been
with us since 1992 and, as we have grown, has run the accounting,
purchasing,
and shipping and receiving departments at various times in the 1990s.
Ms. Reed
has been one of our directors since June 2004, our Secretary since
October 1996
and our Director of Office Operations and Staff Management since
June 2004. In
the 1980s, Ms. Reed managed media tracking for a Los Angeles Infomercial
Media
Buying Group and was an account manager with a Beverly Hills, California
stock
portfolio management company. She earned a Business Degree from MIU
in 1981. Ms.
Reed is the wife of Christopher J. Reed, our Chairman, President,
Chief
Executive Officer, and Financial Officer.
Peter
Sharma III
has been
a member of our Board of Directors since June 2004, and is a registered
representative of Brookstreet Securities Corporation, the underwriter
of this
offering, since June 2004. From March 2002 to April 2003, Mr. Sharma
was a
registered representative of Blue Bay Capital, the selling agent
for the public
offering from which we withdrew in March 2003. From time to time
since January
2000, Mr. Sharma has acted as our management, information technology,
sales,
product development, and marketing consultant. He has worked as an
independent
management consultant since 1997 and continues to do so. From 1990
to 1997, Mr.
Sharma worked as a sales trainer and regional manager for Time-Life
and
Encyclopædia
Britannica North America. Mr. Sharma’s consulting company, Sirius/Pureprophet,
Ltd., is a sole proprietorship that requires only minimal clerical
attention.
Independent
Board Members
Mark
Harris has
been
a member of our board since April 2005. Mark is an independent venture
capitalist and has been retired from the work force since 2002. In
late 2003,
Mr. Harris joined a group of Amgen colleagues in funding NeoStem,
Inc., a
company involved in stem-cell storage, archiving, and research to
which he is
founding angel investor. From 1991 to 2002 Mark worked at biotech
giant Amgen
managing much of the company’s media production for internal use and public
relations. Mr. Harris’ spent the decade prior working in Aerospace with similar
responsibilities. Mr. Harris holds a degree in Cinematography.
Dr.
Daniel S.J. Muffoletto, N.D.
has been
a member of our Board of Directors since April 2005. Dr. Muffoletto
has
practiced as a Naturopathic Physician since 1986. He is CEO of Its
Your Earth, a
natural products marketing company. From 2003 to 2005, Daniel worked
as sales
and marketing director for Worthington, Moore & Jacobs, a Commercial Law
League member firm serving FedEx, UPS, DHL & Kodak among others. From 2001
to 2003, he was owner-operator of the David St. Michel Art Gallery
in Montreal,
Québec. From 1991 to 2001 Dr. Muffoletto was the owner/operator of a
Naturopathic Apothecary, Herbal Alter*Natives of Seattle, WA and
Ellicott City,
MD; the apothecary housed Dr. Muffoletto’s Naturopathic Practice. Daniel holds a
B.A. in Government and Communications (U. of Baltimore, 1977), with
postgraduate
work in the schools of Public Administration and Publication Design
(U. of
Baltimore, 1978 - 1979). In 1986, he received his Doctorate of Naturopathic
Medicine from the Santa Fe Academy of Healing, Santa Fe, NM.
Michael
Fischman has
been
a member of our Board since April 2005. Since 1998, Michael has been
President
and CEO of the APEX course, the corporate training division of the
International
Association of Human Values. In addition, Mr. Fischman is a founding
member and
the director of training for USA at the Art of Living Foundation,
a global
non-profit educational and humanitarian organization at which he
has coordinated
over 200 personal development instructors since 1997. Among Mr. Fischman’s
personal development clients are the World Bank, Royal Dutch Shell,
the United
Nations, the US Department of Probation, the Washington, D.C. Police
Department,
and Rotary Clubs International.
Other
than the relationship of Christopher J. Reed, Judy Holloway Reed,
and Robert T.
Reed, Jr., none of our directors or executive officers are
related to one
another.
Key
Employees. Our
key
employees include the following people:
Steven
Hernandez,
age 48, became our controller in March 2004. From 1997 to
March 2004, Mr.
Hernandez was an independent consultant in the manufacturing field
in systems,
including cost accounting consultant for Gillead Sciences, Inc. (February
2002
to March 2004), cost accounting consultant for Flow Serve, Inc. (April
2001 to
December 2002), cost accounting manager for Crown Bolt, Inc. (1999
to April
2001) and cost analyst at Health Valley Company (1997 to 1999). Mr.
Hernandez
also has experience in cost accounting in the snack food and confectionery
industries. Mr. Hernandez earned his B.S. in Economics/Accounting
from
California State University, Bakersfield in 1978.
During
the next 12 months, we intend to hire a Chief Operating Officer
to handle
day-to-day operations. This will provide operations support to Christopher
J.
Reed. In addition, we intend to hire a Distribution Manager with
extensive
experience in the beverage arena with specific experience in setting
up a
regional distributor network.
We
have
three independent directors and will maintain at least two independent
directors
on our board at all times in the future.
(The
rest of this page left blank intentionally)
Executive
Compensation
The
following table sets forth for the last three fiscal years each component
of
compensation paid or awarded to, or earned by, our executive
officers.
|
|
Annual
Compensation
|
|
|
|
Salary
|
|
Salary
|
|
Salary
|
|
Bonus
|
|
Name
and Principal Position
|
|
2004
|
|
2003
|
|
2002
|
|
2002-2003
|
|
Christopher
J. Reed, President, CEO and CFO
|
|
$
|
150,000
|
|
$
|
150,000
|
|
$
|
150,000
|
|
|
----
|
|
Judy
Holloway Reed, Secretary,
Dir
of Office Operations (part-time)
|
|
|
12,000
|
|
|
12,000
|
|
|
N/A
|
|
|
----
|
|
Robert
T. Reed, Jr.,
Vice
President and National Sales Manager-Mainstream
|
|
|
50,000
|
|
|
50,000
|
|
|
N/A
|
|
|
----
|
|
Eric
Scheffer,
Vice
president and national Sales Manager-Natural Foods
|
|
|
60,000
|
|
|
60,000
|
|
|
60,000
|
|
|
----
|
|
Mr.
Reed’s salary has not changed since 2001, and there are no discussions
underway
as of the date of this prospectus to increase his salary. We have
not adopted
any retirement, pension, profit sharing, or other similar programs.
Director
Compensation
We
do not
pay any compensation to our non-employee directors for their attendance
at board
meetings.
We
have
not adopted any retirement, pension, profit sharing, or other similar
programs.
Option/SAR
Grants and Exercises
During
2003, no stock options or stock appreciation rights, or SARs, were
granted to
Christopher J. Reed. At December 31, 2003, Mr. Reed held no
unexercised
options or SARs.
No
options were granted to or exercised by employees during 2003 or
2004.
Employment
Agreements There
are
no written employment agreements with any of our officers or key
employees,
including Christopher J. Reed.
There
exists since January 2000, a verbal “gentleman’s agreement” with our consultant
Peter Sharma to provide various services in many areas of our business
operations. Mr. Sharma’s verbal agreement is simply a commitment on his part to
help in any way within the scope of his skills sets to aid us in
pursuing
efficient, fruitful execution of our business plan.
2001
Stock Option Plan
Pursuant
to our 2001 Stock Option Plan, we are authorized to issue options
to purchase up
to 500,000 shares of common stock. As of the date of this
prospectus,
17,500 options have been issued under the plan. In addition, options
to purchase
55,000 shares were issued prior to the adoption of the 2001 stock
option plan.
As of December 31, 2004 there are 72,500 options outstanding.
The
plan
permits the grant of options to our employees, directors and consultants.
The
options may constitute either “incentive stock options” within the meaning of
Section 422 of the Internal Revenue Code or “non-qualified stock options.”
The primary difference between “incentive stock options” and “non-qualified
stock options” is that once an option is exercised, the stock received under
an
“incentive stock option” has the potential of being taxed at the more favorable
long-term capital gains rate, while stock received by exercising
a
“non-qualified stock option” is taxed according the ordinary income tax rate
schedule.
The
plan
is currently administered by the board of directors. The plan administrator
has
full and final authority to select the individuals to receive options
and to
grant such options as well as a wide degree of flexibility in determining
the
terms and conditions of options, including vesting provisions.
The
exercise price of an option granted under the plan cannot be less
than 100% of
the fair market value per share of common stock on the date of the
grant of the
option. The exercise price of an incentive stock option granted to
a person
owning more than 10% of the total combined voting power of the common
stock must
be at least 110% of the fair market value per share of common stock
on the date
of the grant. Options may not be granted under the plan on or after
the tenth
anniversary of the adoption of the plan. Incentive stock options
granted to a
person owning more than 10% of the combined voting power of the Common
Stock
cannot be exercisable for more than five years.
When
an
option is exercised, the purchase price of the underlying stock shall
be paid in
cash, except that the plan administrator may permit the exercise
price to be
paid in any combination of cash, shares of stock having a fair market
value
equal to the exercise price, or as otherwise determined by the plan
administrator.
If
an
optionee ceases to be an employee, director, or consultant with us,
other than
by reason of death, disability, or retirement, all vested options
may be
exercised within three months following such event. However, if an
optionee’s
employment or consulting relationship with us terminates for cause,
or if a
director of ours is removed for cause, all unexercised options shall
terminate
immediately. If an optionee ceases to be an employee or director
of, or a
consultant to, us, by reason of death, disability, or retirement,
all vested
options may be exercised within one year following such event.
When
a
stock award expires or is terminated before it is exercised, the
shares set
aside for that award are returned to the pool of shares available
for future
awards.
No
option
can be granted under the plan after ten years following the earlier
of the date
the plan was adopted by the Board of Directors or the date the plan
was approved
by our stockholders.
Indemnification
of Directors and Officers
Our
amended certificate of incorporation provides that, to the fullest
extent
permitted by Delaware law, as it may be amended from time to time,
none of our
directors will be personally liable to us or our stockholders for
monetary
damages resulting from a breach of fiduciary duty as a director.
Our
amended certificate of incorporation also provides discretionary
indemnification
for the benefit of our directors, officers, and employees, to the
fullest extent
permitted by Delaware law, as it may be amended from time to time.
Insofar as
indemnification for liabilities arising under the Securities Act
may be
permitted to our directors or officers, or persons controlling us,
pursuant to
the foregoing provisions, we have been informed that in the opinion
of the SEC,
such indemnification is against public policy as expressed in the
Securities Act
and is therefore unenforceable.
Pursuant
to our amended bylaws, we are required to indemnify our directors,
officers,
employees and agents, and we have the discretion to advance his or
her related
expenses, to the fullest extent permitted by law.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
have three loans payable to Robert T. Reed, Sr., the father of our
founder,
President and CEO, Christopher J. Reed. The first loan was made to us in
May
1991 to provide $94,000 in working capital. This loan bears interest at
10% per annum and matures in October 2006. As of March 31, 2005, the
outstanding principal balance of the loan was $24,648 and accrued and unpaid
interest was $10,785.
The
second loan from Robert T. Reed, Sr. was made to us in June 1999
to provide
$250,000 for the acquisition of Virgil’s Root Beer. This loan bears interest at
8% per annum and matures in October 2006. As of March 31, 2005,
the
outstanding principal balance of the loan was $177,710 and accrued and
unpaid
interest was $62,204. Until July 2005, Mr. Reed has the right to convert
the
principal, and accrued and unpaid interest of this loan into shares of
our
common stock at a rate of one share of common stock for every $2.00 owed
to Mr.
Reed. As of March 31, 2005, the loan was convertible into 119,957 shares
of
common stock.
The third loan from Robert T. Reed, Sr., was made to us in October
2003 to
provide $50,000 for working capital. This loan bears interest at 8% per
annum and matures in October 2006. As of March 31, 2005, the outstanding
principal balance of the loan was $50,000 and accrued and unpaid interest
was
$5,786.
Mr.
Reed,
Sr. has suspended payments due him from
time
to time. His current agreement suspends our payment obligation until October
1,
2006 or we receive financing in excess of $1,000,000, which ever occurs
first.
Robert
T.
Reed Sr. has options to purchase 262,500 shares at $0.02 for his work in
1991
helping the start up of our company. The expiration date of these options
is
June 1, 2005. The original term of the options was until December 31, 1997.
We
affected extension of these options twice, once to December 31, 2000 and
again
to June 1, 2005. These extensions were granted in consideration of extensions
Mr. Reed, Sr. granted us on the repayment of his various loans made to
us. These
options were exercised on May 31, 2005.
In September 2004, Robert T. Reed Jr., our Vice President and National
Sales
Manager — Mainstream and a brother of Christopher J. Reed, co-signed a note
for a line of credit we opened with Merrill Lynch and pledged his stock
account
at Merrill Lynch as collateral. In consideration for Mr. Reed’s pledging his
stock account at Merrill Lynch as collateral, we pay Mr. Reed 5% per
annum
of the amount we borrow from Merrill Lynch.
Robert
T.
Reed Jr.’s investment occurred as follows;
Class
of stock
|
|
|
#
of shares
|
|
|
Price/share
|
|
|
|
|
|
Date
of issue
|
|
Common
|
|
|
187,500
|
|
|
0.27
|
|
$
|
50,000
|
|
|
1991
|
|
Common
|
|
|
50,000
|
|
|
0.75
|
|
$
|
37,500
|
|
|
1993
|
|
Common
|
|
|
10,000
|
|
|
1.50
|
|
$
|
15,000
|
|
|
1996
|
|
Common(*)
|
|
|
20,000
|
|
|
1.00
|
|
$
|
20,000
|
|
|
2001
|
|
Preferred
|
|
|
15,000
|
|
|
10.00
|
|
$
|
150,000
|
|
|
2004
|
|
Total
|
|
|
|
|
|
|
|
$
|
272,500
|
|
|
|
|
(*)
conversion of warrants currently mentioned in Part II of the registration
statement
In
July 2001, Mark Reed, a brother of Christopher J. Reed, converted a loan
he made
to us into 8,889 shares of common stock. The original loan was for
$5,000
and was made in June of 1991. The loan was part of a private offering of
convertible debt.
We
believe that the terms of each of the foregoing transactions were as favorable
to us as the terms that would have been available to us from unaffiliated
parties.
Since
January 2000, we have extended a line of credit to one of our consultants,
Peter
Sharma III who since June 2004 also sits on our Board of Directors;
the
line of credit is interest free. In July 2005, a repayment schedule begins
at
$1,000 per month that ends with a balloon payment for the remaining balance,
due
on December 31, 2007. As of March 31, 2005, the debit balance of the credit
line
was $104,010. From time to time, we utilize Mr. Sharma’s consulting services,
for which he has not levied a fee since October 2001. In addition, Mr.
Sharma is
a representative of the underwriter Brookstreet Securities Corporation
and any
compensation Mr. Sharma receives pursuant from this offering will be paid
to him
by the underwriter only.
At the time of each of the transactions listed above, except for the loan
in
October 2003 from Robert T. Reed, Sr., we did not have any independent
directors
to ratify such transactions.
We
have
three independent directors that have been added to our board as of April
15,
2005; on May 20, 2005, the Board of Directors, inclusive of the independent
directors, resolved to reauthorize all material ongoing and past transactions,
arrangements, and relationships listed herein. In addition, all future
material
affiliated transactions and loans will be made or entered into on terms
that are
no less favorable to us than those that can be obtained from unaffiliated
third
parties; and all future material affiliated transactions and loans, and
any
forgiveness of loans, must be approved by a majority of our independent
directors who do not have an interest in the transactions and who have
access,
at our expense, to independent legal counsel.
(The
rest of this page left blank intentionally)
PRINCIPAL
STOCKHOLDERS
The following table sets forth certain information as to shares of our
common
stock owned as of June 30, 2005, or which can be acquired within 60 days
of
June 30, 2005, by (i) each person known by management to beneficially
own
more than five percent (5%) of our outstanding common stock, (ii) each
of
our directors and executive officers, and (iii) all directors and
executive
officers as a group.
Name
and Address
of
Beneficial Owner
|
|
|
Number
of Shares Owned Before Offering
|
|
|
%
Owned Before Offering(1)
|
|
|
%
Owned If 200,000 Shares Are Sold
|
|
|
%
Owned If 1,000,000 Shares Are Sold
|
|
|
%
Owned If 2,000,000 Shares Are Sold
|
|
5%
Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Grace
1900
West Nickerson Street
Suite
116, PMB 158
Seattle,
WA 98119
|
|
|
500,000
|
|
|
10.0
|
%
|
|
9.6
|
%
|
|
8.3
|
%
|
|
7.2
|
%
|
Robert
T. Reed Sr.
6430
Kinglet Way
Carlsbad,
CA 92009
|
|
|
262,500
|
|
|
5.3
|
%
|
|
5.1
|
%
|
|
4.4
|
%
|
|
3.8
|
%
|
Directors
and Executive Officers
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Reed(3)
|
|
|
3,200,000
|
|
|
64.1
|
%
|
|
61.7
|
%
|
|
53.4
|
%
|
|
45.8
|
%
|
Robert
T. Reed, Jr.(4)
|
|
|
327,500
|
|
|
6.6
|
%
|
|
6.3
|
%
|
|
5.5
|
%
|
|
4.7
|
%
|
Eric
Scheffer
|
|
|
500
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Robert
Lyon
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Judy
Holloway Reed(3)
|
|
|
3,200,000
|
|
|
64.1
|
%
|
|
61.7
|
%
|
|
53.4
|
%
|
|
45.8
|
%
|
Peter
Sharma III(5)
|
|
|
137,539
|
|
|
2.8
|
%
|
|
2.7
|
%
|
|
2.3
|
%
|
|
2.0
|
%
|
Mark
Harris(6)
|
|
|
4,000
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
*
|
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Michael
Fischman
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
All
directors and executive officers as a group (6 persons)
|
|
|
3,669,539
|
|
|
73.5
|
%
|
|
70.7
|
%
|
|
61.2
|
%
|
|
52.5
|
%
|
_________________________
*
Less than 1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Percentage
of ownership for each holder is calculated on 4,988,591shares
of common
stock outstanding on June 30, 2005. Beneficial ownership
is
determined in accordance with the rules of the SEC and generally
includes
shares over which the holder has voting or investment power,
subject to
community property laws. Shares of common stock subject to
options or
warrants that are currently exercisable or exercisable within
60 days
are considered to be beneficially owned by the person holding
the options
or warrants for computing that person’s percentage, but are not treated as
outstanding for computing the percentage of any other
person.
|
(2) |
The
address for all of our directors and officers is: 13000 South
Spring
Street, Los Angeles, California 90061.
|
(3) |
Christopher
J. Reed and Judy Holloway Reed are husband and wife. The same
number of
shares is shown for each of them as they may each be deemed
to be the
beneficial owner of all of such shares.
|
(4) |
Consists
of (i) 267,500 shares of common stock and
(ii) 15,000 shares of Series A preferred
stock, which can
be converted at any time into 60,000 shares of common
stock.
|
(5) |
Consists
of warrants to purchase 137,539 shares of common
stock at any
time.
|
(6) |
Consists
of 1,000 shares of Series A preferred stock, which can
be converted
at any time into 4,000 shares of common
stock.
|
DESCRIPTION
OF OUR SECURITIES
We
have the authority to issue 12,000,000 shares of capital stock, consisting
of 11,500,000 shares of common stock, $.0001 par value per
share, and
500,000 of preferred stock, which can be issued from time to time by our
board
of directors on such terms and conditions as they may determine. As
of June 30, 2005, there were 4,988,591 shares of common
stock
outstanding. In addition, as of December 31, 2004, there were 58,940
shares
of Series A preferred stock issued and outstanding. The CUSIP number
identifying our shares is: 758338. (CUSIP is a Trademark of the Committee
on
Uniform Security Identification Procedures of The American Bankers
Association.)
We
will
not offer preferred stock to Promoters except on the same terms as it is
offered
to all other existing shareholders or to new shareholders; and
We
will
not authorize the issuance of preferred stock unless such issuance is approved
by a majority of our Independent Directors who do not have an interest in
the
transaction and who have access, at our expense, to our legal counsel or
their
independent legal counsel.
All
issuances of Reed’s, Inc. securities require a majority vote of our shareholders
of record at the time of issuance.
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters requiring
a vote of stockholders, including the election of directors. Since our common
stock does not have cumulative voting rights, the holders of more than a
majority of the outstanding shares of common stock can elect all of the
directors whose terms expire that year, if they choose to do so. Christopher
J.
Reed, our President and CEO, holds a majority of our outstanding common stock
and may continue to hold a majority of our outstanding common shares if less
than all the shares being offered in this offering are sold. Consequently,
Mr.
Reed may continue to be able to elect all of our directors.
Holders
of our common stock are entitled to receive dividends only if we have funds
legally available and the Board of Directors declares a dividend.
Holders
of our common stock do not have any rights to purchase additional shares.
This
right is sometimes referred to as a pre-emptive right.
Upon
a liquidation or dissolution, whether in bankruptcy or otherwise, holders
of
common stock rank behind our secured and unsecured debt holders, and behind
any
holder of any series of our preferred stock.
Prior
to this offering, there has been no public market for our common stock.
Series A
Preferred Stock
Holders
of our Series A preferred stock are entitled to receive out of assets
legally available, a 5% pro-rata annual non-cumulative dividend. The first
of
these dividends is payable in cash or shares on the 30th
of June
2005. The dividend can be paid in cash or, in the sole and absolute discretion
of our board of directors, in shares of common stock based on its then fair
market value. We cannot declare or pay any dividend on shares of our securities
ranking junior to the preferred stock until the holders of our preferred
stock
have received the full non-cumulative dividend to which they are entitled.
In
addition, the holders of our preferred stock are entitled to receive pro
rata
distributions of dividends on as “as converted” basis with the holder of our
common stock.
In
the event of any liquidation, dissolution or winding up of our operations,
or if
there is a change of control event, then, subject to the rights of the holders
of our more senior securities, if any, the holders of our Series A
preferred stock are entitled to receive, prior to the holders of any of our
junior securities, $10.00 per share plus all accrued and unpaid dividends.
Thereafter, all remaining assets shall be distributed pro rata among all
of our
security holders.
At
any time after June 30, 2007, we have the right, but not the obligation,
to
redeem all or any portion of the Series A preferred stock by paying
the
holders thereof the sum of the original purchase price per share, which was
$10.00, plus all accrued and unpaid dividends.
The
Series A preferred stock may be converted, at the option of the holder,
at
any time after issuance and prior to the date upon which such stock is redeemed,
into four shares of common stock, subject to adjustment in the event of stock
splits, reverse stock splits, stock dividends, recapitalization,
reclassification, and similar transactions. We are obligated to reserve out
of
our authorized but unissued shares of common stock a sufficient number of
such
shares to effect the conversion of all outstanding shares of Series A
preferred stock.
Except
as provided by law, the holders of our Series A preferred stock do
not have
the right to vote on any matters, including, without limitation, the election
of
directors. However, so long as any shares of Series A preferred stock
are
outstanding, we shall not, without first obtaining the approval of at least
a
majority of the holders of the Series A preferred stock:
· |
amend
our Certificate of Incorporation or bylaws in any manner which
adversely
affects the rights of the Series A preferred stock; or
|
· |
authorize
or issue any equity security having a preference over the Series A
preferred stock with respect to dividends, liquidation, redemption
or
voting, including any other security convertible into or exercisable
for
any equity security other than any senior preferred stock.
|
There
is no public market for our Series A preferred stock and we do not
intend
to register such stock with the SEC or seek to establish a public market
for
such stock.
Options
and Warrants
As
of December 31, 2004, we had outstanding options and warrants to purchase
an aggregate of 921,376 shares of our common stock, with a range of
exercise prices from $0.02 to $6.00 and an average exercise price of
$2.04 per share. The options and warrants expire at various dates
between
2005 and 2007.
Voting
Requirements
Delaware
corporate law and our bylaws require the approval of the holders of a majority
of our voting securities for most actions requiring stockholder approval.
These
actions include:
· |
Sales
of substantially all of our shares, and
|
· |
Amendment
to our certificate of incorporation.
|
There
are no provisions in our Certificate of Incorporation or bylaws that would
delay, defer, or prevent a change in control of our company. However,
Christopher J. Reed, as our principal stockholder, has the power, and may
continue to have the power, to determine the outcome of any such vote,
or any
other matter, on which the stockholders may vote.
Delaware
Anti-Takeover Law
We
are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations, under certain circumstances, from engaging in a “business
combination” with:
· |
A
stockholder who owns 15% or more of our outstanding voting stock
(such a
person is referred to as an “interested stockholder”)
|
· |
An
affiliate of an interested stockholder, or
|
· |
An
associate of an interested stockholder, for three years following
the date
that the stockholder became an interested stockholder.
|
A
“business combination” includes a merger or sale of more than 10% of our assets.
However,
the above provisions of Section 203 do not apply if:
· |
Our
board of directors approves the transaction that made the stockholder
an
interested stockholder, prior to the date of that transaction
|
· |
After
the completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the stockholder owned at
least 85% of
our voting stock outstanding at the time the transaction began,
excluding
shares owned by persons who are our officers and directors, or
|
· |
On
or subsequent to the date of the transaction, the business combination
is
approved by our board and authorized at a meeting of our stockholders
by
an affirmative vote of at least 2/3 of the outstanding voting
stock not
owned by the interested
stockholder.
|
The
provisions of this statute could prohibit or delay mergers or other change
and
control attempts, and thus may discourage attempts to acquire our company.
SHARES
AVAILABLE FOR FUTURE RESALE
Sales
of
substantial amounts of our common stock in the public market, or the perception
that these sales could occur, could adversely affect prevailing market prices
of
our common stock. Those circumstances could also adversely affect our ability
to
raise capital on favorable terms.
All
of
the shares issued in this offering will be freely tradable without restriction
or further registration under the Securities Act of 1933, except for shares,
which may be purchased by our affiliates. The term "affiliates" as defined
in
Rule 144 of the Securities Act of 1933 includes directors, executive
officers and 10%-or-greater stockholders, as well as others who exert control
over a company.
Of the 4,988,591 shares of our common stock outstanding as of June 30,
2005,
4,539,916 shares are restricted securities as that term is defined in
Rule 144. Restricted securities may be resold publicly only if they
are
registered or if the sale qualifies for an exemption under the securities
laws,
including Rule 144. Of these 4,539,916 shares, 4,230,500 shares
are held by
our affiliates.
Under
Rule 144, a person who has beneficially owned restricted shares
of our
common stock for at least one year can sell within any three-month period
a
number of shares that does not exceed the greater of:
·
|
1%
of the shares of common stock then outstanding (in our case,
between
49,886 shares if no shares are sold pursuant to this offering
and 69,886
shares immediately after this offering if all shares offered
hereby are
sold), or
|
·
|
The
average weekly trading volume of our common stock during the four
weeks
preceding the sale. |
Under Rule 144(k), a person who has not been our affiliate for 90 days
preceding a sale can sell shares owned for at least two years without the
aforementioned volume limitations.
Of the 4,539,916 restricted shares of our common stock outstanding,
4,277,416 shares have been owned for at least one year and 4,272,916
of
these shares have been owned for at least two years.
PLAN
OF DISTRIBUTION
General
There
is
no current market for our shares and there can be no assurance that a public
market for our shares will ever develop. Further, there can be no assurance
that
in the event a public market for our shares were to develop that this market
would be sustained over an extended period of time or that it would be of
sufficient trading volume to allow ready liquidity to all investors in our
shares.
We
are offering to sell, on a best efforts basis, up to 2,000,000 newly issued
shares of our common stock at a price of $4.00 per share. No minimum
number
of shares is required to be sold and as a result, we may only sell a nominal
amount of shares under this offering. We will not escrow any of the proceeds
received from the sale of shares before the offering terminates. Upon acceptance
of a share purchase order, the proceeds from that order will be immediately
available for our use and there is no assurance that we will sell all or
any
part of the remaining shares offered in this transaction.
Texas
investors must meet minimum net worth standards having a minimum annual gross
income of $65,000 and a minimum net worth of $65,000 exclusive of automobiles,
home and home furnishings; or a minimum net worth of $150,000 exclusive of
automobiles, home and home furnishings.
Sales
will be made only in states in which we have registered the offering and
only in
states in which Brookstreet is registered to sell securities and only by
representatives currently licensed in those states. Brookstreet Securities
Corporation acknowledges its supervisory responsibility over all of its
independent contractor registered representatives. Brookstreet
has been the managing dealer of approximately 12 private offerings and the
lead
underwriter of one public offering.
Brookstreet
Securities Corporation is a member of the National Association of Securities
Dealers, or NASD. Brookstreet Securities Corporation and Peter Sharma
III are
the underwriters for this offering. For serving as underwriter of this
offering,
we will pay Brookstreet a selling commission equal to 6% of the aggregate
purchase price of the common stock sold in this offering. We will also
pay
Brookstreet a 1% lead underwriter's concession and a non-accountable
expense
allowance equal to 3% of the aggregate purchase price of the common stock
sold
in this offering. Under his agreement with Brookstreet, Mr. Sharma will
receive
90% of all commissions generated in sales initiated by him as well as
50% of the
underwriter's concession and 50% of the non-accountable expense allowance
in the
case of all sales in this offering. In all sales initiated by the general
membership of Brookstreet, such representatives will receive 83% of commission
generated by their sales with Mr. Sharma receiving 7% of those commissions
as
the allocation agent for Brookstreet in this offering. In addition, we
paid
Brookstreet Securities Corporation a non-refundable fee of $25,000, for
legal
and due diligence expenses.
In
addition, we will issue to our underwriters a five-year warrant, to
purchase a
number of shares of common stock equal to 10% of the shares sold in
this
offering, at an assumed purchase price of $6.60 per share. Mr.
Sharma, an
underwriter, will receive 50% of these warrants.
Under
our
agreement with Brookstreet, we may terminate this offering at anytime, for
any
reason, after the declared effective date of this Registration Statement.
Under
an
agreement between Brookstreet and Peter Sharma III, their registered
representative who is also a member of Reed’s, Inc.’s Board of Directors, Mr.
Sharma will act as Brookstreet’s lead agent in this offering.
In
compliance with NASD rules, neither the warrants granted to Brookstreet nor
the
shares issuable upon their exercise may be sold, transferred, assigned, pledged,
or hypothecated by any person, for a period of 180 days following the effective
date of this offering. The warrants and shares issuable upon their exercise
may
be transferred to any NASD member participating in this offering and the
bona
fide officers or partners thereof, and securities which are convertible into
other types of securities or which may be exercised for the purchase of other
securities may be so transferred, converted or exercised if all securities
so
transferred or received remain subject to the restrictions specified above
for
the remainder of the initially applicable time period. All certificates or
similar instruments representing securities restricted pursuant to the foregoing
shall bear an appropriate legend describing the restriction and stating the
time
period for which the restriction is operative. Securities received by a member
of the NASD as underwriting compensation shall only be issued to a member
participating in the offering and the bona fide officers or partners thereof.
In
addition, pursuant to Section III.C.7 of CR-EQUITY Policy, such underwriter
warrants are not transferable for the life of the warrant (five
years).
Brookstreet
is a general securities broker/ dealer registered with the SEC and an NASD
member. We may deem compensation we pay Brookstreet as underwriting commission.
We
are
obligated to pay the expenses of this offering.
We
previously registered and withdrew a public offering in 2003.
We
filed
a registration statement on Form SB-2 offering 3,000,000 shares at $6.00
through
Blue Bay Capital Corp., which was declared effective by the SEC on
December 31, 2002. We withdrew that Registration Statement in March,
2003
in response to our analysis of capital market conditions in the lead-up
to the
Iraq War; we returned all moneys collected. There is no guarantee that
similar
or other circumstances will not arise that would cause us to reconsider
this
effort.
Market
for Common Equity
Our
underwriter, Brookstreet Securities Corporation, plans to apply for quotation
of
our common stock on the OTCBB. The OTCBB is not a national securities exchange,
and many companies have experienced limited liquidity when traded through
this
quotation system. Following successful development of a trading market on
the
OTCBB, it is our further intent to seek listing on a national stock exchange;
Arca|Ex - PSE is our preferred exchange. Each exchange has requirements for
listing that will determine, in part, which exchange we choose; the table
below
demonstrates the listing requirements for these two exchanges.
Listing
Requirement
|
Arca|Ex
- PSE
|
OTCBB
|
Pre-Tax
Income Last Year
|
$100,000†
|
N/A
|
Two
Year Avg. Pre-Tax Income
|
N/A
|
N/A
|
Net
Tangible Assets
|
$2,000,000
|
N/A
|
Market
Value of Publicly Held Stock
|
$1,500,000
|
N/A
|
#
of Shares Publicly Held
|
500,000
|
25,000
|
#
Public Shareholders
|
500
|
40
|
Bid
Price of Listed Securities
|
$3.00
|
No
Minimum
|
Shareholders
Equity
|
No
Minimum
|
No
Minimum
|
Audit
Committee
|
Yes
|
No
|
†
The issuer must meet the $100,000 net income requirement, which
excludes
non-recurring and extraordinary items in the past fiscal year,
two of the
past three fiscal years, or have total net tangible assets of
$2,500,000.
|
Our
underwriter, Brookstreet Securities Corporation, will be the sponsoring broker
dealer of our application to commence quotation of our stock price. While
there
is no assurance, if we do obtain approval of this application, we anticipate
trading on the OTCBB. The OTCBB is not a national securities exchange, and
many
companies have experienced limited liquidity when traded through this quotation
system. We expect to apply to list on the OTCBB shortly after the completion
of
this offering.
We
based
the stock offering price of this offering on the price investors paid in
the
Company’s private placement of 2004, with a premium associated with the improved
liquidity resulting from the public offering and the improved business
prospects
of the Company.
The
Board
of Directors also discussed at length, comparable companies in the beverage,
new
age, and natural beverage industries in general. We also considered press
coverage, trading volume, long term upward price trends for shares of comparable
beverage companies like Lifeway (LWAY), Jones Soda (JSD.V), Hansen Natural
(HANS), JM Smucker (SJM), and others. In our opinion, pro-forma results
from
successful pursuit of our business plans present at least as bright a picture
as
these issuers who are valued in the public markets at 2-5 times current
revenues
with p/e ratios running from 15/1 to over 100/1.
In
addition, private investors with no promises of liquidity have paid $4.00
per
share for our common stock in recent years. This said we feel our valuation
of
around a 2-2 ½ multiple of current revenues to be a reasonable, marketable,
and sustainable price.
We
have
advised all current shareholders of our company, our officers, and directors
regarding the requirements of Regulation M of the Securities Exchange
Act
of 1934. Regulation M regulates the following activities during a securities
offering: (i) activities
by distribution participants (e.g.,
underwriters, prospective underwriters, brokers, and dealers) and their
affiliated purchasers; (ii) activities
by issuers or selling security holders and their affiliated purchasers;
(iii) NASDAQ
passive market making; (iv) stabilization
activities; and (v) short
selling in advance of a public offering. Regulation M also provides that
the
safe harbor of Rule 10b-18 under the Exchange Act is not available during
the
restricted period of a distribution.
Other
Principal Terms of the Underwriting Agreement
The
underwriting agreement also includes the following terms:
· |
We
agree to use our best efforts to have the shares sold in this
offering
listed on a national stock exchange as soon as practicable
following the
offering;
|
· |
We
agree to indemnify the underwriter against certain liabilities,
including
liabilities under the Securities Act of 1933; and
|
· |
For
a period of five years following this offering, the underwriter
will have
the right to designate an observer to our board of directors
and each of
its committees.
|
Offering
Procedures
We
will publish announcements of the offering on certain of our products and
on our
website, and we will mail and e-mail copies of the announcement to our
stockholders, customers and inquirers. The announcements will provide the
limited information permitted under applicable securities laws including
the
appropriate telephone number, mailing address and e-mail address for requesting
this prospectus. We will likely publish similar announcements in selected
print
media.
Shares
may be purchased by placing a buy order in a cash account with Brookstreet.
According to regular way settlement, a written confirmation will be sent
by
electronic mail or first class mail to notify the subscriber of the extent,
if
any, to which Brookstreet has accepted their order on our behalf.
The
offering will begin on the effective date of this prospectus and continue
until
either all of the shares have been sold or we terminate the offering, but
in no
event later than nine months after the date of this prospectus. Subject to
the
foregoing, the timing of the termination is at the discretion of our board
of
directors.
Promotional
Securities Lock-Up Agreements
Each
of our non-independent directors, executive officers and 5%-or-greater
stockholders, has signed a written agreement restricting each such person
from
selling any of their shares of our common stock for a period of 24 months
from the date of completion, other than intra-family transfers or transfers
to
trusts for estate planning purposes, without the prior written consent of
Brookstreet.
In
connection
with this registration statement, and to satisfy the requirements of certain
state securities laws and regulations, certain persons who were deemed our
promoters executed promotional share lock-in agreements with respect to all
or
some of their common stock and/or options. Pursuant to these agreements,
they
agreed that (i) they generally were unable to transfer the subject
shares
and/or options and (ii) in the event of a dissolution, merger,
consolidation, reorganization, sale of exchange of our assets or securities
with
a person who is not a promoter, they would not share in any distribution
until
the public stockholders have received an amount equal to $4.00 times
the
number of shares of common stock that they purchased in this public offering
and
which they still held at the time of such distribution (adjusted for stock
splits, stock dividends, recapitalizations and the like). The latter restriction
could be waived by the vote of holders of a majority of outstanding common
stock
not subject to the promotional shares lock-in agreements. However, the voting
rights of the common stock subject to the escrow are not affected.
In
the event of a non-cash transaction, the fair value of the non-cash
consideration would be used. In the event of a transaction with a promoter,
the
persons named below also would not share in any distribution until the public
stockholders received an amount equal to $4.00 times the number of
shares
of common stock that they purchased in this public offering and which they
still
held at the time of such distribution (adjusted for stock splits, stock
dividends, recapitalizations and similar transactions).
Beginning
one year from the completion or termination of this public offering, 2 1/2%
of the shares subject to the lock-in agreements would be released each quarter.
All remaining promotional shares would be released from lock-in agreements
on
the second anniversary of the completion or termination of this public offering.
Shares released from the promotional shares lock-in agreements would no longer
be considered “promotional shares” and the holders of such released shares
consequently could participate in any distributions with respect to such
released shares. In addition, the agreements provide that the lock-in agreements
would terminate if the registration in the various states was terminated
prior
to the sale of any shares or if the purchase price for any shares sold were
returned to the investors.
Please
note: Our underwriter’s agreement describes a 24-month discretionary agreement
regarding lock-up of promotional shares. Notwithstanding this or any
other
agreement with the underwriter, all promotional shares are subject to
the
lock-in agreements as described herein and as filed in Exhibit 10.7 (et
al) to
this prospectus.
The
promotional shares lock-in agreements relate to the following individuals:
Security
Holder
|
Quantity
|
Type
of Security
|
Christopher
J. Reed &
Judie Holloway Reed
|
3,200,000
|
shares
|
|
279,510
|
shares
and options
|
Robert
T. Reed, Sr.
|
262,500
|
shares
|
Peter
Sharma III
|
137,539
|
warrants
|
Joseph
Grace
|
250,000
|
shares
|
Eric
Scheffer |
500
|
shares
|
Total
|
4,130,049
|
shares
and options
|
(1)
On
May 31, 2005 Robert T. Reed Sr. converted options to common
stock and this
stock is subject to the same lock-in
agreement.
|
We
have
engaged Transfer On-Line, Inc. to act as our registrar, share escrow, and
transfer agent.
LEGAL
MATTERS
The
validity of the securities offered hereby is being passed upon for us
by Horwitz
and Cron of Irvine, California.
EXPERTS
Our
financial statements which appear in this prospectus and in the registration
statement have been audited by Weinberg & Company, P.A. with respect to the
balance sheet at December 31, 2004 and the statements of operations
and
cash flows for the years ended December 31, 2004 and 2003, and
are included
in reliance upon the report of said firm as experts in accounting and
auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed a registration statement on Form SB-2 with the SEC.
This
prospectus, which forms a part of that registration statement, does not
contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement
and
its exhibits. Statements contained in this prospectus regarding the contents
of
any contract or any other document to which reference is made are not
necessarily complete, and you should refer to the exhibits attached to
the
registration statement for copies of the actual contract or document.
You
may review and copy our complete registration statement at the SEC’s Public
Reference Room at 450 Fifth Street, Washington, D.C. 20549,
and at the
SEC’s regional offices in Chicago, Illinois and New York, New York.
You may
call the SEC at 800.732.0330 for further information on the operation
of the
Public Reference Room. The registration statement, and other reports
and filings
we will make with the SEC in the future, can also be reviewed by accessing
the
SEC’s website at http://www.sec.gov.
As
a result of this offering, we will become subject to the information
and
reporting requirements of the Securities Exchange Act for at least twelve
months
and, in accordance therewith, will file periodic reports and other information
with the SEC, including an annual report containing audited financial
statements.
You
should rely only on the information in this prospectus or any supplement
to it.
We have not authorized anyone to provide you with information that is
different.
You should not assume that the information in this prospectus or any
supplement
is accurate as of any date other than the date on its cover.
REMINDER
We
cannot
assure investors that the prices at which our shares will sell in the
public
market after this offering will not be lower than the initial public
offering
price or that an active market in our common stock will develop and continue
after this offering.
(The
rest of this page left blank intentionally)
INDEX
TO
FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Balance
Sheet
|
F-3
|
Statements
Of Operations
|
F-4
|
Statements
Of Changes In Stockholders’ Equity
|
F-5
|
Statements
Of Cash Flows
|
F-6
|
Notes
To Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors:
Reed’s,
Inc.
We have audited the accompanying balance sheet of Reed’s, Inc. as of
December 31, 2004 and the related statements of operations, changes
in
stockholders’ equity and cash flows for the years ended December 31, 2004
and 2003. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we
plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly
in all
material respects, the financial position of Reed’s, Inc. as of
December 31, 2004 and the results of its operations and its cash flows
for
the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States of America.
As
described in Note 14 to the financial statements, the
accompanying financial statments as of December 31, 2004 and 2003 and for
the
years then ended, have been restated.
/s/
WEINBERG & COMPANY, P.A.
Weinberg
& Company, P.A.
Boca
Raton, Florida
March
31,
2005, except for Note 14, as to which the date is May 13, 2005
F-2
REED’S,
INC.
BALANCE
SHEET
ASSETS
|
|
March
31, 2005
(Unaudited)
|
|
December
31, 2004
|
|
CURRENT
ASSETS
|
|
Cash
|
|
$
|
33,160
|
|
$
|
42,488
|
|
Inventory
|
|
|
1,294,441
|
|
|
1,301,025
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns and discounts of $74,974 at December 31, 2004 and
$79,431 at March 31, 2005
|
|
|
656,134
|
|
|
797,614
|
|
Other
receivables
|
|
|
5,372
|
|
|
3,163
|
|
Prepaid
expenses
|
|
|
46,919
|
|
|
5,652
|
|
Total
Current Assets
|
|
|
2,036,026
|
|
|
2,149,942
|
|
Property
and equipment, net of accumulated depreciation of $390,363
at December 31, 2004 and $411,606 at March 31, 2005
|
|
|
1,824,418
|
|
|
1,821,473
|
|
OTHER
ASSETS
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $2,978 at
December 31, 2004 and $3,164 at March 31, 2005
|
|
|
15,449
|
|
|
15,635
|
|
Deferred
stock offering costs
|
|
|
283,017
|
|
|
219,955
|
|
Due
from Director
|
|
|
104,010
|
|
|
91,197
|
|
Total
Other Assets
|
|
|
1,202,677
|
|
|
1,126,988
|
|
TOTAL
ASSETS
|
|
$
|
5,063,121
|
|
$
|
5,098,403
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,609,876
|
|
$
|
1,412,124
|
|
Lines
of credit
|
|
|
1,128,028
|
|
|
1,128,222
|
|
Current
portion of long term debt
|
|
|
106,469
|
|
|
106,113
|
|
Note
payable, related party
|
|
|
—
|
|
|
21,000
|
|
Accrued
interest
|
|
|
121,076
|
|
|
115,581
|
|
Accrued
expenses
|
|
|
99,136
|
|
|
51,549
|
|
Total
Current Liabilities
|
|
|
3,064,585
|
|
|
2,834,589
|
|
Notes
payable, related party
|
|
|
252,358
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
1,017,864
|
|
|
1,041,756
|
|
Total
Liabilities
|
|
|
4,334,807
|
|
|
4,128,703
|
|
COMMITMENTS
AND CONTINGENCIES
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 58,940
outstanding
|
|
|
589,402
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized,
4,726,091 shares
issued and outstanding
|
|
|
472
|
|
|
472
|
|
Additional
paid in capital
|
|
|
2,783,464
|
|
|
2,783,464
|
|
Accumulated
deficit
|
|
|
(2,645,024
|
)
|
|
(2,403,638
|
)
|
Total
stockholders’ equity
|
|
|
728,314
|
|
|
969,700
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,063,121
|
|
$
|
5,098,403
|
|
The
accompanying notes are an integral part of these financial statements
F-3
REED’S,
INC.
STATEMENTS
OF OPERATIONS
|
|
Three
Months
Ended
March 31,
|
|
Year
Ended
December 31,
|
|
|
|
2005
(Unaudited)
|
|
2004 (Unaudited)
|
|
2004
(Restated)
|
|
2003
(Restated)
|
|
SALES
|
|
$
|
1,817,336
|
|
$
|
1,713,340
|
|
$
|
8,978,365
|
|
$
|
6,781,776
|
|
COST
OF SALES
|
|
|
1,486,287
|
|
|
1,302,670
|
|
|
7,103,037
|
|
|
5,462,205
|
|
GROSS
PROFIT
|
|
|
331,049
|
|
|
410,670
|
|
|
1,875,328
|
|
|
1,319,571
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
287,145
|
|
|
138,245
|
|
|
791,975
|
|
|
655,890
|
|
General &
Administrative
|
|
|
214,080
|
|
|
233,941
|
|
|
1,074,536
|
|
|
758,258
|
|
Legal
Fees
|
|
|
—
|
|
|
|
|
|
80,156
|
|
|
|
|
|
|
|
501,225
|
|
|
372,186
|
|
|
1,946,667
|
|
|
1,414,148
|
|
LOSS FROM
OPERATIONS
|
|
|
(170,176
|
)
|
|
38,484
|
|
|
(71,339
|
)
|
|
(94,577
|
)
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(71,210
|
)
|
|
(59,939
|
)
|
|
(255,032
|
)
|
|
(250,738
|
)
|
Stock
Offerings Costs
|
|
|
|
|
|
|
|
|
|
|
|
(426,682
|
)
|
Loss
on extinguishment of debt
|
|
|
|
|
|
|
|
|
(153,000
|
)
|
|
|
|
NET
LOSS
|
|
$
|
(241,386
|
)
|
$
|
(21,455
|
)
|
$
|
(479,371
|
)
|
$
|
(771,997
|
)
|
LOSS
PER SHARE —
Basic and Fully Diluted
|
|
$
|
(0.05
|
)
|
$
|
(0.01
|
)
|
$
|
(.10
|
)
|
$
|
(0.16
|
)
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, Basic
and Fully Diluted
|
|
|
4,726,091
|
|
|
4,726,091
|
|
|
4,726,091
|
|
|
4,724,488
|
|
The
accompanying notes are an integral part of these financial
statements
F-4
REED’S,
INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2004 and
2003,
and
the Three Months Ended March 31, 2005
(Unaudited)
|
|
Common
Stock
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid
In
Capital
|
|
Shares
|
|
Amount
|
|
Accumulated
Deficit
|
|
Total
|
|
Balance,
January 1, 2003 as previously stated
|
|
|
4,721,591
|
|
$
|
472
|
|
$
|
2,414,824
|
|
|
|
|
|
|
|
$
|
$
(896,419
|
)
|
$
|
1,518,877
|
|
Restatement
of packaging design costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,211
|
)
|
|
(55,211
|
)
|
Restated
January 1, 2003 balance
|
|
|
4,721,591
|
|
$
|
472
|
|
$
|
2,414,824
|
|
|
|
|
|
|
|
|
(951,630
|
)
|
|
1,463,666
|
|
Sale
of stock
|
|
|
3,000
|
|
|
—
|
|
|
10,500
|
|
|
|
|
|
|
|
|
—
|
|
|
10,500
|
|
Issuance
of stock for services
|
|
|
1,500
|
|
|
|
|
|
4,500
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Net
Loss for year ended 2003
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
(771,997
|
)
|
|
(771,997
|
)
|
Balance,
December 31, 2003
|
|
|
4,726,091
|
|
|
472
|
|
|
2,429,824
|
|
|
|
|
|
|
|
|
(1,723,627
|
)
|
|
706,669
|
|
Issuance
of preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
33,440
|
|
|
334,400
|
|
|
|
|
|
334,400
|
|
Conversion
of debt to preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
25,500
|
|
|
255,002
|
|
|
|
|
|
255,002
|
|
Recognition
of beneficial conversion feature on issuance of preferred
stock
|
|
|
|
|
|
|
|
|
353,640
|
|
|
|
|
|
|
|
|
(200,640
|
)
|
|
153,000
|
|
Net
loss for year ended 2004 (Restated)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
(479,371
|
)
|
|
(479,371
|
)
|
Balance,
December 31, 2004
|
|
|
4,726,091
|
|
$
|
472
|
|
$
|
2,783,464
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(2,403,638
|
)
|
$
|
969,700
|
|
Net
loss for three months ended March 31, 2005 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241,386
|
)
|
|
(241,386
|
|
Balance
March 31, 2005 (Unaudited)
|
|
|
4,726,091
|
|
$
|
472
|
|
$
|
2,783,464
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(2,645,024
|
)
|
$
|
728,314
|
|
The
accompanying notes are an integral part of these financial statements
F-5
REED’S,
INC.
STATEMENTS
OF CASH FLOWS
|
|
For
The Three Months
Ended
March 31,
|
|
For
The Year
Ended
December 31,
|
|
|
|
2005
(Unaudited)
|
|
2004
(Unaudited)
|
|
2004
(Restated)
|
|
2003
(Restated)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(241,386
|
)
|
$
|
(21,455
|
)
|
$
|
(479,371
|
)
|
$
|
(771,997
|
)
|
Adjustments
to reconcile net loss to net cash used in operation
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
21,429
|
|
|
12,511
|
|
|
97,329
|
|
|
92,797
|
|
Non
cash stock compensation
|
|
|
|
|
|
|
|
|
|
|
|
4,500
|
|
Amortization
of discount on notes payable
|
|
|
|
|
|
|
|
|
|
|
|
24,780
|
|
Write
off of deferred offering costs
|
|
|
|
|
|
|
|
|
|
|
|
426,968
|
|
Loss
on extinguishment of debt
|
|
|
|
|
|
|
|
|
153,000
|
|
|
|
|
(Increase)
decrease in operating assets and increase (decrease) in
operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
141,480
|
|
|
41,669
|
|
|
(231,557
|
)
|
|
(139,472
|
)
|
Inventory
|
|
|
6,584
|
|
|
180,768
|
|
|
(3,665
|
)
|
|
43,262
|
|
Prepaid
expenses
|
|
|
(41,267
|
)
|
|
(9,274
|
)
|
|
11,730
|
|
|
111
|
|
Other
receivables
|
|
|
(2,209
|
)
|
|
(500
|
)
|
|
7,589
|
|
|
(9,031
|
)
|
Accounts
payable
|
|
|
197,752
|
|
|
(72,003
|
)
|
|
233,447
|
|
|
25,914
|
|
Accrued
expenses
|
|
|
47,587
|
|
|
34,503
|
|
|
(9,755
|
)
|
|
19,394
|
|
Accrued
interest
|
|
|
5,495
|
|
|
14,858
|
|
|
45,233
|
|
|
(3,594
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
135,465
|
|
|
180,627
|
|
|
(176,020
|
)
|
|
(286,368
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(24,188
|
)
|
|
(59,108
|
)
|
|
(204,147
|
)
|
|
(143,999
|
)
|
Due
from director
|
|
|
(12,813
|
)
|
|
|
|
|
(44,040
|
)
|
|
|
|
Net
cash used in investing activities
|
|
|
(37,001
|
)
|
|
(59,108
|
)
|
|
(248,187
|
)
|
|
(143,999
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
offering costs
|
|
|
(63,062
|
)
|
|
|
|
|
(219,955
|
)
|
|
|
|
Principal
payments on debt
|
|
|
(44,536
|
)
|
|
(12,630
|
)
|
|
(208,852
|
)
|
|
(104,349
|
)
|
Proceeds
from issuance of common stock
|
|
|
|
|
|
|
|
|
|
|
|
10,500
|
|
Proceeds
received from issuance of preferred stock
|
|
|
|
|
|
|
|
|
334,400
|
|
|
|
|
Proceeds
from borrowings
|
|
|
|
|
|
|
|
|
208,464
|
|
|
|
|
Net
borrowings (payments) on lines of credit
|
|
|
(194
|
)
|
|
(50,505
|
)
|
|
339,708
|
|
|
479,854
|
|
Proceeds
on debt to related parties
|
|
|
|
|
|
--
|
|
|
--
|
|
|
32,550
|
|
Net
cash provided by (used in) financing activities
|
|
|
(107,792
|
)
|
|
(63,135
|
)
|
|
453,765
|
|
|
418,555
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(9,328
|
)
|
|
58,384
|
|
|
29,558
|
|
|
(11,812
|
)
|
CASH —
Beginning of year
|
|
|
42,488
|
|
|
12,930
|
|
|
12,930
|
|
|
24,742
|
|
CASH —
End of year
|
|
$
|
33,160
|
|
$
|
71,314
|
|
$
|
42,488
|
|
$
|
12,930
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
66,314
|
|
$
|
45,081
|
|
$
|
227,669
|
|
$
|
239,813
|
|
Taxes
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
Non-cash
transactions consisted of the following during the year ended December
31,
2004
Notes
payable converted to preferred
stock $224,000
Accrued
interest converted to preferred
stock
31,002
Beneficial
conversion feature 353,640
There
were no non-cash transactions during the year
ended December 31, 2003 or for the three month periods ended March 31, 2005
and
2004.
The
accompanying notes are an integral part of these financial statements.
F-6
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
(1) Operations
and Summary of Significant Accounting Policies
A) Nature
of Operations
Reed’s,
Inc. (the “Company”) was organized under the laws of the state of Florida in
January 1991. In 2001, the Company changed its name from Original Beverage
Corporation to Reed’s, Inc. and changed its state of incorporation from Florida
to Delaware. The Company is engaged primarily in the business of developing,
manufacturing and marketing natural non-alcoholic beverages, as well as candies
and ice creams. The Company currently offers 14 beverages, two candies, and
three ice creams.
The
Company sells its products primarily in upscale gourmet and natural food
stores
and supermarket chains in the United States and, to a lesser degree, in Canada.
B) Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
C) Accounts
Receivable
The
Company evaluates the collectibility of its trade accounts receivable based
on a
number of factors. In circumstances where the Company becomes aware of a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded, which reduces
the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification
of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The
allowance for doubtful accounts and returns and discounts is established
through
a provision for returns and discounts charged against sales. Receivables
are
charged off against the allowance when payments are received or products
returned. The allowance for doubtful accounts and returns and discounts as
of
December 31, 2004 and March 31, 2005 (Unaudited) was $74,974
and
$79,431, respectively.
D) Property
and Equipment and Related Depreciation
Property
and equipment is stated at cost. Depreciation is calculated using accelerated
and straight-line methods over the estimated useful lives of the assets as
follows:
Property
and Equipment Type
|
Years
of Depreciation
|
|
|
Building
|
39 years
|
Machinery
and equipment
|
7 years
|
Computer
|
3-5 years
|
Automobile
|
5 years
|
Office
equipment
|
7 years
|
F-7
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Management
regularly reviews property, equipment and other long-lived assets for possible
impairment. This review occurs quarterly, or more frequently if events or
changes in circumstances indicate the carrying amount of the asset may not
be
recoverable. If there is indication of impairment , then management prepares
an
estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition.
If
these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Management believes that the accounting estimate related to impairment of
its
property and equipment, is a “critical accounting estimate” because: (1) it
is highly susceptible to change from period to period because it requires
management to estimate fair value, which is based on assumptions about cash
flows and discount rates; and (2) the impact that recognizing an impairment
would have on the assets reported on our balance sheet, as well as net income,
could be material. Management’s assumptions about cash flows and discount rates
require significant judgment because actual revenues and expenses have
fluctuated in the past and are expected to continue to do so.
E) Intangible
Assets
The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, Goodwill and Other Intangible
Assets. Goodwill and other intangible assets deemed to have indefinite lives
are
not subject to annual amortization. The Company reviews, at least quarterly,
its
investment in brand names and other intangible assets for impairment and
if
impairment is deemed to have occurred the impairment is charged to expense.
Intangible assets which have finite lives are amortized on a straight line
basis
over their remaining useful life; they are also subject to annual impairment
reviews. See Note 4.
Management
applies the impairment tests contained in SFAS number 142 to determine if
an
impairment has occurred. Accordingly, management compares the carrying value
of
the asset to its fair value in deterring the amount of the impairment. No
impairments were identified for the years ended December 31, 2004
and
2003,
or for
the three months ended March 31, 2005 and 2004 (Unaudited).
Management
believes that the accounting estimate related to impairment of its intangible
assets, is a “critical accounting estimate” because: (1) it is highly
susceptible to change from period to period because it requires management
to
estimate fair value, which is based on assumptions about cash flows and discount
rates; and (2) the impact that recognizing an impairment would have
on the
assets reported on our balance sheet, as well as net income, could be material.
Management’s assumptions about cash flows and discount rates require significant
judgment because actual revenues and expenses have fluctuated in the past
and
are expected to continue to do so.
F) Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed
to risk
for the amounts of funds held in one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess
of the
$100,000 guarantee during the year ended December 31, 2004 and the
three
months ended March 31, 2005 (Unaudited).
During
the years ended December 31, 2004 and 2003 the Company’s had one customer,
which accounted for approximately 13.53% and 15% of sales in each of the
respective years and 15.7 % and 13.8% for each of the three months ended
March
31, 2005 and 2004 (Unaudited), respectively. No other customer accounted
for
more than 10% of sales in either year. As of December 31, 2004,
the Company
had approximately$ 91,000 of accounts receivable from that customer. As
of March
31, 2005, the Company had approximately $145,000 (Unaudited) of accounts
receivable from that customer.
F-8
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
The
Company currently relies on a single contract packer for a majority of its
production and bottling of beverage products. The Company has different packers
for their non-beverage products. Although there are other packers and the
Company is in the process of outfitting their own brewery and bottling plant,
a
change in packers may cause a delay in the production process, which could
ultimately affect operating results.
G) Fair
Value of Financial Instruments
The
carrying amount of the Company’s financial instruments including cash, accounts
and other receivables, due from director, accounts payable, and accrued expenses
approximate their fair value as of December 31, 2004 and March 31,
2005
(Unaudited) due to their short maturities. The carrying amount of
lines of
credit, notes payable, and long term debt approximate fair value because
the
related effective interest rates on these instruments approximate the rates
currently available to the Company.
H) Cost
of sales
The
Company,
with
one exception,
classifies shipping and handling costs of the sale of its products as a
component of cost of sales. The
one
exception regards shipping and handling costs associated with local sales
and
local distribution. Since these activities are integrated, those costs
are
combined and are included as general and administrative expenses. For the
years
ended December 31, 2004 and 2003 those costs were approximately $63,000
and
7,000 respectively. For
the
three months ended March 31, 2005 and March 31, 2004 those costs were
approximately $ -0-and $ 5,200, respectively, (Unaudited). During the three
months ended March 31, 2005, the costs associated with local sales and
local
distribution were charged to selling expenses instead of general and
administrative expenses. Accordingly, local sales and distribution costs
for the
three months ended March 31, 2005, included in selling expenses were
approximately $19,000 (Unaudited).
In
addition, the Company classifies purchasing and receiving costs, inspection
costs, warehousing costs, freight costs, internal transfer costs and other
costs
associated with product distribution as costs of sales. Certain of these
costs
become a component of the inventory cost and are expensed to costs of sales
when
the product to which the cost has been allocated is sold.
Expenses
not related to the production of our products are classified as operating
expenses.
I) Income
Taxes
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for
the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. The Company considers future taxable
income and ongoing, prudent and feasible tax planning strategies, in assessing
the value of its deferred tax assets. If the Company determines that it is
more
likely than not that these assets will not be realized, the Company will
reduce
the value of these assets to their expected realizable value, thereby decreasing
net income. Evaluating the value of these assets is necessarily based on
the
Company’s judgment. If the Company subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the
value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
J) Deferred
Stock Offering Costs
The
Company capitalizes costs incurred related to an initial public offering
and
future issuance of common stock until such time as the stock is issued,
or the
stock offering is abandoned by the Company (usually within six months of
when
the cost was incurred). These costs include attorney’s fees, accountant’s fees,
SEC filing fees, state filing fees, and other consulting fees all related
to the
initial public offering and future issuance of common stock. In 2003, an
offering was abandoned and $426,682 of such costs were expensed. Deferred
offering costs of $219,955 and $283,017 (Unaudited) are included in the
balance
sheet as of December 31, 2004 and March 31, 2005, respectively in connection
with the Company’s public offering anticipated to commence in 2005.
F-9
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
K) Stock
Options
Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), establishes a fair value method of accounting
for stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. SFAS No. 123 also encourages, but does not require companies
to record compensation cost for stock-based employee compensation. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies
to
disclose in interim financial statements the pro forma effect on net income
(loss) and net income (loss) per common share of the estimated fair market
value
of stock options or warrants issued to employees. The Company has chosen
to
continue to account for stock-based compensation issued to employees utilizing
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees”, with pro forma
disclosures of net income (loss) as if the fair value method had been applied.
Accordingly, compensation cost for stock options is measured as the excess,
if
any, of the fair market price of the Company’s stock at the date of grant over
the amount an employee must pay to acquire the stock.
For
the
years ended December 31, 2004 and 2003 and the three months ended
March 31,
2005 and 2004 (Unaudited) no stock options were granted. Therefore, pro forma
disclosure of the fair value method is not applicable and is not
presented.
L) Revenue
Recognition
Revenue
is recognized on the sale of product when the product is shipped, which is
when
the risk of loss transfers to our customers, and collection of the receivable
is
reasonably assured. Product is not shipped without an order from the customer
and credit acceptance procedures being performed. The allowance for returns
is
regularly reviewed and adjusted by management based on historical trends
of
returned items. Amounts paid by customers for shipping and handling costs
are
included in sales.
M)
Net Loss Per Share
Loss
per
share calculations are made in accordance with SFAS No. 128,
“Earnings
Per Share.” Basic loss per share is calculated by dividing net loss by weighted
average number of common shares outstanding for the year. Diluted loss per
share
is computed by dividing net loss by the weighted average number of common
shares
outstanding plus the dilutive effect of outstanding common stock warrants
and
convertible debentures.
For
the
years ended December 31, 2004 and 2003 and the three months ended
March 31,
2005 and 2004 (Unaudited) the calculations of basic and diluted loss per
share
are the same because potential dilutive securities would have an anti-dilutive
effect.
The
potentially dilutive securities consisted of the following as of
December 31, 2004 and March 31, 2005 (Unaudited)
Warrants
|
|
|
848,876
|
|
Convertible
notes
|
|
|
126,485
|
|
Preferred
Stock
|
|
|
235,760
|
|
Options
|
|
|
72,500
|
|
Total
|
|
|
1,283,621
|
|
F-10
REED’S,
INC.
NOTES
TO
FINANCIAL STATEMENTS — (Continued)
N) Advertising
Costs
The
Company accounts for advertising production costs by expensing such production
costs the first time the related advertising is run.
Advertising
costs are expensed as incurred and are included in selling expense in the
amount
of $42,828 and $29,234 for the years ended December 31, 2004 and 2003,
respectively and $14,533 (Unaudited) and $8,914 (Unaudited) for the three
months
ended March 31, 2005 and March 31, 2004.
The
Company accounts for certain sales incentives, including slotting fees, as
a
reduction of gross sales, in accordance with Emerging Issues Task Force on
Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor’s Products.” These sales incentives for the years ended
December 31, 2004 and 2003 approximated $400,000 and $240,000, respectively,
and
approximately $92,000, and approximately $68,000 for the three months ended
March 31, 2005 and 2004 (Unaudited) respectively.
O)
Reporting Segment of the Company
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS No. 131) requires certain disclosures
of operating segments, as defined in SFAS No. 131. Management has determined
that the Company has only one operating segment and therefore is not required
to
disclose operating segment information. The Company does not account for
the net
sales of it various products separately, and the disclosure required by SFAS
No.
131 of product revenue is not presented because it would be impracticable
to do
so.
P) Comprehensive Income
A
statement of comprehensive income is not presented in our financial statements
since we did not have any of the items of other comprehensive income in any
period presented.
Q) Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact of
the
adoption of SFAS 151, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 152, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
F-11
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued
in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that
begins
after June 15, 2005 and small business issuers will be required to adopt
for
reporting periods beginning after December 15, 2005. The Company has evaluated
the impact of the adoption of SFAS 123(R), and does not believe the impact
will
be significant to the Company's overall results of operations or financial
position.
The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated financial position or
results of operations.
(The
rest of this page left blank intentionally)
F-12
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(2)
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or market, and is
comprised
of the following as of December 31, 2004 and March 31, 2005:
|
|
March
31, 2005
(Unaudited)
|
|
December
31, 2004
|
|
Raw
Materials
|
|
$
|
578,382
|
|
$
|
655,693
|
|
Finished
Goods
|
|
|
716,059
|
|
|
645,332
|
|
|
|
$
|
1,294,441
|
|
$
|
1,301,025
|
|
(3)
Fixed
Assets
Fixed
assets are comprised of the following as of December 31, 2004 and
March 31,
2005 (Unaudited):
|
|
March
31, 2005
(Unaudited)
|
|
December
31, 2004
|
|
Land
|
|
$
|
409,546
|
|
$
|
409,546
|
|
Building
|
|
|
906,038
|
|
|
906,038
|
|
Vehicles
|
|
|
183,588
|
|
|
184,983
|
|
Machinery
and equipment
|
|
|
637,915
|
|
|
612,332
|
|
Office
equipment
|
|
|
98,937
|
|
|
98,937
|
|
|
|
|
2,236,024
|
|
|
2,211,836
|
|
Accumulated
depreciation
|
|
|
(411,606
|
)
|
|
(390,363
|
)
|
|
|
$
|
1,824,418
|
|
$
|
1,821,473
|
|
Depreciation
expense for the years ended December 31, 2004 and 2003 was $96,585
and
$92,051, respectively, and $ 21,243 (Unaudited) and $12,324 (Unaudited)
for the
three months ended March 31, 2005 and 2004, respectively. During 2004,
the
Company constructed certain machinery and equipment and capitalized $7,208
of
interest costs. For the three months ended March 31, 2005 no interest was
capitalized (Unaudited).
(4) Intangible
Assets
Brand
Names
Brand
Names consist of two (2) trademarks for natural beverages which the
Company
acquired in previous years. As long as the Company continues to renew its
trademarks, these intangible assets will have an indefinite life. Accordingly,
they are not subject to amortization. The Company determines fair value for
Brand Names by reviewing the net sales of the associated beverage and applying
industry multiples for which similar beverages are sold. As of December 31,
2004
and
March 31, 2005 (Unaudited), the carrying amounts for Brand Names were
$800,201.
F-13
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Other
Intangible Assets
Other
Intangible Assets consist of:
December
31, 2004
|
Asset
|
Gross
Amount
|
Accumulated
Amortization
|
Current
Year
Amortization
|
Useful
Life
|
Building
Loan Fees
|
$18,613
|
$2,978
|
$745
|
300
months
|
March
31, 2005 (Unaudited)
|
Asset
|
Gross
Amount
|
Accumulated
Amortization
|
Current
Year
Amortization
|
Useful
Life
|
Building
Loan Fees
|
$18,613
|
$3,164
|
$186
|
300
months
|
The
estimated aggregate amortization as of December 31, 2004 for each
of the
next five years is:
Year
|
|
|
Amount
|
|
2004
|
|
$
|
745
|
|
2005
|
|
|
745
|
|
2006
|
|
|
745
|
|
2007
|
|
|
745
|
|
2008
|
|
|
745
|
|
(5) Lines
of Credit
The
Company had outstanding borrowings of $1,128,222 and $ 1,128,028 as of
December 31, 2004 and March 31, 2005 (Unaudited), respectively under
the
following line of credit agreements:
The
Company has an unsecured $50,000 line of credit with a bank. Interest is
payable
monthly at the prime rate, as published in the Wall Street Journal, plus
1.5%
per annum. The Company’s outstanding balance was $30,901 at December 31,
2004 and $29,908 at March 31, 2005 (Unaudited). The interest rate in effect
at
December 31, 2004 was 6.75%. The line expires in December
2009.
The
Company has an unsecured $50,000 line of credit with a bank, guaranteed by
the
Small Business Administration (SBA) and the Company’s President. Interest
is payable monthly at a rate of 7.5% per annum. The line of credit
expires
December 2005. Upon expiration, the loan converts to a term loan providing
for
principal and interest payments sufficient to amortize the loan by December
2009. The Company’s outstanding balance was $50,000 at December 31, 2004
and March 31, 2005, (Unaudited), respectively.
The
Company has a line of credit in the amount of $287,934 at December 31, 2004
and
$ 292,525 at March 31, 2005 with Merrill Lynch. The loan was co-signed by
Robert
T. Reed, Jr., the Company’s Vice President and National Sales
Manager — Mainstream and a brother of the Company’s founder and CEO,
Christopher J. Reed. Robert Reed also pledged his personal stock account
on
deposit with Merrill Lynch as collateral. The line of credit bears interest
at a
rate of rate of 3.785% per annum plus LIBOR (6.30% as of December 31, 2004).
In
consideration for Mr. Reed’s pledging his stock account at Merrill Lynch as
collateral, the Company pays Mr. Reed 5% per annum of the amount
the
Company borrows from Merrill Lynch as a loan fee.
The
Company has a line of credit with a finance company. This line of credit
allowed
for a maximum borrowing base of $1,100,000 as of December 31, 2004
and was
to expire on June 25,
2005.
The
amount available for borrowing from time to time under the revolving line
of
credit is dependent upon the levels of certain eligible accounts receivable
and
inventory. As of December 31, 2004, the Company had an outstanding
balance
of $759,387 under the line of credit based on eligible accounts receivable
and
inventory at that time. At March 31, 2005 the amount outstanding was $ 755,595.
The eligible accounts receivable were approximately $744,553 at December
31,
2004 and $556,000 at March 31, 2005 (Unaudited). Borrowings on inventory
are
capped at $250,000. Borrowings under the credit facility bear interest at
the
prime rate plus 9% and 10% per annum (14.25% for the accounts receivable
line and 15.25% for the inventory line as of December 31, 2004). This revolving
line of credit is secured by all Company assets, including accounts receivable,
inventory, trademarks and other intellectual property, and equipment. The
credit
facility does not impose any financial covenants. Subsequent to March 31,
2005,
the Company entered into a new credit facility with a new lender and settled
this facility. (See Note 15.)
F-14
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(6) Notes
Payable to Related Parties
The
Company has three unsecured loans payable to Robert T. Reed, Sr.,
the
father of the Company’s founder Christopher J. Reed, in an amount of $252,358 as
of December 31, 2004 and March 31, 2005 (Unaudited).
The
first
loan bears interest at 10% per annum and matures in October 2006.
The
outstanding principal balance of the loan as of December 31, 2004
and March
31, 2005 (Unaudited) was $24,648.
The
second loan bears interest at 8% per annum and matures in October
2006. The
outstanding principal balance of this loan as of December 31, 2004 and
March 31, 2005 (Unaudited) was $177,710 . As long as the debt is outstanding
Mr. Reed has the right to convert this loan and interest into shares
of our
common stock at a rate of one share of common stock for every $2.00 owed
to
Mr. Reed,including accrued interest. As of December 31, 2004, the
loan was
convertible into 118,205 shares of common stock. As of March 31, 2005 the
loan
was convertible into 119,957 (Unaudited) shares of common stock.
The
third
loan bears interest at 8% per annum and matures in October 2006.
The
outstanding principal balance of this loan as of December 31, 2004
and
March 31, 2005 (Unaudited) was $50,000.
In
addition, the Company has a note payable to Judy Reed, the wife of the
Company’s
founder. The note is unsecured, non-interest bearing and due on demand.
The
amount of this loan as of December 31, 2004 was $21,000. It was paid-in-full
as
of March 31, 2005 (Unaudited)
(7)
Long-term
Debt
Long-term
debt consists of the following as of December 31, 2004 and March
31, 2005
(Unaudited)
|
|
December
31, 2004
|
|
March
31, 2005
(Unaudited)
|
|
Note
payable to SBA in the original amount of $748,000 with interest
at the
Wall Street Journal
prime rate plus 1% per annum, adjusted monthly with no cap
or floor.
The combined
monthly principal and interest payments are $4,910, subject
to annual
adjustments.
The interest rate in effect at December 31, 2004 was
6%. The note is
secured
by land and building and guaranteed by the majority stockholder.
The note
matures
November 2025.
|
|
$
|
688,514
|
|
|
684,250
|
|
Notes
payable to various non-related parties, unsecured, with interest
at
10% per annum. Principal
and accrued interest are payable in full at the end of the
note term.
Theses notes
were issued with warrants, exercisable at issuance. The warrants
have an
exercise price
of $3 and a term of 5 years. Principal and any unpaid
interest are
due in June 2006. (A)
|
|
|
80,000
|
|
|
80,000
|
|
The
Company obtained a building improvement loan with a maximum
draw of
$168,000. The
interest rate is at the Wall Street Journal prime rate plus
1%, adjusted
monthly with no
cap or floor. The combined monthly principal and interest
payments are
$1,016; subject
to annual adjustments. The rate in effect at December 31,
2004 was 6%
per annum.
The note is secured by land and building and guaranteed by
the majority
stockholder
and matures November 2025.
|
|
|
145,233
|
|
|
144,354
|
|
F-15
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Notes
payable to a non-related individual, due on demand, unsecured,
with
interest at 10% per annum. The note is convertible to
common stock at 60%
of the initial public offering price or 100% of a private
offering price.
|
|
|
9,000
|
|
|
9,000
|
|
Notes
payable to GMAC, secured by automobiles, payable in monthly
installments
of $758 including interest at 0.0%, with maturity in
2008.
|
|
|
27,301
|
|
|
25,027
|
|
Notes
payable to Chrysler Financial Corp., secured by automobiles,
payable in
monthly installments of $658, including interest at 1.9%
per annum, with
maturity in 2008.
|
|
|
28,573
|
|
|
26,730
|
|
Installment
loan secured by certain plant equipment. Payable in monthly
installments
of $4,000 plus interest. This loan bears interest at
prime plus 10% per
annum, (15.25% at December 31, 2004) and matures in November
2007
|
|
|
142,000
|
|
|
130,000
|
|
Installment
loan secured by certain plant equipment. Payable in monthly
installment of
$1,138 plus interest. This loan bears interest at prime
plus 12% per
annum, (17.25% at December 31, 2004) and matures in January
2007
|
|
|
27,248
|
|
|
24,972
|
|
Total
|
|
|
1,147,869
|
|
|
1,124,333
|
|
Less
current portion
|
|
|
106,113
|
|
|
106,469
|
|
|
|
|
1,041,756
|
|
|
1,017,864
|
|
(A) During
2000 and 2001, the company issued 420,000 warrants in connection with the
issuance of $420,000 of debt. The Company used the Black-Scholes valuation
technique and determined that $247,800 should be allocated to the value of
the
warrants as of the date of issuance. The Company amortized the discount over
the
initial expected life of the debt resulting in amortization of $24,780 for
the
year ended December 31, 2003. The amount of the discount allocated
to the
warrants has been fully amortized as of December 31, 2003.
The
aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31, 2004:
December
31,
|
|
Amount
|
|
2005
|
|
$
|
106,113
|
|
2006
|
|
|
177,000
|
|
2007
|
|
|
81,100
|
|
2008
|
|
|
26,000
|
|
2009
|
|
|
19,000
|
|
Thereafter
|
|
|
738,656
|
|
Total
|
|
$
|
1,147,869
|
|
(8) Stockholders’
Equity
Common
stock consists of $.0001 par value, 11,500,000 shares authorized,
4,726,091 issued and outstanding as of December 31, 2004 and March
31, 2005
(Unaudited).
Preferred
stock consists of 500,000 shares authorized to
Series A, $10.00 par value, 5% non-cumulative, participating, preferred
stock. As of December 31, 2004 and March 31, 2005 (Unaudited), there were
58,940
shares outstanding.
F-16
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
These
preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend
can be paid in cash or, in the sole and absolute discretion of our board
of
directors, in shares of common stock based on its then fair market value.
We
cannot declare or pay any dividend on shares of our securities ranking junior
to
the preferred stock until the holders of our preferred stock have received
the
full non-cumulative dividend to which they are entitled. In addition, the
holders of our preferred stock are entitled to receive pro rata distributions
of
dividends on as “as converted” basis with the holders of our common
stock.
In
the
event of any liquidation, dissolution or winding up of the Company, or if
there
is a change of control event, then, subject to the rights of the holders
of our
more senior securities, if any, the holders of our Series A preferred stock
are
entitled to receive, prior to the holders of any of our junior securities,
$10.00 per share plus all accrued and unpaid dividends. Thereafter, all
remaining assets shall be distributed pro rata among all of our security
holders.
At
any
time after June 30, 2007, we have the right, but not the obligation, to redeem
all or any portion of the Series A preferred stock by paying the holders
thereof
the sum of the original purchase price per share, which was $10.00, plus
all
accrued and unpaid dividends.
The
Series A preferred stock may be converted, at the option of the holder, at
any
time after issuance and prior to the date such stock is redeemed, into four
shares of common stock, subject to adjustment in the event of stock splits,
reverse stock splits, stock dividends, recapitalization, reclassification
and
similar transactions. We are obligated to reserve out of our authorized but
unissued shares of common stock a sufficient number of such shares to effect
the
conversion of all outstanding shares of Series A preferred stock.
Except
as
provided by law, the holders of our Series A preferred stock do not have
the
right to vote on any matters, including, without limitation, the election
of
directors. However, so long as any shares of Series A preferred stock are
outstanding, we shall not, without first obtaining the approval of at least
a
majority of the holders of the Series A preferred stock
· |
amend
our Certificate of Incorporation or bylaws in any manner which
adversely
affects the rights of the Series A preferred stock;
or |
· |
authorize
or issue any equity security having a preference over the Series
A
preferred stock with respect to dividends, liquidation, redemption
or
voting, including any other security convertible into or exercisable
for
any equity security other than any senior preferred stock.
|
During
2004, the Company sold its preferred stock in a private placement.
33,440 shares
were issued in connection with this offering and $334,400 of proceeds
were
received. The Company recorded a beneficial conversion feature (BCF)
in
accordance with Emerging Issues Task Force (EITF) 98-5. The BCF arises
from the
conversion price of the preferred stock being less than the fair market
value of
the common stock at the commitment date of the offering. The fair market
value
of the stock has been determined to be $4.00 per share, based on the
initial
public offering price which is expected to be $4.00. The excess of
the fair
market price of the underlying common stock over the conversion price
is $1.50.
Since the conversion feature of this offering allows for the conversion
of
preferred stock into 4 shares of common stock for each share of preferred
stock,
133,760 shares of common stock could be issued if fully converted.
Accordingly,
the BCF recorded was $200,640.
In
addition, during 2004, the Company negotiated with certain of its debt
holders
to convert debt and accrued interest to preferred stock. 25,500 shares
were
issued in connection with this conversion and $224,000 of debt principle
and
$31,002 of accrued interest were converted in exchange for the 25,500
shares of
Series A Convertible Preferred Stock. Upon conversion the excess
of the
fair market price of the underlying common stock over the conversion
price of
$1.50 per share as described above, resulted in a loss on extinguishment
of debt
of $153,000; (see Note 14.) In connection with this transaction, the
Company
recorded a BCF of $153,000, since the conversion of all of the preferred
stock
associated with this transaction could be converted into 102,000 shares
of
common stock at $1.50 per share based on the excess of the fair market
price of
the conversion price as described above.
F-17
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(9) Stock
Options and Warrants
A)
Stock Options
The
Company has granted certain employees and other individuals stock options
to
purchase the Company’s common stock under employment agreements. The options
generally vest immediately or when services are performed and have a maximum
term of five (5) years.
In
2001,
the Company adopted the Original Beverage Corporation 2001 Stock Option Plan.
The options shall be granted from time to time by the Compensation Committee.
Individuals eligible to receive options include employees of the Company,
consultants to the Company and directors of the Company. The options shall
have
a fixed price, which will not be less than 100% of the fair market value
per
share on the grant date. Options granted to employees are accounted for
according to APB 25.The following table summarizes the stock option
activity for the year ended December 31, 2004 and 2003:
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
Balance
January 1, 2003
|
|
|
72,500
|
|
$
|
3.21
|
|
Options
granted in 2003
|
|
|
—
|
|
|
N/A
|
|
Options
exercised in 2003
|
|
|
—
|
|
|
N/A
|
|
Balance
December 31, 2003
|
|
|
72,500
|
|
$
|
3.21
|
|
Options
granted in 2004
|
|
|
—
|
|
|
N/A
|
|
Options
exercised in 2004
|
|
|
—
|
|
|
|
|
Exercisable
|
|
|
72,500
|
|
$
|
3.21
|
|
Exercise
Price Range
|
Weighted
Average
Remaining
Number
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average Exercise Price
|
$2.00
|
37,500
|
53 months
|
$2.00
|
$3.00
|
17,500
|
53 months
|
$3.00
|
$6.00
|
17,500
|
53 months
|
$6.00
|
Total
options
|
72,500
|
53 months
|
$3.21
|
All options are vested and exercisable as of December 31, 2004.
A summary of the warrants outstanding and exercisable at December 31,
2004
is as follows:
Exercise
Price
Range
|
Weighted
Average
Remaining
Number
|
Weighted
Average
Remaining
Contractual Life
|
Weighted
Average
Exercise
Price
|
$0.02
|
262,500
|
6 months
|
$0.02
|
$2.00
|
119,876
|
84 months
|
$2.00
|
$3.00
|
466,500
|
110 months
|
$3.00
|
Total
warrants
|
848,876
|
|
|
The
warrants expire at various dates between 2005 and 2009. In June
2005
(Unaudited), 262,500 of warrants were converted to 262,500 shares of common
stock. In lieu of receiving cash, the Company reduced the amount
of
accrued interest it owed on debt payable to Robert T Reed, Sr.
The amount
of the exercise price and the corresponding reduction in accrued interest
was
$5,250. (See Note 15.)
F-18
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(10)
Income
Taxes
At
December 31, 2004, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $1,986,000 for Federal purposes and $1,040,000
for
state purposes. The Federal carryforward expires in 2024 and the state
carryforward expires in 2009. Given the Company’s history of net operating
losses, management has determined that it is more likely than not the Company
will not be able to realize the tax benefit of the carryforwards.
Accordingly,
the Company has not recognized a deferred tax asset for this benefit. Upon
the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards will recognize a deferred tax asset at that time.
Significant
components of the Company’s deferred income tax assets are as
follows:
|
|
Three
Months Ended March 31, 2005
|
|
|
|
Deferred
income tax asset:
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
736,174
|
|
$
|
736,174
|
|
Valuation
allowance
|
|
|
(736,174
|
)
|
|
(736,174
|
)
|
Net
deferred income tax asset
|
|
$
|
—
|
|
$
|
—
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
Three
Months
|
|
Year
Ended
|
|
|
|
Ended
March 31,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
2004
|
|
2003
|
|
Tax
expense at the U.S. statutory income tax
|
|
|
(34.00
|
)%
|
|
(34.00
|
|
|
(34.00
|
|
|
(34.00
|
|
Increase
in the valuation allowance
|
|
|
34.00
|
%
|
|
34.00
|
%
|
|
34.00
|
%
|
|
34.00
|
%
|
Effective
tax rate
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The
amounts of deffered income tax assets, the statutory rate and the effective
income tax rate as of March 31, 2005 (Unaudited) were unchanged from December
31, 2004.
(11)
Commitments
and Contingencies
Lease
Commitments
The
Company leases machinery under non-cancelable operating leases. Rental expense
for the years ended December 31, 2004 and 2003 were $55,157 and $21,784,
respectively. Rental
expense for the three months ended March 31, 2005 and 2004 were, $17,093
(Unaudited) and $9,871(Unaudited), repectively.
Future
payments under these leases as of December 31, 2004 are as
follows:
Year
Ending
|
|
|
|
December
31,
|
|
|
|
2005
|
|
$
|
65,249
|
|
2006
|
|
|
57,349
|
|
2007
|
|
|
19,883
|
|
2008
|
|
|
9,819
|
|
2009
|
|
|
3,631
|
|
Total
|
|
$
|
155,931
|
|
F-19
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(12) Legal
Proceedings
The
Company currently and from time to time is involved in litigation incidental
to
the conduct of its business. The Company is not currently a party to any
lawsuit
or proceeding which, in the opinion of its management, is likely to have
a
material adverse effect on it.
During
2004 the Company incurred $80,156 of legal costs associated with a lawsuit
which
the Company has won. The Plaintiff has appealed. The judgment in favor of
the
Company is to have the Plaintiff reimburse the Company for its legal defense
costs. If the Company is successful in the appeals process, it will record
income from the judgment if it collects the monies. No such legal costs were
incurred in 2003 of the three months ended March 31, 2005 and 2004
(Unaudited).
(13)
Related Party Activity
The
Company has notes payable to related parties. See Note 6.
Under
an
agreement that the Company expects will be entered into between Peter
Sharma III, a director of the Company and a registered securities
broker,
and Brookstreet, Mr. Sharma will receive commissions from the proceeds
of
this offering as per the terms of his agreement with Brookstreet. In addition,
Mr. Sharma will receive 50% of the warrants to be issued by the Company
to
Brookstreet and Brookstreet will pay the exercise price of these warrants
for
Mr. Sharma.
As
of
December 31, 2004, the Company advanced $91,197 to Mr. Sharma
which is
included in Due from Director on the accompanying balance sheet. The amount
advanced as of March 31, 2005 (Unaudited) was $104,010. The advance
is part of a line of credit agreement between the Company and Mr. Sharma.
The
repayment of the advances are to start July 1, 2005 at a minimum of $1,000
per
month, with the remaining balance due on December 31, 2007. The maximum
amount
of advances under this agreement is $200,000. The agreement is non-interest
bearing.
In
June 2005
(Unaudited), Robert T. Reed, Sr. converted 262,500 of warrants to
262,500 shares
of common stock. In lieu of receiving cash, the Company reduced
the amount
of accrued interest it owed on debt payable to Robert T Reed, Sr.
The
amount of the exercise price and the corresponding reduction in accrued
interest
was $5,250.
(The
rest of this page left blank
intentionally)
F-20
(14)
Restatement
The
Company determined that Packaging Designs Costs previously deferred should
not
be capitalized. Accordingly, the Company no longer capitalizes these
costs and
the Company has written off these costs and reversed the amortization
associated
with these costs, as a correction of an error in the years in which they
were
initially incurred. For periods prior to 2003, a net adjustment of $55,211
has
been recorded against the accumulated deficit. This restatement did not
change
the loss per share amount in 2003 or 2004.
The
Company has also restated its accounting for the recognition of the beneficial
conversion feature discussed in Note 8 that was previously reflected
as a charge
against paid in capital. This restatement resulted in a charge of $153,000
to
the statement of operations for the year ending December 31, 2004 relating
to
the recognition of a loss on extinguishment of debt. The accumulated
deficit as
of December 31, 2004 did not change as a result of this
restatement.
The
effect of these restatements in 2004 and 2003 is as follows:
Net
loss
|
|
2004
|
|
2003
|
|
As
previously stated
|
|
$
|
(326,371
|
)
|
$
|
(774,367
|
)
|
Recognition
of loss on extinguishment of debt
|
|
|
(153,000
|
)
|
|
--
|
|
Net
change from restatement of accounting for packaging design
costs
|
|
|
--
|
|
|
2,370
|
|
As
adjusted
|
|
$
|
(479,371
|
)
|
$
|
(771,997
|
)
|
Loss
per share
|
|
|
2004
|
|
As
previously reported
|
|
$
|
(0.07
|
)
|
Recognition
of loss on extinguishment of debt
|
|
|
(0.03
|
)
|
As
adjusted
|
|
|
(0.10
|
)
|
Accumulated
deficit
|
|
2004
|
|
2003
|
|
2002
|
|
As
previously stated
|
|
$
|
(2,403,628
|
)
|
$
|
(1,725,997
|
)
|
$
|
(896,419
|
)
|
Net
change to beginning balance
|
|
|
--
|
|
|
--
|
|
|
(55,211
|
)
|
Net
change during 2003
|
|
|
--
|
|
|
2,370
|
|
|
--
|
|
As
adjusted
|
|
$
|
(2,403,628
|
)
|
$
|
(1,723,627
|
)
|
$
|
(951,630
|
)
|
(15) Subsequent events
(Unaudited)
In
June 2005, Robert T. Reed, Sr.
converted 262,500 of warrants to 262,500 shares of common stock.
In lieu
of receiving cash, the Company reduced the amount of accrued interest
it owed on
debt payable to Robert T Reed, Sr. The amount of the exercise
price and
the corresponding reduction in accrued interest was $5,250.
On
June 25, 2005, we changed our lending facility to
a new lender. As a result we have increased our revolving line of credit
availability from $1,100,00 to $1,910,000. In addition, certain
other long
term debt financing with our previous lender has been refinanced with
the new
lender. We were successful in securing these credit facilities at an
interest
rate of Prime plus 2.75% as opposed to interest rates with our previous
lender
which ranged from Prime plus 9% to Prime plus 12%. All of our assets,
including
real estate, accounts receivable, inventory, trademarks and other intellectual
property and equipment, secure the new revolving line of
credit.
F-21
(This
page left blank intentionally)
F-22
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 24.
|
Indemnification
of Directors and Officers
|
|
Section 145
of the Delaware General Corporation Law (the “DGCL”), as the same exists or may
hereafter be amended, provides that a Delaware corporation may indemnify
any
persons who were, or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right
of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at
the
request of such corporation as a director, officer, employee or agent of
another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit
or
proceeding, provided such person acted in good faith and in a manner he
or she
reasonably believed to be in or not opposed to the corporation’s best interests
and, with respect to any criminal action or proceeding, had no reasonable
cause
to believe that his or her conduct was illegal. A Delaware corporation
may
indemnify any persons who are, were or are threatened to be made, a party
to any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request
of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be
in or
not opposed to the corporation’s best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director,
employee or agent is adjudged to be liable to the corporation. Where an
officer,
director, employee, or agent is successful on the merits or otherwise in
the
defense of any action referred to above, the corporation must indemnify
him or
her against the expenses which such officer or director has actually and
reasonably incurred.
Section 145
of the DGCL further authorizes a corporation to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or
agent of
the corporation, or is or was serving at the request of the corporation
as a
director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him or her and incurred by him or
her in
any such capacity, arising out of his or her status as such, whether or
not the
corporation would otherwise have the power to indemnify him or her under
Section 145 of the DGCL.
The
Company’s amended certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, as it may be amended from time to time,
none
of the Company’s directors will be personally liable to the Company or the
Company’s stockholders for monetary damages resulting from a breach of fiduciary
duty as a director.
The
Company’s amended certificate of incorporation also provides discretionary
indemnification for the benefit of the Company’s directors, officers, and
employees, to the fullest extent permitted by Delaware law, as it may be
amended
from time to time. Insofar as indemnification for liabilities arising under
the
Securities Act may be permitted to the Company’s directors or officers, or
persons controlling us, pursuant to the foregoing provisions, the Company
has
been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Pursuant
to the Company’s bylaws, the Company is required to indemnify its directors,
officers, employees and agents, and the Company has the discretion to advance
his or her related expenses, to the fullest extent permitted by
law.
The
Company does not currently provide liability insurance coverage for its
directors and officers.
(The
rest of this page left blank intentionally)
Item 25.
|
Other
Expenses of
Issuance and Distribution
|
|
The
following is a schedule of the estimated expenses (all of which will be borne
by
the Company) incurred in connection with the offering of the securities
registered hereby, other than underwriter commissions. Advertising expenses
we
incur in connection with our own selling efforts will vary depending on the
success of the offering.
Description
|
|
|
|
Amount
if 200,000
Shares
are Sold
|
|
Amount
if 1,000,000
Shares
are Sold
|
|
Amount
if 2,000,000
Shares
are Sold
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SEC
registration fee
|
|
|
|
|
$
|
1,115
|
|
|
|
|
$
|
1,115
|
|
|
|
|
$
|
1,115
|
|
|
|
|
Printing
and Engraving Fees
|
|
|
|
|
|
10,000
|
* |
|
|
|
|
10,000
|
* |
|
|
|
|
10,000
|
* |
|
|
|
Postage
(mailing share certificates)
|
|
|
|
|
|
500
|
* |
|
|
|
|
500
|
*
|
|
|
|
|
500
|
* |
|
|
|
Legal
Fees
|
|
|
|
|
|
76,000
|
* |
|
|
|
|
76,000
|
* |
|
|
|
|
76,000
|
* |
|
|
|
Accounting
Fees
|
|
|
|
|
|
114,000
|
* |
|
|
|
|
114,000
|
* |
|
|
|
|
114,000
|
* |
|
|
|
Blue
Sky Fees and Expenses
|
|
|
|
|
|
16,000
|
* |
|
|
|
|
16,000
|
* |
|
|
|
|
16,000
|
* |
|
|
|
Underwriter
Expenses
|
|
|
|
|
|
25,000
|
* |
|
|
|
|
25,000
|
* |
|
|
|
|
25,000
|
* |
|
|
|
Advertising
Expenses
|
|
|
|
|
|
25,000
|
* |
|
|
|
|
50,000
|
* |
|
|
|
|
100,000
|
* |
|
|
|
Miscellaneous
Expenses
|
|
|
|
|
|
3,400
|
* |
|
|
|
|
3,400
|
* |
|
|
|
|
3,400
|
* |
|
|
|
TOTAL
|
|
|
|
|
$
|
271,015
|
|
|
|
|
$
|
296,015
|
|
|
|
|
$
|
346,015
|
|
|
|
|
*estimated
expenses
Item 26.
|
Recent
Sales of Unregistered Securities
|
|
There
have been no sales of unregistered securities within the last three years,
except as set forth below.
In
January 2001, the Company issued 14,500 shares of common stock as
a
year-end bonus to its employees. The Company recognized $29,000 of compensation
expense. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a
non-public
sale of securities.
In
January 2001, the Company issued 3,200 shares of common stock in
exchange
for services provided by two vendors. The Company estimates that the value
of
the services provided in exchange for the shares was approximately
$2.00 per share, so it has recognized $6,400 of expense. The Company
believes that the offering was exempt from registration under the Securities
Act
by reason of Section 4(2) thereof as a non-public sale of securities.
In
February 2001 Robert T. Reed Jr. exercised warrants for 20,000 shares
of
the common stock at $1.00 per share. The warrants had been issued
in 1992.
The Company believes that the offering was exempt from registration under
the
Securities Act by reason of Section 4(2) thereof as a non-public
sale of
securities.
In
May 2001, the Company sold 500 shares of common stock at $3.00 per
share to an existing stockholder who is not an affiliate of the Company.
The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a non-public
sale of
securities.
In
June 2001, the Company issued options to purchase 17,500 shares
of
common stock to a manager of the Company. The exercise price of the options
is
$3.00 per share, and the options expire in June 2009. No compensation
cost
was recognized because the strike price equaled the fair value of the stock
at
the date of issuance. The Company believes that the offering was exempt
from
registration under the Securities Act by reason of Section 4(2)
thereof as
a non-public sale of securities.
In
June 2001, the Company issued warrants to purchase 30,000 shares
of
common stock to a consultant of the Company in partial consideration for
services rendered to the Company. The exercise price of the options is
$3.00 per share, and the options expire in June 2009. The fair value
of
this warrant grant is estimated on the date of grant using the Black-Scholes
options pricing model with the following assumptions used: no expected
dividends, 49% volatility, and risk-free interest of 4.81% and expected
life of
five years. The value was calculated to be $1.46 per warrant for
a total
value of $43,807. The total value has been included in deferred stock offering
costs to be offset against the future sale of common stock. The Company
believes
that the offering was exempt from registration under the Securities Act
by
reason of Section 4(2) thereof as a non-public sale of securities.
In
May, June, and July 2001, the Company raised $420,000 from the issuance
of notes
to fifteen persons who were existing stockholders or otherwise familiar
with the
Company. These notes bear interest at 8% per annum. The original
maturity
date of the notes was in February 2003 and the note holders extended the
maturity date until October 2004. The investors also received warrants
to
purchase an aggregate of 420,000 shares of common stock at an exercise
price of $3.00 per share. The warrants expire in 2010. The investors
were:
William
Robertson
|
|
$
|
159,000
|
|
Lucinda
Robertson
|
|
|
30,000
|
|
David
Robinov
|
|
|
50,000
|
|
Martin
Shepard
|
|
|
20,000
|
|
Kapur
Payson
|
|
|
30,000
|
|
Mark
Johnson
|
|
|
30,000
|
|
Dan
Keays
|
|
|
30,000
|
|
Bill
Milligan
|
|
|
25,000
|
|
Shane
Milligan
|
|
|
20,000
|
|
Brant
Milligan
|
|
|
5,000
|
|
Billy
Milligan
|
|
|
5,000
|
|
Shalee
Milligan
|
|
|
5,000
|
|
Shannon
Milligan
|
|
|
5,000
|
|
William
Holiman
|
|
|
1,000
|
|
Jason
Robertson
|
|
|
5,000
|
|
A
portion
of the loan proceeds has been allocated to the value of the underlying warrants,
which was calculated to be $247,800. The Company believes that the offering
was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof as a non-public sale of securities.
In
July 2001, Mark Reed converted $10,000 worth of convertible debt issued in
1991
and accrued interest into 8,889 shares of common stock, or a conversion
rate of $1.125 per share. The Company believes that the conversion
was
exempt from registration under the Securities Act by reason of
Section 3(a)(9), since the issuance was an exchange with existing
security
holders exclusively and no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange. In addition, the Company
believes that the offering was exempt from registration under the Securities
Act
by reason of Section 4(2) thereof as a non- public sale of securities.
In
July 2001, the Company issued warrants to purchase 1,500 shares
of
common stock to a consultant of the Company in partial consideration for
services rendered to the Company. The exercise price of the options is
$3.00 per share, and the options expire in July 2009. The fair value
of
this warrant grant is estimated on the date of grant using the Black-Scholes
options pricing model with the following assumptions used: no expected
dividends, 49% volatility, and risk-free interest of 4.76% and expected life
of
five years. The value was calculated to be $1.46 per warrant for a
total
value of $2,187. The total value has been included in deferred stock offering
costs to be offset against the future sale of common stock. The Company believes
that the offering was exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non-public sale of securities.
In August 2001, $15,000 was raised in a private sale of a total of
3,750 shares of common stock at $4.00 per share to two existing
stockholders of the Company who are not affiliates of the Company. The Company
believes that the offering was exempt from registration under the Securities
Act
by reason of Section 4(2) thereof as a non-public sale of securities.
In
October 2001, B.J. Green converted $17,815 worth of convertible debt and
interest into 11,877 shares of common stock, or a conversion rate
of
$1.50 per share. The convertible debt had been issued in 1991. The
Company
believes that the conversion was exempt from registration under the Securities
Act by reason of Section 3(a)(9), since the issuance was an exchange
with
existing security holders exclusively and no commission or other remuneration
was paid or given directly or indirectly for soliciting such exchange. In
addition, the Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
In
July 2002, the Company issued options to purchase 17,500 shares
of
common stock to a manager of the Company, in accordance with the terms of
the
manager’s employment agreement. The exercise price of the options is
$6.00 per share and the options expire in July 2007. No compensation
cost
was recognized because the strike price equaled the fair value of the stock
at
the date of issuance. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Rule 701 thereunder
as a
sale of securities pursuant to a written compensation contract with an employee
of the issuer, and/or Section 4(2) of the Securities Act as a non-public
sale of securities.
In
January 2003, the Company issued 1,500 shares of common stock as a
year-end
bonus to its employees. The Company recognized $4,500 of compensation expense.
The Company believes that the offering was exempt from registration under
the
Securities Act by reason of Section 4(2) thereof as a non-public sale
of
securities.
In
July
2003, the Company sold 3,000 shares of common stock at $3.50 per
share
to an existing stockholder who is not an affiliate of the Company. The Company
believes that the offering was exempt from registration under the Securities
Act
by reason of Section 4(2) thereof as a non-public sale of
securities.
Beginning
in the second quarter of 2004, the
Company conducted a private offering and raised $334,400 from the sale of
33,440 shares of Series A convertible preferred stock at a
price of
$10.00 per share. This offering was completed in October 2004, after
the
Company filed the Certificate of Designations creating the Series A
convertible preferred stock with the Secretary of State of Delaware. The
sales
were made to existing stockholders and other persons who were familiar with
the
Company. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof or
Regulation D promulgated thereunder, as a non-public sale of securities.
Also
at this time, a number of holders of our debt indicated their willingness
to
convert a total of $255,002 of debt into 25,500 shares of Series A
convertible preferred stock at a price of $10.00 per share. This offering
was completed in October 2004, after the Company filed the Certificate of
Designations creating the Series A convertible preferred stock with
the
Secretary of State of Delaware. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof or Regulation D promulgated thereunder, as a non-public sale
of
securities.
On
May
31, 2005, Robert T. Reed Sr., the CEO’s father converted options for 262,500
shares of common stock. The option price was for $0.02 per share. Mr .
Reed has
held these options since 1991. The common stock are subject to a lock-in
agreement for two years. See –Certain Relationships and Related Transactions
section of this document for more information.
(The
rest of this page left blank intentionally)
Copies
of the following documents are filed with this registration statement as
exhibits:
1.2
|
Underwriting
Agreement
|
1.3
|
Specimen
Subscription Agreement
|
3.1
|
Certificate
of Incorporation
|
3.2
|
Amendment
to Certificate of Incorporation
|
3.3
|
Certificate
of Designations
|
3.4
|
Certificate
of Correction to Certificate of Designations
|
3.5
|
Bylaws,
as amended
|
4.1
|
Form
of common stock certificate
|
4.2
|
Form
of Series A preferred stock certificate
|
4.3
|
2001
Employee Stock Option Plan
|
4.4
|
Convertible
promissory notes issued to investors
|
4.5
|
Amendment
to Promissory Note
|
5.1
|
Legal
opinion of Horwitz and Cron
|
10.1
|
Purchase
Agreement for Virgil’s Root Beer
|
10.2
|
Brewing
Agreement dated as of May 15, 2001 between the Company
and The Lion
Brewery, Inc.
|
10.3
|
Loan
Agreement with U.S. Bank National Association for purchase of
the Brewery
|
10.4
|
Loan
Agreement with U.S. Bank National Association for improvements
at the
Brewery
|
10.5
|
Loan
Agreement with Bay Business Credit
|
10.6
|
Credit
Agreement with Merrill Lynch
|
10.7
|
Form
of Promotional Share Lock-In Agreement
|
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed
|
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr.
|
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr.
|
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma III
|
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace
|
|
10.7(f)
|
Promotional
Share Lock-In Agreement for Judie Holloway Reed |
|
10.7(g)
|
Promotional
Share Lock-In Agreement for Eric Scheffer |
10.8
|
Loan
Agreement dated September 28, 2004 with Bay Business Credit
|
10.9
|
Sirius/Pureprophet,
Ltd. Vendor’s Credit Line Agreement with Original Beverage
Corp.
|
10.10
|
Terms
Of Amortization for Peter Sharma III for Sirius/Pureprophet,
Ltd. Vendor’s
Credit Line Agreement with Original Beverage Corp.
|
10.11
|
Co-Sign
Agreement
|
10.12
|
Loan
Agreement with Robert T. Reed, Sr.
|
10.13
|
Loan
Agreement with William Holiman
|
10.14
|
Loan
Agreement with Bay Business Credit
|
10.15
|
Loan
Agreement with Robert T. Reed
|
10.16
|
Loan
Agreement with Robert T. Reed
|
10.17
|
Amendment
to Loan Agreement with Bay Business Credit
|
10.18
|
Suspension
of Loan Payment Agreement with Robert T. Reed, Sr.
|
23.1
|
Consent
of Weinberg & Co., P.A.
|
23.2 |
Consent
of Horwitz and Cron (contained in Exhibit
5.1) |
23.3 |
Opinion
of Weinberg & Co., P.A. |
24
|
Power
of Attorney (included in the signature page to the Registration
Statement)
|
|
|
A.
Insofar as indemnification for liabilities arising under the Securities Act
of
1933, as amended, or 1933 Act, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the
event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer
or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person
in connection with the securities being registered, the registrant will,
unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
1933 Act and will be governed by the final adjudication of such issue.
B.
The
undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To
include any prospectus required by Section 10(a)(3) of the 1933 Act,
(ii)
To reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change
in the information set forth in the Registration Statement.
Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) (Section 230.424(b) of
Regulation S-B) if, in the aggregate, the changes in volume and
price
represent no more than a 20% change in the maximum aggregate offering price
set
forth in the “Calculation of Registration Fee” table in the effective
Registration Statement, and
(iii) To
include any additional or changed material information with respect to
the plan
of distribution not previously disclosed in the Registration Statement
or any
material change to such information in the Registration Statement.
(2)
That, for the purpose of determining any liability under the 1933 Act,
each
such post-effective amendment shall be deemed to be a new Registration
Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(3)
To remove from registration by means of a post-effective amendment any
of the
securities being registered which remain unsold at the termination of the
offering.
(The
rest of this page left blank intentionally)
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Los Angeles, California, on this 12th
day
of July 2005.
REED’S,
INC
|
By:
/s/ CHRISTOPHER J. REED
|
Christopher
J. Reed
|
Chairman,
President and Chief Executive Officer
|
POWER
OF ATTORNEY
KNOW
ALL
PERSONS BY THESE PRESENTS:
That
the undersigned officers and directors of Reed’s, Inc., Corporation, a Delaware
corporation, do hereby constitute and appoint Christopher J. Reed and Peter
Sharma III, and either of them, the lawful attorneys-in-fact and agents
with full power and authority to do any and all acts and things and to execute
any and all instruments which said attorneys and agents, and either one of
them,
determine may be necessary or advisable or required to enable said corporation
to comply with the Securities Act of 1933, as amended, and any rules or
regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality
of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in
the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed
as
part of or in conjunction with this Registration Statement or amendments
or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or either one of them, shall do or cause
to
be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN
WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as
of the date indicated.
Pursuant
to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities
and
on the dates indicated.
Name
|
Title
|
Date
|
/s/
CHRISTOPHER J. REED
Christopher
J. Reed
|
Chief
Executive Officer, President, Chief Financial Officer,and
Chairman of the
Board
(Principal
Executive Officer, Principal Financial Officer,and Principal
Accounting
Officer)
|
July
12, 2005
|
/s/
JUDIE HOLLOWAY REED
Judy
Holloway Reed
|
Director
|
|
/s/
PETER SHARMA III
Peter
Sharma III
|
Director
|
|
/s/
MARK HARRIS
Mark
Harris
|
Independent
Director
|
|
/s/
DR. DANIEL S.J. MUFFOLETTO, N.D.
Dr.
Daniel S.J. Muffoletto
|
Independent
Director
|
|
/s/
MICHAEL FISCHMAN
Michael
Fischman
|
Independent
Director
|
|
EXHIBIT
INDEX
1.2
|
Underwriting
Agreement
|
1.3
|
Specimen
Subscription Agreement
|
3.1
|
Certificate
of Incorporation
|
3.2
|
Amendment
to Certificate of Incorporation
|
3.3
|
Certificate
of Designations
|
3.4
|
Certificate
of Correction to Certificate of Designations
|
3.5
|
Bylaws,
as amended
|
4.1
|
Form
of common stock certificate
|
4.2
|
Form
of Series A preferred stock certificate
|
4.3
|
2001
Employee Stock Option Plan
|
4.4
|
Convertible
promissory notes issued to investors
|
4.5
|
Amendment
to Promissory Note
|
5.1
|
Legal
opinion of Horwitz and Cron
|
10.1
|
Purchase
Agreement for Virgil’s Root Beer
|
10.2
|
Brewing
Agreement dated as of May 15, 2001 between the Company
and The Lion
Brewery, Inc.
|
10.3
|
Loan
Agreement with U.S. Bank National Association for purchase of
the Brewery
|
10.4
|
Loan
Agreement with U.S. Bank National Association for improvements
at the
Brewery
|
10.5
|
Loan
Agreement with Bay Business Credit
|
10.6
|
Credit
Agreement with Merrill Lynch
|
10.7
|
Form
of Promotional Share Lock-In Agreement
|
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed
|
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr.
|
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr.
|
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma III
|
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace
|
|
10.7(f) |
Promotional
Share Lock-In Agreement for Judie Holloway Reed |
|
10.7(g) |
Promotional
Share Lock-In Agreement for Eric Scheffer |
10.8
|
Loan
Agreement dated September 28, 2004 with Bay Business Credit
|
10.9
|
Sirius/Pureprophet,
Ltd. Vendor’s Credit Line Agreement with Original Beverage
Corp.
|
10.10
|
Terms
Of Amortization for Peter Sharma III for Sirius/Pureprophet,
Ltd. Vendor’s
Credit Line Agreement with Original Beverage Corp.
|
10.11
|
Co-Sign
Agreement
|
10.12
|
Loan
Agreement with Robert T. Reed, Sr.
|
10.13
|
Loan
Agreement with William Holiman
|
10.14
|
Loan
Agreement with Bay Business Credit
|
10.15
|
Loan
Agreement with Robert T. Reed
|
10.16
|
Loan
Agreement with Robert T. Reed
|
10.17
|
Amendment
to Loan Agreement with Bay Business Credit
|
10.18
|
Suspension
of Loan Payment Agreement with Robert T. Reed, Sr.
|
23.1
|
Consent
of Weinberg & Co., P.A.
|
23.2 |
Consent
of Horwitz and Cron (contained in Exhibit 5.1) |
23.3 |
Opinion
of Weinberg & Co., P.A. |
24
|
Power
of Attorney (included in the signature page to the Registration
Statement)
|
|
|
TABLE
OF CONTENTS
Section
|
Page
|
Prospectus
Summary
|
1
|
Risk
Factors
|
3
|
Forward
Looking Statements
|
8
|
Use
of Proceeds
|
9
|
Dividend
Policy
|
10
|
Capitalization
as of December 31, 2004
|
11
|
Dilution
|
12
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
15
|
Business
|
23
|
Legal
Proceedings
|
38
|
Management
|
39
|
Certain
Relationships and Related Transactions
|
43
|
Principal
Stockholders
|
45
|
Description
of Our Securities
|
46
|
Shares
Available for Future Resale
|
48
|
Plan
of Distribution
|
49
|
Legal
Matters
|
52
|
Experts
|
52
|
Where
You Can Find More Information
|
52
|
Index
to Financial Statements
|
F-1
|
Dealers
who solicit prospective investors in the subject offering are required
to
deliver a copy of this Prospectus commencing upon the effective date of
the
subject Registration Statement and terminating 40 days thereafter. The
effective
date of the Registration Statement of which this Prospectus is a part is
July
__,
2005.