SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
OF
1934
For
the
quarterly period ended June 30, 2005
Commission
file number: 333-120451
----------
REED'S
INC.
--------------------------------------------
(Exact
name of registrant as specified in its charter)
Delaware
--------
(State
of
incorporation)
95-4348325
----------
(I.R.S.
Employer
Identification
No.)
13000
South Spring St.
Los
Angeles, Ca. 90061
---------------------------
(Address
of principal executive offices) (Zip Code)
(310)
217-9400
---------------------------------------------
(Registrant's
telephone number, including area code)
-------------------------------------------------------
Indicate
by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing
requirements for the past 90 days.
Yes x
No o
There
were 4,726,091 shares of the registrant's common stock outstanding as
of
June
30,
2005.
REED’S,
INC
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
230,404
|
|
$
|
42,488
|
|
Inventory
|
|
|
1,197,601
|
|
|
1,301,025
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns
and discounts of $79,431 as of June 30, 2005 and $74,974 as of
December
31, 2004
|
|
|
864,919
|
|
|
797,614
|
|
Other
receivables
|
|
|
8,794
|
|
|
3,163
|
|
Prepaid
expenses
|
|
|
36,541
|
|
|
5,652
|
|
Total
Current Assets
|
|
|
2,338,259
|
|
|
2,241,139
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $434,227 as
of June 30,
2005 and $390,363 as of December 31, 2004
|
|
|
1,809,364
|
|
|
1,821,473
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $3,350 as of
June 30, 2005
and $2,978 as of December 31, 2004
|
|
|
15,263
|
|
|
15,635
|
|
Deferred
stock offering costs
|
|
|
354,435
|
|
|
219,955
|
|
Due
from director
|
|
|
116,210
|
|
|
91,197
|
|
Total
Other Assets
|
|
|
1,286,109
|
|
|
1,035,791
|
|
TOTAL
ASSETS
|
|
$
|
5,433,732
|
|
$
|
5,098,403
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,664,156
|
|
|
1,412,124
|
|
Lines
of credit
|
|
|
1,556,490
|
|
|
1,128,222
|
|
Current
portion of long term debt
|
|
|
83,064
|
|
|
106,113
|
|
Note
payable-related party
|
|
|
--
|
|
|
21,000
|
|
Accrued
interest
|
|
|
114,263
|
|
|
115,581
|
|
Accrued
expenses
|
|
|
44,865
|
|
|
51,549
|
|
Total
Current Liabilities
|
|
|
3,462,838
|
|
|
2,834,589
|
|
|
|
|
|
|
|
|
|
Loans
payable, related party
|
|
|
252,358
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
1,038,788
|
|
|
1,041,756
|
|
Total
Liabilities
|
|
|
4,753,984
|
|
|
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
|
|
Common
stock to be issued (269,867 shares)
|
|
|
|
|
|
-
|
|
Additional
paid in capital
|
|
|
2,753,994
|
|
|
2,783,464
|
|
Accumulated
deficit
|
|
|
(2,698,840
|
)
|
|
(2,403,638
|
) |
Total
stockholders’ equity
|
|
|
679,748
|
|
|
969,700
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,433,732
|
|
$
|
5,098,403
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
2,582,273
|
|
$
|
2,782,004
|
|
$
|
4,399,608
|
|
$
|
4,495,344
|
|
COST
OF SALES
|
|
|
2,069,274
|
|
|
2,321,097
|
|
|
3,555,561
|
|
|
3,623,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
512,999
|
|
|
460,907
|
|
|
844,047
|
|
|
871,577
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
236,218
|
|
|
198,033
|
|
|
521,116
|
|
|
336,278
|
|
General &
Administrative
|
|
|
244,502
|
|
|
227,634
|
|
|
456,599
|
|
|
461,575
|
|
|
|
|
480,720
|
|
|
425,667
|
|
|
977,715
|
|
|
797,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
32,279
|
|
|
35,240
|
|
|
(133,668
|
)
|
|
73,724
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(90,327
|
)
|
|
(54,074
|
)
|
|
(161,534
|
)
|
|
(114,013
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(58,048
|
|
$
|
(18,834
|
)
|
$
|
(295,202
|
)
|
$
|
(40,289
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PREFERRED
STOCK DIVIDEND
|
|
|
(29,470
|
)
|
|
-
|
|
|
(29,470
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
$
|
(87,518
|
)
|
$
|
-
|
|
$
|
(324,672
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE —
Basic and Diluted
|
|
$
|
(.02
|
)
|
$
|
(.01
|
)
|
$
|
(.07
|
)
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
4,812,710
|
|
|
4,726,091
|
|
|
4,769,640
|
|
|
4,726,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
|
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
|
For
the Six Months Ended June 30, 2005
(Unaudited)
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Common Stock
To Be
issued
|
|
|
Additional
Paid
In
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2004
|
|
|
4,726,091
|
|
$
|
472
|
|
$
|
|
|
$
|
2,783,464
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(2,403,638
|
)
|
$
|
969,700
|
|
Exercise
of Warrants (Unaudited)
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
Preferred
Stock Dividend (unaudited)
|
|
|
—
|
|
|
—
|
|
|
29,470
|
|
|
(29,470
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
Net
loss for the six months ended June 30, 2005 (Unaudited)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(295,202
|
)
|
|
(295,202
|
|
Balance
June 30, 2005 (Unaudited)
|
|
|
4,726,091
|
|
$
|
472
|
|
$
|
34,720
|
|
$
|
2,753,994
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(2,698,840
|
)
|
$
|
679,748
|
|
See
Accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the six months ended June 30, 2005 and 2004
(Unaudited)
|
|
|
|
|
|
Six
Months Ended
|
|
|
|
(Unaudited)
|
|
|
|
June
30,
|
|
June
30,
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(295,202
|
)
|
|
(40,289
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
46,610
|
|
|
51,959
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(67,305
|
)
|
|
(763,672
|
)
|
Inventory
|
|
|
103,424
|
|
|
(110,425
|
)
|
Prepaid
Expenses
|
|
|
(33,264
|
)
|
|
(35,710
|
)
|
Other
receivables
|
|
|
(5,631
|
)
|
|
(245
|
)
|
Accounts
payable
|
|
|
252,032
|
|
|
587,123
|
|
Accrued
expenses
|
|
|
(6,684
|
)
|
|
(34,504
|
)
|
Accrued
interest
|
|
|
3,932
|
|
|
23,468
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(24,708
|
)
|
|
(253,287
|
) |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(31,754
|
)
|
|
(51,354
|
)
|
Due
from director
|
|
|
(25,013
|
)
|
|
--
|
|
Net
cash used in investing activities
|
|
|
(56,767
|
)
|
|
(51,354
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayment
of previous line of credit
|
|
|
(759,387
|
)
|
|
--
|
|
Borrowings
on new line of credit
|
|
|
1,109,543
|
|
|
--
|
|
Borrowings
on debt
|
|
|
190,000 |
|
|
-- |
|
Principal
payments on debt
|
|
|
(216,016
|
)
|
|
(65,255
|
) |
Proceeds
received prior to issuance of preferred stock
|
|
|
--
|
|
|
310,900
|
|
Net
borrowing on lines of credit
|
|
|
78,112
|
|
|
226,813
|
|
Payments
on debt to related parties
|
|
|
(21,000 |
) |
|
|
|
Payments
for deferred stock offering costs
|
|
|
(134,481
|
)
|
|
(7,672
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
246,771
|
|
|
464,786
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
187,916
|
|
|
(160,145
|
)
|
CASH —
Beginning of period
|
|
|
42,488
|
|
|
12,930
|
|
|
|
|
|
|
|
|
|
CASH —
End of period
|
|
$
|
230,404
|
|
$
|
173,075
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
157,602
|
|
$
|
90,545
|
|
Taxes
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities |
|
|
|
|
|
|
|
Common
stock to be issued
in settlement of accrued interest
|
|
$ |
5,250 |
|
$ |
-- |
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$ |
29,470 |
|
$ |
29,470 |
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
Six
Months Ended June 30, 2005
(UNAUDITED)
The
accompanying interim condensed financial statements are unaudited, but in
the
opinion of management of Reeds, Inc. (the Company), contains all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position at June 30, 2005, the results of operations, and cash
flows
for the three months ended June 30, 2005 and 2004. The balance sheet as of
December 31, 2004 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Registration Statement, Form SB-2 as filed with the Securities and
Exchange Commission on May 13, 2005.
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, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the three and six months ended June 30, 2005 are
not
necessarily indicative of the results of operations to be expected for the
full
fiscal year ending December 31, 2005.
Loss
per
Common Share
Basic
loss per share is calculated by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding
during
the year. Diluted loss per share is calculated assuming the issuance of common
shares, if dilutive, resulting from the exercise of stock options and warrants.
As the Company had a loss in the six month period ended June 30, 2005 and
2004,
basic and diluted loss per share are the same.
The
weighted average shares outstanding at June 30, 2005 includes the shares
to be
issued resulting from the exchange of warrants, which occurred on June 30,
2005
for 262,500 shares of common stock, and the preferred stock dividend payable
for
7,367 shares of common stock . These shares are expected to be issued in
the
third quarter of 2005 (see Notes 5 and 6).
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 Non-monetary Assets,
an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
The amendments made by Statement 153 are based on the principle that exchanges
of non-monetary assets should be measured based on the fair value of the
assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with
a
broader exception for exchanges of non-monetary 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 non-monetary 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 non-monetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary 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 of
the first
fiscal year that begins after June 15, 2005 and the first fiscal year that
begins after December 15, 2005 for small business issuers. 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.
In
June
2005, the Company was successful in replacing the lender of its line of credit
facilities. The new lender has extended a line of credit secured by accounts
receivable and inventory in the maximum amounts of $1,910,000. The borrowing
base on the accounts receivable are 80% of all eligible receivables, which
are
primarily accounts receivables under 90 days. The inventory borrowing base
is
50% of eligible inventory. As of June 30, 2005, the amounts borrowed on this
line of credit were $ 1,109,543. The interest rate on this new loan is Prime
plus 2.75%. The aggregate amounts borrowed under other lines of credit and
payable at June 30, 2005 was $446,947 (see Note 4).
In
June
2005, the Company was successful in replacing the lender of certain long-term
debt secured by equipment. The Company replaced 2 loans which had a combined
principle balance at December 31, 2004 of $169,248 and had interest rates
ranging from Prime plus 10% to Prime plus 12% to one loan at June 30, 2005
with
a principal balance of $190,000 and an interest rate of Prime plus 2.75%.
The
monthly payment on this loan requires principal payments of $3,167, plus
interest. This loan matures in June 2010.
4. |
Equipment
line of credit
|
In
June
2005, the Company obtained an equipment line of credit from the same lender
mentioned in footnotes 2 and 3. The maximum amount of this line of credit
is
$150,000 and can be used for eligible equipment purchases. The interest rate
for
this line of credit is Prime plus 2.75%. As of June 30, 2005, no advances
were
made on this line of credit.
5. |
Related
Party Transactions
|
In
June
2005, 262,500 warrants held by Robert Reed were exercised at $.02 per warrant
resulting in 262,500 shares to be issued. In lieu of receiving $5,250, interest
payable to Robert Reed was reduced by the same amount. As of June 30,
2005, the shares had not been issued.
6. |
Dividend
Distributable
|
Dividend
distributable represents the preferred stock dividend payable to
be paid with the issuance of common stock. The 7,367 shares of common
stock had not been issued as of June 30, 2005.
Inventory
consists of the following at June 30, 2005
Raw
Materials |
|
$ |
546,189 |
|
Finished
Goods |
|
|
651,412 |
|
|
|
$ |
1,197,601 |
|
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.
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
our
Brewery operations in Los Angeles, CA will allow us to reduce certain freight
costs by eliminating the need to ship from our contract manufacturer in
Pennsylvania to our customers in the Western part of the United States.
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 also are designed with this consumer demand in
mind.
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.
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.
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.
Initial
Public Offering - We
anticipate that during the 2005 calendar year we will complete our
regulatory filings with state and federal securities commissions and commence
our public offering. Our public offering is a best efforts offering of up
to 2
million shares of stock at $4.00 per share. While we do not require this
funding
to continue our operations, in the event less than the maximum amount of
this
offering is raised, our future business plans may be adversely effected.
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 Non-monetary Assets,
an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
The amendments made by Statement 153 are based on the principle that exchanges
of non-monetary assets should be measured based on the fair value of the
assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary 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 non-monetary 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 non-monetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary 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 of the first fiscal year that
begins
after June 15, 2005 and the first fiscal year that begins after December
15,
2005 for small business issuers. 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 June 30, 2005 Compared to Three Months Ended June 30,
2004
Net
Sales. Net sales decreased by $199,731, or 7.2%, to $2,582,273 in the three
months ending June 30, 2005 from $2,782,004 in the three months ending June
30,
2004. The net sales decrease was primarily the result of a one time sale
of
product in the three months ending June 30, 2004 of $348,000. Comparing
the three months ended June 30, 2005 to the three
months ended June 30, 2004 overall sales decreased. However, the
2004
period includes sales of
approximately
$348,000 to one customer who placed a one time order. Given
that our sales decreased by $199,731
in the 2005 period as compared to 2004 period,
our
sales
to our recurring customers actually increased approximately $148,000.
This trend is consistent with management's plans to increase
sales to its existing customer base as well as search for new customers,
thereby increasing its customer base. Sales
growth was from existing products. This growth came from the Virgil’s Root Beer
line that includes the new 5 liter kegs and cream soda (2.6%) and from the
core
Reed’s Ginger Brew products (3.0%) 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.
Gross
Profit. Gross profit was $512,999 for the three months ending June 30, 2005,
an
increase of $52,092 or 11.3% higher than the gross profit for the three months
ending June 30, 2004 of $460,907. As a percentage of net sales, gross profit
increased to 19.9% in the three months ending June 30, 2005 from 16.6% in
the
three months ending June 30, 2004. This increase was due to decreased warehouse
expenses (1.1%) due to decreased use of outside warehousing and decreased
freight expenses (2.2%) due to decreased use of cross country freight as
the
west coast facility gears up.
Selling
Expenses. Selling expenses increased by $38,185 or 19.3% to $236,218 in the
three months ending June 30, 2005 from $198,033 in the three months ending
June
30, 2004 and increased as a percentage of net sales to 9.1% in the three
months
ending June 30, 2005 from 7.1% in the three months ending June 30, 2004.
The
increase in selling expenses was primarily due to increased sales wages due
to a
larger sales force (a 25.0% increase), increased selling expenses due to
the
larger sales force (4.7%) and increased promotional expenses in the form
of
demos (7.3%). These increased expenses were offset by lower promotional expenses
(-3.1%) and lower commissions to outside brokers (-14.6%)
General
and Administrative. General and administrative expenses increased by $16,868
or
7.4%, to $244,502 in the three months ending June 30, 2005 from $227,634
in the
three months ending June 30, 2004 and increased as a percentage of net sales
to
9.5% in the three months ending June 30, 2005 from 8.2% in the three months
ending June 30, 2004. The increase in general and administrative expenses
was
primarily due to an increase in insurance expenses (9.5%) and utility expenses
(3.1%) offset by a reclassification of lease expenses in the three months
ending
June 30, 2005 to cost of goods sold (-5.2%).
Interest
expense was $90,327 in the three months ending June 30, 2005, compared to
interest expense of $54,074 in the three months ending June 30, 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.
Six
Months Ended June 30, 2005 Compared to Six Months Ended June 30,
2004
Net
Sales. Net sales decreased by $95,736, or 2.1%, to $4,399,608 in the six
months
ending June 30, 2005 from $4,495,344 in the six months ending June 30, 2004.
2004 sales figures include a one time sale of $348,000. Comparing
the six months ended June 30, 2005 to the six
months ended June 30, 2004 overall sales decreased. However, the
2004
period includes sales of
approximately
$348,000 to one customer who placed a one time order. Given
that our sales decreased by $95,736
in the 2005 period as compared to 2004 period,
our
sales
to our recurring customers actually increased approximately $252,000.
This trend is consistent with management's plans to increase
sales to its existing customer base as well as search for new customers,
thereby increasing its customer base. This net sales increase was primarily
the
result of sales growth of existing products. Existing product growth came
from
the Virgil’s Root Beer line including the new 5 liter part kegs and the cream
soda (2.8%) 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.
Gross
Profit. Gross profit was $844,047 for the six months ending June 30, 2005,
a
decrease of $27,530 or 3.2% lower than the gross profit for the six months
ending June 30, 2004 of $871,577. As a percentage of net sales, gross profit
decreased to 19.2% in the six months ending June 30, 2005 from 19.4% in the
six
months ending June 30, 2004. The decrease in gross margin percentage is due
to
increased customs expenses (-0.3%) due to increased importations of products
and
packaging material, increased depreciation as a percentage of sales (-0.1%)
and
lease expenses being relocated from general and administrative expenses (-0.4%),
offset by reduced freight expenses (0.4%) due to the increased use of the
west
coast facility and reduced labor expenses at the new facility (0.2%) as
efficiencies increase at the new west coast facility.
Selling
Expenses. Selling expenses increased by $184,838 or 55.0% to $521,116 in
the six
months ending June 30, 2005 from $336,278 in the six months ending June 30,
2004
and increased as a percentage of net sales to 11.8% in the six months ending
June 30, 2005 from 7.5% in the six months ending June 30, 2004. The increase
in
selling expenses was primarily due to increased sales wages due to a larger
sales force (31.7%), increased selling expenses due to the larger sales force
(9.0%) and increased promotional expenses in the form of demos (24.2%). This
was
offset by reduced promotional expenses (-4.0%) and reduced commissions expenses
to outside brokers (-5.9%). Selling expenses increased as we prepared 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. General and administrative expenses decreased by $4,976
or
1.1%, to $456,599 in the six months ending June 30, 2005 from $461,575 in
the
six months ending June 30, 2004 and increased as a percentage of net sales
to
10.4% in the six months ending June 30, 2005 from 10.3% in the six months
ending
June 30, 2004. General and administrative expenses saw an increase in utility
expenses (1.5%), an increase in bank processing expenses (0.4%) and an increase
in insurance expenses (3.0%) offset by a reclassification of lease expenses
to
cost of goods sold (-5.0%).
Interest
expense was $161,534 in the six months ending June 30, 2005, compared to
interest expense of $114,013 in the six months ending June 30, 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.
Liquidity
and Capital Resources
Robert
T.
Reed Sr. had 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
was
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.
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
June 30, 2005, we had a working capital deficit of $1,124,579 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, increased borrowing under our credit facilities, and costs
incurred
related to our deferred stock offering.
As of June 30, 2005, cash was $230,404, compared to $42,488 as of
December 31, 2004. This amount arose from cash collections on accounts
receivable not yet applied to our line of credit as of June 30, 2005. Net
cash
used by operating activities was approximately $24,708 for the six months
ended
June 30, 2005.
We
used
$56,767 in investing activities for the six months ended June 30, 2005,
primarily for the purchase of equipment for our West Coast Brewery and advances
on a loan to a director.
Cash
flow
provided from financing activities was $246,771 for the six months ended
June
30, 2005. The increase came primarily from borrowings from our new lender
and
was reduced by the pay-off of loans from our previous lender, the pay-off
of
non-related party 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 previous 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.
We have recently been advised by the Securities Exchange Commission that
our
best efforts $9.2 million SB-2 offering has been declared effective under
the
federal securities laws. Management believes that we are in the final stages
of
obtaining approval of our offering before the coordinated state review,
which
will allow us to offer our shares in 31 states.
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.
Management
believes its sources of cash are adequate for
the next twelve months of operations.
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.
Item
3. Quantitative and Qualitative Disclosures About Market Risk
We
are
exposed to the impact of interest rate changes as most of our borrowings
are
based on the prime rate. As the prime rate increases, our borrowing costs
will
increase and we may not be able to pass along the increase in our borrowing
costs to our customers.
We
are
exposed to the impact of foreign currency fluctuations. Our sales are not
materially impacted by foreign currency fluctuations, as a minimal amount
of our
revenues are currently generated outside the United States. We use certain
suppliers in Germany for product packing materials, and we settle these
transactions in Euro’s. We do not use any foreign currency hedging activities or
other techniques to mitigate our risk to currency fluctuations. Consequently,
our product cost may suffer from a weak dollar and we may not be able to
pass
along foreign currency fluctuations to our customers.
Policies
and Procedures -- The Company does not invest in instruments designed to
provide
hedging against interest rate fluctuations.
Interest
Rate Risk
We
currently have one credit line which we use in our operations with a maximum
loan amount of $1,910,000. Our interest rate is variable and based on the
prime
rate. Our actual interest rate will change with each change of the prime
rate.
In addition, we have term loans with rates based on the prime rate. Since
our
borrowings have been in excess of $1,000,000, changes in the prime rate will
impact our operations.
Foreign
Currency Risk
We
are
exposed to the impact of foreign currency fluctuations. Our sales are not
materially impacted by foreign currency fluctuations, as a minimal amount
of our
revenues are currently generated outside the United States. We use certain
suppliers in Germany for product packing materials, and we settle these
transactions in Euro’s. We do not use any foreign currency hedging activities or
other techniques to mitigate our risk to currency fluctuations. Consequently,
our product cost may suffer from a weak dollar and we may not be able to
pass
along foreign currency fluctuations to our customers.
Overall
Market Risk
With
regard to overall market risk, we attempt to mitigate our exposure to
such
risks by assessing the relative proportion of our investments in cash and
cash
equivalents and the relatively stable and risk-minimized returns available
on
such
investments. At June 30, 2005, our cash was primarily invested in non-interest
bearing checking accounts.