Unassociated Document
UNITED
STATES
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 March 31, 2006
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 5,281,247 shares of the registrant's common stock outstanding as of
March 31, 2006.
Part
I - Financial Information
Item
1. Financial Statements
REED’S,
INC.
CONDENSED
BALANCE SHEETS
ASSETS
|
|
March
31,
|
|
December
31,
|
|
|
|
2006
(Unaudited)
|
|
2005
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
195,457
|
|
$
|
27,744
|
|
Inventory
|
|
|
1,420,692
|
|
|
1,208,019
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns
and discounts of $82,000 as of March 31, 2006 and $70,000 as of
December
31, 2005
|
|
|
742,009
|
|
|
534,906
|
|
Receivable from
sale of common stock |
|
|
48,629
|
|
|
— |
|
Other
receivables
|
|
|
9,363
|
|
|
10,563
|
|
Prepaid
expenses
|
|
|
37,976
|
|
|
74,279
|
|
Total
Current Assets
|
|
|
2,454,126
|
|
|
1,855,511
|
|
Property
and equipment, net of accumulated depreciation of $542,867 as of
March 31,
2006 and $508,136 as of December 31, 2005
|
|
|
1,869,893
|
|
|
1,885,354
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $3,909 as of March
31, 2006 and $3,723 as
of December 31, 2005
|
|
|
14,705
|
|
|
14,891
|
|
Deferred
stock offering costs
|
|
|
—
|
|
|
356,238
|
|
Total
Other Assets
|
|
|
814,906
|
|
|
1,171,330
|
|
TOTAL
ASSETS
|
|
$
|
5,138,925
|
|
$
|
4,912,195
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,843,631
|
|
$
|
1,644,491
|
|
Lines
of credit
|
|
|
1,539,946
|
|
|
1,445,953
|
|
Current
portion of long term debt
|
|
|
168,877
|
|
|
169,381
|
|
Accrued
interest
|
|
|
142,648
|
|
|
136,240
|
|
Accrued
expenses
|
|
|
74,180
|
|
|
54,204
|
|
Total
Current Liabilities
|
|
|
3,769,282
|
|
|
3,450,269
|
|
|
|
|
|
|
|
|
|
Loans
payable, related party
|
|
|
252,358
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
1,032,374
|
|
|
1,060,573
|
|
Total
Liabilities
|
|
|
5,054,014
|
|
|
4,763,200
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 58,940 shares
issued
and outstanding
|
|
|
589,402
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized, 5,281,247
and 5,042,197 shares issued and outstanding, at March 31, 2006 and
December 31, 2005, respectively
|
|
|
528
|
|
|
503
|
|
Common
stock to be issued (7,362 shares)
|
|
|
29,470
|
|
|
29,470
|
|
Additional
paid in capital
|
|
|
3,094,171
|
|
|
2,788,683
|
|
Accumulated
deficit
|
|
|
(3,628,660
|
)
|
|
(3,259,063
|
)
|
Total
stockholders’ equity
|
|
|
84,911
|
|
|
148,995
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,138,925
|
|
$
|
4,912,195
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the three months ended March 31, 2006 and 2005
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended (Unaudited)
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
1,979,272
|
|
$
|
1,817,336
|
|
COST
OF SALES
|
|
|
1,688,876
|
|
|
1,486,287
|
|
GROSS
PROFIT
|
|
|
290,396
|
|
|
331,049
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling
|
|
|
287,158
|
|
|
287,145
|
|
General &
Administrative
|
|
|
262,660
|
|
|
211,954
|
|
Litigation
fees
|
|
|
9,568
|
|
|
2,126
|
|
|
|
|
559,386
|
|
|
501,225
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(268,990
|
)
|
|
(170,176
|
)
|
|
|
|
|
|
|
|
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(100,607
|
)
|
|
(71,210
|
)
|
NET
LOSS
|
|
|
(369,597
|
)
|
|
(241,386
|
)
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE BASIC AND DILUTED
|
|
|
(.07 |
)
|
|
(.05
|
)
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
5,157,077
|
|
|
4,726,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the
three months ended March 31, 2006 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
to
be
|
|
Paid
in
|
|
Preferred
Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Issued
|
|
Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
Balance,
January 1, 2006
|
|
|
5,042,197
|
|
|
503
|
|
|
29,470
|
|
|
2,788,683
|
|
|
58,940
|
|
|
589,402
|
|
|
(3,259,063
|
)
|
|
148,995
|
|
Common
stock issued for cash
and receivable from sale of common stock
|
|
|
239,050
|
|
|
25
|
|
|
—
|
|
|
860,559
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
860,584
|
|
Deferred stock offering costs
charged to additional paid
in
capital
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(555,071
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(555,071
|
)
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(369,597
|
)
|
|
(369,597
|
)
|
Balance
March 31, 2006
|
|
|
5,281,247
|
|
|
528
|
|
|
29,470
|
|
|
3,094,171
|
|
|
58,940
|
|
|
589,402
|
|
|
(3,628,660
|
)
|
|
84,911
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the three months ended March 31, 2006 and 2005
(Unaudited)
|
|
|
|
|
|
Three
Months Ended (Unaudited)
|
|
|
|
March
31,
|
|
March
31,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
Loss
|
|
$
|
(369,597
|
)
|
$
|
(241,386
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
34,918
|
|
|
21,429
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(207,103
|
)
|
|
141,480
|
|
Inventory
|
|
|
(212,673
|
)
|
|
6,584
|
|
Prepaid
Expenses
|
|
|
36,303
|
|
|
(41,267
|
)
|
Other
receivables
|
|
|
1,200
|
|
|
(2,209
|
)
|
Accounts
payable
|
|
|
199,140
|
|
|
197,752
|
|
Accrued
expenses
|
|
|
19,976
|
|
|
47,587
|
|
Accrued
interest
|
|
|
6,408
|
|
|
5,495
|
|
Net
cash (used in) provided by operating activities
|
|
|
(491,428
|
)
|
|
135,465
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(19,271
|
)
|
|
(24,188
|
)
|
Due
from director
|
|
|
|
|
|
(12,813
|
)
|
Net
cash used in investing activities
|
|
|
(19,271
|
)
|
|
(37,001
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Principal
payments on debt
|
|
|
(28,703
|
)
|
|
(44,536
|
)
|
Proceeds
received from sale of common stock
|
|
|
811,955
|
|
|
—
|
|
Net
borrowing (payments) on lines of credit
|
|
|
93,993
|
|
|
(194
|
)
|
Payments
for deferred stock offering costs
|
|
|
(198,833
|
)
|
|
(63,062
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
678,412
|
|
|
(107,792
|
)
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
167,713
|
|
|
(9,328
|
)
|
CASH —
Beginning of period
|
|
|
27,744
|
|
|
42,488
|
|
CASH —
End of period
|
|
$
|
195,457
|
|
$
|
33,160
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
94,199
|
|
$
|
66,314
|
|
Taxes
|
|
$
|
—
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
March
31, 2006 (UNAUDITED)
1.
BASIS
OF
PRESENTATION
The
accompanying interim condensed financial statements are unaudited, but
in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly
the
financial position at March 31, 2006, and the results of operations and
cash
flows for the three months ended March 31, 2006 and 2005. The balance
sheet as
of December 31, 2005 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 Annual Report filed on form 10KSB on April 17, 2006.
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 months ended March 31, 2006 are not
necessarily indicative of the results of operations to be expected for
the full
fiscal year ending December 31, 2006.
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 three month period ended March 31, 2006
and 2005, basic and diluted loss per share are the same.
The
weighted average shares outstanding at March 31, 2006 includes the
preferred stock payable for 7,362 shares of commons stock. These shares
were
issued in May 2006
Going
Concern
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America,
which contemplate continuation of the Company as a going concern. However,
the
Company had a net loss of $369,597 and utilized cash of $491,428 in
operating
activities during the three months ended March 31, 2006, and had a
working
capital deficiency of $1,315,156 at March 31, 2006. In addition, the
Company may
have committed a violation of securities law which may require the
rescission of
common stock issued in 2005 and 2006 in the aggregate of approximately
$1,324,624. These factors raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include
any
adjustments relating to the recoverability and classification of recorded
asset
amounts, or amounts and classification of liabilities that might result
from
this uncertainty. The Company is conducting an initial public offering
of its
stock. The maximum amount of common stock to be sold is 2,000,000 shares
at
$4.00, of which 333,156 has been sold. Management has received interest
enough
in the offering which leads it to believe the maximum amount of the
offering
will be sold, however no assurance can be made that any additional
shares will
be sold as a result of the offering. See Note 2. for information related
to the
common stock offering.
2.
Common
Stock Offering
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our
common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2, the gross proceeds received from the sale of
those
shares were $1,332,624. The net proceeds received from those shares were
$1,199,361. Management has determined that the shares may have been issued
in
violation of securities laws. Management intends to make a rescission
offer to
purchase up to all of the shares sold to date in the offering, however,
it is
our intention that if any of the shares are tendered for rescission,
the shares
will be purchased by related parties and not from our funds. The amount
to be
paid pursuant to the rescission offer, if accepted by any shareholders,
would be
$4.00 per share, plus accrued interest at the applicable statutory rate.
The
exact timing and terms of the rescission offer are not yet finalized.
During
the three months ended March 31, 2006, the Company sold 239,050 of
their shares
for net proceeds of $860,584.
During
the three months ended March 31, 2006, previously deferred stock offering
expenses of $356,238 and additional stock offering costs incurred during
the
period of $198,833 were charged to additional paid in capital.
3.
Common
Stock to be issued
Common
stock to be issued represents the preferred stock dividend payable to
be paid
with the issuance of common stock. The 7,362 shares of common stock had not
been issued as of March 31, 2006, but will be issued in May 2006.
4.
Inventory
Inventory
consists of the following at March 31, 2006
|
|
|
|
|
Raw
Materials
|
|
$
|
575,366
|
|
Finished
Goods
|
|
|
845,326
|
|
|
|
$
|
1,420,692
|
|
5.
Legal
Proceedings and Litigation Fees
During
2005 and 2006, the Company incurred litigation fees associated with a
law suit
which the Company has won. The Plaintiff has lost its appeal. The judgment
in
favor of the Company is to have the Plaintiff reimburse the Company for
its
legal defense costs. The Company is in the processing of perfecting its
judgment
and will record income from the judgment when the monies are collected.
On
January 20 ,
2006,
Consac Industries, Inc. (dba Long Life Teas and Long Life Beverages)
filed a
lawsuit in the United States District Court for the Central District
of
California against Reed’s Inc. and Christopher Reed, Case No. CV06-0376. The
complaint asserts claims for negligence, breach of contract, breach of
warranty,
and breach of express indemnity relating to Reed’s, Inc.’s manufacture of
approximately 13,000 cases of “Prism Green Tea Soda” for Consac. Consac contends
that we negligently manufactured the soda resulting in at least one personal
injury. Consac seeks $2.6 million in damages, plus interest and attorneys
fees.
We contend that Consac was responsible for the soda’s condition by providing a
defective formula which had not been adequately tested. We believe that
we will
successfully defend Consac’s claims. While there is no assurance, we believe
that the Consac litigation will have no material adverse effect upon
our
operations. In May 2006 both parties agreed to a mediation proceeding
which is
expected to commence in the third quarter of 2006.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD
LOOKING STATEMENTS
This
report contains statements that involve expectations, plans or intentions (such
as those relating to future business or financial results, new features or
services, or management strategies). These statements are forward-looking and
are subject to risks and uncertainties, so actual results may vary materially.
You can identify these forward-looking statements by words such as “may,”
“should,” “expect,” “anticipate,” “believe,”
“estimate,” “intend,” “plan” and other similar expressions. You
should consider our forward-looking statements in light of the risks discussed
under the heading “Risk Factors That May Affect Results of Operations and
Financial Condition” below, as well as our financial statements, related notes,
and the other financial information appearing elsewhere in this report and
our
other filings with the Securities and Exchange Commission. We assume no
obligation to update any forward-looking statements.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed financial
statements and the related notes appearing elsewhere in this prospectus. This
discussion and analysis contains forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from
those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under “Risk factors” and elsewhere
in this prospectus.
Overview
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, 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 manufacture, market and sell six unique
product lines:
· |
Virgil’s
Root Beer and Cream Sodas,
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Reed’s
Ginger Juice Brews,
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· |
Reed’s
Ginger Candies, and
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Reed’s
Ginger Ice Creams
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We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
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 -Our
freight rates were approximately 9.7% of net sales during 2005. We expect
freight rates to increase by an additional 5% to 10% in 2006 as a result of
the
continuing increase in fuel prices. However, as we increase production at the
Brewery for delivery of products in the western half of the United States,
we
expect to offset this trend, at least in part, by reducing our need for
cross-country freight services from our eastern co-packing
facility.
Low
Carbohydrate Diets and Obesity
- Our
products are not geared for the low carbohydrate market. Consumer trends have
reflected higher demand for lower carbohydrate products. Despite this trend,
we
achieved an increase in our sales growth in the first quarter of 2006. We
monitor these trends closely and have started developing low-carbohydrate
versions of some of our beverages, although we do not have any currently
marketable low-carbohydrate products.
Distribution
Consolidation -
There
has been a recent trend towards continued consolidation of the beverage
distribution industry through mergers and acquisitions. This consolidation
results in a smaller number of distributors to market our products and
potentially leaves us subject to the potential of our products either being
dropped by these distributors or being marketed less aggressively by these
distributors. As a result, we have initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. Consolidation among natural foods
industry distributors has not had an adverse affect on our sales.
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 ginger-based products 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 mainstream supermarkets throughout
the
United States in natural food sections. 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, particularly for premium products.
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.
Packaging
or Raw Material Price Increases
- An
increase in packaging and raw materials has caused our margins to suffer and
has
negatively impacted our cash flow and profitability. We continue to search
for
packaging and production alternatives to reduce our cost of goods.
Cash
Flow Requirements
- Our
growth will depend on the availability of additional capital infusions. 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 intend to use the proceeds from our future stock offering
to
increase our liquidity to be able to make cash expenditures, as
needed.
Interest
Rates - We
use
lines of credit as a source of capital and are negatively impacted as interest
rates rise. Management believes our future offering will provide capital
sufficient for us to reduce our debt level and allow us to lower our incremental
borrowing costs.
Critical
Accounting Policies
Our
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 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:
Revenue
Recognition. Revenue
is recognized on the sale of a 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. A product is not shipped without an order
from
the customer and credit acceptance procedures 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.
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 these 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 three months ended March 31, 2006 or March 31, 2005.
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 three months ended March 31, 2006 or
2005.
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
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.
Results
of Operations
Three
Months Ended March 31, 2006 Compared to Three Months Ended March 31,
2005
Net
sales
increased by $161,936, or 8.9%, from $1,817,336 in the first three months ended
March 31, 2005 to $ 1,979,272 in the first three months ended March 31, 2006.
Sales of our core Reed’s Ginger Brew items increased
from $916,000 in the first three months ended March 31, 2005 to $1,073,000
in
the first three months ended March 31, 2006. Sales of our Virgil’s Root Beer 12
ounce bottles and our new Virgil’s Cream soda increased by $76,000 from $390,000
and $101,000, respectively, in the first three months ended March 31, 2005
to
$467,000 and $100,000, respectively, in the first three months ended March
31,
2006. Candy sales increased by $76,000 from $129,000 in the first three months
ended March 31, 2005 to $205,000 in the first three months ended March 31,
2006.
These increases were offset by decreases in sales in certain of our other
products. Sales of our new Virgil’s 5 liter party keg labels decreased from
$148,000 in the first three months ended March 31, 2005 to $50,000 in the first
three months ended March 31, 2006 due to non-recurring sales to certain large
retailers. Ice cream sales increased from $34,000 in the first three months
ended March 31, 2005 to $36,000 in the first three months ended March 31, 2006.
Cost
of
sales increased by $202,589, or 13.6%, from $1,486,287 in the first three months
ended March 31, 2005 to $1,688,876 in the first three months ended March 31,
2006. As a percentage of net sales, cost of sales increased from 81.8% in the
first three months ended March 31, 2005 to 85.3% in the first three months
ended
March 31, 2006. Costs of sales increased primarily as a result of increased
depreciation (0.6%), increased production expenses due to fuel costs (2.5%)
and
increased packaging costs (0.4%).
Gross
profit decreased from $331,049 in the first three months ended March 31, 2005
to
$290,396 in the first three months ended March 31, 2006. As a percentage of
net
sales, gross profit decreased from 18.2% in the first three months ended March
31, 2005 to 14.7% in the first three months ended March 31, 2006. Effective
February 1, 2006 we approved a price increase in a number of our product lines
at an average of approximately 7% in order to attempt to increase our gross
profit. The full implementation of the price increase is expected to be
completed by the middle of the third quarter of 2006. We expect margins to
increase by the end of 2006 due to this price increase, provided that these
price increases do not adversely affect our volume of sales.
Operating
expenses increased by $58,161 or 11.6% from $501,225, in the first three months
ended March 31, 2005 to $559,386 in the first three months ended March 31,
2006
and increased as a percentage of net sales from 27.6% in the first three months
ended March 31, 2005 to 28.3% in the first three months ended March 31, 2006.
The increase in expenses was due to increased salaries due to a larger sales
force (0.8%), increased sales expenses from increased fuel costs and increased
telephone charges (3.8%), increased utility expenses (1.1%) and increased legal
and accounting costs due to the costs associated with being a public reporting
company(0.8%). Also, health insurance costs increased due to more people being
covered by our health plan (2.3%) and payroll went up due to temporary employee
services incurred as a result of an employee departure during the quarter ended
March 31, 2006 (2.0%) offset by a reduction in promotional expenses due to
less
club store demos (-1.9%).
Interest
expense increased by $29,397, or 41.3%, from $71,210 in the first three months
ended March 31, 2005 to $100,607, in the first three months ended March 31,
2006. The increase in interest expense was due to increasing short term interest
rates, increased borrowings on our available lines of credit and increasing
our
long term debt, which was used to purchase brewing equipment, vehicles and
office equipment.
As
a
result of the foregoing, we experienced a net loss of $241,386 in the first
three months ended March 31, 2005 and $369,597 in the first three months ended
March 31, 2006. Accordingly, we experienced a net loss of $0 .05 per share
in
the first three months ended March 31, 2005 and $0.07 per share in the first
three months ended March 31, 2006.
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. We have a "best efforts"
commitment from an underwriter to assist us in continuing the process of raising
capital through a public offering of our common stock, which we had commenced
in
2005. Management believes it will be successful in raising additional funds
from
the public offering, however it can not predict the exact amount which will
be
raised. We intend to recommence the offering upon completion of a rescission
offer to persons who have purchased shares in the offering to date. Management
expects the offering to commence during the summer of 2006. Until the
commencement of the offering, we will continue to experience challenges with
managing cash flow, but management believes it has enough liquidity to operate
the business in the short term. The addition of cash from the public offering
,
if successful, would provide us the ability to improve our liquidity position
and provide capital to continue to expand the business. The remaining amount
of
common stock that we can sell in connection with the offering is 1,666,844
shares at an anticipated offering price of $4.00 per share. If the remainder
of
the shares were sold, we would receive approximately $6,000,000, after
underwriter commissions.
As
of
March 31, 2006, we had a working capital deficit of $1,315,156, compared to
a
working capital deficit of $1,594,758 as of December 31, 2005. This
decrease in our working capital deficit should not be viewed as a change in
trend. The primary factor contributing to a reduction in our working capital
deficit was the cash received from our initial public offering.
As
of
March 31, 2005, we had outstanding borrowings of $1,539,946 under our lines
of
credit agreements and we continue to approach maximum borrowing capacity based
on the terms of the lines of credit.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2, the gross proceeds received from the sale of those
shares were $1,332,624. The net proceeds received from those shares were
$1,199,361. Management has determined that the shares may have been issued
in
violation of securities laws. Management intends to make a rescission offer
to
purchase up to all of the shares sold to date in the offering, however, it
is
our intention that if any of the shares are tendered for rescission, the
shares
will be purchased by related parties and not from our funds. The amount to
be
paid pursuant to the rescission offer, if accepted by any shareholders, would
be
$4.00 per share, plus accrued interest at the applicable statutory rate.
The
exact timing and terms of the rescission offer are not yet finalized.
During
the three months ended March 31, 2006, the Company sold 239,050 of their
shares
for net proceeds of $860,584.
During
the three months ended March 31, 2006, previously deferred stock offering
expenses of $356,238 and additional stock offering costs incurred during
the
period of $198,833 were charged to additional paid in
capital.
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the
Company had a net loss of $369,597 and utilized cash of $491,428 in operating
activities during the three months ended March 31, 2006, and had a working
capital deficiency of $1,315,156 at March 31, 2006. In addition, the Company
may
have committed a violation of securities law which may require the rescission
of
common stock issued in 2005 and 2006 in the aggregate of approximately
$1,324,624. These factors raise substantial doubt about the Company’s ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts, or amounts and classification of liabilities that might result from
this uncertainty. The Company is conducting an initial public offering of its
stock. The maximum amount of common stock to be sold is 2,000,000 shares at
$4.00, of which 333,156 has been sold. Management has received interest enough
in the offering which leads it to believe the maximum amount of the offering
will be sold, however no assurance can be made that any additional shares will
be sold as a result of the offering.
Item
3. CONTROLS AND PROCEDURES
(a)
Evaluation of Disclosure Controls and Procedures.
Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design
and
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this quarterly report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded, as of the end of such period, that these disclosure controls and
procedures are effective and designed to ensure that the information required
to
be disclosed in our reports filed or submitted under the Securities Exchange
Act
of 1934 is recorded, processed, summarized and reported within the requisite
time periods.
(b)
Changes in Internal Controls.
There
was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Part
II
Item
1. Legal Proceedings
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserts claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contends that we negligently manufactured the soda resulting in at least
one personal injury. Consac seeks $2.6 million in damages, plus interest and
attorneys fees. We contend that Consac was responsible for the soda’s condition
by providing a defective formula which had not been adequately tested. We
believe that we will successfully defend Consac’s claims. While there is no
assurance, we believe that the Consac litigation will have no material adverse
effect upon our operations. In May 2006 both parties agreed to a mediation
proceeding which is expected to commence in the third quarter of
2006.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2, the gross proceeds received from the sale of those
shares were $1,332,624. The net proceeds received from those shares were
$1,199,361. Management has determined that the shares may have been issued
in
violation of securities laws. Management intends to make a rescission offer
to
purchase up to all of the shares sold to date in the offering, however, it
is
our intention that if any of the shares are tendered for rescission, the
shares
will be purchased by related parties and not from our funds. The
amount to be paid pursuant to the rescission offer, if accepted by any
shareholders, would be $4.00 per share, plus accrued interest at the applicable
statutory rate. The exact timing and terms of the rescission offer are not
yet
finalized.
During
the three months ended March 31, 2006, the Company sold 239,050 of their
shares
for net proceeds of $860,584.
During
the three months ended March 31, 2006, previously deferred stock offering
expenses of $356,238 and additional stock offering costs incurred during
the
period of $198,833 were charged to additional paid in
capital.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. Management has determined that the shares may have
been
issued in violation of securities laws. Management intends to make a rescission
offer to purchase up to all of the shares sold to date in the offering. The
amount to be paid pursuant to the rescission offer, if accepted by any
shareholders, would be $4.00 per share, plus accrued interest at the applicable
statutory rate.
We
received net proceeds of approximately $1,200,000 from the sale of the 333,156
shares, after underwriter commissions. The net proceeds were used to meet our
liquidity needs primarily as working capital and costs relating to the offering.
Item
3. Defaults Upon Senior Securities
Not
applicable
Item
4. Submission of Matters to a Vote of Security Holders
Not
applicable
Item
5. Other Information
Not
applicable
Item
6. Exhibits
Exhibit
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Number
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Description
of Document
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Officer's
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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Officer's
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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