Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB/A
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE
ACT
OF
1934
For
the
annual period ended December 31, 2005
Commission
file number: 333-120451
------------
REED’S
INC.
-------------------------------------
(Exact
name of registrant as specified in its charter)
Delaware
----------
(State
or
other jurisdiction of incorporation or organization)
(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 ( )
There
were 5,042,197 shares of the registrant's common stock outstanding
as
of
December 31, 2005.
FORWARD
LOOKING STATEMENTS
Some
of
the statements made in this report, constitute forward-looking statements.
In
some
cases, you can identify forward-looking statements by terminology such as “may,”
“will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative of such
terms or other comparable terminology.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors
that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievement expressed or implied by such forward-looking
statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside the control of the Company, involve a number
of risks, uncertainties and other factors that could cause actual results and
events to differ materially from the statements made, including, but not limited
to, the following:
|
·
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The
Company’s
ability to generate sufficient cash flow to support capital expansion
plans and general operating activities;
|
|
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·
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Decreased
demand for our products resulting from changes in consumer preferences;
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|
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·
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Competitive
products and pricing pressures and the Company’s ability to gain or
maintain its share of sales in the marketplace;
|
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·
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The
introduction of new products;
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|
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·
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The
Company’s being subject to a broad range of evolving federal, state and
local laws and regulations including those regarding the labeling
and
safety of food products, establishing ingredient designations and
standards of identity for certain foods, environmental protections,
as
well as worker health and safety. Changes in these laws and regulations
could have a material effect on the way in which the Company produces
and
markets its products and could result in increased costs;
|
|
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·
|
Changes
in the cost and availability of raw materials and the ability to
maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of the Company’s products;
|
|
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·
|
The
Company’s ability to penetrate new markets and maintain or expand existing
markets;
|
|
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·
|
Maintaining
existing relationships and expanding the distributor network of the
Company’s products;
|
|
|
·
|
The
marketing efforts of distributors of the Company’s products, most of whom
also distribute products that are competitive with the Company’s products;
|
|
|
·
|
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of the Company’s
products;
|
|
|
·
|
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of the Company’s
products that they are carrying at any time;
|
|
|
·
|
The
availability and cost of capital to finance the Company’s working capital
needs and growth plans;
|
|
|
·
|
The
Effectiveness of the Company’s advertising, marketing and promotional
programs;
|
|
|
·
|
Changes
in product category consumption;
|
|
|
·
|
Economic
and political changes;
|
|
|
·
|
Consumer
acceptance of new products, including taste test comparisons;
|
|
|
·
|
Possible
recalls of the Company’s products; and
|
|
|
·
|
The
Company’s ability to make suitable arrangements for the co-packing of any
of its products.
|
|
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
PART
I
ITEM
1: Description
of Business.
We
were
founded in 1989 and are a corporation.
We
are a
growing developer, manufacturer, marketer, and seller of New Age beverages,
as
well as candies and ice creams. “New Age Beverages” is a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks
and water. We currently offer 14 beverages, 2 candies, and 3 ice creams.
We
sell
the majority of our products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree,
in
Canada. Historically, most of our beverages were sold in the natural food
industry.
Our
current business strategy is to maintain a firm marketing focus in the natural
food marketplace while building a national direct sales and distribution force
to take our proven products into mainstream market and distribution channels.
At
this
time, we produce our carbonated beverages at two facilities. Our Brewery in
Los
Angeles, producing certain soda products for the western half of the United
States and we have a contract with The Lion Brewery, Inc., a packing, or
co-pack, facility in Pennsylvania to supply us with product we don’t produce in
our Los Angeles Brewery. Our Ginger Juice Brews are co-packed for us in Northern
California. Our ice creams are co-packed for us at a dairy in upstate New York.
We
have a
national network of natural and specialty food distributors in the United States
and Canada. We also have mainstream beverage distributors in select markets.
In
Southern California, we have our own direct distribution in addition to other
local distributors. We currently rely upon one retailer for between 10-15%
of
our aggregate gross revenues. If we were to lose this retailer, our operations
would be materially effected. We currently rely on one wholesaler for
approximately 39% of our aggregate gross revenue. Management believes the loss
of this wholesaler will not have a material impact on its business as
alternative distribution channels are available to the Company.
We
currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced by
the
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits to
maintain store and distributor relationships. In the future, we intend to
integrate both our distributions and sales forces.
We
compete for distributors, shelf space, and customers primarily with other New
Age beverage companies including: SoBe (owned by Pepsi), Snapple, Mistic, IBC
and Stewart’s (owned by Cadbury Schweppes), Henry Weinhard (owned by Phillip
Morris), Arizona, Hansen’s, Knudsen & Sons, Jones Sodas, A&W Root Beer,
Blue Sky, Natural Brews
Several
of our competitors and potential competitors have financial resources greater
than ours, and Pepsi, Cadbury Schweppes, and Phillip Morris have substantially
greater financial resources than ours. These greater resources permit our
competitors to implement extensive advertising and promotional programs, which
we have not been, and may not be, able to match. As competitors enter the field,
our market share may fail to increase or may decrease despite our efforts to
continue to produce superior products with higher quality ingredients and a
brewing process that we believe remains a trade secret.
Competitors
in the soft drink industry include bottlers and distributors of nationally
advertised and marketed products as well as chain store and private label soft
drinks. The principal methods of competition include brand recognition, price
and price promotion, retail space management, service to the retail trade,
new
product introductions, packaging changes, distribution methods, and advertising.
We
depend
upon an uninterrupted supply of ginger and certain other ingredients, a
significant portion of which we obtain overseas, principally from China and
Brazil. We obtain almost all of our crystallized ginger from Fiji and our Ginger
Chews from Indonesia. Any decrease in the supply of these ingredients or
increase in the prices of these ingredients as a result of any adverse weather
conditions, pests, crop disease, interruptions of shipment or political
considerations, among other reasons, could substantially increase our costs
and
adversely affect our financial performance.
The
Company currently owns trademarks for the Reed’s brand of products, the Virgil’s
brand of products and the China Cola products.
The
company’s research and development activities are not a material expense to the
business.
The
Company’s primary cost of environmental compliance is in recycling fees, which
approximated $37,000 in 2005.
We
have
30 full time employees and employ additional people on a part-time basis as
needed.
ITEM
2: Description
of Property
In
December 2000, we purchased an 18,000 square foot warehouse, the Brewery,
at 13000 South Spring Street, Los Angeles, California 90061, in an
unincorporated area of Los Angeles County near downtown Los Angeles. This
facility serves as our principal executive offices, our West Coast bottling
plant, and our Southern California warehouse facility. Most of the Company’s
assets provide security, in the form of liens or mortgagees, for the debt
agreements the Company has in place as of December 31, 2005.
ITEM
3: Legal
Proceeding
On
January 20 th
,
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. Management has filed
a
motion to dismiss. We believe that we will successfully defend Consac’s claims
and the case is without merit. Some of the allegations made against the company
are covered by insurance and some allegations are not covered by insurance.
While there is no assurance, we believe that the Consac litigation will have
no
material adverse effect upon our operations.
On
January 26, 2006 we filed a post-effective amendment with the Securities
and
Exchange Commission for this offering. We have recently been advised that
sales
of securities in the amount of up to 189,760 shares may have been completed
without the Securities and Exchange Commission declaring this January 26,
2006
amendment effective. We are currently considering the possibility of offering
to
all the investors in these 189,760 shares the alternative of either reaffirming
their investment or requesting a refund of the amount of their investment.
The
maximum amount of the refund is approximately $759,000. Management will develop
a plan to effect such a
refund
in the event it proceeds with such an offer. It is possible that such a refund
would materially and adversely effect the Company’s financial
position.
ITEM
4: Submission
of Matters to a Vote of Security Holders
No
matters were submitted to a vote of the securities holders during the fourth
quarter of the 2005 fiscal year.
PART
II
ITEM
5: Market for Common Equity Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
We
issued
262,500 shares of unregistered securities during the 2005 fiscal year, as
a
result of warrant exercise We
did
not repurchase any of our securities during the 2005 fiscal year. Our shares
of
common stock do not trade on any market and the Company does not facilitate
the
purchase or sale of stock between private parties. The Company is conducting
an
initial public offering at a price of $4.00
per
share
of common stock. During the two years ending December 31, 2005, the only
sale of
common stock by the Company is in connection with its current initial public
offering. Management has no knowledge of the per share value of any shares
which
may have be sold between private parties. We currently have approximately
198
shareholders. The
Company
has not
declared a dividend on its common stock in the two years ended December 31,
2005. Common stock dividends can not be declared or paid until preferred
stock
holders have received the full non-commutative dividend to which they are
entitled.. Management has no intent to
declare
a
common stock dividend in the year ending December 31,
2006.
ITEM
6: Management
Discussion and Analysis or Plan of Operation
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this prospectus.
Except for historical information, the following discussion and analysis
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.
Overview
We
develop, manufacture, market, and sell “alternative” or “New Age” beverages and
assorted foods. We currently manufacture, market and sell six unique product
lines:
|
·
|
Virgil’s
Root Beer and Cream Sodas
|
|
·
|
Reed’s
Ginger Juice Brews
|
|
·
|
Reed’s
Ginger Ice Creams
|
We
currently distribute and sell our products through a network of natural,
gourmet, and independent distributors, as well as through our growing in-house
direct sales and distribution team, throughout the United States and, to a
lesser extent, in Canada. In 2003, we implemented direct sales to several large
national retail accounts. These accounted for approximately 19% of our gross
sales in 2003 and approximately 22% of our gross sales in 2004 and 16% in 2005.
In addition, in 2003 we created our own distribution system in southern
California. This accounted for approximately 1% of our gross sales in 2003
and
approximately 4% of our gross sales in 2004 and 8% in 2005. The following table
shows a breakdown of net sales with respect to the distribution
channel.
Distribution
Channel
|
Direct
sales to large retailers
|
%
|
Our
local direct distribution
|
%
|
Natural,
Gourmet and Mainstream
distributors
|
%
|
Total
|
2003
|
$1,286,365
|
19
|
$90,121
|
1
|
$5,405,290
|
80
|
$6,781,776
|
2004
|
1,983,598
|
22
|
395,601
|
4
|
6,599,166
|
74
|
8,978,365
|
2005
|
1,536,896
|
16
|
751,999
|
8
|
7,181,390
|
76
|
9,470,285
|
New
products, or SKUs, that we launched in 2003 include a 5-liter “party keg”
version of our Virgil’s Root Beer and Virgil’s Cream Soda in 12-ounce long neck
bottles. Both of these high-margin items continued to contribute to growth
of
our sales for 2003, 2004 and 2005. In 2004, we launched the 750 ml size bottles
of our Reed’s Spiced Apple Brew and the Cream Soda 5-liter party keg. These were
followed up in 2005 with the launch of Reed’s Original and Reed’s Extra Ginger
Brew in the new 750ml size. These new launches have been successful and these
products continue to be part of our product mix.
In
2003,
we expanded our marketing from our historical focus on natural and gourmet
foods
to include more mainstream markets. These efforts included selling our products
directly to large retail accounts, primarily Costco, BJ Wholesale, and Cost
Plus World Markets. In addition, through our current North American natural
and
gourmet distributors, we have focused sales to the natural food section of
mainstream supermarket chains. This has resulted in our products now being
sold
in Safeway, Kroger’s and numerous other national supermarket chains. Our local
distribution in southern California is placing our products directly into
accounts locally, including Ralph’s, Bristol Farms, and many independent
accounts. These efforts continue to be a part of our sales
expansion.
We
gauge
the financial success of our company by a number of different parameters.
Because our industry typically values companies on a top-line basis, one of
our
main company goals is to increase net sales. We continue to increase net sales
each year. Net sales have increased from $6.2 million in 2001 to
$6.4 million in 2002 to $6.8 million in 2003. In 2004 sales grew to
$9.0 million and $9.5 million in 2005. We believe that the increase in net
sales
comes from three sources: successes in our new local distribution, increases
in
our core business and our new direct sales to large retailers.
Almost
as
important as increasing our net sales are increasing our gross margins. We
continue to work to reduce costs related to production of our products. In
2002,
we purchased and outfitted a West Coast production facility, the Brewery, in
part to help reduce both production costs and freight costs associated with
our
West Coast sales. Gross profits declined after the construction of the Brewery.
Gross margins decreased from 24.8% in 2002 to 19.5% in 2003. We believe that
the
inefficiencies commensurate with a start-up period for the Brewery have been
a
principal cause of the decline of our gross margins in 2003. Gross margins
recovered to 20.9% in 2004, we believe that this increase in gross margin is
because of the Brewery attaining greater functionality and efficiencies. In
2005, fuel prices, as a result of the hurricane Katrina, put downward pressure
on our margins due to increased freight expenses and increased glass and
production costs both of which are sensitive to fuel costs. In addition, the
brewery on the west coast is running at 40% of capacity. The main reason for
the
underutilization is that management is trying to solve problems associated
with
the flavor of the ginger brew products produced at the west coast facility.
Management is committed to selling a high quality, great tasting product. Since
the east coast co-packer is producing such a product, management has elected
to
continue to sell that product on the west coast, even though it negatively
impacts Company gross margins. As the Brewery continues to become more fully
operational, we believe that we will see greater margin improvements due to
freight and production savings. We expect to have the Brewery fully functional
by the end of 2006. The following table shows the progress of production at
the
Brewery and the savings being generated:
Year
|
|
Cases
of
candy
produced
at
new
brewery
|
|
Candy
production
savings
($)
|
|
Cases
of
beverages
produced
at
new
brewery
|
|
Freight
savings
beverages
($)
|
|
Total
savings
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
0
|
|
$
|
0
|
2003
|
|
|
33,514
|
|
$
|
33,514
|
|
|
16,835
|
|
$
|
22,390
|
|
$
|
55,904
|
2004
|
|
|
31,278
|
|
$
|
31,278
|
|
|
113,816
|
|
$
|
151,372
|
|
$
|
182,650
|
2005
|
|
|
39,058
|
|
$
|
39,058
|
|
|
229,094
|
|
$
|
304,688
|
|
$
|
343,746
|
In
addition, through the Brewery, we have increased our capability to offer
specialty beverage packaging options not typically available in the marketplace,
such as our new 5-liter party keg line and our new 750 ml. champagne bottle
line. We also intend to manage general and administrative and selling expenses,
in order to improve our profitability.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks, and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices -
As oil
prices continue to rise, our freight rates, which run at approximately 8% of
net
sales, have been increasing. We currently see freight rates increasing by an
additional 5% to 10% in the near term. On the other hand, we expect that the
Brewery will counter this trend, at least in part, by reducing our need for
cross-country freight services.
Low
Carbohydrate Diets and Obesity
-
Consumers have been demanding lower carbohydrate products. This trend did not
seem to affect our sales growth in 2005. We are watching this trend closely
and
have started developing low-carbohydrate versions of some of our beverages.
Distribution
Consolidation -
The
trend towards continued consolidation of the beverage distribution industry
through mergers and acquisitions has inspired us to start our own direct
distribution locally in southern California and to go to large national
retailers. Consolidation among natural foods industry distributors has not
had
an affect on our sales. However, this consolidation may limit the distributor
options outside natural foods to service mass-market food accounts.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our products are designed with this consumer demand in mind also.
Supermarket
and Natural Food Stores -
More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in supermarkets throughout the United
States. Supermarkets can require that we spend more advertising money and they
sometimes require slotting fees. We continue to work to keep these fees
reasonable. Slotting fees in the natural food section of the supermarket are
generally not as expensive as in other areas of the store. See the “Business”
section regarding supermarket marketing.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate. There is an increase in the
sophistication with respect to beverage packaging design. While we feel that
our
current core brands still compete on the level of packaging, we continue
to
experiment with new and novel packaging designs such as the 5-liter party
keg
and 750 ml champagne style bottles. We have further plans for other innovative
packaging designs. See the “Business” section for new product developments.
Cash
Flow Requirements
- Growth
of our company will depend on the availability of additional capital infusions.
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.
Packaging
or Raw Material Price Increases
- An
increase in packaging or raw materials has caused our margins to suffer and
has
negatively impacted our cash flow and income. We continue to search for
packaging and production alternatives to reduce our cost of goods.
Interest
Rates - The
Company is negatively impacted in an increasing interest rate environment,
such
as the current environment. Management believes the IPO will provide capital
sufficient for the Company to reduce its debt level and allow the Company to
lower its incremental borrowing costs.
Results
of Operations:
Twelve
Months Ended December 31, 2005 Compared to Twelve Months Ended
December 31, 2004
Net
sales
increased by $491,920, or 5.5%, from $8,978,365 in 2004 to $9,470,285 in 2005.
Sales were affected by a number of trends from 2004 to 2005. In 2004, we had
a
number of sales of the new Virgil’s 5 liter party keg that did not reoccur in
2005. These one time sales were to large club store customers. Sales of these
5
liter party kegs dropped by $427,000 from $1,002,000 in 2004 to $575,000 in
2005. Sales of the new Virgil’s Cream soda increased from $139,000 in 2004 to
$667,000 in 2005. Ice cream sales dropped from $196,000 in 2004 to $145,000
in
2005. Candy sales increased from $699,000 in 2004 to $822,000 in 2005. The
core
Reed’s Ginger Brew item increased from $3,681,000 in 2004 to $4,103,000 in 2005.
Virgil’s Root Beer 12 ounce bottles increased from $1,591,000 in 2004 to
$2,091,000 in 2005. We had other offsets such as our co-packing sales of private
labels from our west coast facility that dropped by $210,000. In summary, our
core brands Reed’s Ginger Brews and Virgil’s Root Beer lines continue to
increase in sales. These increases are being offset by reduced co-packing sales,
ice cream sales and juice sales and the reduced Virgil Root Beer 5 liter party
keg sales. We expect to continue this trend with a few exceptions. We expect
to
turn around the ice cream sales or at least stabilize them. We also expect
to
increase our sales of the 5 liter party keg. We do not believe this product
will
continue its trend down since a core customer base is being established and
it
is meeting with ongoing success and year after year orders in these accounts.
With the completion of the companies current IPO, we expect to increase the
sales force and therefore experience increased sales of the core product lines
for 2006. Due to the decreased margins, we have raised prices effective February
1, 2006 and we anticipate that sales will initially be slower but expect a
recovery in the second quarter of 2006. We are launching the new Virgil’s Black
Cherry Cream in May 2006 and expect it to add to 2006 sales.
In
2004,
we incurred $400,323 of promotional expenses due to deals offered by our sales
force in the sale of our products. This represented about 4.3% of gross sales.
In 2005, they were similar at $291,755 and about 2.9% of gross sales. These
deals are accounted for as a direct reduction of sales. These percentage rates
are in line with our historical rates and we do not anticipate them changing
significantly. These promotional expenses are monitored and kept in a certain
range.
As
a
percentage of net sales, gross profit decreased from 20.9% in 2004 to 18.2%
in
2005. This decrease was due to increases in higher freight costs due to
increased fuel costs (0.6%), increased depreciation (0.3%) and increased
packaging costs due to glass costs increasing due to fuel costs increases
(1.7%). To offset the reduced margins, effective February 1, 2006 we have
increased prices in a number of the companies product lines. We expect margins
to increase for 2006 due to this. This price increase averaged approximately
7%
across the board.
General
and Administrative and Selling expenses increased by $213,958 or 11.5% from
$1,866,511, in 2004 to $2,080,469 in 2005 and increased as a percentage of
net
sales from 20.8% in 2004 to 22.0% in 2005. The increase in expenses was
primarily due to increased sales wages due to a larger sales force (2.7%),
more
commissions due to increased number of outside sales brokers (1.0%), increased
sales fuel costs (1.6%), increased fuel expenses for plant heating requirements
(1.5%) and increased accounting costs due to the extra costs associated with
being an SEC reporting company (1.7%). We do expect to increase the selling
expenses upon the completion of the current IPO as we gear up the sales force
for further expansion into the mainstream. We anticipate a lead time until
these
new sales people are generating enough additional revenue to support their
additional expenses. We anticipate that General and Administrative expenses
should remain relatively constant for 2006.
Legal
Defense costs for 2004 were $80,156. These expenses were incurred for a
lawsuit brought against us by a consultant alleging funds due him from us.
We
mounted a successful defense in this action. We filed a post trial motion for
attorney fees and costs and were awarded $64,895. The case went to appeal which
generated an additional expense of $36,558 in 2005. We won the appeal and are
seeking additional damages. In 2006, we expect to spend approximately the same
amount of legal expenses as 2005.
Interest
expense was $309,504 in 2005, compared to interest expense of $255,032 in 2004.
We had slightly higher interest expense in 2005 due to increased borrowing
on
our receivable line of credit with our lender, BACC. In 2006, we expect
that the IPO will reduce our need for debt financing and allow the Company
to
obtain more favorable borrowing rates, thus offsetting the rise in the Prime
Rate, and therefore interest expense should decrease.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through private sales of common stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations.
As
of
December 31, 2005, we had a working capital deficit of $1,594,758, compared
to a
working capital deficit of $684,647 as of December 31, 2004. This increase
in our working capital deficit was primarily attributable to increases in
accounts payable and our line of credit These increases were required due to
the
loss the Company incurred in 2005 and costs incurred for the IPO.
We
used
$214,667 in investing activities for the twelve months ended December 31, 2005,
primarily for the purchase of equipment for our West Coast Brewery and a loan
made to a director before we became public. The purchase of equipment was for
the 5 liter party keg filler. This piece of equipment reduces the labor costs
by
over 75% in the manufacture of the party kegs.
Cash
flow
provided from financing activities was $242,533 for the twelve months ended
December 31, 2005 and was the result of increased borrowing on our line of
credit, principal borrowing on long term debt, used primarily to purchase
manufacturing equipment to improve the west coast production facility and
vehicles, and cash from the sale of stock from the company’s IPO, offset by
principal payments of debt payments for deferred offering expenses associated
with the Company’s IPO.
Management
recognizes the operating losses and costs incurred
in the
Company’s initial public offering have
negatively
impacted liquidity. Management plans to continue to have available a line
of
credit to provide short term liquidity and plans to continue its efforts
regarding the IPO currently effective. Management believes the combination
of
these two items, will provide the liquidity the Company needs for 2006. In
addition, the price increases Management instituted should lead to increased
margins and a decrease in loss from operations, thus improving the Company’s
liquidity needs.
Management also recognizes there may be a potential securities law violation,
which may require the Company to refund a maximum of approximately $759,000
relating to the issuance of shares of our common stock in 2006. In
the
event no further sales of the offering occur and in the event the Company
is
required to refund the entire $759,000, Management believes it will be able
to
refund that amount and provide working capital to the Company sufficient
for the
Company to conduct operations during the 2006 fiscal year.
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 summarizes 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 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 years ended December 31, 2005 or 2004.
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, 2005 or 2004.
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 that begins after June 15, 2005. The Company has evaluated the impact
of
the adoption of SFAS 123(R), and does not believe the impact will be significant
to the Company’s overall results of operations or financial position. All
options issued prior to December 31, 2005 vested immediately, and therefore,
there is no associated unamortized compensation that will be recorded in future
periods relating to these options.
In
May
2005 the FASB issued SFAS Number 154, “Accounting Changes and Error
Corrections”. This SFAS provides guidance on accounting for and reporting of
accounting changes and error corrections. The Company has evaluated the impact
of SFAS 154 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.
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.
Principal
Commitments:
At
December 31, 2005, the Company did not have any material commitments for
capital
expenditures. The Company's principal commitments for the next five fiscal
years consisted of contractual commitments as summarized below. The summary
shown below assumes that the Company will repay it lines of credit in full
without renewals.
|
|
|
|
|
|
|
|
|
|
Payments
Due by
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
cash obligations
|
|
Total
|
|
2006
|
|
2007
|
|
2008
|
|
2009
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lines
of credit
|
|
$
|
1,445,953
|
|
$
|
1,445,953
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
$
|
-0-
|
|
Long
-term debt
|
|
|
580,794
|
|
|
169,381
|
|
|
111,321
|
|
|
102,654
|
|
|
87,348
|
|
|
38,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations
|
|
|
94,479
|
|
|
58,433
|
|
|
20,968
|
|
|
10,905
|
|
|
4,173
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash Obligations
|
|
$
|
5,644,978
|
|
$
|
1,933,813
|
|
$
|
1,168,870
|
|
$
|
1,232,707
|
|
$
|
884,183
|
|
$
|
425,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM
7: FINANCIAL
STATEMENTS
We
have
audited the accompanying balance sheet of Reed’s, Inc. as of December 31, 2005
and the related statements of operations, changes in stockholders’ equity and
cash flows for the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Reed’s, Inc. as of December 31,
2005 and the results of its operations and its cash flows for the years
ended
December 31, 2005 and 2004 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the
Company
will continue as a going concern. However, the Company incurred a loss
of
$825,955 and used $42,610 of cash in operating activities during the
year ended
December 31, 2005, and had a working capital deficiency of $1,594,758
as of
December 31, 2005. These factors, among others, as discussed in Note
1 to the
financial statements, raise substantial doubt about the Company's ability
to
continue as a going concern. Management's plans in regard to these matters
are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/
WEINBERG & COMPANY, P.A.
Weinberg
& Company, P.A.
Los
Angeles, California
April
7,
2006
REED’S,
INC.
BALANCE
SHEET
ASSETS
|
|
|
|
|
Cash
|
|
$
|
27,744
|
|
Inventory
|
|
|
1,208,019
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns
and discounts of $70,000
|
|
|
534,906
|
|
Other
receivables
|
|
|
10,563
|
|
Prepaid
expenses
|
|
|
74,279
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
1,855,511
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $508,136
|
|
|
1,885,354
|
|
OTHER
ASSETS
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $3,723
|
|
|
14,891
|
|
Deferred
stock offering costs
|
|
|
356,238
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
1,171,330
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
4,912,195
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
|
$
|
1,644,491
|
|
Lines
of credit
|
|
|
1,445,953
|
|
Current
portion of long term debt
|
|
|
|
|
Accrued
interest
|
|
|
136,240
|
|
Accrued
expenses
|
|
|
54,204
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
3,450,269
|
|
|
|
|
|
|
Loans
payable, related party
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
1,060,573
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,763,200
|
|
COMMITMENTS
AND CONTINGENCIES |
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 58,940 shares
issued
and outstanding, liquidation preference of $10.00, per
share
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized,
5,042,197 shares issued and outstanding
|
|
|
503
|
|
Common
stock to be issued (7,367 shares)
|
|
|
29,470
|
|
Additional
paid in capital
|
|
|
2,788,683
|
|
Accumulated
deficit
|
|
|
(3,259,063
|
)
|
Total
stockholders’ equity
|
|
|
148,995
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
4,912,195
|
|
The
accompanying notes are an integral part of these financial statements
REED’S,
INC.
STATEMENTS
OF OPERATIONS
For
the Years Ended December 31, 2005 and
2004
|
|
|
Year
Ended
December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
9,470,285
|
|
$
|
8,978,365
|
|
COST
OF SALES
|
|
|
7,745,499
|
|
|
7,103,037
|
|
GROSS
PROFIT
|
|
|
1,724,786
|
|
|
1,875,328
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling
|
|
|
1,124,705
|
|
|
791,975
|
|
General &
Administrative
|
|
|
955,764
|
|
|
1,074,536
|
|
Legal
Fees
|
|
|
36,558
|
|
|
80,156
|
|
Provision
for amounts due from director
|
|
|
124,210
|
|
|
0
|
|
|
|
|
2,241,237 |
|
|
1,946,667 |
|
LOSS FROM
OPERATIONS
|
|
|
(516,451
|
)
|
|
(71,339
|
)
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(309,504
|
)
|
|
(255,032
|
)
|
Loss
on extinguishment of debt
|
|
|
(—
|
)
|
|
(153,000
|
)
|
|
|
|
(309,504
|
)
|
|
(408,032
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(825,955
|
)
|
|
(479,371
|
)
|
Preferred
Stock Dividend
|
|
|
(29,470
|
)
|
|
—
|
|
Net
Loss Attributable to Common Stockholders
|
|
$
|
|
)
|
$
|
(479,371
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS — BASIC
AND DILUTED
|
|
$
|
(0.18
|
)
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING,
Basic
and Fully Diluted
|
|
|
4,885,151
|
|
|
4,726,091
|
|
The
accompanying notes are an integral part of these financial statements
REED’S,
INC.
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2005 and
2004
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Common
Stock to be Issued
|
|
|
Additional
Paid
In
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
|
4,726,091
|
|
$ |
472
|
|
$ |
—
|
|
$ |
2,429,824
|
|
|
—
|
|
$ |
—
|
|
$ |
(1,723,627
|
)
|
$ |
706,669
|
|
Issuance
of preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,440
|
|
|
334,400
|
|
|
—
|
|
|
334,400
|
|
Conversion
of debt to preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,500
|
|
|
255,002
|
|
|
—
|
|
|
255,002
|
|
Recognition
of beneficial conversion feature on issuance of preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
353,640
|
|
|
—
|
|
|
—
|
|
|
(200,640
|
)
|
|
153,000
|
|
Net
loss for year ended 2004
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(479,371
|
)
|
|
(479,371
|
)
|
Balance,
December 31, 2004
|
|
|
4,726,091
|
|
|
472
|
|
|
—
|
|
|
2,783,464
|
|
|
58,940
|
|
|
589,402
|
|
|
(2,403,638
|
)
|
|
969,700
|
|
Exercise
of warrants
|
|
|
262,500
|
|
|
26
|
|
|
|
|
|
5,224
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
Preferred
Stock Dividend
|
|
|
—
|
|
|
—
|
|
|
29,470
|
|
|
|
|
|
—
|
|
|
—
|
|
|
(29,470
|
)
|
|
— |
|
Common
stock issued for cash
|
|
|
53,606
|
|
|
5
|
|
|
— |
|
|
196,570
|
|
|
— |
|
|
— |
|
|
— |
|
|
196,575
|
|
Deferred
stock offering costs charged to additional paid in capital
|
|
|
— |
|
|
— |
|
|
— |
|
|
(196,575
|
)
|
|
— |
|
|
— |
|
|
— |
|
|
(196,575
|
)
|
Net
loss for year ended December 31, 2005
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(825,955
|
)
|
|
|
)
|
Balance
December 31, 2005
|
|
|
5,042,197
|
|
$
|
503
|
|
$
|
29,470
|
|
$
|
2,788,683
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(3,259,063
|
)
|
$
|
148,995
|
|
The
accompanying notes are an integral part of these financial statements
|
|
Year
Ended
December 31 ,
|
|
|
|
2005
|
|
2004
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
|
|
|
$
|
(479,371
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
118,517
|
|
|
97,329
|
|
Loss
on extinguishment of debt
|
|
|
— |
|
|
153,000
|
|
Provision
for amounts due from director |
|
|
124,210 |
|
|
— |
|
(Increase)
decrease in operating assets and increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
262,708
|
|
|
(231,557
|
)
|
Inventory
|
|
|
93,006
|
|
|
(3,665
|
)
|
Prepaid
expenses
|
|
|
(68,627
|
)
|
|
11,730
|
|
Other
receivables
|
|
|
(7,400
|
)
|
|
7,589
|
|
Accounts
payable
|
|
|
232,367
|
|
|
233,447
|
|
Accrued
expenses
|
|
|
2,655
|
|
|
(9,755
|
)
|
Accrued
interest
|
|
|
25,909
|
|
|
45,233
|
|
Net
cash used in operating activities
|
|
|
(42,610
|
)
|
|
(176,020
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(181,654
|
)
|
|
(204,147
|
)
|
Due
from director
|
|
|
(33,013
|
)
|
|
(44,040
|
)
|
Net
cash used in investing activities
|
|
|
(214,667
|
)
|
|
(248,187
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Deferred
offering costs
|
|
|
(332,858
|
)
|
|
(219,955
|
)
|
Principal
payments on debt
|
|
|
(263,815
|
) |
|
(208,852
|
)
|
Proceeds
from issuance of common stock
|
|
|
196,575
|
|
|
—
|
|
Proceeds
received from issuance of preferred stock
|
|
|
—
|
|
|
334,400
|
|
Proceeds
from borrowings on debt
|
|
|
295,900 |
|
|
208,464
|
|
Net
borrowings on lines of credit
|
|
|
367,731
|
|
|
339,708
|
|
Payments
on debt to related parties
|
|
|
(21,000
|
)
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
242,533
|
|
|
453,765
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(14,744
|
)
|
|
29,558
|
|
CASH —
Beginning of year
|
|
|
42,488
|
|
|
12,930
|
|
CASH —
End of year
|
|
$
|
27,744
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
283,595
|
|
$
|
227,669
|
|
Taxes
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable converted to preferred stock
|
|
|
|
|
|
224,000
|
|
Accrued
interest converted to preferred stock
|
|
|
|
|
|
31,002
|
|
Beneficial
conversion feature
|
|
|
|
|
|
353,640
|
|
Common
Stock issued in settlement of accrued interest on related party
debt upon exercise
of warrants
|
|
|
5,250
|
|
|
—
|
|
Common
Stock to be issued in settlement of preferred stock dividend
(7,367 shares)
|
|
|
29,470
|
|
|
—
|
|
Conversion
of a line of credit to a term loan
|
|
|
50,000 |
|
|
—
|
|
The
accompanying notes are an integral part of these financial statements.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
(1)
Operations
and Summary of Significant Accounting Policies
A)
Nature
of Operations
Reed’s,
Inc. (the “Company”) was organized under the laws of the state of Florida in
January 1991. In 2001, the Company changed its name from Original Beverage
Corporation to Reed’s, Inc. and changed its state of incorporation from Florida
to Delaware. The Company is engaged primarily in the business of developing,
manufacturing and marketing natural non-alcoholic beverages, as well as
candies
and ice creams. The Company currently offers 14 beverages, two candies,
and
three ice creams.
The
Company sells its products primarily in upscale gourmet and natural food
stores
and supermarket chains in the United States and, to a lesser degree, in
Canada.
The
accompanying 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 $825,955 and utilized cash of $42,610 in operating
activities
during the year ended December 31, 2005, and had a working capital deficiency
of
$1,564,758 at December 31, 2005. In addition, the Company may have committed
a
violation of securities law which may require the rescission of common
stock
issued in 2006 in the aggregate of approximately $759,000, see Note 14.
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. Management
has
received interest enough in the offering which leads it to believe the
maximum
amount of the offering will be sold. The Company has received approximately
$975,076 from the offering, see Note 14. In the event no further sales
of the
offering occur and in the event the Company is required to refund the
entire
$759,000, management believes it will be able to refund that amount and
provide
working capital to the Company sufficient for the Company to conduct
operations
during the 2006 fiscal year.
C)
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D)
Accounts
Receivable
The
Company evaluates the collectibility of its trade accounts receivable based
on a
number of factors. In circumstances where the Company becomes aware of
a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded, which reduces
the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification
of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The
allowance for doubtful accounts and returns and discounts is established
through
a provision for returns and discounts charged against sales. Receivables
are
charged off against the allowance when payments are received or products
returned. The allowance for doubtful accounts and returns and discounts
as of
December 31, 2005 was $70,000.
E)
Property
and Equipment and Related Depreciation
Property
and equipment is stated at cost. Depreciation is calculated using accelerated
and straight-line methods over the estimated useful lives of the assets
as
follows:
Property
and Equipment Type
|
|
Years
of Depreciation
|
|
|
|
Building
|
|
|
39
years
|
Machinery
and equipment
|
|
|
7-12
years
|
Computer
|
|
|
3-5
years
|
Automobile
|
|
|
5
years
|
Office
equipment
|
|
|
7
years
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Management
regularly reviews property, equipment and other long-lived assets for possible
impairment. This review occurs quarterly, or more frequently if events
or
changes in circumstances indicate the carrying amount of the asset may
not be
recoverable. If there is indication of impairment, management prepares
an
estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition.
If
these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Management believes that the accounting estimate related to impairment
of its
property and equipment is a “critical accounting estimate” because: (1) it
is highly susceptible to change from period to period because it requires
management to estimate fair value, which is based on assumptions about
cash
flows and discount rates; and (2) the impact that recognizing an impairment
would have on the assets reported on our balance sheet, as well as net
income,
could be material. Management’s assumptions about cash flows and discount rates
require significant judgment because actual revenues and expenses have
fluctuated in the past and are expected to continue to do so.
F)
Intangible
Assets
The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible
Assets.” Goodwill and other intangible assets deemed to have indefinite lives
are not subject to annual amortization. The Company reviews, at least quarterly,
its investment in brand names and other intangible assets for impairment
and if
impairment is deemed to have occurred the impairment is charged to expense.
Intangible assets which have finite lives are amortized on a straight line
basis
over their remaining useful life; they are also subject to annual impairment
reviews. See Note 4.
Management
applies the impairment tests contained in SFAS number 142 to determine
if an
impairment has occurred. Accordingly, management compares the carrying
value of
the asset to its fair value in determining the amount of the impairment.
No
impairments were identified for the years ended December 31, 2005 and
2004.
Management
believes that the accounting estimate related to impairment of its intangible
assets, is a “critical accounting estimate” because: (1) it is highly
susceptible to change from period to period because it requires management
to
estimate fair value, which is based on assumptions about cash flows and
discount
rates; and (2) the impact that recognizing an impairment would have on the
assets reported on our balance sheet, as well as net income, could be material.
Management’s assumptions about cash flows and discount rates require significant
judgment because actual revenues and expenses have fluctuated in the past
and
are expected to continue to do so.
G)
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed
to risk
for the amounts of funds held in one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess
of the
$100,000 guarantee during the year ended December 31, 2005.
During
the years ended December 31, 2005 and 2004 the Company’s had two customers,
which accounted for approximately 39% and 15% and 39% and 14% of sales,
respectively . No other customer accounted for more than 10% of sales
in either
year. As of December 31, 2005, the Company had approximately $181,580
and
$38,000, respectively, of accounts receivable due from these
customers.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
The
Company currently relies on a single contract packer for a majority of
its
production and bottling of beverage products. The Company has different
packers
for their non-beverage products. Although there are other packers and the
Company is in the process of outfitting their own brewery and bottling
plant, a
change in packers may cause a delay in the production process, which could
ultimately affect operating results.
H)
Fair
Value of Financial Instruments
The
carrying amount of the Company’s financial instruments including cash, accounts
and other receivables, accounts payable, accrued interest and accrued expenses
approximate their fair value as of December 31, 2005 due to their
short maturities. The carrying amount of lines of credit, loans payable,
related party and long term debt approximate fair value because the related
effective interest rates on these instruments approximate the rates currently
available to the Company.
I)
Cost
of sales
The
Company , with one exception, classifies shipping and handling costs of
the sale
of its products as a component of cost of sales. The one exception regards
shipping and handling costs associated with local sales and local distribution.
Since these activities are integrated, those costs are combined and are
included
as selling expenses in the year ended 2005 and general and administrative
expenses in the year ended 2004. For the years ended December 31, 2005
and 2004
those costs were approximately $88,000 and $63,000, respectively.
In
addition, the Company classifies purchasing and receiving costs, inspection
costs, warehousing costs, freight costs, internal transfer costs and other
costs
associated with product distribution as costs of sales. Certain of these
costs
become a component of the inventory cost and are expensed to costs of sales
when
the product to which the cost has been allocated is sold.
Expenses
not related to the production of our products are classified as operating
expenses.
J)
Income
Taxes
Current
income tax expense is the amount of income taxes expected to be payable
for the
current year. A deferred income tax asset or liability is established for
the
expected future consequences of temporary differences in the financial
reporting
and tax bases of assets and liabilities. The Company considers future taxable
income and ongoing, prudent and feasible tax planning strategies, in assessing
the value of its deferred tax assets. If the Company determines that it
is more
likely than not that these assets will not be realized, the Company will
reduce
the value of these assets to their expected realizable value, thereby decreasing
net income. Evaluating the value of these assets is necessarily based on
the
Company’s judgment. If the Company subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the
value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
K)
Deferred
Stock Offering Costs
The
Company capitalizes costs incurred related to an initial public offering
and
future issuance of common stock until such time as the stock is issued,
or the
stock offering is abandoned by the Company. These costs include attorney’s fees,
accountant’s fees, SEC filing fees, state filing fees, and other specific
incremental costs directly related to the initial public offering and
related
issuance of common stock. At December 31, 2005, deferred offering costs
were
$356,238. The offering associated with these costs is continuing. As
proceeds
are received from the offering the deferred offering costs are charged
to
additional paid in capital. During the year ended December 31, 2005,
$196,575 of
deferred offering costs where charged to additional paid in capital.
No such
charge was made to additional paid in capital during 2004, as the offering
had
not commenced until 2005.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
L)
Stock
Options
Statement
of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), establishes a fair value method of accounting
for stock-based compensation plans and for transactions in which an entity
acquires goods or services from non-employees in exchange for equity
instruments. SFAS No. 123 also encourages, but does not require, companies
to record compensation cost for stock-based employee compensation. SFAS
No. 123 was amended by SFAS No. 148, which now requires companies to
disclose in interim financial statements the pro forma effect on net income
(loss) and net income (loss) per common share of the estimated fair market
value
of stock options or warrants issued to employees. The Company has chosen
to
continue to account for stock-based compensation issued to employees utilizing
the intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees”, with pro forma
disclosures of net income (loss) as if the fair value method had been applied.
Accordingly, compensation cost for stock options is measured as the excess,
if
any, of the fair market price of the Company’s stock at the date of grant over
the amount an employee must pay to acquire the stock.
For
the
year ended December 31, 2005, 218,500 options were issued that immediately
vested. The pro forma disclosure related to the issuance and vesting of
these options is as follows:
Net
loss as reported
|
|
$
|
(825,955
|
)
|
Stock
based compensation
|
|
|
(530,955
|
)
|
|
|
|
|
|
Pro
forma loss
|
|
$
|
(1,356,910
|
)
|
|
|
|
|
|
Primary
and fully diluted loss per share, as reported
|
|
$
|
(0.18
|
)
|
Proforma
fully and diluted loss per share
|
|
$
|
(0.28
|
)
|
No
options were granted during 2004, therefore, pro forma disclosure of the
fair
value method is not applicable and is not presented. The assumptions used
in
calculating the fair value of the options granted during 2005, using the
Black-Scholes option pricing model, were: risk free interest rate, 4.05%,
expected life, 5 years, expected volatility 70% and, no expected
dividends.
M)
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.
N)
Net
Loss Per Share
Loss
per
share calculations are made in accordance with SFAS No. 128, “Earnings
Per Share.” Basic loss per share is calculated by dividing net loss by weighted
average number of common shares outstanding for the year. Diluted loss
per share
is computed by dividing net loss by the weighted average number of common
shares
outstanding plus the dilutive effect of outstanding common stock warrants
and
convertible debentures.
For
the
years ended December 31, 2005 and 2004 the calculations of basic and
diluted loss per share are the same because potential dilutive securities
would
have an anti-dilutive effect.
The
potentially dilutive securities consisted of the following as of
December 31, 2005:
|
|
|
|
Warrants
|
|
|
613,241
|
|
Convertible
notes
|
|
|
133,954
|
|
Preferred
Stock
|
|
|
235,760
|
|
Options
|
|
|
291,000
|
|
|
|
|
|
|
Total
|
|
|
1,273,955
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
O)
Advertising
Costs
The
Company accounts for advertising production costs by expensing such production
costs the first time the related advertising is run.
Advertising
costs are expensed as incurred and are included in selling expense in the
amount
of $90,176 and $42,828 for the years ended December 31, 2005 and 2004,
respectively.
The
Company accounts for certain sales incentives, including slotting fees,
as a
reduction of gross sales, in accordance with Emerging Issues Task Force
on
Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor’s Products.” These sales incentives for the years ended
December 31, 2005 and 2004 approximated $292,000 and $400,000,
respectively.
P)
Reporting
Segment of the Company
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS No. 131) requires certain disclosures
of operating segments, as defined in SFAS No. 131. Management has determined
that the Company has only one operating segment and therefore is not required
to
disclose operating segment information. The Company does not account for
the net
sales of its various products separately, and the disclosure required by
SFAS
No. 131 of product revenue is not presented because it would be impracticable
to
do so.
Q)
Comprehensive
Income
A
statement of comprehensive income is not presented in our financial statements
since we did not have any of the items of other comprehensive income in
any
period presented.
R)
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and
wasted
materials (spoilage) should be recognized as current period charges and
require
the allocation of fixed production overheads to inventory based on the
normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact
of the
adoption of SFAS 151, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with
a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded
amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive
assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By
focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of
the
adoption of SFAS 152, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions
be
recognized in financial statements. That cost will be measured based on
the fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement
No. 123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Statement 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting
for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public
entities
(other than those filing as small business issuers) will be required to
apply
Statement 123(R) as of the first interim or annual reporting period that
begins
after June 15, 2005 and small business issuers will be required to adopt
for
reporting periods beginning after December 15, 2005. The Company has evaluated
the impact of the adoption of SFAS 123(R), and does not believe the impact
will
be significant to the Company's overall results of operations or financial
position. All options issued prior to December 31, 2005 vested immediately,
and
therefore, there is no associated unamortized compensation that will be
recorded
in future periods relating to these options.
In
May
2005 the FASB issued SFAS Number 154, “Accounting Changes and Error
Corrections.” This SFAS provides guidance on accounting for and reporting of
accounting changes and error corrections. The Company has evaluated the
impact
of SFAS 154 and does not believe the impact will be significant to the
Company’s
overall results of operations or financial position.
The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated financial position or
results of operations.
(The
rest of this page left blank intentionally)
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(2)
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or market, and is
comprised
of the following as of December 31, 2005:
Raw
Materials
|
|
$
|
678,343
|
|
Finished
Goods
|
|
|
529,676
|
|
|
|
$
|
1,208,019
|
|
(3)
Fixed
Assets
Fixed
assets are comprised of the following as of December 31, 2005:
Land
|
|
$
|
409,546
|
|
Building
|
|
|
915,932
|
|
Vehicles
|
|
|
223,867
|
|
Machinery
and equipment
|
|
|
734,886
|
|
Office
equipment
|
|
|
109,259
|
|
|
|
|
2,393,490
|
|
Accumulated
depreciation
|
|
|
(508,136
|
)
|
|
|
$
|
1,885,354
|
|
Depreciation
expense for the years ended December 31, 2005 and 2004 was $117,773 and
$96,585, respectively.
(4)
Intangible
Assets
Brand
Names
Brand
Names consist of two (2) trademarks for natural beverages which the Company
acquired in previous years. As long as the Company continues to renew its
trademarks, these intangible assets will have an indefinite life. Accordingly,
they are not subject to amortization. The Company determines fair value
for
Brand Names by reviewing the net sales of the associated beverage and applying
industry multiples for which similar beverages are sold. As of December 31,
2005, carrying amounts for Brand Names were $800,201.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Other
Intangible Assets
At
December 31, 2005, Other Intangible Assets consist of:
Asset
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Current
Year
Amortization
|
|
|
Useful
Life
|
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
3,723
|
|
$
|
745
|
|
|
300
months
|
|
The
estimated aggregate amortization as of December 31, 2005 for each of the
next five years is:
Year |
|
|
Amount
|
|
2006
|
|
$
|
745
|
|
2007
|
|
|
745
|
|
2008
|
|
|
745
|
|
2009
|
|
|
745
|
|
2010
|
|
|
745
|
|
(5)
Lines
of Credit
The
Company had outstanding borrowings of $1,445,953 as of December 31, 2005
under the following line of credit agreements:
The
Company has an unsecured $50,000 line of credit with a bank. Interest is
payable
monthly at the prime rate, as published in the Wall Street Journal, plus
1.5%
per annum. The Company’s outstanding balance was $27,321 at December 31,
2005. The interest rate in effect at December 31, 2005 was 8.75%. The line
expires in December 2009.
The
Company has a line of credit in the amount of $482,264 at December 31,
2005 with
Merrill Lynch. The loan was co-signed by Robert T. Reed, Jr., the Company’s
Vice President and National Sales Manager — Mainstream and a brother of the
Company’s founder and CEO, Christopher J. Reed. Robert Reed also pledged his
personal stock account on deposit with Merrill Lynch as collateral. The
line of
credit bears interest at a rate of rate of 3.785% per annum plus LIBOR
(8.255%
as of December 31, 2005). In consideration for Mr. Reed’s pledging his
stock account at Merrill Lynch as collateral, the Company pays Mr. Reed
5% per annum of the amount the Company borrows from Merrill Lynch as a loan
fee. During the years ended December 31, 2005 and 2004, the Company paid
Mr.
Reed $15,250 and $3,125, respectively, under this agreement.
The
Company has a line of credit with a finance company. This line of credit
allows
the Company to borrow a maximum amount of $1,910,000, based on a borrowing
base
of accounts receivables and inventory. The borrowing base on the accounts
receivable is 80% of all eligible receivables, which are primarily accounts
receivables under 90 days. The inventory borrowing base is 50% of eligible
inventory. As of December 31, 2005, the amounts borrowed on this line
of credit
were $ 936,368. The interest rate on this line of credit is Prime plus
2.75%,
making the interest rate at December 31, 2005 10%. The line of credit
expires in
June 2006 and is guaranteed by Chris and Judy Reed, the principal stockholders
of the Company. This revolving line of credit is secured by all Company
assets,
including accounts receivable, inventory, trademarks and other intellectual
property, building and equipment. As of December 31, 2005, the Company
had
approximately $10,000 of availability on this line of credit.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(6)
Notes
Payable to Related Parties
The
Company has three unsecured loans payable to Robert T. Reed, Sr., the
father of the Company’s founder Christopher J. Reed, in an amount of $252,358 as
of December 31, 2005.
The
first
loan bears interest at 10% per annum and matures in October 2007. The
outstanding principal balance of the loan as of December 31, 2005 was
$24,648.
The
second loan bears interest at 8% per annum and matures in October 2007. The
outstanding principal balance of this loan as of December 31, 2005
was $177,710. As long as the debt is outstanding, Mr. Reed has the right to
convert this loan and accrued interest into shares of our common stock
at a rate
of one share of common stock for every $2.00 owed to Mr. Reed. As of
December 31, 2005, the loan was convertible into 125,313 shares of common
stock.
The
third
loan bears interest at 8% per annum and matures in October 2007. The
outstanding principal balance of this loan as of December 31, 2005 was
$50,000.
(7)
Long-term
Debt
Long-term
debt consists of the following as of December 31, 2005:
Note
payable to SBA in the original amount of $748,000 with interest
at the
Wall Street Journal prime rate plus 1% per annum, adjusted monthly
with no
cap or floor. The combined monthly principal and interest payments
are $5,851, subject to annual adjustments. The interest rate
in effect at
December 31, 2005 was 8%. The note is secured by land and building
and guaranteed by the majority stockholder. The note matures
November
2025.
|
|
$
|
674,582
|
|
|
|
|
|
|
Notes
payable, unsecured, with interest at 10% per annum. Principal and
accrued interest are payable in full at the end of the note term.
Theses
notes were issued with warrants, exercisable at issuance. The
warrants
have an exercise price of $3 and a term of 5 years. Principal and any
unpaid interest are due in June 2006.
|
|
|
50,000
|
|
|
|
|
|
|
Building
improvement loan with a maximum draw of $168,000. The interest
rate is at
the Wall Street Journal prime rate plus 1%, adjusted monthly
with no cap
or floor. The combined monthly principal and interest payments
are $1,186;
subject to annual adjustments. The rate in effect at December 31,
2005 was 8% per annum. The note is secured by land and building
and
guaranteed by the majority stockholder and matures
November 2025.
|
|
|
142,119
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Notes
payable, due on demand, unsecured, with interest at 10% per annum.
The
note is convertible to common stock at 60% of the initial public
offering
price or 100% of a private offering price.
|
|
|
9,000
|
|
|
|
|
|
|
Note
payable to a bank, unsecured, interest rate is prime plus 3.25%.
The
interest rate in effect December 31, 2005 was10.5% . The note
matures in
December 2009.
|
|
|
50,000
|
|
|
|
|
|
|
Notes
payable to GMAC, secured by automobiles, payable in monthly installments
of $758 including interest at 0.0%, with maturity in 2008.
|
|
|
18,204
|
|
|
|
|
|
|
Notes
payable to Chrysler Financial Corp., secured by automobiles,
payable in
monthly installments of $658, including interest at 1.9% per
annum, with
maturity in 2008.
|
|
|
21,151
|
|
|
|
|
|
|
Equipment
line of credit up to a maximum of $150,000, secured by certain
plant
equipment. Payable in ratable monthly installments of principal and
applicable interest. This loan bears interest at prime plus 2.75% per
annum. The
interest rate in effect at December 31, 2005 was 10.00%. This loan
matures in May 2009.
|
|
|
93,900
|
|
|
|
|
|
|
Installment
loan secured by certain plant equipment. Payable in monthly installments
of $3,167 plus interest. This loan bears interest at prime plus
2.75% per
annum. The
interest rate in effect at December 31, 2005 was 10.00%. This loan
matures in June 2010.
|
|
|
170,998
|
|
|
|
|
|
|
Total
|
|
|
1,229,954
|
|
|
|
|
|
|
Less
current portion
|
|
|
169,381
|
|
|
|
$
|
1,060,573
|
|
The
aggregate maturities of long-term debt for each of the next five years
and
thereafter are as follows as of December 31, 2005:
|
|
|
|
|
|
|
|
2006
|
|
$ |
169,381 |
|
2007
|
|
|
111,321 |
|
2008
|
|
|
102,654 |
|
2009
|
|
|
87,348 |
|
2010
|
|
|
38,090 |
|
Thereafter
|
|
|
721,160 |
|
Total
|
|
$ |
1,229,954 |
|
(8)
Stockholders’
Equity
Common
stock consists of $.0001 par value, 11,500,000 shares authorized,
5,042,197 shares issued and outstanding as of December 31,
2005.
Preferred
stock consists of 500,000 shares authorized to Series A, $10.00 par
value, 5% non-cumulative, participating, preferred stock. As of December
31,
2005 there were 58,940 shares outstanding, liquidation preference of $10.00.
These
preferred shares have a 5% pro-rata annual non-cumulative dividend. The
dividend
can be paid in cash or, in the sole and absolute discretion of our board
of
directors, in shares of common stock based on its then fair market value.
We
cannot declare or pay any dividend on shares of our securities ranking
junior to
the preferred stock until the holders of our preferred stock have received
the
full non-cumulative dividend to which they are entitled. In addition, the
holders of our preferred stock are entitled to receive pro rata distributions
of
dividends on an “as converted” basis with the holders of our common stock.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
In
the
event of any liquidation, dissolution or winding up of the Company, or
if there
is a change of control event, then, subject to the rights of the holders
of our
more senior securities, if any, the holders of our Series A preferred stock
are
entitled to receive, prior to the holders of any of our junior securities,
$10.00 per share plus all accrued and unpaid dividends. Thereafter, all
remaining assets shall be distributed pro rata among all of our security
holders.
At
any
time after June 30, 2007, we have the right, but not the obligation, to
redeem
all or any portion of the Series A preferred stock by paying the holders
thereof
the sum of the original purchase price per share, which was $10.00, plus
all
accrued and unpaid dividends.
The
Series A preferred stock may be converted, at the option of the holder,
at any
time after issuance and prior to the date such stock is redeemed, into
four
shares of common stock, subject to adjustment in the event of stock splits,
reverse stock splits, stock dividends, recapitalization, reclassification
and
similar transactions. We are obligated to reserve out of our authorized
but
unissued shares of common stock a sufficient number of such shares to effect
the
conversion of all outstanding shares of Series A preferred stock.
Except
as
provided by law, the holders of our Series A preferred stock do not have
the
right to vote on any matters, including, without limitation, the election
of
directors. However, so long as any shares of Series A preferred stock are
outstanding, we shall not, without first obtaining the approval of at least
a
majority of the holders of the Series A preferred stock authorize or issue
any
equity security having a preference over the Series A preferred stock with
respect to dividends, liquidation, redemption or voting, including any
other
security convertible into or exercisable for any equity security other
than any
senior preferred stock.
During
2004, the Company sold its preferred stock in a private placement. 33,440
shares
were issued in connection with this offering and $334,400 of proceeds were
received. The Company recorded a beneficial conversion feature (BCF) in
accordance with Emerging Issues Task Force (EITF) 98-5. The BCF arises
from the
conversion price of the preferred stock being less than the fair market
value of
the common stock at the commitment date of the offering. The fair market
value
of the stock has been determined to be $4.00 per share, based on the initial
public offering price which is expected to be $4.00. The excess of the
fair
market price of the underlying common stock over the conversion price is
$1.50.
Since the conversion feature of this offering allows for the conversion
of
preferred stock into 4 shares of common stock for each share of preferred
stock,
133,760 shares of common stock could be issued if fully converted. Accordingly,
the BCF recorded was $200,640 and was reflected as a charge to accumulated
deficit during the year ended December 31, 2004.
In
addition, during 2004, the Company negotiated with certain of its debt
holders
to convert debt and accrued interest to preferred stock. In connection
with this
conversion $224,000 of debt principal and $31,002 of accrued interest were
converted in exchange for the 25,500 shares of Series A Convertible Preferred
Stock. Upon conversion, the excess of the fair market price of the
underlying common stock over the conversion price of $1.50 per share as
described above, resulted in a loss on extinguishment of debt of $153,000.
In
connection with this transaction, the Company recorded a BCF of $153,000,
since
the conversion of all of the preferred stock associated with this transaction
could be converted into 102,000 shares of common stock at $1.50 per share
based
on the excess of the fair market price of the conversion price as described
above.
During
the year ended December 31, 2005, the Company accrued $29,740 dividend
payable
to the preferred shareholders, which management has elected to pay in shares
of
common stock. As such, common stock to be issued as of December 31, 2005
represents the preferred stock dividend to be paid with the issuance of
common
stock.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(9)
Stock
Options and Warrants
A)
Stock
Options
The
Company has granted certain employees and other individuals stock options
to
purchase the Company’s common stock under employment agreements. The options
generally vest immediately or when services are performed and have a maximum
term of five (5) years.
In
2001,
the Company adopted the Original Beverage Corporation 2001 Stock Option
Plan.
The options shall be granted from time to time by the Compensation Committee.
Individuals eligible to receive options include employees of the Company,
consultants to the Company and directors of the Company. The options shall
have
a fixed price, which will not be less than 100% of the fair market value
per
share on the grant date. Options granted to employees are accounted for
according to APB 25.The following table summarizes the stock option
activity for the years ended December 31, 2005 and 2004:
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2004
|
|
|
72,500
|
|
$
|
3.21
|
|
Options
granted in 2004
|
|
|
—
|
|
|
N/A
|
|
Options
exercised in 2004
|
|
|
—
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2004
|
|
|
72,500
|
|
$
|
3.21
|
|
Options
granted in 2005
|
|
|
218,500
|
|
$
|
4.00
|
|
Options
exercised in 2005
|
|
|
---
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
291,000
|
|
$
|
3.80
|
|
Exercise
Price
Range
|
|
Weighted
Average
Remaining
Number
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
|
$2.00
|
|
|
37,500
|
|
|
44
months
|
|
$
|
2.00
|
$3.00
|
|
|
17,500
|
|
|
42
months
|
|
|
3.00
|
$4.00
|
|
|
218,500
|
|
|
60
months
|
|
|
4.00
|
$6.00
|
|
|
17,500
|
|
|
42
months
|
|
|
6.00
|
|
|
|
|
|
|
|
|
|
|
Total
options
|
|
|
291,000
|
|
|
56
months
|
|
|
3.80
|
All
options are vested and exercisable as of December 31, 2005.
A
summary
of the warrants outstanding and exercisable at December 31, 2005 is as
follows:
|
|
|
|
|
|
|
Exercise
Price
Range
|
|
Weighted
Average
Remaining
Number
|
|
Weighted
Average
Remaining
Contractual Life
|
|
Weighted
Average
Exercise
Price
|
$2.00
|
|
|
119,876
|
|
|
42
months
|
|
$
|
2.00
|
$3.00
|
|
|
493,365
|
|
|
42
months
|
|
$
|
3.00
|
|
|
|
|
|
|
|
|
|
|
Total
warrants
|
|
|
613,241
|
|
|
|
|
|
|
The
warrants expire at various dates in 2009 and all are fully
exercisable.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(10)
Income
Taxes
At
December 31, 2005, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $2,745,000 for Federal purposes and $1,284,000
for
state purposes. The Federal carryforward expires in 2025 and the state
carryforward expires in 2010. Given the Company’s history of net operating
losses, management has determined that it is more likely than not the
Company
will not be able to realize the tax benefit of the carryforwards.
Accordingly,
the Company has not recognized a deferred tax asset for this benefit. Upon
the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards and will recognize a deferred tax asset at that time.
Significant
components of the Company’s deferred income tax assets as of December 31, 2005
are as follows:
Deferred
income tax asset:
|
|
|
|
Net
operating loss carry forward
|
|
$
|
1,061,000
|
|
Valuation
allowance
|
|
|
(1,061,000
|
)
|
Net
deferred income tax asset
|
|
$
|
—
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2005
|
|
2004
|
|
Tax
expense at the U.S. statutory income tax
|
|
|
(34.00
|
)%
|
|
(34.00
|
)%
|
Increase
in the valuation allowance
|
|
|
34.00
|
%
|
|
34.00
|
%
|
Effective
tax rate
|
|
|
—
|
|
|
—
|
|
(11)
Commitments
and Contingencies
The
Company leases machinery under non-cancelable operating leases. Rental
expense
for the years ended December 31, 2005 and 2004 was $67,816 and $55,157,
respectively.
Future
payments under these leases as of December 31, 2005 are as follows:
|
|
|
|
Year
Ending
|
|
|
|
December
31,
|
|
|
|
2006
|
|
$
|
58,433
|
|
2007
|
|
|
20,968
|
|
2008
|
|
|
10,905
|
|
2009
|
|
|
4,173
|
|
Total
|
|
$
|
94,479
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(12)
Legal
Proceedings
The
Company currently and from time to time is involved in litigation incidental
to
the conduct of its business. The Company is not currently a party to any
lawsuit
or proceeding which, in the opinion of its management, is likely to have
a
material adverse effect on it.
During
2005 and 2004 the Company incurred $30,901 and $80,156, respectively, of
legal
costs associated with a lawsuit which the Company has won. The Plaintiff
has
appealed. The judgment in favor of the Company is to have the Plaintiff
reimburse the Company for its legal defense costs. If the Company is successful
in the appeals process, it will record income from the judgment when the
monies
are collected.
On
January 20 th
,
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. Management has
filed a
motion to dismiss. We believe that we will successfully defend Consac’s claims
and the case is without merit. Some of the allegations made against the
company
are covered by insurance and some allegations are not covered by insurance.
While there is no assurance, we believe that the Consac litigation will
have no
material adverse effect upon our operations.
(13)
Related
Party Activity
The
Company has notes payable to related parties. See Note 6.
As
of
December 31, 2005, the Company was owed $124,210 from Peter Sharma, a
former
director. For financial reporting purposes, Company Management has decided
to reserve 100% of this receivable as of December 31, 2005. The collection
of
the receivable was deemed by management to be impaired. Management is
pursuing
collection efforts. In January 2006, the director, Peter Sharma, resigned
from
the Board of Directors.
In
June
2005, Robert T. Reed, Sr. converted 262,500 of warrants to 262,500 shares
of
common stock. In lieu of receiving cash, the Company reduced the amount of
accrued interest it owed on debt payable to Robert T Reed, Sr. The amount
of the exercise price and the corresponding reduction in accrued interest
was
$5,250.
(14)
Subsequent
events
From
January 1, 2006 to April 7, 2006, the Company sold 270,850 shares
of common
stock as a result of its public offering. The Company received approximately
$975,076 from these sales. The Company intends to continue the
offering.
On
January 26, 2006 we filed a post-effective amendment with the
Securities and
Exchange Commission for our offering. We have recently been advised
that sales
of securities in the amount of up to 189,760 shares may have
been completed
without the Securities and Exchange Commission declaring this
January 26, 2006
amendment effective. We are currently considering the possibility
of offering to
all the investors in these 189,760 shares the alternative of
either reaffirming
their investment or requesting a refund of the amount of their
investment. The
maximum amount of the refund is approximately $759,000. Management
will develop
a plan to effect such a refund in the event it proceeds with
such an offer. It
is possible that such a refund would materially and adversely
effect the
Company’s financial position.
ITEM
8: CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
We
did
not change our auditors and there are no disagreements with our auditors.
ITEM
8A: CONTROLS AND PROCEDURES
a)
Evaluation of Disclosure Controls and Procedures
Disclosure
controls and procedures are designed to ensure that information required
to be disclosed in the reports filed or submitted by the Company under
the
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported,
within the time periods specified in the rules and forms of the Securities
and Exchange Commission. Disclosure controls and procedures include,
without
limitation, controls and procedures designed to ensure that information
required
to be disclosed in the reports filed under the Securities Exchange Act
of
1934
is accumulated and communicated to the Company's management, including
its
principal executive and financial officers, as appropriate, to allow timely
decisions
regarding required disclosure.
As
of
December 31, 2005, we carried out an evaluation, under the supervision and
with
the participation of our chief executive officer and chief financial officer,
of
the effectiveness of the design and operations of our disclosure controls
and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act
of
1934.
Our
chief
executive officer and chief financial officer concluded that as of the
evaluation date, such disclosure controls and procedures were effective to
ensure that information required to be disclosed by us in the reports we
file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities
and
Exchange Commission, and is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b)
Changes in Internal Controls
There
were no changes in our internal controls over financial reporting during
the
quarter ended December 31, 2005 that materially affected, or were reasonably
likely to materially affect, our internal controls over financial
reporting.
PART
III
ITEM
9: DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
following table sets forth certain information with respect to our directors
and
executive officers:
Name
|
|
Age
|
|
Position
|
Christopher
J. Reed
|
|
46
|
|
President,
Chief Executive Officer, Chief Financial Officer and Chairman of
the Board
|
Eric
Scheffer
|
|
37
|
|
Vice
President and National Sales Manager - Natural Foods
|
Robert
T. Reed, Jr.
|
|
49
|
|
Vice
President and National Sales Manager - Mainstream
|
Robert
Lyon
|
|
55
|
|
Vice
President Sales - Special Projects
|
Judy
Holloway Reed
|
|
45
|
|
Secretary
and Director
|
Mark
Harris
|
|
48
|
|
Independent
Director
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
50
|
|
Independent
Director
|
Michael
Fischman
|
|
49
|
|
Independent
Director
|
Christopher
J. Reed founded
our company in 1987. Mr. Reed has served as our Chairman, President, Chief
Executive Officer, and Chief Financial Officer since our incorporation in 1991.
Mr. Reed has been responsible for our design and products including the original
product recipes, the proprietary brewing process, and the packaging and
marketing strategies. Mr. Reed received a B.S. in Chemical Engineering in 1980
from Rennselaer Polytechnic Institute in Troy, New York.
Eric
Scheffer has
been
our Vice President and National Sales Manager - Natural Foods since May
2001. From September 2000 to May 2001, Mr. Scheffer worked as Vice President
of
Sales for Rachel Perry Natural Cosmetics. Mr. Scheffer was national sales
manager at Earth Science, Inc. from January 1999 to September 2000, where he
managed the United States and Canadian outside sales force. Mr. Scheffer was
national sales manager at USA Nutritionals from June 1997 to January 1999,
where
he led a successful effort bridging their marketing from natural foods to
mainstream stores. He worked for Vita Source as Western sales manager from
May
1994 to June 1997 and was their first sales representative.
Robert
T. Reed Jr. has
been
our Vice President and National Sales Manager - Mainstream since January
2004. From 1988 through December 2003, Mr. Reed was Vice President of Strategic
Sales at SunGard Availability Services, during that period the company’s
revenues increased from $30 million to over $1.2 billion, earning the
company a place in the Fortune 500. Mr. Reed became President of the SunGard
eSourcing, the managed Internet services provider subsidiary of SunGard
Availability Services, an entity with revenues in excess of $70 million and
over 300 employees. He earned a Bachelors of Science at Mount Saint Mary’s
University in 1977. Mr. Reed is the brother of Christopher J. Reed, our
Chairman, President, Chief Executive Officer, and Chief Financial Officer.
Robert
Lyon has
been
our Vice President Sales - Special Projects since June 2002. In that capacity,
Mr. Lyon directs our southern California direct sales and distribution program,
our launch in mainstream markets. Over the past five years, Mr. Lyon also ran
an
organic rosemary farm in Malibu, California, selling bulk to re-packagers.
In
the 1980s and 1990s, Mr. Lyon started a successful water taxi service with
20
employees and eight vessels of his own design. He also built the national sales
team for a jewelry company, Iberia. Mr. Lyon holds several U.S. patents. He
earned a Business Degree from Northwestern Michigan University in 1969.
Judy
Holloway Reed has
been
with us since 1992 and, as we have grown, has run the accounting, purchasing,
and shipping and receiving departments at various times in the 1990s. Ms. Reed
has been one of our directors since June 2004, our Secretary since October
1996
and our Director of Office Operations and Staff Management since June 2004.
In
the 1980s, Ms. Reed managed media tracking for a Los Angeles Infomercial Media
Buying Group and was an account manager with a Beverly Hills, California stock
portfolio management company. She earned a Business Degree from MIU in 1981.
Ms.
Reed is the wife of Christopher J. Reed, our Chairman, President, Chief
Executive Officer, and Chief Financial Officer.
Independent
Board Members
Mark
Harris has
been
a member of our board since April 2005. Mark is an independent venture
capitalist and has been retired from the work force since 2002. In late 2003,
Mr. Harris joined a group of Amgen colleagues in funding NeoStem, Inc., a
company involved in stem-cell storage, archiving, and research to which he
is
founding angel investor. From 1991 to 2002 Mark worked at biotech giant Amgen
managing much of the company’s media production for internal use and public
relations. Mr. Harris spent the decade prior working in Aerospace with similar
responsibilities. Mr. Harris holds a degree in Cinematography.
Dr.
Daniel S.J. Muffoletto, N.D. has
been
a member of our Board of Directors since April 2005. Dr. Muffoletto has
practiced as a Naturopathic Physician since 1986. He is CEO of Its Your Earth,
a
natural products marketing company. From 2003 to 2005, Daniel worked as sales
and marketing director for Worthington, Moore & Jacobs, a Commercial Law
League member firm serving FedEx, UPS, DHL & Kodak among others. From 2001
to 2003, he was owner-operator of the David St. Michel Art Gallery in Montreal,
Québec. From 1991 to 2001 Dr. Muffoletto was the owner/operator of a
Naturopathic Apothecary, Herbal Alter*Natives of Seattle, WA and Ellicott City,
MD; the apothecary housed Dr. Muffoletto’s Naturopathic Practice. Daniel holds a
B.A. in Government and Communications (U. of Baltimore, 1977), with postgraduate
work in the schools of Public Administration and Publication Design (U. of
Baltimore, 1978 - 1979). In 1986, he received his Doctorate of Naturopathic
Medicine from the Santa Fe Academy of Healing, Santa Fe, NM.
Michael
Fischman has
been
a member of our Board since April 2005. Since 1998, Michael has been President
and CEO of the APEX course, the corporate training division of the International
Association of Human Values. In addition, Mr. Fischman is a founding member
and
the director of training for USA at the Art of Living Foundation, a global
non-profit educational and humanitarian organization at which he has coordinated
over 200 personal development instructors since 1997. Among Mr. Fischman’s
personal development clients are the World Bank, Royal Dutch Shell, the United
Nations, the US Department of Probation, the Washington, D.C. Police Department,
and Rotary Clubs International.
Other
than the relationship of Christopher J. Reed, Judy Holloway Reed, and Robert
T.
Reed, Jr., none of our directors or executive officers are related to one
another.
Code
of ethics.
Management
is currently developing a code of ethics for adoption and plans to do so in
the
year ending December 31, 2006.
ITEM
10: EXECUTIVE
COMPENSATION
The
following table sets forth for the last three fiscal years each component of
compensation paid or awarded to, or earned by, our executive officers.
|
|
Annual
Compensation
|
|
|
|
Salary
|
|
Salary
|
|
Salary
|
|
Bonus
|
|
Name
and Principal Position
|
|
2005
|
|
2004
|
|
2003
|
|
2002-2003
|
|
Christopher
J. Reed, President, CEO and CFO
|
|
$
|
150,000
|
|
$
|
150,000
|
|
$
|
150,000
|
|
|
|
|
|
----
|
|
Judy
Holloway Reed, Secretary,
Dir
of Office Operations (part-time)
|
|
|
12,000
|
|
|
12,000
|
|
|
N/A
|
|
|
|
|
|
----
|
|
Robert
T. Reed, Jr.,
Vice
President and National Sales Manager-Mainstream
|
|
|
50,000
|
|
|
50,000
|
|
|
N/A
|
|
|
|
|
|
----
|
|
Eric
Scheffer,
Vice
president and national Sales Manager-Natural Foods
|
|
|
60,000
|
|
|
60,000
|
|
|
60,000
|
|
|
|
|
|
----
|
|
ITEM
11: SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
The
following table sets forth certain information as to shares of our common stock
owned as of December 31, 2005, or which can be acquired within 60 days of
December 31, 2005, by (i) each person known by management to beneficially
own more than five percent (5%) of our outstanding common stock, (ii) each
of our directors and executive officers, and (iii) all directors and
executive officers as a group.
Name
and Address
of
Beneficial Owner
|
|
Number
of Shares Owned
|
|
%
Owned (1)
|
|
|
|
|
|
5%
Stockholders
|
|
|
|
|
Joseph
Grace
1900
West Nickerson Street
Suite
116, PMB 158
Seattle,
WA 98119
|
|
|
500,000
|
|
|
9.9
|
|
|
|
|
|
|
|
Robert
T Reed, Sr. 6430
Kinglet
Way
Carlsbad,
CA 92009
|
|
|
262,500
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
and Executive Officers (2)
|
|
|
|
|
|
|
Christopher
J. Reed (3)
|
|
|
3,200,000
|
|
|
63.5
|
Robert
T. Reed, Jr. (4)
|
|
|
327,500
|
|
|
6.5
|
Eric
Scheffer
|
|
|
500
|
|
|
*
|
|
|
|
|
|
|
|
Mark
Harris (5)
|
|
|
4,000
|
|
|
*
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0
|
Michael
Fischman
|
|
|
0
|
|
|
0
|
All
directors and executive officers as a group (6 persons)
|
|
|
3,532,000
|
|
|
70.0
|
_________________________
*
Less
than 1%
(1)
|
Percentage
of ownership for each holder is calculated on 5,042,197 shares
of common
stock outstanding on December 31, 2005. Beneficial ownership is
determined
in accordance with the rules of the SEC and generally includes
shares over
which the holder has voting or investment power, subject to community
property laws. Shares of common stock subject to options or warrants
that
are currently exercisable or exercisable within 60 days are
considered to be beneficially owned by the person holding the options
or
warrants for computing that person’s percentage, but are not treated as
outstanding for computing the percentage of any other person.
|
|
|
(2)
|
The
address for all of our directors and officers is: 13000 South Spring
Street, Los Angeles, California 90061.
|
|
|
(3)
|
Christopher
J. Reed and Judy Holloway Reed are husband and wife. The same number
of
shares is shown for each of them as they may each be deemed to be
the
beneficial owner of all of such shares.
|
|
|
(4)
|
Consists
of (i) 267,500 shares of common stock and
(ii) 15,000 shares of Series A preferred stock, which can
be converted at any time into 60,000 shares of common stock.
|
|
|
(5)
|
Consists
of 1,000 shares of Series A preferred stock, which can be converted
at any time into 4,000 shares of common stock.
|
|
|
ITEM
12:
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We
have
three loans payable to Robert T. Reed, Sr., the father of our founder,
President and CEO, Christopher J. Reed. The first loan was made to us in May
1991 to provide $94,000 in working capital. This loan bears interest at
10% per annum and matures in October 2007. As of December 31, 2005, the
outstanding principal balance of the loan was $24,648 and accrued and unpaid
interest was $7,393.
The
second loan from Robert T. Reed, Sr. was made to us in June 1999 to provide
$250,000 for the acquisition of Virgil’s Root Beer. This loan bears interest at
8% per annum and matures in October 2007. As of December 31, 2005, the
outstanding principal balance of the loan was $177,710 and accrued and unpaid
interest was $72,915. As long as the debt is outstanding, Mr. Reed has the
right
to convert the principal, and accrued and unpaid interest of this loan into
shares of our common stock at a rate of one share of common stock for every
$2.00 owed to Mr. Reed. As of December 31, 2005, the loan was convertible
into 125,313 shares of common stock.
The
third
loan from Robert T. Reed, Sr., was made to us in October 2003 to provide
$50,000 for working capital. This loan bears interest at 8% per annum and
matures in October 2007. As of December 31, 2005, the outstanding principal
balance of the loan was $50,000 and accrued and unpaid interest was $8,800.
Mr.
Reed,
Sr. has suspended payments due him from time to time. His current
agreement suspends our payment obligation until October 1, 2007 or we receive
financing in excess of $1,000,000, which ever occurs first.
Robert
T.
Reed Sr. has options to purchase 262,500 shares at $0.02 for his work in 1991
helping the start up of our company. The expiration date of these options is
June 1, 2005. The original term of the options was until December 31, 1997.
We
affected extension of these options twice, once to December 31, 2000 and again
to June 1, 2005. These extensions were granted in consideration of extensions
Mr. Reed, Sr. granted us on the repayment of his various loans made to us.
These
options were exercised on May 31, 2005.
In
September 2004, Robert T. Reed Jr., our Vice President and National Sales
Manager — Mainstream and a brother of Christopher J. Reed, co-signed a note
for a line of credit we opened with Merrill Lynch and pledged his stock account
at Merrill Lynch as collateral. In consideration for Mr. Reed’s pledging his
stock account at Merrill Lynch as collateral, we pay Mr. Reed 5% per annum
of the amount we borrow from Merrill Lynch.
Robert
T.
Reed Jr.’s investment occurred as follows;
Class
of stock
|
|
#
of shares
|
|
Price/share
|
|
$
invested
|
|
Date
of issue
|
|
Common
|
|
|
187,500
|
|
|
0.27
|
|
$
|
50,000
|
|
|
1991
|
|
Common
|
|
|
50,000
|
|
|
0.75
|
|
$
|
37,500
|
|
|
1993
|
|
Common
|
|
|
10,000
|
|
|
1.50
|
|
$
|
15,000
|
|
|
1996
|
|
Common(*)
|
|
|
20,000
|
|
|
1.00
|
|
$
|
20,000
|
|
|
2001
|
|
Preferred
|
|
|
15,000
|
|
|
10.00
|
|
$
|
150,000
|
|
|
2004
|
|
Total
|
|
|
|
|
|
|
|
$
|
272,500
|
|
|
|
|
In
July
2001, Mark Reed, a brother of Christopher J. Reed, converted a loan he made
to
us into 8,889 shares of common stock. The original loan was for $5,000 and
was made in June of 1991. The loan was part of a private offering of convertible
debt.
We
believe that the terms of each of the foregoing transactions were as favorable
to us as the terms that would have been available to us from unaffiliated
parties.
Since
January 2000, we have extended a line of credit to one of our consultants,
Peter
Sharma III who sat on our board until February 2006; the line of credit is
interest free. In July 2005, a repayment schedule begin at $1,000 per month
end
with a balloon payment for the remaining balance, due on December 31, 2007.
As
of December 31, 2005, management has chosen to reserve the entire amount of
the
outstanding balance of $124,210. Management is pursuing collection
efforts.
At
the
time of each of the transactions listed above, except for the loan in October
2003 from Robert T. Reed, Sr., we did not have any independent directors to
ratify such transactions.
We
have
three independent directors that have been added to our board as of April 15,
2005; on May 20, 2005, the Board of Directors, inclusive of the independent
directors, resolved to reauthorize all material ongoing and past transactions,
arrangements, and relationships listed herein. In addition, all future material
affiliated transactions and loans will be made or entered into on terms that
are
no less favorable to us than those that can be obtained from unaffiliated third
parties; and all future material affiliated transactions and loans, and any
forgiveness of loans, must be approved by a majority of our independent
directors who do not have an interest in the transactions and who have access,
at our expense, to independent legal counsel.
ITEM
13: EXHIBITS
None
ITEM
14:
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Audit
and
Audit Related Fees:
Weinberg
& Company, P.A. ("Weinberg") was the Company's independent registered
public
accounting firm for the years ended December 31, 2005 and 2004. ervices
provided
to the Company by Weinberg with respect to such periods consisted of
the
audits of the Company's consolidated financial statements and limited
reviews
of the condensed consolidated financial statements included in Quarterly
Reports
on Form 10-QSB. Weinberg & Co. also provided services with respect to
the
filing of the Company's Registration Statement on Form SB-2, and amendments
thereto,
during 2005. Charges by Weinberg with respect to these matters aggregated
approximately $144,000 and $35,000, respectively, for the years ended
December
31, 2005 and 2004.
Tax
Fees:
Weinberg
did not provide any services to the Company with respect to the preparation
of corporate income tax returns or tax planning matters.
All
Other
Fees:
Weinberg
did not provide any services with respect to any matters other than those
related to audit and audit-related matters.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REED’S , INC.
(Registrant)
Date: April
17, 2006
Name
|
Title
|
Date
|
/s/
CHRISTOPHER J. REED
Christopher J. Reed
|
Chief
Executive Officer, President, Chief Financial Officer, and Chairman
of the
Board
(Principal
Executive Officer, Principal Financial Officer, and Principal Accounting
Officer)
|
July
27, 2006
|
|
|
|
/s/
JUDY HOLLOWAY REED
Judy Holloway Reed
|
Director
|
|
|
|
|
/s/
MARK HARRIS
Mark Harris
|
Independent
Director
|
|
|
|
|
/s/
DR. DANIEL S.J. MUFFOLETTO, N.D.
Dr. Daniel S.J. Muffoletto
|
Independent
Director
|
|
|
|
|
/s/
MICHAEL FISCHMAN
Michael Fischman
|
Independent
Director
|
|