10QSB
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
For
the
quarterly period ended June 30, 2006
Commission
file number: 333-120451
(Exact
name of registrant as specified in its charter)
(State
of
incorporation)
(I.R.S.
Employer Identification
No.)
13000
South Spring St.
(Address
of principal executive offices) (Zip Code)
(Registrant's
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days.
Yes
x No o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
There
were 5,335,482 shares of the registrant's common stock outstanding as of
June 30, 2006.
Item
1. Financial Statements
REED’S,
INC
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30,2006
(Unaudited)
|
|
December
31,
2005
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
54,768
|
|
$
|
27,744
|
|
Inventory
|
|
|
1,275,819
|
|
|
1,208,019
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $101,000 as of June 30, 2006 and $70,000 as of December
31, 2005
|
|
|
982,484
|
|
|
534,906
|
|
Other
receivables
|
|
|
6,267
|
|
|
10,563
|
|
Prepaid
expenses
|
|
|
106,311
|
|
|
74,279
|
|
Total
Current Assets
|
|
|
2,425,649
|
|
|
1,855,511
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $566,449 as of
June 30,
2006 and $508,136 as of December 31, 2005
|
|
|
1,864,011
|
|
|
1,885,354
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $4,095 as of June
30, 2006
and $3,723 as of December 31, 2005
|
|
|
14,519
|
|
|
14,891
|
|
Deferred
stock offering costs
|
|
|
20,000
|
|
|
356,238
|
|
Total
Other Assets
|
|
|
834,720
|
|
|
1,171,330
|
|
TOTAL
ASSETS
|
|
$
|
5,124,380
|
|
$
|
4,912,195
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,381,103
|
|
$
|
1,644,491
|
|
Lines
of credit
|
|
|
1,463,461
|
|
|
1,445,953
|
|
Current
portion of long term debt
|
|
|
191,516
|
|
|
169,381
|
|
Accrued
interest
|
|
|
154,191
|
|
|
136,240
|
|
Accrued
expenses
|
|
|
75,769
|
|
|
54,204
|
|
Total
Current Liabilities
|
|
|
4,266,040
|
|
|
3,450,269
|
|
|
|
|
|
|
|
|
|
Loans
payable, related party
|
|
|
252,358
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
984,568
|
|
|
1,060,573
|
|
Total
Liabilities
|
|
|
5,502,966
|
|
|
4,763,200
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY (DEFICIENCY)
|
|
|
|
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 58,940
outstanding
|
|
|
589,402
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized,
5,335,482 shares issued and outstanding at June 30, 2006 and
5,042,197 at December 31, 2005
|
|
|
533
|
|
|
503
|
|
Common
stock to be issued
|
|
|
—
|
|
|
29,470
|
|
Additional
paid in capital
|
|
|
3,276,847
|
|
|
2,788,683
|
|
Accumulated
deficit
|
|
|
(4,245,368
|
)
|
|
(3,259,063
|
)
|
Total
stockholders’ equity (deficiency)
|
|
|
(378,586
|
)
|
|
148,995
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
|
|
$
|
5,124,380
|
|
$
|
4,912,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the Three and Six Months Ended June 30, 2006 and 2005
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended (Unaudited)
|
|
Six
months ended (Unaudited)
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
3,157,818
|
|
$
|
2,582,273
|
|
$
|
5,137,089
|
|
$
|
4,399,608
|
|
COST
OF SALES
|
|
|
2,589,864
|
|
|
2,069,274
|
|
|
4,278,741
|
|
|
3,555,561
|
|
GROSS
PROFIT
|
|
|
567,954
|
|
|
512,999
|
|
|
858,348
|
|
|
844,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
313,462
|
|
|
236,218
|
|
|
600,619
|
|
|
521,116
|
|
General &
Administrative
|
|
|
386,995
|
|
|
244,502
|
|
|
649,656
|
|
|
456,599
|
|
Expenses
associated with rescission offer on prior sales of common
stock
|
|
|
351,757
|
|
|
|
|
|
351,757
|
|
|
|
|
Legal
fees
|
|
|
5,230
|
|
|
|
|
|
14,797
|
|
|
|
|
Total
Operating Expenses
|
|
|
1,057,444
|
|
|
480,720
|
|
|
1,616,829
|
|
|
977,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM OPERATIONS
|
|
|
(489,490
|
)
|
|
32,279
|
|
|
(758,481
|
)
|
|
(133,668
|
)
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(97,748
|
)
|
|
(90,327
|
)
|
|
(198,354
|
)
|
|
(161,534
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(587,238
|
)
|
|
(58,048
|
)
|
|
(956,835
|
)
|
|
(295,202
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
(29,470
|
)
|
|
(29,470
|
)
|
|
(29,470
|
)
|
|
(29,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(616,708
|
)
|
$
|
(87,518
|
)
|
$
|
(986,305
|
)
|
$
|
(324,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE —
Basic and Diluted
|
|
$
|
(.12
|
)
|
$
|
(.02
|
)
|
$
|
(.19
|
)
|
$
|
(.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
5,322,755
|
|
|
4,812,710
|
|
|
5,239,913
|
|
|
4,769,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICICENCY)
For
the
six months ended June 30, 2006 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Common
Stock
to be
|
|
Additional
Paid in
|
|
Preferred
Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Issued
|
|
Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2006
|
|
|
5,042,197
|
|
$
|
503
|
|
|
29,470
|
|
$
|
2,788,683
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(3,259,063
|
)
|
$
|
148,995
|
|
Preferred
Stock Dividend
|
|
|
7,373
|
|
|
1
|
|
|
|
|
|
29,469
|
|
|
|
|
|
|
|
|
(29,470
|
)
|
|
|
|
Common
stock issued in connection with the June 30, 2005 preferred stock
dividend
|
|
|
7,362
|
|
|
1
|
|
|
(29,470
|
)
|
|
29,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash, net of offering costs
|
|
|
278,550
|
|
|
28
|
|
|
|
|
|
429,226
|
|
|
|
|
|
|
|
|
|
|
|
429,254
|
|
Net
Loss for the six months ended June 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(956,835
|
)
|
|
(956,835
|
)
|
Balance,
June 30, 2006
|
|
|
5,335,482
|
|
$
|
533
|
|
$
|
|
|
$
|
3,276,847
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(4,245,368
|
)
|
$
|
(378,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the six months ended June 30, 2006 and 2005
(Unaudited)
|
|
Six
Months Ended
(Unaudited)
|
|
|
|
June
30,
2006
|
|
June
30,
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(956,835
|
)
|
$
|
(295,202
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
58,684
|
|
|
46,610
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(447,578
|
)
|
|
(67,305
|
)
|
Inventory
|
|
|
(67,800
|
)
|
|
103,424
|
|
Prepaid
Expenses
|
|
|
(32,032
|
)
|
|
(33,264
|
)
|
Other
receivables
|
|
|
4,296
|
|
|
(5,631
|
)
|
Accounts
payable
|
|
|
736,612
|
|
|
252,032
|
|
Accrued
expenses
|
|
|
21,565
|
|
|
(6,684
|
)
|
Accrued
interest
|
|
|
17,951
|
|
|
3,932
|
|
Net
cash used in operating activities
|
|
|
(665,137
|
)
|
|
(2,088
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(36,969
|
)
|
|
(31,754
|
)
|
Due
from director
|
|
|
—
|
|
|
(25,013
|
)
|
Net
cash used in investing activities
|
|
|
(36,969
|
)
|
|
(56,767
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Repayment
of previous line of credit
|
|
|
|
|
|
(759,387
|
)
|
Borrowings
on new line of credit
|
|
|
|
|
|
1,109,543
|
|
Borrowings
on debt
|
|
|
|
|
|
190,000
|
|
Principal
payments on debt
|
|
|
(53,870
|
)
|
|
(216,016
|
)
|
Proceeds
received on sale of common stock
|
|
|
1,002,779
|
|
|
|
|
Payments
for stock offering costs
|
|
|
(237,287
|
)
|
|
(134,481
|
)
|
Net
borrowing on lines of credit
|
|
|
17,508
|
|
|
78,112
|
|
Payments
of debt to related parties
|
|
|
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
729,130
|
|
|
246,771
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN
CASH
|
|
|
27,024
|
|
|
187,916
|
|
CASH —
Beginning of period
|
|
|
27,744
|
|
|
42,488
|
|
CASH —
End of period
|
|
$
|
54,768
|
|
$
|
230,404
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
180,403
|
|
$
|
157,602
|
|
Taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities
|
|
|
|
|
|
|
|
Common
stock to be issued in settlement of accrued interest
|
|
$
|
|
|
$
|
5,250
|
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$
|
29,470
|
|
$
|
29,470
|
|
Common
stock issued in settlement of preferred stock dividend
|
|
$
|
29,470
|
|
$
|
|
|
Deferred
stock offering costs charged to paid in capital
|
|
$
|
356,238
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
June
30, 2006 (UNAUDITED)
The
accompanying interim condensed financial statements are unaudited, but in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position at June 30, 2006 and the results of operations and cash
flows
for the six months ended June 30, 2006 and 2005. The balance sheet as of
December 31, 2005 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Annual Report, Form 10-KSB/A, as filed with the Securities and
Exchange Commission on July 27, 2006.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the six months ended June 30, 2006 are not necessarily
indicative of the results of operations to be expected for the full fiscal
year
ending December 31, 2006.
Income
(Loss) per Common Share
Basic
income (loss) per share is calculated by dividing net income (loss) available
to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted income per share is calculated assuming the issuance
of
common shares, if dilutive, resulting from the exercise of stock options and
warrants. As the Company had a loss in the six month period ended June 30,
2006
and 2005, basic and diluted loss per share are the same because the inclusion
of
common share equivalents would be anti-dilutive.
Going
Concern
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the
Company had a net loss of $956,835 and utilized cash of $665,137 in operating
activities during the six months ended June 30, 2006, and had a working capital
deficiency of $1,840,391and stockholders’ deficiency of $378,586 at June 30,
2006. In addition, the Company may have committed a violation of securities
law
which may require the rescission of common stock issued in 2005 and 2006 in
the
aggregate of approximately $1,324,624, see Note 6. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might result from this uncertainty. The
Company is conducting an initial public offering of its stock. The maximum
amount of common stock to be sold is 2,000,000 shares at $4.00, of which 333,156
has been sold as of April 7, 2006. Management has received enough interest
in
the offering which leads it to believe the maximum amount of the offering will
be sold, however no assurance can be made that any additional shares will be
sold as a result of the offering. See Note 5 for information related to the
common stock offering.
Recent
Accounting Pronouncements
In
June 2005, the FASB issued SFAS 154, “Accounting Changes and Error
Corrections,” a replacement of existing accounting pronouncements. SFAS 154
modifies accounting and reporting requirements when a company voluntarily
chooses to change an accounting principle or correct an accounting error. SFAS
154 requires retroactive restatement of prior period financial statements unless
it is impractical. Previous accounting guidelines allowed recognition by
cumulative effect in the period of the accounting change. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
In
February 2006, the FASB issued SFAS 155,“Accounting for Certain Hybrid Financial
Instruments”, an amendment of SFAS 133 and 140. These SFAS’s deal with
derivative and hedging activities, accounting for transfers and servicing of
financial instruments and extinguishment of liabilities. SFAS 155 is effective
for all financial instruments acquired or issued in an entity’s first fiscal
year beginning after September 15, 2006. The Company does not engage in the
activities described in these SFAS’s and does not have any intention of engaging
in those activities when SFAS 155 becomes effective. The Company has evaluated
the impact of the adoption of SFAS 155, and does not believe the impact will
be
significant to the Company's overall results of operations or financial
position.
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 six months ended June 30, 2006.
During
the six months ended June 30, 2006 and 2005 the Company had two customers,
which
accounted for approximately 18% and 46 % and 15% and 46 % of sales, respectively
. No other customers accounted for more than 10% of sales in either year. As
of
June 30, 2006, the Company had $101,562 and $328,636 , respectively of accounts
receivable from these customers.
Inventory
consists of the following at June 30, 2006
|
|
|
|
|
Raw
Materials
|
|
$
|
649,873
|
|
Finished
Goods
|
|
|
625,946
|
|
|
|
$
|
1,275,819
|
|
In
June
2006, one of the Company’s lines of credit expired. The Company renewed this
line of credit with its current lender. The renewal line of credit is secured
by
accounts receivable and inventory in the maximum amounts of $1,400,000. The
borrowing base on the accounts receivable are 80% of all eligible receivables,
which are primarily accounts receivables under 90 days. The inventory borrowing
base is 50% of eligible inventory. The interest rate to be charged on these
borrowings is Prime plus 4.00%. As of June 30, 2006, the amounts borrowed on
this line of credit was $751,861. The amount available to borrow was $385,901.
No changes were made to other lines of credit agreements appearing in the
Company’s Annual Report, Form 10-KSB/A filed with the Securities and Exchange
Commission on July 27, 2006.
In
June
2006, the Company, in connection with its line of credit renewal described
in
Note 4, consolidated its equipment line of credit and its equipment installment
loan with its lender. The interest rate on this consolidated loan is Prime
plus
4.00% and is secured by certain equipment and property of the Company. The
loan
requires payments of principal of $7,500 per month, plus interest, until paid
in
full. No changes were made to other long
term
debt
agreements appearing in the Company’s Annual Report, Form 10-KSB/A filed with
the Securities and Exchange Commission on July 27, 2006.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. Management has determined that the shares may have
been
issued in violation of securities laws. Management has made a rescission offer
to purchase up to all of the shares sold to date in the offering, however,
it is
our intention that if any of the shares are tendered for rescission, the shares
will be purchased by others and not from our funds. The amount to be paid
pursuant to the rescission offer, if accepted by any shareholders, would be
$4.00 per share, plus accrued interest at the applicable statutory rate. The
rescission offer commenced in August 2006.
During
the six months ended June 30, 2006, the Company sold 278,550 of common stock
for
proceeds of $1,002,779, net of commisions. During the six months ended June
30,
2006, previously deferred stock offering costs of $356,238 and additional stock
offering costs incurred during the period of $217,287 were charged to additional
paid in capital.
7. |
Preferred
stock dividend
|
During
the six months ended June 30, 2006, the Company issued 14,735 shares of common
stock in accordance with the terms of the preferred stock agreement. 7,373
shares were associated with the $29, 469 dividend payable as of June 30, 2006
and 7,362 shares were associated with the $29,469 dividend payable as of June
30, 2005.
8. |
Legal
Proceedings and Litigation
Fees
|
During
2005 and 2006, the Company incurred litigation fees associated with a law suit
which the Company has won. The Plaintiff has lost its appeal. The judgment
in
favor of the Company is to have the Plaintiff reimburse the Company for its
legal defense costs. The Company is in the processing of perfecting its judgment
and will record income from the judgment when the monies are collected.
On
January 20 ,
2006,
Consac Industries, Inc. (dba Long Life Teas and Long Life Beverages) filed
a
lawsuit in the United States District Court for the Central District of
California against Reed’s Inc. and Christopher Reed, Case No. CV06-0376. The
complaint asserts claims for negligence, breach of contract, breach of warranty,
and breach of express indemnity relating to Reed’s, Inc.’s manufacture of
approximately 13,000 cases of “Prism Green Tea Soda” for Consac. Consac contends
that we negligently manufactured the soda resulting in at least one personal
injury. Consac seeks $2.6 million in damages, plus interest and attorneys fees.
We contend that Consac was responsible for the soda’s condition by providing a
defective formula which had not been adequately tested. In May 2006 both parties
agreed to a mediation proceeding which is expected to commence in the third
quarter of 2006. We believe that we will successfully defend Consac’s claims.
While there is no assurance, we believe that the Consac litigation will have
no
material adverse effect upon our operations.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
FORWARD
LOOKING STATEMENTS
This
report contains statements that involve expectations, plans or intentions (such
as those relating to future business or financial results, new features or
services, or management strategies). These statements are forward-looking and
are subject to risks and uncertainties, so actual results may vary materially.
You can identify these forward-looking statements by words such as “may,”
“should,” “expect,” “anticipate,” “believe,”
“estimate,” “intend,” “plan” and other similar expressions. You
should consider our forward-looking statements in light of the risks discussed
under the heading “Risk Factors That May Affect Results of Operations and
Financial Condition” below, as well as our financial statements, related notes,
and the other financial information appearing elsewhere in this report and
our
other filings with the Securities and Exchange Commission. We assume no
obligation to update any forward-looking statements.
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed financial
statements and the related notes appearing elsewhere in this Form 10-QSB. This
discussion and analysis contains forward-looking statements based on assumptions
about our future business. Our actual results could differ materially from
those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under “Risk factors” and elsewhere
in this Form 10-QSB.
Overview
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell six unique
product lines:
|
·
|
Virgil’s
Root Beer and Cream Sodas,
|
|
·
|
Reed’s
Ginger Juice Brews,
|
|
·
|
Reed’s
Ginger Candies, and
|
|
·
|
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks, and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices -Our
freight rates were approximately 9.7% of net sales during 2005. We expect
freight rates to increase by an additional 5% to 10% in 2006 as a result of
the
continuing increase in fuel prices. However, as we increase production at the
Brewery for delivery of products in the western half of the United States,
we
expect to offset this trend, at least in part, by reducing our need for
cross-country freight services from our eastern co-packing
facility.
Low
Carbohydrate Diets and Obesity
- Our
products are not geared for the low carbohydrate market. Consumer trends have
reflected higher demand for lower carbohydrate products. Despite this trend,
we
achieved an increase in our sales growth in the first six months of 2006. We
monitor these trends closely and have started developing low-carbohydrate
versions of some of our beverages, although we do not have any currently
marketable low-carbohydrate products.
Distribution
Consolidation -
There
has been a recent trend towards continued consolidation of the beverage
distribution industry through mergers and acquisitions. This consolidation
results in a smaller number of distributors to market our products and
potentially leaves us subject to the potential of our products either being
dropped by these distributors or being marketed less aggressively by these
distributors. As a result, we have initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. Consolidation among natural foods
industry distributors has not had an adverse affect on our sales.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our ginger-based products are designed with this consumer demand
in
mind.
Supermarket
and Natural Food Stores -
More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in mainstream supermarkets throughout
the
United States in natural food sections. Supermarkets can require that we spend
more advertising money and they sometimes require slotting fees. We continue
to
work to keep these fees reasonable. Slotting fees in the natural food section
of
the supermarket are generally not as expensive as in other areas of the
store.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate, particularly for premium products.
There is an increase in the sophistication with respect to beverage packaging
design. While we feel that our current core brands still compete on the level
of
packaging, we continue to experiment with new and novel packaging designs such
as the 5-liter party keg and 750 ml champagne style bottles. We have further
plans for other innovative packaging designs.
Packaging
or Raw Material Price Increases
- An
increase in packaging and raw materials has caused our margins to suffer and
has
negatively impacted our cash flow and profitability. We continue to search
for
packaging and production alternatives to reduce our cost of goods.
Cash
Flow Requirements
- Our
growth will depend on the availability of additional capital infusions. We
have
a financial history of losses and are dependent on non-banking sources of
capital, which tend to be more expensive and charge higher interest rates.
Any
increase in costs of goods will further increase losses and will further tighten
cash reserves. We intend to use the proceeds from our future stock offering
to
increase our liquidity to be able to make cash expenditures, as
needed.
Interest
Rates - We
use
lines of credit as a source of capital and are negatively impacted as interest
rates rise. Management believes our future offering will provide capital
sufficient for us to reduce our debt level and allow us to lower our incremental
borrowing costs.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires
us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable
and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
Revenue
Recognition. Revenue
is recognized on the sale of a product when the product is shipped, which is
when the risk of loss transfers to our customers, and collection of the
receivable is reasonably assured. A product is not shipped without an order
from
the customer and credit acceptance procedures performed. The allowance for
returns is regularly reviewed and adjusted by management based on historical
trends of returned items. Amounts paid by customers for shipping and handling
costs are included in sales.
Trademark
License and Trademarks.
Trademark license and trademarks primarily represent the costs we pay for
exclusive ownership of the Reed’s® trademark in connection with the manufacture,
sale and distribution of beverages and water and non-beverage products. We
also
own the Virgil’s® trademark and the China Cola® trademark. In addition, we own a
number of other trademarks in the United States as well as in a number of
countries around the world. We account for these items in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the provisions
of SFAS No. 142, we do not amortize indefinite-lived trademark licenses and
trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified during
the six months ended June 30, 2006 or June 30, 2005.
Long-Lived
Assets.
Our
management regularly reviews property, equipment and other long-lived assets,
including identifiable amortizing intangibles, for possible impairment. This
review occurs quarterly or more frequently if events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. If there
is
indication of impairment of property and equipment or amortizable intangible
assets, then management prepares an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset
and
its eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized to write down the asset to its
estimated fair value. The fair value is estimated at the present value of the
future cash flows discounted at a rate commensurate with management’s estimates
of the business risks. Quarterly, or earlier, if there is indication of
impairment of identified intangible assets not subject to amortization,
management compares the estimated fair value with the carrying amount of the
asset. An impairment loss is recognized to write down the intangible asset
to
its fair value if it is less than the carrying amount. Preparation of
estimated
expected future cash flows is inherently subjective and is based on management’s
best estimate of assumptions concerning expected future conditions. No
impairments were identified during the six months ended June 30, 2006 or 2005.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising.
We
account for advertising production costs by expensing such production costs
the
first time the related advertising is run.
Accounts
Receivable.
We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to
the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment
of
past due trade accounts receivable outstanding.
Inventories.
Inventories are stated at the lower of cost to purchase and/or manufacture
the
inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand
and/or our ability to sell the product(s) concerned and production requirements.
Demand for our products can fluctuate significantly. Factors that could affect
demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations
of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be
inaccurate, which could result in an understated or overstated provision
required for excess and obsolete inventory.
Income
Taxes.
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the value
of our deferred tax assets. If our management determines that it is more likely
than not that these assets will not be realized, we will reduce the value of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Results
of Operations
Three
Months Ended June 30, 2006 Compared to Three Months Ended June 30,
2005
Net
sales
increased by $575,545, or 22.3%, from $2,582,273 in the three months ended
June
30, 2005 to $3,157,818 in the three months ended June 30, 2006. Sales of
our core Reed’s Ginger Brew items increased
from $1,319,000 in the three months ended June 30, 2005 to $1,634,000 in the
three months ended June 30, 2006. Sales of our Virgil’s Root Beer line increased
from $934,000 in the three months ended June 30, 2005 to $1,075,000 in the
three
months ended June 30, 2006. The Virgil’s Root Beer and Cream Soda 12 ounce
bottles increased from $507,000 and $119,000, respectively, in the three months
ended June 30, 2005 to $704,000 and $174,000, respectively, in the three months
ended June 30, 2006. The new Virgil’s Black Cherry Cream Soda launched at the
end of May 2006 had sales for the three months ended June 30, 2006 of $107,000.
Progressive Grocers, a top trade publication in the Grocer industry voted this
product as the best new beverage product of 2006. We expect sales of this item
to positively impact future sales. Sales of the Virgil’s 5 liter party kegs
continued to decline from $180,000 in the three months ended June 30, 2005
to
$49,000 in the three months ended June 30, 2006. Candy sales decreased from
$208,000 in the three months ended June 30, 2005 to $204,000 in the three months
ended June 30, 2006. Ice cream sales decreased from $50,000 in the three months
ended June 30, 2005 to $23,000 in the three months ended June 30, 2006. China
Cola sales increased from $51,000 in the three months ended June 30, 2005 to
$86,000 in the three months ended June 30, 2006. Canadian sales increased from
$16,000 in the three months ended June 30, 2005 to $44,000 in the three months
ended June 30, 2006. We have increased our focus on the Canadian market place
in
2006 and the China cola brisk sales increase comes as somewhat of a
surprise.
Cost
of
sales increased by $520,590, or 25.2%, from $2,069,274 in the three months
ended
June 30, 2005 to $2,589,864 in the three months ended June 30, 2006. As a
percentage of net sales, cost of sales increased from 80.1% in the three months
ended June 30, 2005 to 82.0% in the three months ended June 30, 2006. Costs
of
sales increased primarily as a result of increased warehouse expenses due to
increased inventory levels (0.6%) and increased production expenses (0.5%)
and
freight costs (0.8%) due to fuel related cost increases.
Gross
profit increased from $512,999 in the three months ended June 30, 2005 to
$567,954 in the three months ended June 30, 2006. As a percentage of net sales,
gross profit decreased from 19.9% in the three months ended June 30, 2005 to
18.0% in the three months ended
June
30,
2006. Effective February 1, 2006 we approved a price increase in a number of
our
product lines at an average of approximately 7% in order to attempt to increase
our gross profit. The full implementation of the price increase is expected
to
be completed by the middle of the third quarter of 2006. We expect margins
to
increase by the end of 2006 due to this price increase.
Operating
expenses increased by $576,724, or approximately 120%, from $480,720 in the
three months ended June 30, 2005 to $1,057,444 in the three months ended June
30, 2006 and increased as a percentage of net sales from 18.6% in the three
months ended June 30, 2005 to 33.5% in the three months ended June 30, 2006.
The
primary increase in expenses was due to the rescission offer that the Company
undertook to satisfy a possible securities law violation associated with its
sales of common stock. The Company had no rescission related expenses for the
three months ended June 30, 2005 and $351,757 of rescission related expenses
for
the three months ended June 30, 2006. Other changes were: increased salaries
due
to a larger sales force (9.5%), increased sales expenses from increased fuel
costs and increased telephone charges (7.0%), increased recycling fees expenses
(6.6%) and increased legal and accounting costs due to the costs associated
with
being a public reporting company (13.8%). We also had increased consulting
fees
due to the one time usage of a marketing group to evaluate our marketing
strategies (6.3%). Also, increased commissions due to increased reliance on
outside reps in some markets (6.1%), offset by a reduction in promotional
expenses due to less club store demos (-2.9%), resulted in the increase in
these
expenses.
Interest
expense increased by $7,421, or 8.2%, from $90,327 in the three months ended
June 30, 2005 to $97,748 in the three months ended June 30, 2006. The increase
in interest expense was due to increasing short term interest rates, increased
borrowings on our available lines of credit and increasing our long term debt,
which was used to purchase brewing equipment, vehicles and office equipment.
As
a
result of the foregoing, we experienced a net loss of $58,048 in the three
months ended June 30, 2005 and $587,238 in the three months ended June 30,
2006.
Our net loss was $0 .02 per share in the three months ended June 30, 2005 and
$0.12 per share in the three months ended June 30, 2006, which included the
value of our preferred stock dividend.
Six
Months Ended June 30, 2006 Compared to Six Months Ended June 30,
2005
Net
sales
increased by $737,481, or 16.8%, from $4,399,608 in the first six months ended
June 30, 2005 to $5,137,089 in the first six months ended June 30, 2006. Sales
of our core Reed’s Ginger Brew items increased
from $2,286,000 in the six months ended June 30, 2005 to $2,776,000 in the
six
months ended June 30, 2006. Sales of our Virgil’s Root Beer line increased from
$1,665,000 in the six months ended June 30, 2005 to $1,772,000 in the six months
ended June 30, 2006. The Virgil’s Root Beer and Cream Soda 12 ounce bottles
increased from $1,018,000 and $224,000, respectively, in the six months ended
June 30, 2005 to $1,185,000 and $281,000, respectively, in the six months ended
June 30, 2006. The new Virgil’s Black Cherry Cream Soda launched at the end of
May 2006 had sales for the six months ended June 30, 2006 of $107,000.
Progressive Grocers, a top trade publication in the Grocer industry voted this
product as the best new beverage product of 2006. We expect sales of this item
to positively impact future sales. Sales of the Virgil’s 5 liter party kegs
continued to decline from $275,000 in the six months ended June 30, 2005 to
$100,000 in the six months ended June 30, 2006. Candy sales increased from
$337,000 in the six months ended June 30, 2005 to $410,000 in the six months
ended June 30, 2006. Ice cream sales decreased from $85,000 in the six months
ended June 30, 2005 to $68,000 in the six months ended June 30, 2006. China
Cola
sales increased from $106,000 in the six months ended June 30, 2005 to $120,000
in the six months ended June 30, 2006. Canadian sales increased from $32,000
in
the six months ended June 30, 2005 to $64,000 in the six months ended June
30,
2006. We have increased our focus on the Canadian market place in
2006.
Cost
of
sales increased by $723,180, or 20.3%, from $3,555,561 in the first six months
ended June 30, 2005 to $4,278,741 in the first six months ended June 30, 2006.
As a percentage of net sales, cost of sales increased from 80.8% in the first
six months ended June 30, 2005 to 83.3% in the first six months ended June
30,
2006. Costs of sales increased primarily as a result of increased warehouse
expenses due to increased inventory levels (0.3%) and increased production
expenses (1.9%) and freight costs (0.3%) due to fuel related cost
increases.
Gross
profit increased from $844,047 in the first six months ended June 30, 2005
to
$858,348 in the first six months ended June 30, 2006. As a percentage of net
sales, gross profit decreased from 19.2% in the first six months ended June
30,
2005 to 16.7% in the first six months ended June 30, 2006. Effective February
1,
2006 we approved a price increase in a number of our product lines at an average
of approximately 7% in order to attempt to increase our gross profit. The full
implementation of the price increase is expected to be completed by the middle
of the third quarter of 2006. We expect margins to increase by the end of 2006
due to this price increase.
Operating
expenses increased by $639,114, or 65.4%, from $977,715 in the first six months
ended June 30, 2005 to $1,616,829 in the first six months ended June 30, 2006
and increased as a percentage of net sales from 22.2% in the first six months
ended June 30, 2005 to 31.5% in the first six months ended June 30, 2006. The
primary increase in expenses was due to the rescission offer that the Company
undertook to satisfy a possible securities law violation associated with its
sales of common stock. The Company had no rescission related expenses for the
six months ended June 30, 2005 and $351,757 of rescission related expenses
for
the six months ended June 30, 2006. Other changes were: increased salaries
due
to a larger sales force (6.4%), increased sales expenses from increased fuel
costs and increased telephone charges (7.1%), increased recycling fees expenses
(3.7%) and increased legal and accounting costs due to the costs associated
with
being a public reporting company (8.5%). We had increased consulting fees due
to
the one time usage of a marketing group to evaluate our marketing strategies
(3.6%). Also, increased commissions due to increased reliance on outside reps
in
some markets (2.5%) offset by a reduction in promotional expenses due to less
club store demos (-3.7%), resulted in the increase in these
expenses.
Interest
expense increased by $36,820, or 22.8%, from $161,534 in the first six months
ended June 30, 2005 to $198,354 in the first six months ended June 30, 2006.
The
increase in interest expense was due to increasing short term interest rates,
increased borrowings on our available lines of credit and increasing our long
term debt, which was used to purchase brewing equipment, vehicles and office
equipment.
As
a
result of the foregoing, we experienced a net loss of $295,202 in the first
six
months ended June 30, 2005 and $956,835 in the first six months ended June
30,
2006. Our net loss was $0.07 per share in the first six months ended June 30,
2005 and $0.19 per share in the first six months ended June 30, 2006, which
included the value of our preferred stock dividend.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through private sales of common stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations. We have a "best efforts"
commitment from an underwriter to assist us in continuing the process of raising
capital through a public offering of our common stock, which we had commenced
in
2005. Management believes it will be successful in raising additional funds
from
the public offering, however it can not predict the exact amount which will
be
raised. We intend to recommence the offering upon completion of a rescission
offer to persons who have purchased shares in the offering to date. Management
expects the offering to commence during the summer of 2006. Until the
commencement of the offering, we will continue to experience challenges with
managing cash flow, but management believes it has enough liquidity to operate
the business in the short term. The addition of cash from the public offering
,
if successful, would provide us the ability to improve our liquidity position
and provide capital to continue to expand the business. The remaining amount
of
common stock that we can sell in connection with the offering is 1,666,844
shares at an anticipated offering price of $4.00 per share. If the remainder
of
the shares were sold, we would receive approximately $6,000,000, after
underwriter commissions.
As
of
June 30, 2006, we had a working capital deficit of $1,840,391, compared to
a
working capital deficit of $1,594,758 as of December 31, 2005.
As
of
June 30, 2006, we had outstanding borrowings of $1,463,461 under our lines
of
credit agreements and we continue to approach maximum borrowing capacity based
on the terms of the lines of credit.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. Management has determined that the shares may have
been
issued in violation of securities laws. Management intends to make a rescission
offer to purchase up to all of the shares sold to date in the offering, however,
it is our intention that if any of the shares are tendered for rescission,
the
shares will be purchased by others and not from our funds. The amount to be
paid
pursuant to the rescission offer, if accepted by any shareholder, would be
$4.00
per share, plus accrued interest at the applicable statutory rate. The
rescission offer commenced in August 2006.
During
the six months ended June 30, 2006, the Company sold 278,550 of their shares
for
$1,002,779, net of commisions.
During
the six months ended June 30, 2006, previously deferred stock offering expenses
of $356,238 and additional stock offering costs incurred during the period
of
$217,287 were charged to additional paid in capital.
The
accompanying condensed financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America,
which contemplate continuation of the Company as a going concern. However,
the
Company had a net loss of $956,835 and utilized cash of $665,137 in operating
activities during the six months ended June 30, 2006, and had a working capital
deficiency of $1,840,391and stockholders’ deficiency of $378,586 at June 30,
2006. In addition, the Company may have committed a violation of securities
law
which may require the rescission of common stock issued in 2005 and 2006 in
the
aggregate of approximately $1,324,624. These factors raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might result from this uncertainty. The Company is conducting
an initial public offering of its stock. The maximum amount of common stock
to
be sold is 2,000,000 shares at $4.00, of which 333,156 has been sold as of
April
7, 2006. Management has received enough interest in the offering which leads
it
to believe the maximum amount of the offering will be sold, however no assurance
can be made that any additional shares will be sold as a result of the
offering
In
June 2005, the FASB issued SFAS 154, “Accounting Changes and Error
Corrections,” a replacement of existing accounting pronouncements. SFAS 154
modifies accounting and reporting requirements when a company voluntarily
chooses to change an accounting principle or correct an accounting error. SFAS
154 requires retroactive restatement of prior period financial statements unless
it is impractical. Previous accounting guidelines allowed recognition by
cumulative effect in the period of the accounting change. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
In
February 2006, the FASB issued SFAS 155,“Accounting for Certain Hybrid Financial
Instruments”, an amendment of SFAS 133 and 140. These SFAS’s deal with
derivative and hedging activities, accounting for
transfers
and servicing of financial instruments and extinguishment of liabilities. SFAS
155 is effective for all financial instruments acquired or issued in an entity’s
first fiscal year beginning after September 15, 2006. The Company does not
engage in the activities described in these SFAS’s and does not have any
intention of engaging in those activities when SFAS 155 becomes effective.
The
Company has evaluated the impact of the adoption of SFAS 155, and does not
believe the impact will be significant to the Company's overall results of
operations or financial position.
Item
3. CONTROLS AND PROCEDURES
(a) |
Evaluation
of Disclosure Controls and Procedures.
|
As
of
June 30, 2006, we carried out an evaluation, under the supervision and with
the
participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as amended) as of the end of the period covered
by this quarterly report. Based on this evaluation, our principal executive
officer and principal financial officer concluded, as of the end of such period,
that these disclosure controls and procedures are effective and designed to
ensure that the information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the requisite time periods.
(b) |
Changes
in Internal Controls.
|
There
was
no change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended)
identified in connection with the evaluation of our internal control performed
during our last fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
Part
II
Item
1. Legal Proceedings
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserts claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contends that we negligently manufactured the soda resulting in at least
one personal injury. Consac seeks $2.6 million in damages, plus interest and
attorneys fees. We contend that Consac was responsible for the soda’s condition
by providing a defective formula which had not been adequately tested. We
believe that we will successfully defend Consac’s claims. While there is no
assurance, we believe that the Consac litigation will have no material adverse
effect upon our operations. In May 2006 both parties agreed to a mediation
proceeding which is expected to commence in the third quarter of
2006.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. Management has determined that the shares may have
been
issued in violation of securities laws. Management intends to make a rescission
offer to purchase up to all of the shares sold to date in the offering, however,
it is our intention that if any of the shares are tendered for rescission,
the
shares will be purchased by others and not from our funds. The amount to be
paid
pursuant to the rescission offer, if accepted by any shareholders, would be
$4.00 per share, plus accrued interest at the applicable statutory
rate.
The
rescission offer commenced in August 2006.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. Management has determined that the shares may have
been
issued in violation of securities laws. Management intends to make a rescission
offer to purchase up to all of the shares sold to date in the offering. The
amount to be paid pursuant to the rescission offer, if accepted by any
shareholders, would be $4.00 per share, plus accrued interest at the applicable
statutory rate.
We
received net proceeds of approximately $1,200,000 from the sale of the 333,156
shares, after underwriter commissions. The net proceeds were used to meet our
liquidity needs primarily as working capital and costs relating to the offering.
Item
3. Defaults Upon Senior Securities
Not
applicable
Item
4. Submission of Matters to a Vote of Security Holders
Not
applicable
Item
5. Other Information
Not
applicable
Item
6. Exhibits
Number |
Description of
Document |
31 |
Officer's
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
|
32 |
Officer's
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
SIGNATURE
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.
|
|
|
|
REEDS,
INC. |
|
|
|
Date: August
21, 2006 |
By: |
/s/ CHRISTOPHER
J. REED |
|
|
|
Name:
Christopher J. Reed
Title:
Chief Executive Officer, President
and Chief Financial Officer
|