SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x |
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the fiscal year ended December 31, 2006.
OR
o |
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the transition period from __________ to _________
Commission
File Number 000-32501
REED’S,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
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35-2177773
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State
or other jurisdiction of incorporation or organization
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|
I.R.S.
Employer Identification Number
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|
|
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13000
South Spring Street
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|
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Los
Angeles, California
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90061
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Address
of principal executive offices
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Zip
Code
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(310)
217-9400
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, par value $0.0001
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 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
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No
x
The
issuer's revenues for the fiscal year ended December 31, 2006 were
$10,484,353.
The
aggregate market value of the voting common stock held by non-affiliates of
the
issuer as of March 30, 2007 was approximately $22,626,123 (computed based on
the
closing sale price of the common stock at $6.18 per share as of such date).
Shares of common stock held by each officer and director and each person owning
more than 10% of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of the affiliate
status is not necessarily a conclusive determination for other
purposes.
The
number of shares of Common Stock of the registrant outstanding as of March
30,
2007 was 7,143,185.
Transitional
Small Business Disclosure Format (Check One): Yes o No
x
PART
I
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3
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Item
1. Description of Business
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3
|
Item
2. Description of Property
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24
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Item
3. Legal Proceedings
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24
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Item
4. Submission of Matters to a Vote of Security Holders
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25
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PART
II
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25
|
Item
5. Market for Common Equity and Related Stockholder
Matters
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25
|
Item
6. Management’s Discussion and Analysis or Plan of
Operation
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27
|
Item
7. Financial Statements
|
36
|
Item
8. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure
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37
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Item
8A. Controls and Procedures
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37
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Item
8B. Other Information
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37
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PART
III
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37
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Item
9. Directors, Executive Officers, Promoters, Control Persons
and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
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37
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Item
10. Executive Compensation
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41
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Item11.
Security Ownership of Certain Beneficial Owners, Management and
Related
Stockholder Matters
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43
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Item12.
Certain Relationships and Related Transactions, and Director
Independence
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44
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Item
13. Exhibits
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47
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Item14.
Principal Accounting Fees and Services
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48
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
INFORMATION
This
Annual Report on Form 10-KSB, the other reports, statements, and information
that we have previously filed or that we may subsequently file with the
Securities and Exchange Commission (“SEC”) and public announcements that we have
previously made or may subsequently make include, may include, incorporate
by
reference or may incorporate by reference certain statements that may be deemed
to be “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and are intended to enjoy the benefits of that
act. The forward-looking statements included or incorporated by reference in
this Annual Report and those reports, statements, information and announcements
address activities, events or developments that Reed’s, Inc. (together with its
subsidiaries hereinafter referred to as “we,” “us,” “our” or “Reed’s”) expects
or anticipates will or may occur in the future. Any
statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance
are not
historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as “may,”
“should,” “could,” “predict,” “potential,” “believe,” “will likely result,”
“expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,”
“projection,” “would” and “outlook,” and similar expressions. Accordingly, these
statements involve estimates, assumptions and uncertainties, which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to
the
factors discussed throughout this document. All
forward-looking statements concerning economic conditions, rates of growth,
rates of income or values as may be included in this document are based on
information available to us on the dates noted, and we assume no obligation
to
update any such forward-looking statements.
The
risk
factors referred to in this Annual Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements
made
by us, and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which
it
is made and we do not undertake any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, 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, and other factors discussed elsewhere in this Annual Report,
including under the section entitled “Risk Factors:”
·
|
Our
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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Competitive
products and pricing pressures and our 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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Our
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 we produce and market our products and could
result in
increased costs,
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·
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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 our
products,
|
·
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Our
ability to penetrate new markets and maintain or expand existing
markets,
|
·
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Maintaining
existing relationships and expanding the distributor network of our
products,
|
·
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The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
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·
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Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of our products
that
they are carrying at any time,
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·
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The
availability and cost of capital to finance our working capital needs
and
growth plans,
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·
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The
effectiveness of our advertising, marketing and promotional
programs,
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·
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Changes
in product category consumption,
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·
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Economic
and political changes,
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·
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Consumer
acceptance of new products, including taste test
comparisons,
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·
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Possible
recalls of our products, and
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·
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Our
ability to make suitable arrangements for the co-packing of any of
our
products.
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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
Background
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:
·
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Virgil’s
Root Beer and Cream Sodas,
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·
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Reed’s
Ginger Juice Brews,
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·
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Reed’s
Ginger Candies, and
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·
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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.
We
produce and co-pack our products principally at our company-owned facility
in
Los Angeles, California, known as the Brewery, and at a contracted co-packing
facility in Pennsylvania. We also co-pack certain of our products at smaller
co-packing facilities in the United States and in Europe.
Key
elements of our business strategy include:
·
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increased
national direct sales and
distribution,
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·
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increased
store placement with mainstream stores and
retailers,
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·
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strong
national distributorships,
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·
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stimulate
strong consumer demand for our existing brands and
products,
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·
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develop
additional unique alternative beverage brands and other products,
and
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·
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specialty
packaging like our 5-liter party kegs, our ceramic swing-lid bottle
and
our 750 ml. champagne bottle.
|
Our
current sales efforts are focused in three areas:
·
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sales
to mainstream, natural and specialty food stores in the United States
and,
to a lesser degree, Canada, through our regional distributors and
sales
representatives,
|
·
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direct
sales effort to large national retailers,
and
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·
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direct
distribution by our trucks and drivers to retailers in Southern
California.
|
We
believe that these marketing efforts have contributed to our growth. We intend
to continue to expand our sales personnel in each of these marketing
areas.
In
addition, since 2003, we have introduced new products and offer specialty
beverage packaging options not typically available in the marketplace into
the
marketplace that have contributed to our growth in sales. These products include
a 5-liter “party keg” version of our Virgil’s Root Beer and Cream Soda, 12-ounce
long neck bottles of our Virgil’s Cream Soda, 750 ml. size bottles of our Reed’s
Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew and a one pint
version of our Virgil’s Root Beer with a swing-lid. In addition, we have
recently introduced a new flavor, our Black Cherry Cream soda in a 12-ounce
bottle. These new packaging options are being utilized in our marketing
efforts.
We
create
consumer demand for our products by:
·
|
supporting
in-store sampling programs of our
products,
|
·
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generating
free press through public
relations,
|
·
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advertising
in national magazines targeting our
customers,
|
·
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maintaining
a company website (www.reedsgingerbrew.com);
and
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·
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participating
in large public events as sponsors.
|
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our Internet
address is (www.reedsgingerbrew.com). Information contained on our website
or
that is accessible through our website should not be considered to be part
of
this Annual Report.
Historical
Development
In
June
1987, Christopher J. Reed, our founder and Chief Executive Officer, began
development of Reed’s Original Ginger Brew, his first beverage creation. After
two years of development, the product was introduced to the market in Southern
California stores in 1989. By 1990, we began marketing our products through
natural food distributors and moved our production to a larger facility in
Boulder, Colorado.
In
1991,
we incorporated our business operations in the state of Florida under the name
of Original Beverage Corporation and moved all of our production to a co-pack
facility in Pennsylvania. We began exhibiting at national natural and specialty
food trade shows, which brought national distribution in natural, gourmet and
specialty foods and the signing of our first mainstream supermarket distributor.
Our products began to receive trade industry recognition as an outstanding
new
product. The United States National Association of the Specialty Food Trade,
or
NASFT, named Original Ginger Brew as an “Outstanding Beverage Finalist” in the
United States, and the Canadian Fancy Food Association, or CFFA, awarded us
“Best Imported Food Product.”
Throughout
the 1990’s, we continued to develop and launch new Ginger Brew varieties. Reed’s
Ginger Brews reached broad placement in natural and gourmet foods stores
nationwide through major specialty, natural/gourmet and mainstream food and
beverage distributors.
In
1997,
we began licensing the products of China Cola and eventually acquired the rights
to that product in December 2000. In addition, we launched Reed’s Crystallized
Ginger Candy, a product which we manufacture in Fiji under a proprietary,
natural, non-sulfured process. In 1999, we purchased the Virgil’s Root Beer
brand from the Crowley Beverage Company. The brand has won numerous gourmet
awards. In 2000, we began to market three new products: Reed’s Original Ginger
Ice Cream, Reed’s Cherry Ginger Brew and a beautiful designer 10-ounce gift tin
of our Reed’s Crystallized Ginger Candy. In December 2000, we purchased an
18,000 square foot warehouse property, the Brewery, in Los Angeles, California,
to house our west coast production and warehouse facility. The Brewery now
also
serves as our principal executive offices. In 2001, we changed our state of
incorporation to Delaware and also changed our name to Reed’s, Inc. We also
introduced our Reed’s Chocolate Ginger Ice Cream and Reed’s Green Tea Ginger Ice
Cream products and expanded our confectionary line with two new candy products:
Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger Candy Chews. In 2002,
we launched our Reed’s Ginger Juice Brew line, with four flavors of organic
juice blends. In November 2002, we completed our first test runs of Reed’s and
Virgil’s products at the Brewery and in January 2003, our first commercially
available products came off the Los Angeles line. In 2003, we commenced our
own
direct distribution in Southern California and introduced sales of our 5-liter
Virgil’s party keg. In 2004, we expanded our product line to include Virgil’s
Cream Soda (including in a 5-liter keg), Reed’s Spiced Apple Brew in a
750 ml. champagne bottle and draught Virgil’s Root Beer and Cream Soda. In
2006, we expanded our product line to include Virgil’s Black Cherry Cream Soda.
Progressive Grocers, a top trade publication in the grocery industry voted
this
product as the best new beverage product of 2006.
On
December 12, 2006, we completed the sale of 2,000,000 shares of our common
stock
at an offering price of $4.00 per share in our initial public offering. The
public offering resulted in gross proceeds of $8,000,000 to us.
Industry
Overview
Our
beverages are classified as New Age beverages, a category that includes natural
soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks and
water. According to Beverage Marketing Corporation, in 2004, total wholesale
dollar sales in the New Age segment were approximately $16.5 billion in
wholesale dollar sales, an increase of 11.3% from 2003. (Source: Beverage World
Magazine, April 15, 2006)
Annual
confectionary sales (including chocolate, non-chocolate and gum sales) in the
United States were approximately $27.9 billion in 2005, of which approximately
$8.7 billion was non-chocolate candy. (Source: National Confectioners
Association, 2006 Year in Review)
According
to the International Dairy Foods Association (IDFA), total U.S. sales of ice
cream and frozen desserts were estimated at approximately $21 billion. The
packaged ice cream industry includes economy, regular, premium and super-premium
products. Super-premium ice cream, such as Reed’s Ginger Ice Creams, is
generally characterized by a greater richness and density than other kinds
of
ice cream. This higher quality ice cream generally costs more than other kinds
and is usually marketed by emphasizing quality, flavor selection, texture and
brand image. The International Ice Cream Association attributes almost all
of
the market growth over the past 10 years to sales of super-premium and premium
ice creams, particularly the innovative products. Sales of premium and
super-premium styles account for approximately 42% of the total industry
revenues, versus approximately 15% for all the “light” formulations combined.
(Source: CNN/Money, July 29, 2005.)
Our
Products
We
currently manufacture and sell 15 beverages, three candies and three ice creams.
We make all of our products using premium all-natural ingredients.
We
produce carbonated and non-carbonated products. Most sales of our beverage
products are of our sodas. According to Spence Information Services (SPINS),
which is the only sales information service catering to the natural food trade,
for the year 2003,
· |
Reed’s
Ginger Brews and Virgil’s Root Beer held three of the top ten items based
on dollar and unit sales among all sugar/fructose sweetened sodas
in the
natural foods industry in the United States, with Reed’s Extra Ginger Brew
holding the number one position,
and
|
· |
Reed’s
Original Ginger Brew and Virgil’s were two of the top ten brands based on
dollar and unit sales among all sugar/fructose sweetened sodas in
the
natural foods industry in the United States, with Reed’s Original Brew
holding the number one position.
|
Our
carbonated products include six varieties of Reed’s Ginger Brews, Virgil’s Root
Beer and Cream Sodas, China Cola and Cherry China Cola. We also sell four
varieties of a new line of non-carbonated Ginger Brews called Reed’s Ginger
Juice Brews.
Our
candy
products include Reed’s Crystallized Ginger Candy, Reed’s Crystallized Ginger
Baking Bits and Reed’s Ginger Candy Chews.
Our
ice
cream products include Reed’s Original Ginger Ice Cream, Reed’s Chocolate Ginger
Ice Cream and Reed’s Green Tea Ginger Ice Cream.
Beverages
Reed’s
Ginger Brews
Ginger
ale is the oldest known soft drink. Before modern soft drink technology existed,
non-alcoholic beverages were brewed at home directly from herbs, roots, spices,
and fruits. These handcrafted brews were then aged like wine and highly prized
for their taste and their tonic, health-giving properties. Reed’s Ginger Brews
are a revival of this home brewing art and we make them with care and attention
to wholesomeness and quality, using the finest fresh herbs, roots, spices,
and
fruits. Our expert brew masters brew each batch and age it with great
pride.
We
believe that Reed’s Ginger Brews are unique in their kettle brewed origin among
all mass-marketed soft drinks. Reed’s Ginger Brews contain between 8 and 26
grams of fresh ginger in every 12-ounce bottle. We use no refined sugars as
sweeteners. Our products differ from commercial soft drinks in three particular
characteristics: sweetening, carbonation and coloring for greater adult appeal.
Instead of using injected-based carbonation, we produce our carbonation
naturally, through slower, beer-oriented techniques. This process produces
smaller, longer lasting bubbles that do not dissipate rapidly when the bottle
is
opened. We do not add coloring. The color of our products comes naturally from
herbs, fruits, spices, roots and juices.
In
addition, since Reed’s Ginger Brews are pasteurized, they do not require or
contain any preservatives. In contrast, modern commercial soft drinks generally
are produced using natural and artificial flavor concentrates prepared by flavor
laboratories, tap water, and highly refined sweeteners. Typically, manufacturers
make a centrally processed concentrate that will lend itself to a wide variety
of situations, waters, and filling systems. The final product is generally
cold-filled and requires preservatives for stability. Colors are added that
are
either natural, although highly processed, or artificial.
In
addition, while we make no claim as to any medical or therapeutic benefits
of
our products, we have found friends and advocates among alternative, holistic,
naturopathic, and homeopathic medical practitioners, dieticians and medical
doctors, who tell us that they recommend Reed’s Extra Ginger Brew for their
patients as a simple way to ingest a known level of ginger. The United States
Food and Drugs Administration (FDA) include ginger on their GRAS (generally
recognized as safe) list. However, neither the FDA nor any other government
agency officially endorses or recommends the use of ginger as a dietary
supplement.
We
currently manufacture and sell six varieties of Reed’s Ginger
Brews:
· |
Reed’s
Original Ginger Brew was
our first creation, and is a Jamaican recipe for homemade ginger
ale using
17 grams of fresh ginger root, lemon, lime, honey, fructose, pineapple,
herbs and spices. Reed’s Original Ginger Brew is 20% fruit
juice.
|
· |
Reed’s
Extra Ginger Brew is
the same approximate recipe, with 26 grams of fresh ginger root for
a
stronger bite. Reed’s Extra Ginger Brew is 20% fruit
juice.
|
· |
Reed’s
Premium Ginger Brew is
the no-fructose version of Reed’s Original Ginger Brew, and is sweetened
only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20%
fruit juice.
|
· |
Reed’s
Raspberry Ginger Brew is
brewed from 17 grams of fresh ginger root, raspberry juice and lime.
Reed’s Raspberry Ginger Brew is
20% raspberry juice and is sweetened with fruit juice and
fructose.
|
· |
Reed’s
Spiced Apple Brew uses
8 grams of fresh ginger root, the finest tart German apple juice
and such
apple pie spices as cinnamon, cloves and allspice. Reed’s Spiced Apple
Brew is 50% apple juice and sweetened with fruit juice and
fructose.
|
· |
Reed’s
Cherry Ginger Brew is
the newest addition to our Ginger Brew family, and is naturally brewed
from: filtered water, fructose, fresh ginger root, cherry juice from
concentrate and spices. Reed’s Cherry Ginger Brew is 22% cherry
juice.
|
All
six
of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores as
singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold by select retailers in a special 12-pack. Reed’s Spiced Apple Brew is now
available in a 750 ml. champagne bottle.
Virgil’s
Root Beer
Over
the
years, Virgil’s Root Beer has won numerous awards and has a reputation among
many as one of the best root beers made anywhere. Virgil’s Root Beer won the
“Outstanding Beverage” award at the NASFT’s International Fancy Food and
Confection Show in 1997.
Virgil’s
is a premium root beer. We use all-natural ingredients, including filtered
water, unbleached cane sugar, anise from Spain, licorice from France, bourbon
vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia,
wintergreen from China, sweet birch and molasses from the southern United
States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from
Peru and cassia oil from China.
We
collect these ingredients worldwide and gather them together at the brewing
and
bottling facilities we use in the United States and Germany. We combine and
brew
these ingredients under strict specifications and finally heat-pasteurize
Virgil’s Root Beer, to ensure quality.
We
sell
Virgil’s Root Beer in four packaging styles: 12-ounce bottles in a four-pack, a
special ceramic-swing-lid style pint bottle, a 5-liter self-tapping party keg
and a draught “pony keg.”
Virgil’s
Cream Soda
We
launched Virgil’s Cream Soda in January 2004. We make this product with the same
attention to quality that makes Virgil’s Root Beer so popular.
Virgil’s
Cream Soda is a gourmet cream soda. We brew Virgil’s Cream Soda the same way we
brew Virgil’s Root Beer. We use all-natural ingredients, including filtered
water, unbleached cane sugar and bourbon vanilla from Madagascar.
Virgil’s
Cream Soda is currently sold in 12-ounce long neck bottles in colorful 4-packs,
a 5-liter party keg version and in our draught format.
In
2006,
we expanded our product line to include Virgil’s Black Cherry Cream Soda in a
12-ounce bottle.
China
Cola
We
consider China Cola to be the best tasting and most natural cola in the world.
We restored China Cola to its original delicious blend of raw cane sugar,
imported Chinese herbs, essential oils and natural spices. China Cola contains
no caffeine. It comes in two varieties, Original China Cola and Cherry China
Cola.
Original
China Cola is made from filtered water, raw cane sugar, szechwan poeny root,
cassia bark, Malaysian vanilla, oils of lemon, oil of lime, oil of orange,
nutmeg, clove licorice, cardamom, caramel color, citric acid and phosphoric
acid.
Cherry
China Cola is made from the same ingredients as Original China Cola, with the
addition of natural cherry flavor.
China
Cola and Cherry China Cola sell as singles, in four-packs and in 24-bottle
cases.
Reed’s
Ginger Juice Brews
In
May
2002, we launched a new line of Ginger Brews called Reed’s Ginger Juice Brews.
They are 100% juice products that are non-carbonated and brewed from organic
fresh ginger root and sweetened with organic juices. We created this product,
in
part, in response to a strong trend we have seen toward organic ingredients
and
non-carbonated beverages in the marketplace. We intend to extend our Ginger
Brew
line and believe that these new flavors will cater to the growing market for
organic non-carbonated beverages.
All
four
of our Reed’s Ginger Juice Brews contain: filtered water, organic fresh ginger
root, and organic white grape juice from concentrate. Specifically,
·
|
Reed’s
Lemon Guava Ginger Juice Brew adds guava juice from concentrate and
lemon
juice from concentrate.
|
·
|
Reed’s
Strawberry Kiwi Ginger Juice Brew adds organic strawberry juice from
concentrate and organic kiwi juice from
concentrate.
|
·
|
Pineapple
Orange Ginger Juice Brew adds organic pineapple juice from concentrate,
organic orange juice from concentrate, and organic lime juice from
concentrate.
|
·
|
Reed’s
Cranberry Raspberry Ginger Juice Brew adds cranberry juice from
concentrate, and organic raspberry juice from
concentrate.
|
Reed’s
Ginger Juice Brews drinks come in a 16-ounce juice bottle as singles or in
cases
of 12 and 24 bottles.
Reed’s
Ginger Candies
Reed’s
Crystallized Ginger Candy
Reed’s
Crystallized Ginger was the first crystallized ginger on the market in the
United States to be sweetened with raw cane instead of refined white sugar.
Reed’s Crystallized Ginger is custom-made for us in Fiji.
The
production process is an ancient one that has not changed much over time. After
harvesting baby ginger (the most tender kind), the root is diced and then
steeped for several days in large vats filled with simmering raw cane syrup.
The
ginger is then removed and allowed to crystallize into soft, delicious nuggets.
Many peoples of the islands have long enjoyed these treats for health and
pleasure.
We
sell
this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins,
16-ounce re-sealable Mylar bags, and in bulk. We also sell Reed’s Crystallized
Ginger Baking Bits in bulk.
Reed’s
Ginger Candy Chews
For
many
years, residents of Southeast Asia from Indonesia to Thailand have enjoyed
soft,
gummy ginger candy chews. We sell Reed’s Ginger Candy Chews individually wrapped
in soft-packs of ten candies and as individually wrapped loose pieces in bulk.
Reed’s has taken them a step further, adding more ginger, using no gelatin
(vegan-friendly) and making them slightly easier to unwrap than their Asian
counterparts.
Reed’s
Ginger Candy Chews are made for us in Indonesia from sugar, maltose (malt
sugar), ginger, and tapioca starch.
Reed’s
Ginger Ice Creams
We
make
Reed’s Ginger Ice Creams with 100% natural ingredients, using the finest
hormone-free cream and milk. We combine fresh milk and cream with the finest
natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane
sugar to make a delicious ginger ice cream with a super premium, ultra-creamy
texture and Reed’s signature spicy-sweet bite. Our ice creams are made for us,
according to our own recipes, at a dairy in upstate New York.
We
sell
three Reed’s Ginger Ice Cream products:
· |
Reed’s
Original Ginger Ice Cream made
from milk, cream, raw cane sugar, Reed’s Crystallized Ginger Candy (finest
ginger root, raw cane sugar), ginger puree, and guar gum (a natural
vegetable gum),
|
· |
Chocolate
Ginger Ice Cream made
from milk, cream, raw cane sugar, finest Belgian cocoa (used to make
Belgian chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger
root, raw cane sugar), chocolate shavings (sugar, unsweetened chocolate,
Belgian cocoa, soy lecithin and real vanilla), ginger puree, and
guar gum
(a natural vegetable gum) creating the ultimate chocolate ginger
ice
cream, and
|
· |
Reed’s
Green Tea Ginger Ice Cream made
from milk, cream, the finest green tea, raw cane sugar, ginger puree,
Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar),
and guar gum (a natural vegetable gum) creating the ultimate green
tea
ginger ice cream.
|
We
sell
Reed’s Ginger Ice Creams in pint containers and cases of eight pints. We also
intend to supply Reed’s Ginger Ice Creams in foodservice volume
packaging.
New
Product Development
We
are
always working on developments to continue expanding from our Reed’s Ginger
Brews, Virgil’s product line, Reed’s Ginger Juice Brew, Reed’s Ginger Ice Cream,
and Reed’s Ginger Candy product lines and packaging styles. However, research
and development expenses in the last two years have been nominal. We intend
to
expend some, but not a significant amount, of funds on research and development
for new products and packaging. We intend to introduce new products and
packaging as we deem appropriate from time to time for our business
plan.
Among
the
advantages of our owned and self-operated Brewery are the flexibility to try
innovative packaging and the capability to experiment with new product flavors
at less cost to our operations or capital. Currently, we sell a half-liter
Virgil’s Root Beer swing-lid bottle that is made for us in Europe. We intend to
produce several of our beverages in one-liter swing-lid bottles in the United
States. Our Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew
are available in a 750 ml. champagne bottle and other products are planned
to be
available with this packaging in the near future.
Manufacture
of Our Products
We
produce our carbonated beverages at two facilities:
· |
a
facility that we own in Los Angeles, California, known as The Brewery,
at
which we produce certain soda products for the western half of the
United
States, and
|
· |
a
packing, or co-pack, facility in Pennsylvania, known as the Lion
Brewery,
with which they contract to supply us with product we do not produce
at
The Brewery. The term of our agreement with Lion Brewery expires
on May
31, 2007 and renews automatically for successive two-year terms unless
terminated by either party. The Lion Brewery assembles our products
and
charges us a fee, generally by the case, for the products they
produce.
|
Our
west
coast Brewery facility is running at 40% of capacity. We have had difficulties
with the flavor of our Ginger Brew products produced at the Brewery. As a
result, we continue to supply our Ginger Brew products at the Brewery from
our
east coast co-packing facility, thereby causing us to incur increased freight
and warehousing expenses on our products. Management is committed to selling
a
high quality, great tasting product and has elected to continue to sell certain
of our Ginger Brew products produced from our east coast facility on the west
coast, even though it negatively impacts our gross margins. As we are able
to
make the Brewery become more fully utilized, we believe that we will experience
improvements in gross margins due to freight and production
savings.
Our
Ginger Juice Brews are co-packed for us at H.A. Ryder in Northern California.
We
supply all the ingredients and packaging. The co-pack facility assembles our
products and charges us a fee, by the case. Our ice creams are co-packed for
us
at Ronnybrooke dairy in upstate New York. We supply all the flavor additions
and
packaging and the dairy supplies the ice cream base. The co-pack facility
assembles our products and charges us a fee, by the unit produced for us. We
have half-liter swing-lid bottles of our Virgil’s Root Beer line co-packed for
us at the Hofmark Brewery in southern Germany. The co-pack facility assembles
our products and charges us a fee by the unit they produce for us. Our
arrangements with H.A Ryder, Ronnybrooke Dairy and Hofmark Brewery are on an
order by order by basis.
We
follow
a “fill as needed” manufacturing model to the best of our ability and we have no
significant backlog of orders.
Substantially
all of the raw materials used in the preparation, bottling and packaging of
our
products are purchased by us or by our contract packers in accordance with
our
specifications. Reed’s Crystallized Ginger is made to our specifications in
Fiji. Reed’s Ginger Candy Chews are made to our specifications in Indonesia, and
we repackage them at the Brewery in Los Angeles.
Generally,
we obtain the ingredients used in our products from domestic suppliers and
each
ingredient has several reliable suppliers. We have no major supply contracts
with any of our suppliers. As a general policy, we pick ingredients in the
development of our products that have multiple suppliers and are common
ingredients. This provides a level of protection against a major supply
constriction or calamity.
We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that the Brewery has ample capacity to handle
increased West Coast business. To the extent that any significant increase
in
business requires us to supplement or substitute our current co-packers, we
believe that there are readily available alternatives, so that there would
not
be a significant delay or interruption in fulfilling orders and delivery of
our
products. In addition, we do not believe that growth will result in any
significant difficulty or delay in obtaining raw materials, ingredients or
finished product that is repackaged at the Brewery.
Our
Primary Markets
We
target
a niche in the soft drink industry known as New Age beverages. The soft drink
industry generally characterizes New Age Beverages as being made more naturally,
with upscale packaging, and often creating and utilizing new and unique flavors
and flavor combinations.
The
New
Age beverage segment is highly fragmented and includes such competitors as
SoBe,
Snapple, Arizona, Hansen’s and Jones Soda, among others. These brands have the
advantage of being seen widely in the national market and being commonly well
known for years through well-funded ad campaigns. Despite our products’ having a
relatively high price for a premium beverage product, no mass media advertising
and a relatively small presence in the mainstream market compared to many of
our
competitors, we believe that results to date demonstrate that Reed’s Ginger
Brews and Virgil’s sodas are making market inroads among these significantly
larger brands. See “Business - Competition.”
We
sell
the majority of our products in natural food stores, mainstream supermarket
chains and foodservice locations, primarily in the United States and, to a
lesser degree, in Canada.
Natural
Food Stores
Our
primary and historical marketing source of our products has been natural food
and gourmet stores. These stores include Whole Foods Market, Wild Foods, Trader
Joe’s and Wild Oats. We also sell in gourmet restaurants and delis.
We
believe that our products have achieved a leading position in their niche in
the
fast-growing natural food industry.
With
the
advent of large natural food store chains and specialty merchants, the natural
foods segment continues to grow each year in direct competition with the
mainstream grocery trade.
Mainstream
Supermarkets and Retailers
We
sell
our products in over 1,000 mainstream supermarkets throughout the United States,
and to a lesser extent, in Canada. These stores include national and regional
supermarket chains, such as Kroger, Ralph’s, Raley’s, Safeway and Winn-Dixie.
Generally, these stores market our products in specialty natural and gourmet
sections within the stores, although we are increasing our presence in
mainstream soft drink sections in these stores.
Supermarkets,
particularly supermarket chains and prominent local supermarkets, often impose
slotting fees before permitting new product placements in their store or chain.
These fees can be structured to be paid one-time only or in installments. We
pursue broad-based slotting in supermarket chains throughout the United States
and, to a lesser degree, in Canada. However, our direct sales team in Southern
California and our national sales management team have been able to place our
products without having to pay slotting fees much of the time. However, slotting
fees for new placements normally cost between $10 and $100 per store per new
item placed.
We
also
sell our products to large national retailers who place our products within
their national distribution streams. These retailers include Costco, Sam’s Club
and Trader Joe’s.
Foodservice
Placement
We
also
market our beverage products to industrial cafeterias, bars and restaurants.
We
intend to place our beverage products in stadiums, sports arenas, concert halls,
theatres, and other cultural centers as a long-term marketing plan. In addition,
we plan to market our ice creams in restaurants nationwide.
International
Sales
We
have
developed a limited market for our products in Canada, Europe and Asia. Sales
outside of North America currently represent less than 1% of our total sales.
Sales in Canada represent about 1.3% of our total sales.
The
European Union is an open market for Reed’s with access to that market due in
part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in
Germany. We market our products in Europe through a master distributor in
Amsterdam and sub-distributors in the Netherlands, Denmark, the United Kingdom
and Spain. We are currently negotiating with a Dutch company in Amsterdam for
wider European distribution.
American
Trading Corp. in Japan orders our products on a regular basis for distribution
in Japan. We are holding preliminary discussions with other trading companies
and import/ export companies for the distribution of our products throughout
Japan, China and the rest of Asia. We believe that these areas are a natural
fit
for Reed’s ginger products, because of the importance of ginger in Asian diet
and nutrition.
Distribution,
Sales and Marketing
We
currently have a national network of mainstream, natural and specialty food
distributors in the United States and Canada. We sell directly to our
distributors, who in turn sell to retail stores. We also use our own sales
group
and independent sales representatives to promote our products for our
distributors and direct sales to our retail customers. In Southern California,
we have our own direct distribution in addition to other local distributors.
We
plan to expand our direct distribution into other markets.
One
of
the main goals of our sales and marketing efforts is to increase the number
of
sales people and distributors focused on growing our brands. Where a market
does
not support or lend itself to direct distribution, we intend to enlist local
mainstream beverage distributors to carry our products. Our increased efforts
in
marketing also will require us to hire additional sales representatives and
other marketing expenses. We plan to hire additional sales people, as needed,
to
support both the expansion of our existing direct distribution and to grow
sales
through mainstream distributors.
We
currently maintain two separate sales organizations, one of which handles
natural food store sales and the other of which handles mainstream store sales.
We currently have three in-house sales managers and eleven independent sales
representatives. These sales forces consist of in-house sales managers and
independent sales representatives who support our distributors and direct
selling efforts. The natural food store sales force works mainly in the natural
and gourmet food stores serviced by natural and gourmet distributors.
Representatives are responsible for the accounts in their territory and they
stay on a focused schedule of visits to maintain store and distributor
relationships. In the future, we intend to integrate both our distribution
and
sales forces.
Our
sales
force markets existing products, run promotions and introduce new items. Our
in-house sales managers are responsible for the distributor relationships and
larger chain accounts that require headquarter sales visits and managing our
independent sales representatives.
We
also
offer our products and promotional merchandise directly to consumers via the
Internet through our website, www.reedsgingerbrew.com.
Marketing
to Distributors
We
market
to distributors using a number of marketing strategies, including direct
solicitation, telemarketing, trade advertising and trade show exhibition. These
distributors include natural food, gourmet food, and mainstream distributors.
Our distributors sell our products directly to natural food, gourmet food and
mainstream supermarkets for sale to the public. We maintain direct contact
with
the distributors through our in-house sales managers. In limited markets, where
use of our direct sales managers is not cost-effective, we utilize food brokers
and outside representatives.
Marketing
to Retail Stores
We
market
to retail stores by utilizing trade shows, trade advertising, telemarketing,
direct mail pieces and direct contact with the store. Our sales managers and
representatives visit these retail stores to sell directly in many regions.
Sales to retail stores are coordinated through our distribution network and
our
regional warehouses.
Direct
Sales and Distribution
In
June
2003, we started Direct Sales and Distribution (DSD) to stores in Southern
California, using a direct hired sales team and our delivery trucks. Our
in-house sales manager works directly with our new route drivers and with
distributors in the Southern California area. A DSD system allows us to have
greater control over our marketing efforts, as we become less dependent on
distributors who have relationships with our competitors. We hope to expand
our
DSD network to areas outside of Southern California as our resources will
allow.
Southern
California sales represented approximately $1,040,000 and $750,000 in 2006
and
2005, respectively. These new direct-distribution accounts also include retail
locations, including many new independent supermarkets, “mom and pop” markets
and foodservice locations. In addition, direct distribution facilitates our
new
placements at hospitals, the Getty Center in Los Angeles, Fox Studios and other
cultural and institutional accounts.
Marketing
to Consumers
Advertising.
We
utilize several marketing strategies to market directly to consumers.
Advertising in targeted consumer magazines such as “Vegetarian Times” and “New
Age” magazine, in-store discounts on the products, in-store product
demonstration, street corner sampling, coupon advertising, consumer trade shows,
event sponsoring and our website www.reedsgingerbrew.com
are all
among current consumer-direct marketing devices.
In-Store
Draught Displays.
As part
of our marketing efforts, we have started to offer in-store draught displays,
or
Kegerators. While we believe that packaging is an important part of making
successful products, we also believe that our products and marketing methods
themselves need to be exceptional to survive in today’s marketplace. Our
Kegerator is an unattended, in-store draught display that allows a consumer
to
sample our products at a relatively low cost per demonstration. Stores offer
premium locations for these new, and we believe unique, draught
displays.
On
Draught Program.
Our
West Coast Brewery has initiated an on-draught program. We have installed
draught locations at Fox Studios commissaries and in approximately 12
restaurants in Southern California. Currently, we are serving Virgil’s Root
Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger Brew on draught. In addition,
all of our other carbonated drinks are available in draught format.
Proprietary
Coolers. The
placement of in-store branded refrigerated coolers by our competitors has proven
to have a significant positive effect on their sales. We are currently testing
our own Reed’s branded coolers in a number of locations.
Competition
The
beverage industry is highly competitive. The principal areas of competition
are
pricing, packaging, development of new products and flavors and marketing
campaigns. Our products compete with a wide range of drinks produced by a
relatively large number of manufacturers. Most of these brands have enjoyed
broad, well-established national recognition for years, through well-funded
ad
and other branding campaigns. In addition, the companies manufacturing these
products generally have greater financial, marketing and distribution resources
than we do.
Important
factors affecting our ability to compete successfully include taste and flavor
of products, trade and consumer promotions, rapid and effective development
of
new, unique cutting edge products, attractive and different packaging, branded
product advertising and pricing. We also compete for distributors who will
concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the New Age beverage categories could cause
our products to be unable to gain or to lose market share or we could experience
price erosion.
We
believe that our innovative beverage recipes and packaging and use of premium
ingredients and a trade secret brewing process provide us with a competitive
advantage and that our commitments to the highest quality standards and brand
innovation are keys to our success.
Our
premium New Age beverage products compete generally with all liquid refreshments
and in particular with numerous other New Age beverages, including: SoBe,
Snapple, Mistic, IBC, Stewart’s, Henry Weinhard, Arizona, Hansen’s, Knudsen
& Sons and Jones Sodas.
Our
Virgil’s and China Cola lines compete with a number of other natural soda
companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and
Natural Brews.
We
also
generally compete with other traditional soft drink manufacturers and
distributors, such as Coke and Pepsi.
Reed’s
Crystallized Ginger Candy competes primarily with other candies and snacks
in
general and, in particular, with other ginger candies. The main competitors
in
ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and
Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one
among these brands that is sulfur-free.
Reed’s
Ginger Ice Creams compete primarily with other premium and super-premium ice
cream brands. Our principal competitors in the ice cream business are
Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of
smaller natural food ice cream companies.
Proprietary
Rights
We
own
trademarks that we consider material to our business, including Reed’s, Virgil’s
and China Cola. Three of our material trademarks are registered trademarks
in
the U.S. Patent and Trademark Office: Virgil’s®, Reed’s® and China Cola®.
Registrations for trademarks in the United States will last indefinitely as
long
as we continue to use and police the trademarks and renew filings with the
applicable governmental offices. We have not been challenged in our right to
use
any of our material trademarks in the United States. We intend to obtain
international registration of certain trademarks in foreign jurisdictions,
as we
see fit.
In
addition, we consider our finished product and concentrate formulae, which
are
not the subject of any patents, to be trade secrets. Our brewing process is
a
trade secret. This process can be used to brew flavors of beverages other than
ginger ale and ginger beer, such as root beer, cream soda, cola, and other
spice
and fruit beverages. We have not sought any patents on our brewing processes
because we would be required to disclose our brewing process in patent
applications.
We
generally use non-disclosure agreements with employees and distributors to
protect our proprietary rights.
Government
Regulation
The
production, distribution and sale in the United States of many of our products
is subject to the Federal Food, Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act of 1994, the Occupational Safety and Health Act,
various environmental statutes and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. California
law
requires that a specific warning appear on any product that contains a component
listed by the State as having been found to cause cancer or birth defects.
The
law exposes all food and beverage producers to the possibility of having to
provide warnings on their products because the law recognizes no generally
applicable quantitative thresholds below which a warning is not required.
Consequently, even trace amounts of listed components can expose affected
products to the prospect of warning labels. Products containing listed
substances that occur naturally in the product or that are contributed to the
product solely by a municipal water supply are generally exempt from the warning
requirement. While none of our beverage products are required to display
warnings under this law, we cannot predict whether an important component of
any
of our products might be added to the California list in the future. We also
are
unable to predict whether or to what extent a warning under this law would
have
an impact on costs or sales of our products.
Measures
have been enacted in various localities and states that require that a deposit
be charged for certain non-refillable beverage containers. The precise
requirements imposed by these measures vary. Other deposit, recycling or product
stewardship proposals have been introduced in certain states and localities
and
in Congress, and we anticipate that similar legislation or regulations may
be
proposed in the future at the local, state and federal levels, both in the
United States and elsewhere.
Our
facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which
approximated $185,000 in 2006. This is a standard cost of doing business in
the
soft drink industry.
In
California, and in certain other states where we sell our products, we are
required to collect redemption values from our customers and remit those
redemption values to the state, based upon the number of bottles of certain
products sold in that state.
In
certain other states and Canada where our products are sold, we are also
required to collect deposits from our customers and to remit such deposits
to
the respective state agencies based upon the number of cans and bottles of
certain carbonated and non-carbonated products sold in such states.
Employees
We
currently have 37 full-time employees, as follows: one in general management,
14
in sales and marketing support, five in operations and 17 in production. We
employ additional people on a part-time basis as needed.
We
have
never participated in a collective bargaining agreement. We believe that the
relationship with our employees is good.
Risk
Factors
The
risks
described below could materially and adversely affect our business, financial
condition, results of operations and the trading price of our common stock.
You
should carefully consider the following risk factors and all other information
contained in this Annual Report. The risks and uncertainties described below
are
not the only ones we face, and there may be additional risks not presently
known
to us or that we currently believe are immaterial to our business.
THERE
IS
A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. PERSONS WHO MAY OWN OR INTEND
TO
PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON STOCK MAY TRADE
SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER INFORMATION
CONTAINED ELSEWHERE IN OUR REPORTS, PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC
INFORMATION, AS FILED WITH THE COMMISSION, PRIOR TO PURCHASING SHARES OF OUR
COMMON STOCK:
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain or expand
operations according to our business plan.
As
of
December 31, 2006, we had an accumulated deficit of $5,502,142.
For
the
years ended December 31, 2006 and 2005, we incurred losses from operations
of $1,806,590 and $516,451, respectively. We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If
we are
not able to achieve profitable operations at some point in the future, we
eventually may have insufficient working capital to maintain our operations
as
we presently intend to conduct them or to fund our expansion and
marketing and product development plans.
In
addition, our losses may increase in the future as we expand our manufacturing
capabilities and fund our marketing plans and product development. These losses,
among other things, have had and will continue to have an adverse effect on
our
working capital, total assets and stockholders’ equity. If we are unable to
achieve profitability, the market value of our common stock will decline and
there would be a material adverse effect on our financial
condition.
If
we
need to raise additional financing to support our operations, we cannot assure
you that additional financing will be available on terms favorable to us, or
at
all. If adequate funds are not available or if they are not available on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
We
may not be able to develop successful new beverage products which are important
to our growth.
An
important part of our strategy is to increase our sales through the development
of new beverage products. We cannot assure you that we will be able to continue
to develop, market and distribute future beverage products that will enjoy
market acceptance. The failure to continue to develop new beverage products
that
gain market acceptance could have an adverse impact on our growth and materially
adversely affect our financial condition. We may have higher obsolescent product
expense if new products fail to perform as expected due to the need to write
off
excess inventory of the new products.
Our
results of operations may be impacted in various ways by the introduction of
new
products, even if they are successful, including the following:
· |
sales
of new products could adversely impact sales of existing
products,
|
· |
we
may incur higher cost of goods sold and selling, general and
administrative expenses in the periods when we introduce new products
due
to increased costs associated with the introduction and marketing
of new
products, most of which are expensed as incurred,
and
|
· |
when
we introduce new platforms and bottle sizes, we may experience increased
freight and logistics costs as our co-packers adjust their facilities
for
the new products.
|
The
beverage business is highly competitive.
The
premium beverage and carbonated soft drink industries are highly competitive.
Many of our competitors have substantially greater financial, marketing,
personnel and other resources than we do. 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 also compete for
distributors, shelf space and customers primarily with other premium beverage
companies. As additional competitors enter the field, our market share may
fail
to increase or may decrease.
The
loss of our largest customers would substantially reduce
revenues.
Our
customers are material to our success. If we are unable to maintain good
relationships with our existing customers, our business could suffer. Unilateral
decisions could be taken by our distributors, and/or convenience chains, grocery
chains, specialty chain stores, club stores and other customers to discontinue
carrying all or any of our products that they are carrying at any time, which
could cause our business to suffer.
United
Natural Foods, the parent of certain of our retailers, accounted for
approximately 39% of our sales in each of 2006 and 2005. Trader Joe’s accounted
for approximately 17% of our 2006 sales and approximately 15% of our sales
in
2005. The loss of United Natural Foods or Trader Joe’s as a retailer would
substantially reduce our revenues unless and until we replaced that source
of
revenue.
The
loss of our third-party distributors could impair our operations and
substantially reduce our financial results.
We
depend
in large part on distributors to distribute our beverages and other products.
Most of our outside distributors are not bound by written agreements with us
and
may discontinue their relationship with us on short notice. Most distributors
handle a number of competitive products. In addition, our products are a small
part of our distributors’ businesses.
We
continually seek to expand distribution of our products by entering into
distribution arrangements with regional bottlers or other direct store delivery
distributors having established sales, marketing and distribution organizations.
Many of our distributors are affiliated with and manufacture and/or distribute
other soda and non-carbonated brands and other beverage products. In many cases,
such products compete directly with our products.
The
marketing efforts of our distributors are important for our success. If our
brands prove to be less attractive to our existing distributors and/or if we
fail to attract additional distributors, and/or our distributors do not market
and promote our products above the products of our competitors, our business,
financial condition and results of operations could be adversely
affected.
United
Natural Foods, Inc. accounted for approximately 39% of our sales in 2006 and
2005. Management believes it could find alternative distribution channels in
the
event of the loss of this distributor. Such a loss may adversely affect sales
in
the short term.
The
loss
of our third-party beverage distributors could impair our operations and
adversely affect our financial performance.
Price
fluctuations in, and unavailability of, raw materials that we use could
adversely affect us.
We
do not
enter into hedging arrangements for raw materials. Although the prices of raw
materials that we use have not increased significantly in recent years, our
results of operations would be adversely affected if the price of these raw
materials were to rise and we were unable to pass these costs on to our
customers.
We
depend
upon an uninterrupted supply of the ingredients for our products, a significant
portion of which we obtain overseas, principally from China and Brazil. We
obtain almost all of our crystallized ginger from Fiji and our Ginger Chews
from
Indonesia. Any decrease in the supply of these ingredients or increase in the
prices of these ingredients as a result of any adverse weather conditions,
pests, crop disease, interruptions of shipment or political considerations,
among other reasons, could substantially increase our costs and adversely affect
our financial performance.
The
loss of any of our co-packers could impair our operations and substantially
reduce our financial results.
We
rely
on third parties, called co-packers in our industry, to produce some of our
beverages, to produce our glass bottles and to bottle some of our beverages.
Our
co-packing arrangements with our main co-packer are under a contract that
expires on May 31, 2007 and renews automatically for successive two-year terms
unless terminated by either party. Our co-packing arrangements with other
companies are on a short term basis and such co-packers may discontinue their
relationship with us on short notice. While this arrangement permits us to
avoid
significant capital expenditures, it exposes us to various risks, including:
· |
our
largest co-packer, Lion Brewery, accounted for approximately 72%
of our
total case production in 2006,
|
· |
if
any of those co-packers were to terminate our co-packing arrangement
or
have difficulties in producing beverages for us, our ability to produce
our beverages would be adversely affected until we were able to make
alternative arrangements, and
|
· |
our
business reputation would be adversely affected if any of the co-packers
were to produce inferior quality
products.
|
We
compete in an industry that is brand-conscious, so brand name recognition and
acceptance of our products are critical to our success.
Our
business is substantially dependent upon awareness and market acceptance of
our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. Although we believe that we have been
relatively successful towards establishing our brands as recognizable brands
in
the New Age beverage industry, it may be too early in the product life cycle
of
these brands to determine whether our products and brands will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of our product name brands will
also be substantially dependent upon acceptance of our product name brands.
Accordingly, any failure of our brands to maintain or increase acceptance or
market penetration would likely have a material adverse affect on our revenues
and financial results.
We
compete in an industry characterized by rapid changes in consumer preferences
and public perception, so our ability to continue to market our existing
products and develop new products to satisfy our consumers’ changing preferences
will determine our long-term success.
Consumers
are seeking greater variety in their beverages. Our future success will depend,
in part, upon our continued ability to develop and introduce different and
innovative beverages. In order to retain and expand our market share, we must
continue to develop and introduce different and innovative beverages and be
competitive in the areas of quality and health, although there can be no
assurance of our ability to do so. There is no assurance that consumers will
continue to purchase our products in the future. Additionally, many of our
products are considered premium products and to maintain market share during
recessionary periods, we may have to reduce profit margins, which would
adversely affect our results of operations. Product lifecycles for some beverage
brands and/or products and/or packages may be limited to a few years before
consumers’ preferences change. The beverages we currently market are in varying
stages of their lifecycles and there can be no assurance that such beverages
will become or remain profitable for us. The beverage industry is subject to
changing consumer preferences and shifts in consumer preferences may adversely
affect us if we misjudge such preferences. We may be unable to achieve volume
growth through product and packaging initiatives. We also may be unable to
penetrate new markets. If our revenues decline, our business, financial
condition and results of operations will be materially and adversely
affected.
Our
quarterly operating results may fluctuate significantly because of the
seasonality of our business.
Our
highest revenues occur during the spring and summer, the second and third
quarters of each fiscal year. These seasonality issues may cause our financial
performance to fluctuate. In addition, beverage sales can be adversely affected
by sustained periods of bad weather.
Our
business is subject to many regulations and noncompliance is
costly.
The
production, marketing and sale of our unique beverages, including contents,
labels, caps and containers, are subject to the rules and regulations of various
federal, provincial, state and local health agencies. If a regulatory authority
finds that a current or future product or production run is not in compliance
with any of these regulations, we may be fined, or production may be stopped,
thus adversely affecting our financial conditions and operations. Similarly,
any
adverse publicity associated with any noncompliance may damage our reputation
and our ability to successfully market our products. Furthermore, the rules
and
regulations are subject to change from time to time and while we closely monitor
developments in this area, we have no way of anticipating whether changes in
these rules and regulations will impact our business adversely. Additional
or
revised regulatory requirements, whether labeling, environmental, tax or
otherwise, could have a material adverse effect on our financial condition
and
results of operations.
Rising
fuel and freight costs may have an adverse impact on our sales and
earnings.
The
recent volatility in the global oil markets has resulted in rising fuel and
freight prices, which many shipping companies are passing on to their customers.
Our shipping costs, and particularly our fuel expenses, have been increasing
and
we expect these costs may continue to increase. Due to the price sensitivity
of
our products, we do not anticipate that we will be able to pass all of these
increased costs on to our customers. The increase in fuel and freight costs
could have a material adverse impact on our financial condition.
Our
manufacturing process is not patented.
None
of
the manufacturing processes used in producing our products are subject to a
patent or similar intellectual property protection. Our only protection against
a third party using our recipes and processes is confidentiality agreements
with
the companies that produce our beverages and with our employees who have
knowledge of such processes. If our competitors develop substantially equivalent
proprietary information or otherwise obtain access to our knowledge, we will
have greater difficulty in competing with them for business, and our market
share could decline.
We
face risks associated with product liability claims and product
recalls.
Other
companies in the beverage industry have experienced product liability litigation
and product recalls arising primarily from defectively manufactured products
or
packaging. We maintain product liability insurance insuring our operations
from
any claims associated with product liability and we believe that the amount
of
this insurance is sufficient to protect us. We do not maintain product recall
insurance. In the event we were to experience additional product liability
or
product recall claim, our business operations and financial condition could
be
materially and adversely affected.
Our
intellectual property rights are critical to our success, the loss of such
rights could materially, adversely affect our business.
We
regard
the protection of our trademarks, trade dress and trade secrets as critical
to
our future success. We have registered our trademarks in the United States
that
are very important to our business. We also own the copyright in and to portions
of the content on the packaging of our products. We regard our trademarks,
copyrights and similar intellectual property as critical to our success and
attempt to protect such property with registered and common law trademarks
and
copyrights, restrictions on disclosure and other actions to prevent
infringement. Product packages, mechanical designs and artwork are important
to
our success and we would take action to protect against imitation of our
packaging and trade dress and to protect our trademarks and copyrights, as
necessary. We also rely on a combination of laws and contractual restrictions,
such as confidentiality agreements, to establish and protect our proprietary
rights, trade dress and trade secrets. However, laws and contractual
restrictions may not be sufficient to protect the exclusivity of our
intellectual property rights, trade dress or trade secrets. Furthermore,
enforcing our rights to our intellectual property could involve the expenditure
of significant management and financial resources. There can be no assurance
that other third parties will not infringe or misappropriate our trademarks
and
similar proprietary rights. If we lose some or all of our intellectual property
rights, our business may be materially and adversely affected.
If
we are not able to retain the full-time services of Christopher J. Reed, it
will
be more difficult for us to manage our operations and our operating performance
could suffer.
Our
business is dependent, to a large extent, upon the services of Christopher
J.
Reed, our founder, President, Chief Executive Officer, Chairman of the Board
and
Chief Financial Officer. We depend on Mr. Reed’s creativity and leadership in
running or supervising virtually all aspects of our day-to-day operations.
We do
not have a written employment agreement with Mr. Reed. In addition, we do not
maintain key person life insurance on Mr. Reed. Therefore, in the event of
the
loss or unavailability of Mr. Reed to us, there can be no assurance that we
would be able to locate in a timely manner or employ qualified personnel to
replace him. The loss of the services of Mr. Reed or our failure to attract
and
retain other key personnel over time would jeopardize our ability to execute
our
business plan and could have a material adverse effect on our business, results
of operations and financial condition.
Our
Chief Executive Officer may lack the experience and formal training to serve
as
our Chief Financial Officer.
Our
Chief
Executive Officer, Christopher J. Reed, currently also serves as our Chief
Financial Officer. However, Mr. Reed does not have any formal financial training
as a Chief Financial Officer. Due to the increasing complexity of accountancy
and cash management for reporting companies and the emphasis on internal
controls over financial reporting, Mr. Reed’s lack of experience in this area
may adversely affect the future results of our operations and our ability to
maintain an adequate system of internal controls over financial
reporting.
We
need to manage our growth and implement and maintain procedures and controls
during a time of rapid expansion in our business.
The
cost
of manufacturing and packaging our products was approximately 80% of our
aggregate revenues in 2006. This gross margin places pressure upon our cash
flow
and cash reserves when our sales increase. If we are to expand our operations,
such expansion would place a significant strain on our management, operational
and financial resources. Such expansion would also require improvements in
our
operational, accounting and information systems, procedures and controls. If
we
fail to manage this anticipated expansion properly, it could divert our limited
management, cash, personnel, and other resources from other responsibilities
and
could adversely affect our financial performance.
We
have operated without independent directors in the past.
We
have
not had two independent directors through a large portion of our history. As
a
result, certain material agreements between related parties have not been
negotiated with the oversight of independent directors and were entered into
at
the absolute discretion of the majority stockholder, Christopher J. Reed. Please
see the “Certain Relationships and Related Transactions” section for specific
details of these transactions.
Risks
Relating to Our Securities
We
recently conducted a rescission offer for shares issued in our initial public
offering. Although we have completed the rescission offer, we may continue
to be
subject to claims related to the circumstances related to the rescission
offer.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering. The shares issued in
connection with the initial public offering may have been issued in violation
of
either federal or state securities laws, or both, and may be subject to
rescission. In order to address this issue, we made a rescission offer to the
holders of these shares.
Our
rescission covered an aggregate of 333,156 shares of common stock issued in
connection with our initial public offering. These securities represented all
of
the shares issued in connection with the initial public offering prior to
October 11, 2006. We offered to rescind the shares of our common stock that
were
subject to the rescission offer for an amount equal to the price paid for the
shares plus interest, calculated from the date of the purchase through the
date
on which the rescission offer expires, at the applicable statutory interest
rate
per year. If our rescission offer had been accepted by all offerees, we would
have been required to make an aggregate payment to the holders of these shares
of up to approximately $1,332,624, plus statutory interest.
On
August
12, 2006, we made a rescission offer to all holders of the outstanding shares
that we believe are subject to rescission, pursuant to which we offered to
repurchase these shares then outstanding from the holders. At the expiration
of
our rescission offer on September 18, 2006, the rescission offer was accepted
by
32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. The shares that were tendered for
rescission were agreed to be purchased by others and not from our
funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. Accordingly,
although the rescission offer may have been accepted or rejected by some of
the
offerees, we may continue to be liable under federal and state securities laws
for up to an amount equal to the value of all shares of common stock issued
in
connection with the initial public offering, plus any statutory interest we
may
be required to pay. If it is determined that we offered securities without
properly registering them under federal or state law, or securing an exemption
from registration, regulators could impose monetary fines or other sanctions
as
provided under these laws.
There
has been a very limited public trading market for our securities and the market
for our securities, may continue to be limited, and be sporadic and highly
volatile.
There
is
currently a limited public market for our common stock. Our common stock only
has been listed for trading on the Over-the-Counter Bulletin Board (the “OTCBB”)
since January 3, 2007. We cannot assure you that an active market for our shares
will be established or maintained in the future. The OTCBB is not a national
securities exchange, and many companies have experienced limited liquidity
when
traded through this quotation system. Holders of our common stock may,
therefore, have difficulty selling their shares, should they decide to do so.
In
addition, there can be no assurances that such markets will continue or that
any
shares, which may be purchased, may be sold without incurring a loss. Any such
market price of our shares may not necessarily bear any relationship to our
book
value, assets, past operating results, financial condition or any other
established criteria of value, and may not be indicative of the market price
for
the shares in the future.
In
addition, the market price of our common stock may be volatile, which could
cause the value of our common stock to decline. Securities markets experience
significant price and volume fluctuations. This market volatility, as well
as
general economic conditions, could cause the market price of our common stock
to
fluctuate substantially. Many factors that are beyond our control may
significantly affect the market price of our shares. These factors
include:
· |
price
and volume fluctuations in the stock
markets,
|
· |
changes
in our earnings or variations in operating
results,
|
· |
any
shortfall in revenue or increase in losses from levels expected by
securities analysts,
|
· |
changes
in regulatory policies or law,
|
· |
operating
performance of companies comparable to us,
and
|
· |
general
economic trends and other external
factors.
|
Even
if
an active market for our common stock is established, stockholders may have
to
sell their shares at prices substantially lower than the price they paid for
it
or might otherwise receive than if a broad public market existed.
Future
financings could adversely affect common stock ownership interest and rights
in
comparison with those of other security holders.
Our
board
of directors has the power to issue additional shares of common or preferred
stock without stockholder approval. If additional funds are raised through
the
issuance of equity or convertible debt securities, the percentage ownership
of
our existing stockholders will be reduced, and these newly issued securities
may
have rights, preferences or privileges senior to those of existing
stockholders.
If
we
issue any additional common stock or securities convertible into common stock,
such issuance will reduce the proportionate ownership and voting power of each
other stockholder. In addition, such stock issuances might result in a reduction
of the book value of our common stock.
Because
Christopher J. Reed controls a majority of our stock, he can control the
outcome, or greatly influence the outcome, of all matters on which stockholders
vote.
Christopher
J. Reed, our President, Chief Executive Officer, Chairman of the Board and
Chief
Financial Officer owns 44.8% of our common stock. Therefore, Mr. Reed will
be
able to control the outcome, or greatly influence the outcome, on all matters
requiring stockholder approval, including the election of directors, amendment
of our certificate of incorporation, and any merger, consolidation or sale
of
all or substantially all of our assets or other transactions resulting in a
change of control of our company. In addition, as our Chairman and Chief
Executive Officer, Mr. Reed has and will continue to have significant influence
over our strategy, technology and other matters. Mr. Reed’s interests may not
always coincide with the interests of other holders of our common
stock.
A
substantial number of our shares are available for sale in the public market
and
sales of those shares could adversely affect our stock
price.
Sales
of
a substantial number of shares of common stock into the public market, or the
perception that such sales could occur, could substantially reduce our stock
price in the public market for our common stock, and could impair our ability
to
obtain capital through a subsequent financing of our securities. We have
7,143,185 shares of common stock outstanding. Of the shares of our common stock
currently outstanding, 3,900,094 shares are “restricted securities” under the
Securities Act. Some of these “restricted securities” will be subject to
restrictions on the timing, manner, and volume of sales of such
shares.
In
addition, we have issued and outstanding options and warrants that may be
exercised into 1,176,741 shares
of
common stock (including 200,000 shares reserved for future issuance under the
underwriters’ warrant) and 58,940 shares of Series A preferred stock that may be
converted into 235,760 shares of common stock. In addition, our outstanding
shares of Series A preferred stock bear a dividend of 5% per year, or
approximately $29,470 per year. We have the option to pay the dividend in shares
of our common stock. In 2005 and 2006, we paid the dividend in an aggregate
of
7,362 and 7,373 shares of common stock in each such year, respectively, and
anticipate that we will be obligated to issue at least this many shares annually
to the holders of the Series A preferred stock so long as such shares are issued
and outstanding.
Our
common stock is subject to “penny stock” regulations that may affect the
liquidity of our common stock.
Our
common stock is subject to the rules adopted by the SEC that regulates
broker-dealer practices in connection with transactions in “penny stocks.” Penny
stocks are generally equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted
on
the NASDAQ Stock Market, provided that current price and volume information
with
respect to transactions in such securities is provided by the exchange or
system).
The
penny
stock rules require that a broker-dealer, prior to a transaction in a penny
stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the SEC, which contains the following:
· |
a
description of the nature and level of risk in the market for penny
stocks
in both public offerings and secondary
trading,
|
· |
a
description of the broker’s or dealer’s duties to the customer and of the
rights and remedies available to the customer with respect to violation
of
such duties or other requirements of securities
laws,
|
· |
a
brief, clear, narrative description of a dealer market, including
“bid”
and “ask” prices for penny stocks and significance of the spread between
the “bid” and “ask” price,
|
· |
a
toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or in
the
conduct of trading in penny stocks,
and
|
· |
such
other information and is in such form (including language, type,
size and
format), as the SEC shall require by rule or
regulation.
|
Prior
to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:
· |
the
bid and offer quotations for the penny
stock,
|
· |
the
compensation of the broker-dealer and its salesperson in the
transaction,
|
· |
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market
for such stock,
|
· |
the
liquidity of the market for such stock,
and
|
· |
monthly
account statements showing the market value of each penny stock held
in
the customer’s account.
|
In
addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock such as our common stock if it
is
subject to the penny stock rules.
Item
2. Description of Property
We
own an
18,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street
in an unincorporated area of Los Angeles County, near downtown Los Angeles.
The
property is located in the Los Angeles County Mid-Alameda Corridor Enterprise
Zone. Businesses located in the enterprise zone are eligible for certain
economic incentives designed to stimulate business investment, encourage growth
and development and promote job creation.
We
purchased the facility in December 2000 for a purchase price of $850,000,
including a down payment of $102,000. We financed approximately $750,000 of
the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a building
improvement loan for $168,000 from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. Christopher J. Reed, our
founder and Chief Executive Officer, personally guaranteed both loans. Both
loans are due and payable on November 29, 2025, with interest at the New York
prime rate plus 1%, adjusted monthly, with no cap or floor. As of December
31,
2006, the principal and interest payments on the two loans combined were $7,237
per month. This facility serves as our principal executive offices, our West
Coast Brewery and bottling plant and our Southern California warehouse
facility.
Item
3. Legal
Proceedings
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 asserted 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
contended that we negligently manufactured the soda resulting in at least one
personal injury. Consac sought $2.6 million in damages, plus interest and
attorneys fees. In January 2007, we settled the lawsuit for $450,000, of which
$300,000 was paid by us and $150,000 was paid by our insurance carrier. The
$300,000 was accrued as of December 31, 2006 and is included in legal costs
in
the statement of operations for the year ended December 31, 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. These securities
represented all of the shares issued in connection with the initial public
offering prior to October 11, 2006. These shares issued in connection with
the
initial public offering may have been issued in violation of either federal
or
state securities laws, or both, and may be subject to rescission.
On
August
12, 2006, we made a rescission offer to all holders of the outstanding shares
that we believe are subject to rescission, pursuant to which we offered to
repurchase these shares then outstanding from the holders. At the expiration
of
our rescission offer on September 18, 2006, the rescission offer was accepted
by
32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. The shares that were tendered for
rescission were agreed to be purchased by others and not from our
funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. If any or
all
of the offerees reject the rescission offer, we may continue to be liable under
federal and state securities laws for up to an amount equal to the value of
all
shares of common stock issued in connection with the initial public offering
plus any statutory interest we may be required to pay. If it is determined
that
we offered securities without properly registering them under federal or state
law, or securing an exemption from registration, regulators could impose
monetary fines or other sanctions as provided under these laws.
Except
as
set forth above, we believe that there are no material litigation matters at
the
current time. Although the results of such litigation matters and claims cannot
be predicted with certainty, we believe that the final outcome of such claims
and proceedings will not have a material adverse impact on our financial
position, liquidity, or results of operations.
Item
4. Submission
of Matters to a Vote of Security Holders
No
matters were submitted to our stockholders, through the solicitation of proxies
or otherwise, during the fourth quarter of the year ended December 31,
2006.
PART
II
Item
5. Market
for Common Equity and Related Stockholder Matters
Trading
History
Our
common stock has been listed for trading on the National Association of
Securities Dealers, Inc. Over-the-Counter Bulletin Board, or the OTC Bulletin
Board, under the symbol “REED.OB” since January 3, 2007. Trading in our common
stock has not been extensive and such trades cannot be characterized as
constituting an active trading market. The following is a summary of the high
and low closing prices of our common stock on the OTC Bulletin Board during
the
periods presented. Such prices represent inter-dealer prices, without retail
mark-up, mark down or commissions, and may not necessarily represent actual
transactions:
|
|
Closing
Sale Price
|
|
|
|
High
|
|
Low
|
|
Year
Ending December
31, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
7.17
|
|
$
|
3.00
|
|
On
March
30, 2007, the closing sales price for the common stock was $6.18, as reported
on
the website of the NASDAQ Stock Market. As of March 30, 2007, there were
approximately 282 stockholders of record of the common stock (not including
the
number of persons or entities holding stock in nominee or street name through
various brokerage firms) and 7,143,185 outstanding shares of common
stock.
Dividends
We
have
never declared or paid dividends on our common stock. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we
do
not anticipate declaring or paying any dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board
of
directors after taking into account various factors, including the terms of
our
credit facility and our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock in either cash or additional shares
of common stock at our discretion. In 2005 and 2006, we paid the dividend in
an
aggregate of 7,362 and 7,373 shares of common stock in each such year,
respectively, and anticipate that we will be obligated to issue at least this
many shares annually to the holders of the Series A preferred stock so long
as
such shares are issued and outstanding.
Recent
Issuances of Unregistered Securities
In
September 2005, we declared a dividend of 7,362 shares of our common stock
as a
dividend to the holders of our Series A preferred stock based on a $29,470
accrued annual dividend payable. We issued the stock dividend in May 2006.
As of
June 30, 2006, we declared and issued a dividend of 7,373 shares of our common
stock as a dividend to the holders of our Series A preferred stock based on
a
$29,470 accrued annual dividend payable. The Series A preferred stock bears
a 5%
annual, non-cumulative dividend that may be in cash or in shares of our common
stock based on its then fair market value. We believe the securities were issued
in reliance from exemptions from registration pursuant to Section 4(2) or
Regulation D under the Securities Act.
In
November and December 2006, we issued an aggregate of 140,859 shares of common
stock to holders of our convertible notes with respect to the conversion of
an
aggregate of $285,444 of the obligations, including principal and accrued
interest, on such notes. These note conversions included the conversion by
Robert T. Reed, Sr., the father of Christopher J. Reed, of an aggregate of
$263,089 of the obligations, including principal and accrued interest, on such
notes into an aggregate of 131,544 shares of common stock. We believe the
securities were issued in reliance from exemptions from registration pursuant
to
Section 4(2) or Regulation D under the Securities Act.
In
December 2006 we issued 85,000 options to purchase shares of our common stock
to
our employees under the 2001 Stock Option Plan at an exercise price of $4.00
per
share. We believe the securities were issued in reliance from exemptions from
registration pursuant to Regulation D under the Securities Act.
Use
of Proceeds from Initial Public Offering
On
December 12, 2006, we completed the sale of 2,000,000 shares of our common
stock
at an offering price of $4.00 per share in our initial public offering. The
public offering resulted in gross proceeds of $8,000,000 to us. In connection
with the public offering (Registration Statement on Form SB-2, File No.
333-120451, effective date October 11, 2006) , we paid aggregate commissions,
concessions and non-accountable expenses to the underwriters of $800,000,
resulting in net proceeds of $7,200,000, excluding other expenses of the public
offering. From August 3, 2005 through April 7, 2006, we had issued 333,156
shares of our common stock in connection with the public offering. We sold
the
balance of the 2,000,000 shares in connection with the public offering
(1,666,844 shares) following October 11, 2006.
None
of
the proceeds were paid to directors, officers, affiliates or stockholders owning
10% or more of our common stock. We used approximately $340,000 of the proceeds
to pay expenses associated with our rescission offer, as described below. This
may be deemed to represent a material change from the estimated use of proceeds
contained in the final prospectus relating to our initial public offering.
The
following table sets forth the uses of approximately $6,355,000
of
the
proceeds from our initial public offering, as of December 31, 2006:
Commissions
related to the public offering (1)
|
|
$
|
800,000
|
|
Other
offering expenses (2)
|
|
|
830,000
|
|
Expenses
related to the rescission offer (3)
|
|
|
340,000
|
|
Investment
in a restricted money market account (4)
|
|
|
1,575,000
|
|
Payment
to reduce line of credit (5)
|
|
|
720,000
|
|
Payment
of accounts payable and current operating expenses
(6)
|
|
|
1,567,000
|
|
Costs
of hiring of additional sales personnel (7)
|
|
|
499,000
|
|
New
product launch costs (8)
|
|
|
4,000
|
|
Sales
delivery vehicles (9)
|
|
|
20,000
|
|
Total
estimated proceeds used
|
|
$
|
6,355,000
|
|
(1) This
amount represents 10% of the gross proceeds of the public offering which were
paid as selling commissions to the underwriters in accordance with the
underwriting agreement.
(2) This
amount represents costs, including legal, accounting, printing and reimbursable
expenses of the underwriters associated with the public offering.
(3) This
amount represents legal and accounting expenses associated with the rescission
offer.
(4) These
funds were deposited in a restricted money market account in order to secure
a
line of credit with California United Bank.
(5) These
funds were used to reduce our obligation on a line of credit with Merrill Lynch
in order to reduce interest expense. The line of credit remains in effect and
the amount remaining on the line of credit is available for our use, from time
to time.
(6) These
funds were used to settle accounts payable and pay for current operating
expenses.
(7) These
funds were used to pay the incremental increase of hiring new personnel and
related expenses.
(8) These
funds were used to pay for the development and product design costs for new
product launches.
(9) These
funds were used to purchase a new delivery vehicle related to the operations
of
the Brewery.
Item
6. Management’s
Discussion and Analysis or Plan of Operation
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes appearing elsewhere in this Annual Report. This discussion and
analysis may contain 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 the heading of “Risk Factors”
in the “Business” section in this Annual Report.
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.
The
following table shows a breakdown of net sales with respect to our distribution
channels for the periods set forth in the table:
|
|
Direct
sales to large retailer accounts
|
|
%
of total sales
|
|
Local
direct distribution
|
|
%
of total sales
|
|
Natural,
gourmet and mainstream distributors
|
|
%
of total
|
|
Total
sales
|
|
2006
|
|
$
|
1,853,439
|
|
|
18
|
|
$
|
1,039,966
|
|
|
10
|
|
$
|
7,590,948
|
|
|
72
|
|
$
|
10,484,353
|
|
2005
|
|
|
1,536,896
|
|
|
16
|
|
|
751,999
|
|
|
8
|
|
|
7,181,390
|
|
|
76
|
|
|
9,470,285
|
|
2004
|
|
|
1,983,598
|
|
|
22
|
|
|
395,601
|
|
|
4
|
|
|
6,599,166
|
|
|
74
|
|
|
8,978,365
|
|
Historically,
we have focused our marketing efforts on natural and gourmet food stores. In
2003, we expanded our marketing efforts to include more mainstream markets.
These efforts included selling our products directly to:
· |
large
retail accounts, such as Costco, BJ Wholesale, and Cost Plus World
Markets, and
|
· |
the
natural food section of mainstream national supermarket chains, such
as
Safeway, Kroger’s, Ralph’s and Bristol
Farms.
|
In
addition, since 2003, we have introduced new products and offer specialty
beverage packaging options not typically available in the marketplace into
the
marketplace that have contributed to our growth in sales. These products include
a 5-liter “party keg” version of our Virgil’s Root Beer and Cream Soda, 12-ounce
long neck bottles of our Virgil’s Cream Soda and 750 ml. size bottles of our
Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple
Brew.
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. Our net sales have increased each
year during the period from 2002 to 2006, as follows:
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Net
sales
|
|
$
|
6,400,000
|
|
$
|
6,800,000
|
|
$
|
9,000,000
|
|
$
|
9,500,000
|
|
$
|
10,500,000
|
|
We
believe that the increase in net sales over this period comes from three
factors:
· |
successes
in our Southern California direct distribution
strategy,
|
· |
increases
in our core of national distribution to natural and gourmet food
stores
and mainstream supermarket chains,
and
|
· |
increases
in our 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. However,
we have encountered difficulties in increasing our gross margins due to certain
factors, including:
· |
inefficiencies
commensurate with a start-up period for the Brewery that we purchased
in
2002 as our West Coast production facility,
and
|
· |
higher
freight, glass and production expenses due to the increase in the
cost of
fuel and increases in the price of ingredients in our
products.
|
In
2002,
we purchased and outfitted the Brewery, in part to help reduce both production
costs and freight costs associated with our west coast sales. Gross margins
decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
result of attaining greater functionality and efficiencies in our operation
of
the Brewery by our own personnel and being able to produce and ship products
in
the western half of the United States from a west coast facility. However,
in
2005, gross margins decreased to 18.2% as a principal result of increases in
fuel prices, which 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 February 2006, we decided to raise our prices on the Ginger
Brew line for the first time in 16 years. In 2006, gross margins recovered
to
19.6% partially as a result of a price increase on our core Reed’s Ginger Brew
line and offset by increased pressure from more expensive production,
ingredients and packaging expenses due to fuel related price increases.
In
addition, our west coast Brewery facility is running at 40% of capacity. We
have
had difficulties with the flavor of our Ginger Brew products produced at the
Brewery. As a result, we continue to supply our Ginger Brew products at the
Brewery from our east coast co-packing facility, thereby causing us to incur
increased freight and warehousing expenses on our products. Management is
committed to selling a high quality, great tasting product and has elected
to
continue to sell certain of our Ginger Brew products produced from our east
coast facility on the west coast, even though it negatively impacts our gross
margins. As we are able to make the Brewery become more fully utilized, we
believe that we will experience improvements in gross margins due to freight
and
production savings.
On
December 12, 2006, we completed the sale of 2,000,000 shares of our common
stock
at an offering price of $4.00 per share in our initial public offering. The
public offering resulted in gross proceeds of $8,000,000 to us. In connection
with the public offering, we paid aggregate commissions, concessions and
non-accountable expenses to the underwriters of $800,000, resulting in net
proceeds of $7,200,000, excluding other expenses of the public offering. In
addition, we have agreed to issue, to the underwriters, warrants to purchase
up
to approximately an additional 200,000 shares of common stock at an exercise
price of $6.60 per share (165% of the public offering price per share), at
a
purchase price of $0.001 per warrant. The underwriters’ warrants are exercisable
for a period of five years commencing on the final closing date of the public
offering. From August 3, 2005 through April 7, 2006, we had issued 333,156
shares of our common stock in connection with the public offering. We sold
the
balance of the 2,000,000 shares in connection with the public offering
(1,666,844 shares) following October 11, 2006.
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 increase, our packaging, production and ingredient costs
will
continue to rise. We have attempted to offset the rising freight costs from
fuel
price increases by creatively negotiating rates and managing freight. We will
continue to pursue alternative production, packaging and ingredient suppliers
and options to help offset the affect of rising fuel prices on these
expenses.
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 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 or 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.
Interest
Rates - We
use
lines of credit as a source of capital and are negatively impacted as interest
rates rise.
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® registered trademark in connection with the
manufacture, sale and distribution of beverages and water and non-beverage
products. We also own the China Cola® and Virgil’s® registered trademarks. 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, 2006 or 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 years ended December 31, 2006 or
2005.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising.
We
account for advertising production costs by expensing such production costs
the
first time the related advertising is run.
Accounts
Receivable.
We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to
the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment
of
past due trade accounts receivable outstanding.
Inventories.
Inventories are stated at the lower of cost to purchase and/or manufacture
the
inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand
and/or our ability to sell the product(s) concerned and production requirements.
Demand for our products can fluctuate significantly. Factors that could affect
demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations
of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be
inaccurate, which could result in an understated or overstated provision
required for excess and obsolete inventory.
Income
Taxes.
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the value
of our deferred tax assets. If our management determines that it is more likely
than not that these assets will not be realized, we will reduce the value of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Results
of Operations
Twelve
Months Ended December 31, 2006 Compared to Twelve Months Ended December 31,
2005
Net
sales
increased by $1,014,068, or 10.7%, to $10,484,353 in 2006 from $9,470,285 in
2005. Sales were affected by a number of trends from 2005 to 2006. The Reed’s
Ginger Brew product line increased from $4,690,000 in 2005 to $5,345,000 in
2006. The Virgil’s Root Beer line increased from $3,345,000 in 2005 to
$3,729,000 in 2006. These increases were offset by reduced co-packing sales.
We
expect to continue this trend with a few exceptions. Even though the Virgil’s 5
liter party keg decreased from 2005 to 2006 by $214,000, we expect to increase
our sales of the 5 liter party keg. We do not believe this product will continue
its downward trend since we have aligned with a marketing group which sells
a
small appliance that is a home unit for chilling and dispensing our 5 liter
party kegs, and uses our kegs in many new accounts, including Bloomingdales.
Ice
cream sales dropped from $147,000 in 2005 to $144,000 in 2006. Candy sales
increased from $755,000 in 2005 to $800,000 in 2006. With the completion of
our
public offering, and the utilization of these funds to increase the sales force
and marketing in general, we expect to increase sales in 2007 from our 2006
levels.
Cost
of
sales increased by $681,275, or 8.8%, from $7,745,499 in 2005 to $8,426,774
in
2006. As a percentage of net sales, cost of sales decreased from 81.8% in 2005
to 80.4% in 2006. Cost of sales as a percentage of net sales decreased by 1.4%,
primarily as a result of higher prices on products sold (7.3%) and lower freight
costs due to both better negotiated rates and transferring freight costs to
customers (2.5%) offset by increased promotional discounting (-2.7%), increased
production expenses (-2.2%), increased packaging costs (-1.4%) and increased
ingredient costs (-1.0%).
Gross
profit increased from $1,724,786 in 2005 to $2,057,579 in 2006. As a percentage
of net sales, gross profit increased from 18.2% in 2005 to 19.6% in 2006.
Fuel
price increases have driven costs of production, packaging and ingredients
up.
If fuel prices continue to increase, we will have more pressure on our margins.
There remain opportunities to reduce the ingredients, packaging and production
expenses. We intend to focus our attention on reducing these costs. In 2006,
we
were able to reduce freight expenses at a time of rapidly rising fuel costs.
Currently, we are looking at alternative production plants to reduce production
costs, our largest expense, and we are aggressively negotiating packaging and
raw material prices.
Operating
expenses increased by $1,622,932, or 72.4%, from $2,241,237 in 2005 to
$3,864,169 in 2006 and increased as a percentage of net sales from 23.7% in
2005
to 36.9% in 2006. The primary increase in expenses was due to the costs
associated with the rescission offer that we undertook to satisfy a possible
securities law violation associated with our sales of common stock and the
resumption of our sales of securities and the settlement of a lawsuit. We had
one time expenses for 2005 of $160,768. These expenses were for the provision
of
a former director loan and for the defense of a lawsuit. In 2006, one time
expenses included rescission expenses of $835,008 and $300,000 in expenses
for
the settling of the Consec lawsuit, more fully described in Item 3 (“Legal
Proceedings”) of this Annual Report. Theses two expenses in 2006 made up 70% of
the increase in operating expenses. The remaining 30% of the operating expense
increase came from the following: increased salaries due to a larger sales
force
(10.3%), increased sales expenses from increased fuel costs and increased
telephone charges (7.2%), increased recycling fees expenses (11.3%), increased
legal and accounting costs due to the costs associated with being a public
reporting company (9.7%) and increased insurance expenses (3.2%), offset by
reduced promotional expenses (-2.7%). In 2007, we expect professional fees
and
recycling fees to decrease, and sales expenses, including wages and commissions,
to increase.
Interest
expense was $309,504 in 2005, compared to interest expense of $414,792 in 2006.
We had higher interest expense in 2006 due to increased borrowing on our
receivable line of credit with our lender. In 2007, we expect that the IPO
will
reduce our need for debt financing and allow us 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. On December 12, 2006, we
completed the sale of 2,000,000 shares of our common stock at an offering price
of $4.00 per share in our initial public offering. The public offering resulted
in gross proceeds of $8,000,000 to us. In connection with the public offering,
we paid aggregate commissions, concessions and non-accountable expenses to
the
underwriters of $800,000, resulting in net proceeds of $7,200,000, excluding
other expenses of the public offering. In addition, we issued, to the
underwriters, warrants to purchase up to approximately an additional 200,000
shares of common stock at an exercise price of $6.60 per share (165% of the
public offering price per share), at a purchase price of $0.001 per warrant.
The
underwriters’ warrants are exercisable for a period of five years commencing on
the final closing date of the public offering. From August 3, 2005 through
April
7, 2006, we had issued 333,156 shares of our common stock in connection with
the
public offering. We sold the balance of the 2,000,000 shares in connection
with
the public offering (1,666,844 shares) following October 11, 2006.
As
of
December 31, 2006, we had an accumulated deficit of $5,502,142.
As
of
December 31, 2006, we had a working capital surplus of $2,834,940, compared
to a
working capital deficit of $1,594,758 as of December 31, 2005. This
increase in our working capital was primarily attributable to an increase in
our
cash position resulting from our public offering. Cash and cash equivalents
were
$1,638,917 as of December 31, 2006, as compared to $27,744 as December 31,
2005.
Net
cash
used in operating activities increased to $3,003,327 in the year ended December
31, 2006 from $42,610 in the year ended December 31, 2005. This increase was
primarily due to our net loss in 2006 of $2,213,609 and increases in our
accounts receivable of $648,857 and inventory of $303,211in 2006.
We
used
$1,645,380 in investing activities in the year ended December 31, 2006, as
compared to $214,667 in the year ended December 31, 2005. The increase was
primarily a result of our investment of $1,580,456 in a restricted money market
account which secures our line of credit facility and the purchase of $64,924
of
equipment, including a new delivery vehicle.
Cash
flow
provided from financing activities was $6,259,880 in the year ended December
31,
2006, as compared to $242,533 in the year ended December 31, 2005. The increase
resulted primarily from the receipt of $7,004,611 of proceeds from our initial
public offering in 2006, offset by the payment of deferred offering costs of
$251,924 and $327,734 to reduce outstanding debt.
As
of
December 31, 2006, we had outstanding borrowings of $1,355,526 under the
following line of credit agreements:
· |
We
have an unsecured $50,000 line of credit with US Bank which expires
in
December 2009. Interest is payable monthly at the prime rate, as
published
in the Wall Street Journal, plus 12% per annum. Our outstanding balance
was $24,750 at December 31, 2006 and there was $25,250 available
under the
line of credit. The interest rate in effect at December 31, 2006
was
9.75%%.
|
· |
We
have a line of credit with Merrill Lynch. Robert T. Reed, Jr., our
Vice
President and National Sales Manager - Mainstream and a brother of
our
Chief Executive Officer, Christopher J. Reed, has pledged certain
securities (which do not include any of our securities which are
owned by
Mr. Reed) in his personal securities account on deposit with Merrill
Lynch
as collateral for repayment of the line of credit. The amount of
the line
of credit is based on a percentage value of such securities. At December
31, 2006, the outstanding balance on the line of credit was $-0-,
and
there was approximately $701,000 available under the line of credit.
The
line of credit bears interest at a rate of 3.785% per annum plus
LIBOR
(9.1% as of December 31, 2006). In consideration for Mr. Reed’s pledging
his stock account at Merrill Lynch as collateral, we have agreed
to pay
Mr. Reed 5% per annum of the amount we borrow from Merrill Lynch, as
a loan fee. During the years ended December 31, 2006 and 2005, we
paid Mr.
Reed $28,125 and $15,250, respectively, under this agreement. In
addition,
Christopher J. Reed has pledged all of his shares of common stock
to
Robert T. Reed, Jr. as collateral for the shares pledged by Robert
T.
Reed, Jr.
|
· |
We
have a line of credit with California United Bank. This line of credit
allows us to borrow a maximum amount of $1,500,000. As of December
31,
2006, the amount borrowed on this line of credit was $1,330,776.
The
interest rate on this line of credit is Prime, which was 8.25% at
December
31, 2006. The line of credit expires in June 2008. This revolving
line of
credit is secured by all Company assets, except real estate. In addition,
we have assigned a security interest in a deposit account at the
bank. The
amount of the deposit and the security interest is $1,575,000 and
may be
offset by the bank against any balance on the line of credit. The
deposit
cannot be withdrawn during the term of the line of credit. We may
terminate the line of credit arrangement at any time, without penalty.
As
of December 31, 2006, we had approximately $169,000 of availability
on
this line of credit. During the term of this line of credit e are
required
to have a minimum stockholders’ equity balance of
$1,500,000.
|
At
December 31, 2006, we did not have any material commitments for capital
expenditures.
Management
recognizes that operating losses negatively impact liquidity and is working
on
decreasing operating losses, while focusing on increasing net sales. Management
believes our current cash position and lines of credit will be sufficient to
enable us to meet our cash needs through at least the end of 2007.
We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If
we are
not able to achieve profitable operations at some point in the future, we
eventually may have insufficient working capital to maintain our operations
as
we presently intend to conduct them or to fund our expansion and
marketing and product development plans.
In
addition, our losses may increase in the future as we expand our manufacturing
capabilities and fund our marketing plans and product development. These losses,
among other things, have had and will continue to have an adverse effect on
our
working capital, total assets and stockholders’ equity. If we are unable to
achieve profitability, the market value of our common stock will decline and
there would be a material adverse effect on our financial
condition.
If
we
continue to suffer losses from operations, the proceeds from our public offering
may be insufficient to support our ability to expand our business operations
as
rapidly as we would deem necessary at any time, unless we are able to obtain
additional financing. There can be no assurance that we will be able to obtain
such financing on acceptable terms, or at all. If adequate funds are not
available or are not available on acceptable terms, we may not be able to pursue
our business objectives and would be required to reduce our level of operations,
including reducing infrastructure, promotions, personnel and other operating
expenses. These events could adversely affect our business, results of
operations and financial condition.
In
addition, some or all of the elements of our expansion plan may have to be
curtailed or delayed unless we are able to find alternative external sources
of
working capital. We would need to raise additional funds to respond to business
contingencies, which may include the need to:
· |
fund
more rapid expansion,
|
· |
fund
additional marketing expenditures,
|
· |
enhance
our operating infrastructure,
|
· |
respond
to competitive pressures, and
|
· |
acquire
other businesses.
|
We
cannot
assure you that additional financing will be available on terms favorable to
us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Recent
Accounting Pronouncements
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
“Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109,” which seeks to reduce the diversity in practice associated with the
accounting and reporting for uncertainty in income tax positions. This
Interpretation prescribes a comprehensive model for the financial statement
recognition, measurement, presentation and disclosure of uncertain tax positions
taken or expected to be taken in an income tax return. FIN 48 presents a
two-step process for evaluating a tax position. The first step is to determine
whether it is more-likely-than-not that a tax position will be sustained upon
examination, based on the technical merits of the position. The second step
is
to measure the benefit to be recorded from tax positions that meet the
more-likely-than-not recognition threshold, by determining the largest amount
of
tax benefit that is greater than 50 percent likely of being realized upon
ultimate settlement, and recognizing that amount in the financial statements.
FIN 48 is effective for fiscal years beginning after December 15, 2006.
Management believes the adoption of FIN 48 will not have a material impact
on
our results of operations, financial position or cash flow.
In
September 2006, the Securities and Exchange Commission issued Staff Accounting
Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.” SAB No.
108 was issued in order to eliminate the diversity in practice surrounding
how
public companies quantify financial statement misstatements. SAB No. 108
requires that registrants quantify errors using both a balance sheet (iron
curtain) approach and an income statement (rollover) approach then evaluate
whether either approach results in a misstated amount that, when all relevant
quantitative and qualitative factors are considered, is material. SAB No. 108
is
effective for fiscal years ending after November 15, 2006. We
have
adopted the bulletin during 2006. The adoption did not have a material effect
on
results
of operations, financial position, or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No.
133 and 140.” This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.” This Statement permits fair value re-measurement for any
hybrid financial instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement 133,
establishes a requirement to evaluate interests in securitized financial assets
to identify interests that are freestanding derivatives or that are hybrid
financial instruments that contain an embedded derivative requiring bifurcation,
clarifies that concentrations of credit risk in the form of subordination are
not embedded derivatives, and amends Statement 140 to eliminate the prohibition
on a qualifying special-purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than another derivative
financial instrument. This
statement is effective for fiscal years beginning after September 15, 2006.
We
currently
do not engage in the activities described in SFAS 155. Consequently, management
believes SFAS 155 will not have a material impact on our results of operations,
financial position or cash flow.
In
March
2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets-
an amendment of FASB Statement No. 140.” This Statement requires an entity to
recognize a servicing asset and liability each time it undertakes an obligation
to service a financial asset. This
statement is effective for fiscal years beginning after September 15, 2006.
We
currently
do not engage in the activities described in SFAS 156. Consequently, management
believes SFAS 156 will not have a material impact on our results of operations,
financial position or cash flow.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157
also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures
on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and
to
interim periods within those fiscal years.
We are
currently in the process of evaluating the effect, if any, the adoption of
SFAS
No. 157 will have on its results of operations, financial position, or cash
flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” which will require us to
recognize the funded status of defined benefit plans in its statement of
financial position. This statement will be effective as of our year ending
August
31, 2007.
We
currently do not have pension benefit plans. Consequently, management believes
SFAS 158 will not have a material impact on our results of operations, financial
position or cash flow.
On
September 22, 2005, the SEC issued rules to delay by one-year the required
reporting by management on internal controls over financial reporting for
non-accelerated filers. The new SEC rule extends the compliance date for such
registrants to fiscal years ending on or after July 15, 2007. Accordingly,
we
qualify for the deferral until the year ending December 31, 2007 in order to
comply with the internal control reporting requirements.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
ITEM
7: FINANCIAL
STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
BALANCE
SHEET |
F-2
|
|
|
STATEMENTS
OF OPERATIONS |
F-3
|
|
|
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-4
|
|
|
STATEMENTS
OF CASH FLOWS
|
F-5
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
F-6
|
Report
of Independent Registered Public Accounting Firm
We
have
audited the accompanying balance sheet of Reed’s, Inc. as of December 31, 2006
and the related statements of operations, changes in stockholders’ equity and
cash flows for the years ended December 31, 2006 and 2005. 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,
2006 and the results of its operations and its cash flows for the
years ended
December 31, 2006 and 2005 in conformity with accounting principles
generally
accepted in the United States of America.
As
discussed in Note 1 to the financial statements,
effective January 1, 2006 the Company adopted Statement of Financial
Accounting
Standard ("SFAS") 123(R), "Share-Based Payment" ("SFAS 123(R)"),
which requires
companies to estimate the fair value of share-based payment awards
on the date
of grant using an option-pricing model.
/s/
WEINBERG & COMPANY, P.A.
Weinberg
& Company, P.A.
Los
Angeles, California
March
13, 2007
REED’S,
INC.
BALANCE
SHEET
December 31,
2006
ASSETS
|
|
|
|
Cash
|
|
$
|
1,638,917
|
|
Restricted
cash
|
|
|
1,580,456
|
|
Inventory
|
|
|
1,511,230
|
|
Trade
accounts receivable, net of allowance for doubtful accounts
and returns
and discounts of $173,253
|
|
|
1,183,763
|
|
Other
receivables
|
|
|
24,811
|
|
Prepaid
expenses
|
|
|
164,462
|
|
Total
Current Assets
|
|
|
6,103,639
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $663,251
|
|
|
1,795,163
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $4,467
|
|
|
14,146
|
|
Total
Other Assets
|
|
|
814,347
|
|
TOTAL
ASSETS
|
|
$
|
8,713,149
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable
|
|
$
|
1,695,014
|
|
Lines
of credit
|
|
|
1,355,526
|
|
Current
portion of long term debt
|
|
|
71,860
|
|
Accrued
interest
|
|
|
27,998
|
|
Accrued
expenses
|
|
|
118,301
|
|
Total
Current Liabilities
|
|
|
3,268,699
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
821,362
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,090,061
|
|
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,
7,143,185 shares issued and outstanding
|
|
|
714
|
|
|
|
|
|
|
Additional
paid in capital
|
|
|
9,535,114
|
|
Accumulated
deficit
|
|
|
(5,502,142
|
)
|
Total
stockholders’ equity
|
|
|
4,623,088
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
8,713,149
|
|
The
accompanying notes are an integral part of these financial
statements
REED’S,
INC.
STATEMENTS
OF OPERATIONS
For
the Years Ended December 31, 2006
and
2005
|
|
Year
Ended
December 31 ,
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
SALES
|
|
$
|
10,484,353
|
|
$
|
9,470,285
|
|
COST
OF SALES
|
|
|
8,426,774
|
|
|
7,745,499
|
|
GROSS
PROFIT
|
|
|
2,057,579
|
|
|
1,724,786
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling
|
|
|
1,352,313
|
|
|
1,124,705
|
|
General &
Administrative
|
|
|
2,187,227
|
|
|
955,764
|
|
Legal
Fees
|
|
|
321,629
|
|
|
36,558
|
|
Provision
for amounts due from director
|
|
|
3,000
|
|
|
124,210
|
|
|
|
|
3,864,169
|
|
|
2,241,237
|
|
LOSS FROM
OPERATIONS
|
|
|
(1,806,590
|
)
|
|
(516,451
|
)
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
7,773
|
|
|
|
|
Interest
Expense
|
|
|
(414,792
|
)
|
|
(309,504
|
)
|
|
|
|
(407,019
|
)
|
|
(309,504
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(2,213,609
|
)
|
|
(825,955
|
)
|
Preferred
Stock Dividend
|
|
|
(29,470
|
)
|
|
(29,470
|
)
|
Net
Loss Attributable to Common Stockholders
|
|
$
|
(2,243,079
|
)
|
$
|
(855,425
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS—
BASIC
AND DILUTED
|
|
$
|
(0.41
|
)
|
$
|
(0.18
|
)
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING,
Basic
and Fully Diluted
|
|
|
5,522,753
|
|
|
4,885,151
|
|
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, 2006 and
2005
|
|
|
|
Common
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Stock
to be
|
|
Paid
|
|
Preferred
Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Issued
|
|
In
Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 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
|
)
|
|
(825,955
|
)
|
Balance,
December 31, 2005
|
|
|
5,042,197
|
|
|
503
|
|
|
29,470
|
|
|
2,788,683
|
|
|
58,940
|
|
|
589,402
|
|
|
(3,259,063
|
)
|
|
148,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, issued in connection with the June 30, 2006 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 upon debt conversion
|
|
|
140,859
|
|
|
14
|
|
|
|
|
|
285,430
|
|
|
|
|
|
|
|
|
|
|
|
285,444
|
|
Common
stock issued for cash, net of offering costs
|
|
|
1,945,394
|
|
|
195
|
|
|
|
|
|
6,396,255
|
|
|
|
|
|
|
|
|
|
|
|
6,396,450
|
|
Fair
value of options issued to employees
|
|
|
|
|
|
|
|
|
|
|
|
5,808
|
|
|
|
|
|
|
|
|
|
|
|
5,808
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
)
|
|
|
)
|
Balance,
December 31, 2006
|
|
|
7,143,185
|
|
$
|
714
|
|
$
|
|
|
$
|
9,535,114
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(5,502,142
|
)
|
$
|
4,623,088
|
|
The
accompanying notes are an integral part of these financial
statements
STATEMENTS
OF CASH FLOWS
|
|
Year Ended
December 31
,
|
|
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
|
)
|
$
|
(825,955
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
155,860
|
|
|
118,517
|
|
Provision
for amounts due from director
|
|
|
3,000
|
|
|
124,210
|
|
Fair
value of common stock issued to employees
|
|
|
5,808
|
|
|
|
|
(Increase)
decrease in operating assets and increase (decrease) in
operating
liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(648,857
|
)
|
|
262,708
|
|
Inventory
|
|
|
(303,211
|
)
|
|
93,006
|
|
Prepaid
expenses
|
|
|
(90,183
|
)
|
|
(68,627
|
)
|
Other
receivables
|
|
|
(17,248
|
)
|
|
(7,400
|
)
|
Accounts
payable
|
|
|
50,523
|
|
|
232,367
|
|
Accrued
expenses
|
|
|
64,097
|
|
|
2,655
|
|
Accrued
interest
|
|
|
(9,507
|
)
|
|
25,909
|
|
Net
cash used in operating activities
|
|
|
(3,003,327
|
)
|
|
(
42,610
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(64,924
|
)
|
|
(181,654
|
)
|
Due
from director
|
|
|
|
|
|
(
33,013
|
)
|
Increase
in restricted cash
|
|
|
(1,580,456
|
)
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,645,380
|
)
|
|
(
214,667
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Deferred
offering costs
|
|
|
(251,924
|
)
|
|
(332,858
|
)
|
Principal
payments on debt
|
|
|
(327,734
|
)
|
|
(263,815
|
)
|
Proceeds
from issuance of common stock
|
|
|
7,004,611
|
|
|
196,575
|
|
Proceeds
from borrowings on debt
|
|
|
|
|
|
295,900
|
|
Payoff
of previous
line of credit |
|
|
(1,171,567 |
)
|
|
— |
|
Net
borrowings (repayments) existing on lines of credit
|
|
|
1,081,140
|
|
|
367,731
|
|
Payments
on debt to related parties
|
|
|
(74,646
|
)
|
|
(
21,000
|
)
|
Net
cash provided by financing activities
|
|
|
6,259,880
|
|
|
242,533
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
1,611,173
|
|
|
(14,744
|
)
|
CASH —
Beginning of year
|
|
|
27,744
|
|
|
42,488
|
|
CASH —
End of year
|
|
$
|
1,638,917
|
|
$
|
27,744
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
424,298
|
|
$
|
283,595
|
|
Taxes
|
|
$
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
term debt converted to common stock
|
|
$
|
9,000
|
|
$
|
|
|
Related
party debt converted to common stock
|
|
$
|
177,710
|
|
$
|
|
|
Accrued
interest converted to common stock
|
|
$
|
98,734
|
|
$
|
|
|
Common
Stock issued in settlement of accrued interest on related party
debt upon exercise of warrants
|
|
$
|
|
|
$
|
5,250
|
|
Common
Stock issued in settlement of preferred stock dividend
|
|
$
|
29,470
|
|
$
|
29,470
|
|
Conversion
of a line of credit to a term loan
|
|
$
|
|
|
$
|
50,000
|
|
Deferred
stock offering costs charged to paid in capital
|
|
$
|
608,161
|
|
$
|
196,575
|
|
The
accompanying notes are an integral part of these financial
statements.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
(1) |
Operations
and Summary of Significant Accounting
Policies
|
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 15 beverages, three candies,
and three ice creams.
The
Company sells its products primarily in upscale gourmet and natural
food stores
and supermarket chains in the United States and, to a lesser degree,
in
Canada.
|
B) |
Cash
and Cash Equivalents
|
Cash
and cash equivalents include unrestricted deposits
and short-term investments with an original maturity of three months
or
less.
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.
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, 2006 was $ 173,253.
|
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
|
|
|
5-12
years
|
|
Vehicles
|
|
|
5
years
|
|
Office
equipment
|
|
|
5-7
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.
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 5.
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, 2006 and
2005.
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.
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 bank accounts 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,
2006.
During
the years ended December 31, 2006 and 2005 the Company had two customers,
which accounted for approximately 39% and 17% and 39% and 15% of sales,
respectively . No other customer accounted for more than 10% of sales
in either
year. As of December 31, 2006, the Company had approximately $264,000
(22%) and
$135,000 (11%), 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,
restricted cash, accounts and other receivables, accounts payable,
accrued
interest and accrued expenses approximate their fair value as of
December 31, 2006 due to their short maturities. The carrying amount
of lines of credit and long term debt approximate fair value because the
related effective interest rates on these instruments approximate
the rates
currently available to the Company.
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. For the years ended December 31, 2006 and 2005
those costs
were approximately $179,000 and $88,000, 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.
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 capitalized costs incurred related to its initial public
offering and
future issuance of common stock until such time as the stock was
issued. These
costs included 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. As proceeds
are received
from the offering, the deferred offering costs were charged to additional
paid in capital. At December 31, 2006, the initial public offering
had been
completed. Accordingly, at December 31, 2006 no deferred offering
costs
remained. During the years ended December 31, 2006 and 2005, $608,161
and
$196,575, respectively, of deferred offering costs where charged
to additional
paid in capital.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
|
L) |
Stock-Based
Compensation
|
The
Company periodically issues stock options and warrants to employees
and
non-employees.
Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No 123"), established a fair value method of
accounting for
stock-based compensation plans and for transactions in which an
entity acquires goods or services for non-employees in exchange
for equity instruments. SFAS No. 123 was amended by Statement of Financial
Accounting Standards No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure", which required
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.
Through
December 31, 2005, the Company accounted for stock-based compensation
utilizing
the intrinsic value method prescribed in Accounting Principles Board
Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB No. 25"), with
pro forma
disclosures of net income (loss) as if the fair value method had
been applied.
Accordingly, compensation cost for stock options was 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.
The
Company adopted SFAS No. 123R effective January 1, 2006, and is using
the
modified prospective method in which compensation cost is recognized
beginning
with the effective date (a) based on the requirements of SFAS No.
123R for all
share-based payments granted after the effective date and (b) based
on the
requirements of SFAS No. 123R for all awards granted to employees
prior to the
effective date of SFAS No. 123R that remain unvested on the effective
date. The
Company accounts for stock option and warrant grants issued and vesting
to non
employees in accordance with EITF No. 96-18: "Accounting for Equity
Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction
with
Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain
Transactions involving Equity Instruments Granted to Other Than Employees”
whereas the value of the stock compensation is based upon the measurement
date
as determined at either a) the date at which a performance commitment
is
reached, or b) at the date at which the necessary performance to
earn the equity
instruments is complete.
As
the
exercise price of stock options and warrants issued to employees
was not less
than the fair market value of the Company's common stock on the date
of grant,
and in accordance with accounting for such options utilizing the
intrinsic value
method, there was no related compensation expense recorded in the
Company's 2005
financial statements. The fair value of stock options and warrants
issued to
officers, directors and employees at not less than fair market value
of the
Company's common stock on the date of grant was estimated using the
Black-Scholes option-pricing model, and the effect on the Company's
results of
operations was shown in a pro forma disclosure
as if such stock options and warrants had been accounted for pursuant
to SFAS
No. 123.
In
December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No.
123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"), a revision
to SFAS
No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123R
superseded APB
No. 25 and amended SFAS No. 95, "Statement of Cash Flows". Effective
January 1,
2006, SFAS No. 123R requires that the Company measure the cost of
employee
services received in exchange for equity awards based on the grant
date fair
value of the awards, with the cost to be recognized as compensation
expense in
the Company's financial statements over the vesting period of the
awards.
Accordingly,
the Company recognizes compensation cost for equity-based compensation
for all
new or modified grants issued after December 31, 2005. Since the
Company did not
have any unvested awards as of December 31, 2005, no recognition
of previously
calculated fair values was required.
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:
|
|
|
|
|
|
|
$
|
(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
|
)
|
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.
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.
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, 2006 and 2005 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, 2006:
|
|
|
|
Warrants
|
|
|
813,241
|
|
Preferred
Stock
|
|
|
235,760
|
|
Options
|
|
|
363,500
|
|
Total
|
|
|
1,412,501
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
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 $51,739 and $90,176, for the years ended December 31, 2006 and 2005,
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, 2006 and 2005 approximated $697,000 and $292,000,
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.
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.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
|
R) |
Recent
Accounting
Pronouncements
|
In
June
2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
"Accounting for Uncertainty in Income Taxes--an interpretation of
FASB Statement
No. 109," which seeks to reduce the diversity in practice associated
with the
accounting and reporting for uncertainty in income tax positions.
This
Interpretation prescribes a comprehensive model for the financial
statement
recognition, measurement, presentation and disclosure of uncertain
tax positions
taken or expected to be taken in an income tax return. FIN 48 presents
a
two-step process for evaluating a tax position. The first step is
to determine
whether it is more-likely-than-not that a tax position will be sustained
upon
examination, based on the technical merits of the position. The second
step is
to measure the benefit to be recorded from tax positions that meet
the
more-likely-than-not recognition threshold, by determining the largest
amount of
tax benefit that is greater than 50 percent likely of being realized
upon
ultimate settlement, and recognizing that amount in the financial
statements.
FIN 48 is effective for fiscal years beginning after December 15,
2006.
Management believes the adoption of FIN 48 will not have a material
impact on
the Company’s results of operations, financial position or cash
flow.
In
September 2006, the Securities and Exchange Commission issued Staff
Accounting
Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year
Misstatements
when Quantifying Misstatements in Current Year Financial Statements."
SAB No.
108 was issued in order to eliminate the diversity in practice surrounding
how
public companies quantify financial statement misstatements. SAB
No. 108
requires that registrants quantify errors using both a balance sheet
(iron
curtain) approach and an income statement (rollover) approach then
evaluate
whether either approach results in a misstated amount that, when
all relevant
quantitative and qualitative factors are considered, is material.
SAB No. 108 is
effective for fiscal years ending after November 15, 2006. The
Company has adopted the bulletin during 2006. The adoption did not
have a
material effect on results
of operations, financial position, or cash flows.
In
February 2006, the FASB issued SFAS No. 155, “Accounting
for Certain Hybrid Financial Instruments - an amendment of FASB Statements
No.
133 and 140.” This
Statement resolves issues addressed in Statement 133 Implementation
Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.” This Statement permits fair value re-measurement for any
hybrid financial instrument that contains an embedded derivative
that otherwise
would require bifurcation, clarifies which interest-only strips and
principal-only strips are not subject to the requirements of Statement
133,
establishes a requirement to evaluate interests in securitized financial
assets
to identify interests that are freestanding derivatives or that are
hybrid
financial instruments that contain an embedded derivative requiring
bifurcation,
clarifies that concentrations of credit risk in the form of subordination
are
not embedded derivatives, and amends Statement 140 to eliminate the
prohibition
on a qualifying special-purpose entity from holding a derivative
financial
instrument that pertains to a beneficial interest other than another
derivative
financial instrument. This
statement is effective for fiscal years beginning after September
15, 2006.
The
Company currently does not engage in the activities described in
SFAS 155.
Consequently, management believes SFAS 155 will not have a material
impact on
the Company’s results of operations, financial position or cash
flow.
In
March
2006, the FASB issued SFAS 156, “Accounting for Servicing of Financial Assets-
an amendment of FASB Statement No. 140.” This Statement requires an entity to
recognize a servicing asset and liability each time it undertakes
an obligation
to service a financial asset. This
statement is effective for fiscal years beginning after September
15, 2006.
The
Company currently does not engage in the activities described in
SFAS 156.
Consequently, management believes SFAS 156 will not have a material
impact on
the Company’s results of operations, financial position or cash
flow.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements,"
which
provides enhanced guidance for using fair value to measure assets
and
liabilities. SFAS No. 157 provides a common definition of fair value
and
establishes a framework to make the measurement of fair value in
generally
accepted accounting principles more consistent and comparable. SFAS
No. 157 also
requires expanded disclosures to provide information about the extent
to which
fair value is used to measure assets and liabilities, the methods
and
assumptions used to measure fair value, and the effect of fair value
measures on
earnings. SFAS No. 157 is effective for financial statements issued
in fiscal
years beginning after November 15, 2007 and
to
interim periods within those fiscal years.
The
Company is currently in the process of evaluating the effect, if
any, the
adoption of SFAS No. 157 will have on its results of operations,
financial
position, or cash flows.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” which will require the Company
to recognize the funded status of defined benefit plans in its statement
of
financial position. This statement will be effective as of the Company’s year
ending August
31, 2007.
The
Company currently does not have pension benefit plans. Consequently,
management
believes SFAS 158 will not have a material impact on the Company’s results of
operations, financial position or cash flow.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
The
Company has a line of credit that is secured with a
cash deposit, see Note 6. The deposit cannot be withdrawn during
the term of the
line of credit. The balance in this restricted account at December
31, 2006 was
$1,580,456. $5,456 of this amount may be withdrawn with the bank’s
permission.
Inventory
is valued at the lower of cost (first-in, first-out) or market, and
is comprised
of the following as of December 31, 2006:
|
|
|
|
|
Raw
Materials
|
|
$
|
593,458
|
|
Finished
Goods
|
|
|
917,772
|
|
|
|
$
|
1,511,230
|
|
Fixed
assets are comprised of the following as of December 31, 2006:
Land
|
|
$
|
409,546
|
|
Building
|
|
|
924,042
|
|
Vehicles
|
|
|
243,844
|
|
Machinery
and equipment
|
|
|
757,511
|
|
Office
equipment
|
|
|
123,471
|
|
|
|
|
2,458,414
|
|
Accumulated
depreciation
|
|
|
(663,251
|
)
|
|
|
$
|
1,795,163
|
|
Depreciation
expense for the years ended December 31, 2006 and 2005 was $155,116 and
$117,773, respectively.
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,
2006, carrying amounts for Brand Names were $800,201.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Other
Intangible Assets
At
December 31, 2006, Other Intangible Assets consist of:
Asset
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Current
Year
Amortization
|
|
|
Useful
Life
|
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
4,467
|
|
$
|
745
|
|
|
300
months
|
|
The
estimated aggregate amortization as of December 31, 2006 for each of the
next five years is:
Year
|
|
|
Amount
|
|
2007
|
|
$
|
745
|
|
2008
|
|
|
745
|
|
2009
|
|
|
745
|
|
2010
|
|
|
745
|
|
2011
|
|
|
745
|
|
The
Company had outstanding borrowings of $1,355,526 as of December 31, 2006
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 $24,750 at December 31,
2006. The interest rate in effect at December 31, 2006 was 9.75%. The line
expires in December 2009.
The
Company has a line of credit at December 31, 2006 with Merrill Lynch.
At
December 31, 2006, no amounts were outstanding on this line of credit
and the
Company had approximately $701,000 of availability on this line of
credit. 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 (9.10%
as of December
31, 2006). 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, 2006 and 2005, the Company paid Mr. Reed
$28,125 and
$15,250, respectively, under this agreement.
The
Company has a line of credit with a bank. This line of credit allows
the Company
to borrow a maximum amount of $1,500,000. As of December 31, 2006,
the amount
borrowed on this line of credit was $1,330,776. The interest rate
on this line
of credit is Prime, which was 8.25% at December 31, 2006. The line
of credit
expires in June 2008. This revolving line of credit is secured by
all Company
assets, except real estate. In addition, the Company has assigned
a security
interest in a deposit account at the bank. The amount of the deposit
and the
security interest is $1,575,000 and may be offset by the bank against
any
balance on the line of credit. The deposit cannot be withdrawn during
the term
of the line of credit. The Company may terminate the line of credit
arrangement
at any time, without penalty. As of December 31, 2006, the Company
had
approximately $169,000 of availability on this line of credit. During the term of this line of credit, the
Company is required to have a
minimum stockholders’
equity balance of
$1,500,000.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Long-term
debt consists of the following as of December 31, 2006:
|
|
|
|
|
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 $6,062, subject to annual adjustments. The interest
rate in effect at
December 31, 2006 was 9.25%. The note is secured by land and building
and guaranteed by the majority stockholder. The note matures
November
2025.
|
|
$
|
662,349
|
|
|
|
|
|
|
Note
payable, unsecured, with interest at 10% per annum. Principal and
accrued interest are payable in full at the end of the
note term. This
note was issued with warrants, exercisable at issuance.
The warrants have
an exercise price of $3 and a term of 5 years. The note is payable on
demand.
|
|
|
30,000
|
|
|
|
|
|
|
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 $1,175;
subject to annual adjustments. The rate in effect at December 31,
2005 was 9.25% per annum. The note is secured by land and
building and
guaranteed by the majority stockholder and matures
November 2025.
|
|
|
139,542
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
Note
payable to a bank, unsecured, interest rate is prime plus
3.25%. The
interest rate in effect December 31, 2006 was 11.50% .
The note matures in
December 2009.
|
|
|
38,634
|
|
|
|
|
|
|
Notes
payable to GMAC, secured by automobiles, payable in monthly
installments
of $758 including interest at 0.0%, with maturity in 2008.
|
|
|
9,108
|
|
|
|
|
|
|
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.
|
|
|
13,589
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
893,222
|
|
|
|
|
|
|
Less
current portion
|
|
|
71,860
|
|
|
|
$
|
821,362
|
|
The
aggregate maturities of long-term debt for each of the next five
years and
thereafter are as follows as of December 31, 2006:
|
|
|
|
|
|
|
|
2007
|
|
$
|
71,860
|
|
2008
|
|
|
31,827
|
|
2009
|
|
|
25,496
|
|
2010
|
|
|
20,750
|
|
2011
|
|
|
14,651
|
|
Thereafter
|
|
|
728,638
|
|
Total
|
|
$
|
893,222
|
|
Preferred
Stock
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,
2006 there were 58,940 shares outstanding, with a 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
the year ended December 31, 2005, the Company accrued a $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. This dividend was paid during fiscal 2006.
Common
Stock
Common
stock consists of $.0001 par value, 11,500,000 shares authorized,
7,143,185 shares issued and outstanding as of December 31,
2006.
During
2006, the Company completed a public offering of its stock. The Company
sold a
total of 2,000,000 shares of common stock at $4.00 per share. The
offering
spanned 2005 and 2006. The Company received proceeds after commission
of
approximately $7,200,00 in the aggregate, of which approximately
$7,005,000 was
received in 2006($6,396,450 after commissions). In addition, the
Company granted
warrants to purchase 200,000 shares of common stock to the underwriters.
These
warrants have an exercise price of $6.60 See Note 9.
In
June
of 2006, the Company issued 7,373 shares of common stock valued at
$29,470 to
its preferred stockholders as payment for a preferred stock dividend,
in
accordance with the terms of the preferred stock agreement.
In
November 2006, the Company issued 9,315 shares of
common stock as a result of a former note holder who converted his
note and
accrued interest, in the amount of $22,355, to common stock in accordance
with
the original note terms. During 2006, the Company converted related
party debt
and associated accrued interest, in the amount of $263,089, to common stock
(See Note 12). The total shares issued were 140,859 at a total value
of
$285,444.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(9) |
Stock
Options and Warrants
|
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. The total number of options authorized is
500,000.
During
the year ended December 31, 2006, the Company issued 85,000 options
to purchase
the Company's common stock at $4.00 per share to employees under
the 2001 stock
option plan. The aggregate value of the options vesting from January
1, 2006 to
December 31, 2006 was $5,808 and has been reflected as compensation
cost. As of
December 31, 2006, the aggregate value of unvested options was
$203,292, which
will be amortized as compensation cost as the options vest, over
3
years.
The
weighted-average grant date fair value of options granted during
2006 and 2005
was $2.46 and $2.44, respectively.
|
Year
ended
December
31, 2006
|
Year
ended
December
31, 2005
|
Expected
volatility
|
70%
|
70%
|
Weighted
average volatility
|
70%
|
70%
|
Expected
dividends
|
|
|
Expected
term (in years)
|
5
|
5
|
Risk
free rate
|
4.49%
|
4.05%
|
A
summary
of option activity as of December 31, 2006 and changes during the
year then
ended is presented below:
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Terms
(Years)
|
|
Aggregate
Intrinsic
Value
|
Outstanding
at January 1, 2006
|
|
291,000
|
|
$
3.80
|
|
|
|
|
Granted
|
|
85,000
|
|
$
4.00
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
Forfeited
or expired
|
|
|
|
$4.00
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
363,500
|
|
$3.84
|
|
3.8
|
|
$92,500
|
Exercisable
at December 31, 2006
|
|
278,500
|
|
$3.79
|
|
3.5
|
|
|
A
summary
of the status of the Company’s nonvested shares granted under the Company’s
stock option plan as of December 31, 2006 and changes during the
year ended
December 31, 2006 is presented below:
Nonvested
Shares
|
Shares
|
Weighted-Average
Grant
Date
Fair Value
|
|
|
|
Nonvested
at January 1, 2006
|
|
|
Granted
|
85,000
|
$2.46
|
Vested
|
|
|
Forfeited
|
|
|
Nonvested
at December 31, 2006
|
85,000
|
$2.46
|
During
the year ended Decmeber 31, 2006, the Company granted 200,000 warrants
in
relation to an underwriting agreement see (Note 8) valued at $406,000.
The
fair
value of each warrant is estimated on the date of grant using the
Black-Scholes
option pricing model that uses the assumptions noted in the following
table.
Expected volatility is based on the volatilities of public entities
which are in
the same industry as the Company. For purposes of determining the
expected life
of the option, the full contract life of the option is used. The
risk-free rate
for periods within the contractual life of the options is based
on the U. S.
Treasury yield in effect at the time of the grant.
|
Year
ended
December
31, 2006
|
Expected
volatility
|
70%
|
Weighted
average volatility
|
70%
|
Expected
dividends
|
-
|
Expected
term (in years)
|
5
|
Risk
free rate
|
4.45%
|
The
weighted-average grant date fair value of warrants granted during
2006 was
$2.03.
A
summary
of warrant activity as of December 31, 2006 and changes during the
year then
ended is presented below:
|
Shares
|
Weighted-Average
Exercise
Price
|
Weighted-Average
Remaining
Contractual Term (Years)
|
Aggregate
Intrinsic
Value
|
Outstanding
at January 1, 2006
|
613,241
|
$
2.80
|
|
|
Granted
|
200,000
|
$
6.60
|
|
|
Exercised
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
Outstanding
at December 31, 2006
|
813,241
|
$3.74
|
3.0
|
$731,617
|
Exercisable
at December 31, 2006
|
613,241
|
$2.80
|
2.4
|
|
The
aggregate intrinsic value was calculated, as of December 31, 2006,
as the
difference between the market price and the exercise price of the
Company’s
stock for the 613,241warrants which were in-the-money.
A
summary
of the status of the Company’s nonvested shares granted as warrants as
of
December 31, 2006 and changes during the year ended December 31,
2006 is
presented below:
Nonvested
Shares
|
Shares
|
Weighted-Average
Grant
Date
Fair Value
|
|
|
|
Nonvested
at January 1, 2006
|
|
|
Granted
|
200,000
|
$2.03
|
Vested
|
|
|
Forfeited
|
|
|
Nonvested
at December 31, 2006
|
200,000
|
$2.03
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
At
December 31, 2006, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The
amounts
available were approximately $4,900,000 for Federal purposes and
$2,000,000 for
state purposes. The Federal carryforward expires in 2026 and the
state
carryforward expires in 2011. 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, 2006
are as follows:
Deferred
income tax asset:
|
|
|
|
Net
operating loss carry forward
|
|
$
|
1,873,000
|
|
Valuation
allowance
|
|
|
(1,873,000
|
)
|
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,
|
|
|
|
2006
|
|
2005
|
|
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, 2006 and 2005 was $67,707 and $67,816,
respectively.
Future
payments under these leases as of December 31, 2006 are as
follows:
|
|
|
|
Year
Ending
|
|
|
|
December
31,
|
|
|
|
2007
|
|
$
|
30,431
|
|
2008
|
|
|
18,634
|
|
2009
|
|
|
12,365
|
|
2010
|
|
|
7,496
|
|
2011
|
|
|
6,872
|
|
Total
|
|
$
|
75,798
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
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
2006 and 2005 the Company incurred $21,629 and $30,901, 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. The Company has
been successful in the appeals process 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 the Company negligently manufactured the soda resulting in at
least one
personal injury. Consac sought $2.6 million in damages, plus interest
and
attorneys fees. In January 2007, the Company settled the lawsuit
for $450,000,
of which $300,000 was paid by the Company and $150,000 was paid by
the Company's
insurance. The $300,000 was accrued as of December 31, 2006 and is
included in
legal costs on the Statement of Operations.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares
of our common
stock in connection with our initial public offering. These securities
represented all of the shares issued in connection with the initial
public
offering prior to October 11, 2006. These shares issued in connection
with the
initial public offering may have been issued in violation of either
federal or
state securities laws, or both, and may be subject to rescission.
On
August
12, 2006, we made a rescission offer to all holders of the outstanding
shares
that we believe are subject to rescission, pursuant to which we
offered to
repurchase these shares then outstanding from the holders. At the
expiration of
our rescission offer on September 18, 2006, the rescission offer
was accepted by
32 of the offerees to the extent of 28,420 shares for an aggregate
of
$118,711.57, including statutory interest. The shares that were
tendered for
rescission were agreed to be purchased by others and not from our
funds.
Federal
securities laws do not provide that a rescission offer will terminate
a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements.
If any or all
of the offerees reject the rescission offer, we may continue to
be liable under
federal and state securities laws for up to an amount equal to
the value of all
shares of common stock issued in connection with the initial public
offering
plus any statutory interest we may be required to pay. If it is
determined that
we offered securities without properly registering them under federal
or state
law, or securing an exemption from registration, regulators could
impose
monetary fines or other sanctions as provided under these
laws.
(12) |
Related
Party Activity
|
The
Company had notes payable to Robert T. Reed, Sr, the father of the
Company’s
President. During 2006 these notes payable and related accrued interest
were
either converted to common stock or fully repaid. $177,710 of notes
payable was
converted to 88,855 shares of common stock, in accordance with the
original
terms of the note. In addition, $85,379 of accrued interest was converted
to
42,689 shares of common stock, in accordance with the original terms
of the
note. $74,648 of notes payable and $25,625 of accrued interest were
repaid.
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. 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.
Item
8. Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item
8A. Controls
and Procedures
As
of
December 31, 2006, we carried out an evaluation, under the supervision and
with
the participation of our management, including our chief executive officer
and
chief financial officer, of the effectiveness of the design and operation of
our
“disclosure controls and procedures,” as such term is defined under Exchange Act
Rules 13a-15(e) and 15d-15(e).
Based
on
this evaluation, our chief executive officer and chief financial officer
concluded that, as of December 31, 2006, 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 SEC, and accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives and in reaching a reasonable level of assurance our management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2006 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial
reporting.
Item
8B. Other Information
Not
applicable.
PART
III
Item
9. Directors, Executive Officers,
Promoters, Control Persons and Corporate Governance; Compliance with Section
16(a) of the Exchange Act
General
Our
directors currently have terms which will end at our next annual meeting of the
stockholders or until their successors are elected and qualify, subject to
their
death, resignation or removal. Officers serve at the discretion of the board
of
directors. Except as described below, there are no family relationships among
any of our directors and executive officers. Our board members are encouraged
to
attend meetings of the board of directors and the annual meeting of
stockholders. The board of directors held three meetings and adopted six
unanimous written consents in lieu of meetings in 2006.
The
following table sets forth certain biographical information with respect to
our
directors and executive officers:
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
Christopher
J. Reed
|
|
President,
Chief Executive Officer, Chief Financial Officer and Chairman of
the
Board
|
|
48
|
Eric
Scheffer
|
|
Vice
President and National Sales Manager - Natural Foods
|
|
39
|
Robert
T. Reed, Jr.
|
|
Vice
President and National Sales Manager - Mainstream
|
|
51
|
Robert
Lyon
|
|
Vice
President Sales - Special Projects
|
|
57
|
Judy
Holloway Reed
|
|
Secretary
and Director
|
|
47
|
Mark
Harris
|
|
Director
|
|
50
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
Director
|
|
52
|
Michael
Fischman
|
|
Director
|
|
51
|
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.
Prior to joining us, Mr. Reed was employed with SunGard Availability Services
from 1987 through 2003. He started with SunGard as an Account Manager. Over
the
years, Mr. Reed earned promotions to Director of Sales in 1989, Vice President
of Sales in 1992 and Senior Vice President of Sales in 1997. In March 2000,
Mr.
Reed was appointed President of SunGard eSourcing, a subsidiary of SunGard
Availability Services, with annual revenue in excess of $70 million and over
300
employees. During Mr. Reed’s tenure with SunGard Availability Services, revenues
increased from $30 million to over $1.2 billion. He earned a Bachelors of
Science degree in Business and Finance from 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
in mainstream markets. Over the past five years, Mr. Lyon also has operated
an
organic rosemary farm in Malibu, California, selling bulk to re-packagers.
In
the 1980s and 1990s, Mr. Lyon operated 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 from 1982 through 1987. 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 since 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.
Mark
Harris has
been
a member of our board of directors since April 2005. Mr. Harris 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, Mr. Harris 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 the
aerospace industry at Northrop with similar responsibilities.
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 has been chief executive
officer of Its Your Earth, a natural products marketing company since June
2004.
From 2003 to 2005, Dr. Muffoletto worked as sales and marketing director for
Worthington, Moore & Jacobs, a Commercial Law League member firm serving
FedEx, UPS, DHL and Kodak, among others. From 2001 to 2003, he was the
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, Washington and Ellicott City,
Maryland. The apothecary housed Dr. Muffoletto’s Naturopathic Practice. Dr.
Muffoletto received a Bachelors of Arts degree in Government and Communications
from the University of Baltimore in 1977, and conducted postgraduate work in
the
schools of Public Administration and Publication Design at the University of
Baltimore from 1978 to 1979. In 1986, he received his Doctorate of Naturopathic
Medicine from the Santa Fe Academy of Healing, Santa Fe, New
Mexico.
Michael
Fischman has
been
a member of our board of directors since April 2005. Since 1998, Mr. Fischman
has been President and chief executive officer 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 relationships of Christopher J. Reed, Judy Holloway Reed, and Robert
T.
Reed, Jr., none of our directors or executive officers are related to one
another.
Currently
our Chief Executive Officer, Christopher J. Reed, serves as our Chief Financial
Officer. Mr. Reed does not have any formal financial training as a Chief
Financial Officer. During the next 12 months, we intend to hire a Chief
Financial Officer. In addition, we intend to hire a Distribution Manager with
extensive experience in the beverage arena with specific experience in setting
up a regional distributor network.
We
are
committed to having sound corporate governance principles. Such principles
are
essential to running our business efficiently and to maintaining our integrity
in the marketplace.
We
believe that our directors should have the highest professional and personal
ethics and values, consistent with our longstanding values and standards. They
should have broad experience at the policy-making level in business or banking.
They should be committed to enhancing stockholder value and should have
sufficient time to carry out their duties and to provide insight and practical
wisdom based on experience. Their service on other boards of public companies
should be limited to a number that permits them, given their individual
circumstances, to perform responsibly all director duties for us. Each director
must represent the interests of all stockholders. When considering potential
director candidates, the Board also considers the candidate’s character,
judgment, diversity, age and skills, including financial literacy and experience
in the context of our needs and the needs of the board of
directors.
The
Board
has determined that three members of our board of directors, Mr. Harris, Dr.
Muffoletto and Mr. Fischman are independent under the revised listing standards
of The Nasdaq Stock Market, Inc. We intend to maintain at least two independent
directors on our board of directors in the future.
Our
Chief
Executive Officer and all senior financial officers, including the Chief
Financial Officer, are bound by a Code of Ethics that complies with Item 406
of
Regulation S-B of the Exchange Act.
Our
Board
of Directors has three standing committees: an Audit Committee, a Compensation
Committee and a Nominations and Governance Committee. These committees were
recently formed in January 2007.
Audit
Committee.
Our
Audit Committee oversees our accounting and financial reporting processes,
internal systems of accounting and financial controls, relationships with
independent auditors and audits of financial statements. Specific
responsibilities include the following:
· |
selecting,
hiring and terminating our independent
auditors;
|
· |
evaluating
the qualifications, independence and performance of our independent
auditors;
|
· |
approving
the audit and non-audit services to be performed by our independent
auditors;
|
· |
reviewing
the design, implementation, adequacy and effectiveness of our internal
controls and critical accounting
policies;
|
· |
overseeing
and monitoring the integrity of our financial statements and our
compliance with legal and regulatory requirements as they relate
to
financial statements or accounting
matters;
|
· |
reviewing
with management and our independent auditors, any earnings announcements
and other public announcements regarding our results of operations;
and
|
· |
preparing
the audit committee report that the SEC requires in our annual proxy
statement.
|
Our
Audit
Committee is comprised of Dr.
Muffoletto, Mr. Harris and Mr. Fischman.
Dr.
Muffoletto
serves
as Chairman of the Audit Committee. The Board has determined that the three
members of the Audit Committee are independent under the rules of the SEC and
the Nasdaq National Market and that Dr.
Muffoletto
qualifies as an “audit committee financial expert,” as defined by the rules of
the SEC. Our
Board
of Directors has adopted a written charter for the Audit Committee meeting
applicable standards of the SEC and the Nasdaq National
Market.
Compensation
Committee.
Our
Compensation Committee assists our Board of Directors in determining the
development plans and compensation of our officers, directors and employees.
Specific responsibilities include the following:
· |
approving
the compensation and benefits of our executive
officers;
|
· |
reviewing
the performance objectives and actual performance of our officers;
and
|
· |
administering
our stock option and other equity compensation
plans.
|
Our
Compensation Committee is comprised of
Dr.
Muffoletto, Mr. Harris and Mr. Fischman. The
Board
has determined that three of its members of the Compensation Committee are
independent under the rules of the Nasdaq National Market. Our
Board
has adopted a written charter for the Compensation Committee.
Nominations
and Governance Committee.
Our
Nominations and Governance Committee assists the Board by identifying and
recommending individuals qualified to become members of our Board of Directors,
reviewing correspondence from our stockholders, and establishing, evaluating
and
overseeing our corporate governance guidelines. Specific responsibilities
include the following:
· |
evaluating
the composition, size and governance of our Board of Directors and
its
committees and making recommendations regarding future planning and
the
appointment of directors to our
committees;
|
· |
establishing
a policy for considering stockholder nominees for election to our
Board of
Directors; and
|
· |
evaluating
and recommending candidates for election to our Board of
Directors.
|
Our
Nominations and Governance Committee is comprised of Dr.
Muffoletto and Mr. Fischman.
The
Board has determined that two of the members of the Nominations and Governance
Committee are independent under the rules of the Nasdaq National Market.
Our
Board
has adopted a written charter for the Nominations and Corporate Governance
Committee.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
requires our directors and executive officers and beneficial holders of more
than 10% of our common stock to file with the SEC initial reports of ownership
and reports of changes in ownership and reports of changes in ownership of
our
equity securities. As of the date of this Annual Report, to our knowledge,
based
solely on our review of the copies of such reports received by us, we believe
that none of the Section 16 reporting persons has timely filed or filed the
reports under Section 16(a) of the Exchange Act for the year ended December
31,
2006.
Item
10. Executive Compensation
Executive
Compensation
The
following table sets forth certain information concerning compensation of
certain of our executive officers, including our Chief Executive Officer and
all
other executive officers, or the Named Executives, whose total annual salary
and
bonus exceeded $100,000, for the years ended December 31, 2006 and
2005:
Name
and Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards
|
|
Option
Awards
|
|
Non-Equity
Incentive
Plan
Compensation
|
|
Non-Qualified
Deferred
Compensation
Earnings
|
|
All
Other
Compensation
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Reed, Chief Executive Officer
|
|
|
2006
|
|
$
|
150,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
150,000
|
|
|
|
|
2005
|
|
$
|
150,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
$
|
150,000
|
|
None
of
our other employees received total compensation in excess of $100,000 during
the
years ended December 31, 2005 and 2006.
Option/SAR
Grants to Executive Officers
None
of
our Named Executive Officers received or exercised any stock awards, stock
options or SARs during 2006, or otherwise were the beneficial owners of any
stock awards, stock options or SARs at December 31, 2006.
Director
Compensation
Prior
to
the fourth quarter of 2006, we did not pay any compensation to our non-employee
directors for their attendance at board meetings. During the fourth quarter
of
2006, we began a policy of compensating our non-employee directors for their
services. We pay each director, with the exception of Christopher J. Reed,
$75.00 for each resolution submitted to the board of directors. During the
year
ended December 31, 2006, we paid each of our directors, other than Christopher
J. Reed, an aggregate of $300 for their services on our Board of
Directors.
Committee
Interlocks and Insider Participation
No
interlocking relationship exists between any member of our board of directors
and any member of the board of directors or compensation committee of any other
companies, nor has such interlocking relationship existed in the
past.
Employment
Agreements
There
are
no written employment agreements with any of our officers or key employees,
including Christopher J. Reed. We do not have any agreements which provide
for
severance upon termination of employment, whether in context of a change of
control or not.
2001
Stock Option Plan
Pursuant
to our 2001 Stock Option Plan, we are authorized to issue options to purchase
up
to 500,000 shares of common stock. As of the date of this Annual Report,
291,000 options
have been issued under the plan, of which 206,000 options have vested. On August
28, 2001, our board of directors adopted the plan and the plan was approved
by
our stockholders.
The
plan
permits the grant of options to our employees, directors and consultants. The
options may constitute either “incentive stock options” within the meaning of
Section 422 of the Internal Revenue Code or “non-qualified stock options.”
The primary difference between “incentive stock options” and “non-qualified
stock options” is that once an option is exercised, the stock received under an
“incentive stock option” has the potential of being taxed at the more favorable
long-term capital gains rate, while stock received by exercising a
“non-qualified stock option” is taxed according the ordinary income tax rate
schedule.
The
plan
is currently administered by the board of directors. The plan administrator
has
full and final authority to select the individuals to receive options and to
grant such options as well as a wide degree of flexibility in determining the
terms and conditions of options, including vesting provisions.
The
exercise price of an option granted under the plan cannot be less than 100%
of
the fair market value per share of common stock on the date of the grant of
the
option. The exercise price of an incentive stock option granted to a person
owning more than 10% of the total combined voting power of the common stock
must
be at least 110% of the fair market value per share of common stock on the
date
of the grant. Options may not be granted under the plan on or after the tenth
anniversary of the adoption of the plan. Incentive stock options granted to
a
person owning more than 10% of the combined voting power of the Common Stock
cannot be exercisable for more than five years.
When
an
option is exercised, the purchase price of the underlying stock will be paid
in
cash, except that the plan administrator may permit the exercise price to be
paid in any combination of cash, shares of stock having a fair market value
equal to the exercise price, or as otherwise determined by the plan
administrator.
If
an
optionee ceases to be an employee, director, or consultant with us, other than
by reason of death, disability, or retirement, all vested options may be
exercised within three months following such event. However, if an optionee’s
employment or consulting relationship with us terminates for cause, or if a
director of ours is removed for cause, all unexercised options will terminate
immediately. If an optionee ceases to be an employee or director of, or a
consultant to us, by reason of death, disability, or retirement, all vested
options may be exercised within one year following such event or such shorter
period as is otherwise provided in the related agreement.
When
a
stock award expires or is terminated before it is exercised, the shares set
aside for that award are returned to the pool of shares available for future
awards.
No
option
can be granted under the plan after ten years following the earlier of the
date
the plan was adopted by the Board of Directors or the date the plan was approved
by our stockholders.
Indemnification
of Directors and Officers
Our
amended certificate of incorporation provides that, to the fullest extent
permitted by Delaware law, as it may be amended from time to time, none of
our
directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Our
amended certificate of incorporation also provides discretionary indemnification
for the benefit of our directors, officers, and employees, to the fullest extent
permitted by Delaware law, as it may be amended from time to time. Insofar
as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, or persons controlling us, pursuant
to
the foregoing provisions, we have been informed that in the opinion of the
SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Pursuant
to our amended bylaws, we are required to indemnify our directors, officers,
employees and agents, and we have the discretion to advance his or her related
expenses, to the fullest extent permitted by law.
Item 11.
Security Ownership of Certain Beneficial Owners, Management and Related
Stockholder Matters
The
following table reflects, as of the date of this Annual Report, the beneficial
common stock ownership of: (a) each of our directors, (b) each named executive
officer, (c) each person known by us to be a beneficial holder of 5% or more
of
our common stock, and (d) all of our executive officers and directors as a
group.
Except
as
otherwise indicated below, the persons named in the table have sole voting
and
investment power with respect to all shares of common stock held by them. Unless
otherwise indicated, the principal address of each listed executive officer
and
director is 13000 South Spring Street, Los Angeles, California 90061.
Name
of Beneficial Owner
|
|
Beneficially
Owned
|
|
Percentage
of Shares
Beneficially Owned
(1)
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
Christopher
J. Reed (2)
|
|
|
3,200,000
|
|
|
44.80
|
|
Judy
Holloway Reed (2)
|
|
|
3,200,000
|
|
|
44.80
|
|
Mark
Harris (3)
|
|
|
4,250
|
|
|
*
|
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0
|
|
Michael
Fischman
|
|
|
0
|
|
|
0
|
|
Robert
T. Reed, Jr. (4)
|
|
|
391,250
|
|
|
5.39
|
|
Directors
and executive officers as a group (8 persons) (5)
|
|
|
3,731,000
|
|
|
50.47
|
|
|
|
|
|
|
|
|
|
5%
or greater stockholders
|
|
|
|
|
|
|
|
Joseph
Grace (6)
|
|
|
500,000
|
|
|
7.00
|
|
Robert
T. Reed, Sr.
|
|
|
394,044
|
|
|
5.52
|
|
* Less
than
1%.
(1) |
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this Annual Report, are
deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder's
name.
Unless otherwise indicated, the officers, directors and stockholders
can
be reached at our principal offices. Percentage of ownership is based
on
7,143,185 shares of common stock outstanding as of the date of this
Annual
Report.
|
(2) |
Christopher
J. Reed and Judy Holloway Reed are husband and wife. The same number
of
shares of common stock is shown for each of them, as they may each
be
deemed to be the beneficial owner of all of such shares. These shares
have
been pledged as collateral to Robert T. Reed, Jr. to secure a pledge
of
Mr. Reed of his shares as collateral for a line of credit extended
to
us.
|
(3) |
Consists
of: (i) 250 shares of common stock, and (ii) 4,000 shares of common
stock,
which can be converted at any time from 1,000 shares of Series A
preferred
stock. The address for Mr. Harris is 160 Barranca Road, Newbury Park,
California 91320.
|
(4) |
Consists
of (i) 281,250 shares of common stock, (ii) options exercisable into
50,000 shares of common stock, and (iii) 60,000 shares of common
stock,
which can be converted at any time from 15,000 shares of Series A
preferred stock. Does not include options to purchase up to 30,000
shares
of common stock which vest in portions through the period ending
December
2009.
|
(5) |
Includes
three executive officers (including Robert T. Reed, Jr., our Executive
Vice-President and National Sales Manager - Mainstream (see footnote
4
above), Robert Lyon, our Vice President Sales - Special Projects
(options
to purchase up to 60,000 shares) and Eric Scheffer, our Vice President
and
National Sales Manager - Natural Foods (500 shares and options to
purchase
up to 75,000 shares) who beneficially own in the aggregate of 526,750
shares of common stock. Does not include options to purchase up to
85,000
shares of common stock which vest in portions through the period
ending
December 2009.
|
(6) |
The
address for Mr. Grace is 1900 West Nickerson Street, Suite 116, PMB
158,
Seattle, Washington 98119.
|
Equity
Compensation Plan Information
The
following table provides information, as of December 31, 2006, with respect
to
options outstanding and available under the 2001 Plan and certain other
outstanding options:
Plan
Category
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
(a)
|
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants
and Rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding securities reflected in Column
(a))
(c)
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
291,000
|
|
$
|
4.00
|
|
|
209,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
240,451
|
|
$
|
2.57
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
531,451
|
|
$
|
3.35
|
|
|
209,000
|
|
Item 12.
Certain Relationships and Related Transactions,
and Director Independence
We
had
three loans payable to Robert T. Reed, Sr., the father of our founder, President
and Chief Executive Officer, Christopher J. Reed, in the aggregate principal
amount of $252,358. These loans were made at various times between 1991 and
2003.
In
November and December 2006, we issued an aggregate of 131,544 shares of common
stock to Robert T. Reed, Sr., with respect to the conversion of an aggregate
of
$263,089 of the obligations, including $177,710 of principal and $85,379 of
accrued interest, on such notes. In addition, we repaid $74,648 of principal
and
$25,625 of accrued interest, on the balance of such notes.
We
had
issued warrants to Mr. Reed to purchase up to 262,500 shares at $0.02 for his
work in 1991 in helping the start up of our company. The original term of the
warrants was until December 31, 1997. We extended the term of these warrants
twice, once to December 31, 2000 and again to June 1, 2005. These extensions
were granted in consideration of the extensions Mr. Reed had granted us on
the
repayment of his various loans made to us. These warrants were exercised in
full
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, pledged certain
securities (which do not include any of our securities which are owned by Mr.
Reed) in his personal securities account on deposit with Merrill Lynch as
collateral for repayment of the line of credit. The amount of the line of credit
is based on a percentage value of such securities. At December 31, 2006, the
outstanding balance on the line of credit was $-0-, and there was approximately
$701,000 available under the line of credit. The line of credit bears interest
at a rate of 3.785% per annum plus LIBOR (9.1% as of December 31, 2006). In
consideration for Mr. Reed’s pledging his stock account at Merrill Lynch as
collateral, we have agreed to pay Mr. Reed 5% per annum of the amount we
borrow from Merrill Lynch, as a loan fee. During the years ended December 31,
2006 and 2005, we paid Mr. Reed $28,125 and $15,250, respectively, under this
agreement. In addition, Christopher J. Reed has pledged all of his shares of
common stock to Robert T. Reed, Jr. as collateral for the shares pledged by
Robert T. Reed, Jr.
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.
Beginning
in January 2000, we extended an interest-free line of credit to one of our
consultants, Peter Sharma, III who was a member of our board until January
27,
2006. In July 2005, a repayment schedule began at $1,000 per month and was
to
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.
Mr. Sharma was a registered representative of Brookstreet Securities Corporation
until May 4, 2006. Brookstreet was one of the underwriters in our initial public
offering. Mr. Sharma received compensation of approximately $28,000 through
his
former relationship with Brookstreet.
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.
In
2005,
we added three independent directors to our board. We will maintain at least
two
independent directors on our board in the future. The Board of Directors,
inclusive of at least a majority of these independent directors, who did not
have an interest in the transactions and had access, at our expense, to our
or
independent legal counsel, resolved to reauthorize all material ongoing and
past
transactions, arrangements and relationships listed above. In addition, all
future material affiliated transactions and loans: (i) 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, (ii) 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 our or independent
legal counsel, and (iii) will comply with the Sarbanes-Oxley Act and other
securities laws and regulations.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of common stock
in connection with this offering. The shares may have been issued in violation
of federal or state securities laws, or both, and may be subject to rescission.
On August 12, 2006, we made a rescission offer to all holders of the outstanding
shares that we believe are subject to rescission, pursuant to which we offered
to repurchase these shares then outstanding from the holders. At the expiration
of our rescission offer on September 18, 2006, the rescission offer was accepted
by 32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. This exposure amount was calculated
by reference to the acquisition price of $4.00 per share for the common stock
in
connection with the earlier offering, plus accrued interest at the applicable
statutory rate. If our rescission offer had been accepted by all offerees,
we
would have been required to make an aggregate payment to the holders of these
options and shares of up to approximately $1,332,624, plus statutory
interest.
We
had
entered into agreements with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. Each of the designated purchasers is a brother of Christopher J.
Reed, our Chief Executive Officer, Chief Financial Officer and the Chairman
of
the Board of Directors. Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 5.39% of our common stock.
We
assigned to the designated purchasers the right to purchase any rescission
shares at 100% of the amount required to pay the rescission price under
applicable state law. Mark Reed agreed to purchase all of the rescission shares
from stockholders who accepted the rescission offer. The
shares that were tendered for rescission were agreed to be purchased by others
and not from our funds. The
rescission shares, purchased by the designated purchasers in the rescission
offer, are deemed to be registered shares for the benefit of the designated
purchasers pursuant to the registration statement filed by us relating to the
rescission offer under the Securities Act, effective as of the commencement
date
of the rescission offer without any further action on the part of the designated
purchasers. There
are
no assurances that we will not be subject to penalties or fines relating to
these issuances. We believe our anticipated rescission offer could provide
us
with additional meritorious defenses against any future claims relating to
these
shares. This transaction was ratified by a majority of our independent directors
who did not have an interest in the transactions and who had access, at our
expense, to our or independent legal counsel.
Item
13 Exhibits
The
following exhibits are included herein or incorporated herein by
reference:
3.1
|
Certificate
of Incorporation 1
|
|
|
3.2
|
Amendment
to Certificate of Incorporation 1
|
|
|
3.3
|
Certificate
of Designations 1
|
|
|
3.4
|
Certificate
of Correction to Certificate of Designations 1
|
|
|
3.5
|
Bylaws,
as amended 1
|
|
|
4.1
|
Form
of common stock certificate 1
|
|
|
4.2
|
Form
of Series A preferred stock certificate 1
|
|
|
4.3
|
2001
Employee Stock Option Plan 1
|
|
|
4.4
|
Convertible
promissory notes issued to investors 1
|
|
|
4.5
|
Amendment
to Promissory Note 1
|
|
|
10.1
|
Purchase
Agreement for Virgil’s Root Beer 1
|
|
|
10.2
|
Brewing
Agreement dated as of May 15, 2001 between the Company and The Lion
Brewery, Inc. 1
|
|
|
10.3
|
Loan
Agreement with U.S. Bank National Association for purchase of the
Brewery
1
|
|
|
10.4
|
Loan
Agreement with U.S. Bank National Association for improvements at
the
Brewery 1
|
|
|
10.5
|
Loan
Agreement with Bay Business Credit 1
|
|
|
10.6
|
Credit
Agreement with Merrill Lynch 1
|
|
|
10.7
|
Form
of Promotional Share Lock-In Agreement 1
|
|
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed 1
|
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr. 1
|
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr. 1
|
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma, III 1
|
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace 1
|
|
10.7(f)
|
Promotional
Share Lock-In Agreement for Judy Holloway Reed 1
|
|
10.7(g)
|
Promotional
Share Lock-In Agreement for Eric Scheffer 1
|
|
10.7(h)
|
Promotional
Share Lock-In Agreement for Mark Harris 2
|
|
|
10.8
|
Loan
Agreement dated September 28, 2004 with Bay Business Credit
1
|
|
|
10.9
|
Sirius/Pureprophet,
Ltd. Vendor’s Credit Line Agreement with Original Beverage Corp.
1
|
|
|
10.10
|
Terms
Of Amortization for Peter Sharma III for Sirius/Pureprophet, Ltd.
-
Vendor’s
Credit Line Agreement with Original Beverage Corp. 1
|
|
10.11
|
Co-Sign
Agreement 1
|
|
|
10.12
|
Loan
Agreement with Robert T. Reed, Sr. 1
|
|
|
10.13
|
Loan
Agreement with William Holiman 1
|
|
|
10.14
|
Loan
Agreement with Bay Business Credit 1
|
|
|
10.15
|
Loan
Agreement with Robert T. Reed, Sr. 1
|
|
|
10.16
|
Loan
Agreement with Robert T. Reed, Sr. 1
|
|
|
10.17
|
Amendment
to Loan Agreement with Bay Business Credit 1
|
|
|
10.18
|
Suspension
of Loan Payment Agreement with Robert T. Reed, Sr. 1
|
|
|
10.19
|
Agreement
to Assume Repurchase Obligations 2
|
|
|
10.20
|
Loan
and Security Agreement with Business Alliance Capital Corporation
dated
June 3, 2005,
and
Amendment No. 1 thereto dated June 29, 2006 2
|
|
|
14.1
|
Code
of Ethics 2
|
|
|
21
|
Subsidiaries
of Reed’s, Inc.
|
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
|
32
|
Certifications
of Chief Executive Officer and Chief Financial Officer Pursuant to
18
U.S.C. Section 1350, as Adopted
Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
1 Filed
as
part of the Registrant’s Registration Statement on Form SB-2 (File No.
333-120451).
2. Filed
as
part of the Registrant’s Registration Statement on Form SB-2 (File No.
333-135186).
Item 14.
Principal Accounting Fees and Services
Weinberg
& Company, P.A. (“Weinberg”) was our independent registered public
accounting firm for the years ended December 31, 2006 and 2005.
The
following table shows the fees paid or accrued by us for the audit and other
services provided by Weinberg for the years ended December 31, 2006 and
2005.
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
153,000
|
|
$
|
144,000
|
|
Audit-Related
Fees
|
|
|
0
|
|
|
0
|
|
Tax
Fees
|
|
|
0
|
|
|
0
|
|
All
Other Fees
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
153,000
|
|
$
|
144,000
|
|
As
defined by the SEC, (i) “audit fees” are fees for professional services rendered
by our principal accountant for the audit of our annual financial statements
and
review of financial statements included in our Form 10-QSB, or for services
that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years; (ii) “audit-related
fees” are fees for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under “audit fees;” (iii) “tax fees”
are fees for professional services rendered by our principal accountant for
tax
compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for
products and services provided by our principal accountant, other than the
services reported under “audit fees,” “audit-related fees,” and “tax
fees.”
Audit
Fees
Services
provided to us by Weinberg with respect to such periods consisted of the audits
of our financial statements and limited reviews of the financial statements
included in Quarterly Reports on Form 10-QSB. Weinberg also provided services
with respect to the filing of our registration statements in 2005 and 2006.
Charges by Weinberg with respect to these matters aggregated approximately
$153,000 and $144,000, respectively, for the years ended December 31, 2006
and
2005.
Audit
Related Fees
Weinberg
did not provide any professional services to us with which would relate to
“audit related fees.”
Tax
Fees
Weinberg
did not provide any professional services to us with which would relate to
“tax
fees.”
All
Other Fees
Weinberg
did not provide any professional services to us with which would relate to
“other fees.”
Audit
Committee Pre-Approval Policies and Procedures
Under
the
SEC’s rules, the Audit Committee is required to pre-approve the audit and
non-audit services performed by the independent registered public accounting
firm in order to ensure that they do not impair the auditors’ independence. The
Commission’s rules specify the types of non-audit services that an independent
auditor may not provide to its audit client and establish the Audit Committee’s
responsibility for administration of the engagement of the independent
registered public accounting firm.
Consistent
with the SEC’s rules, the Audit Committee Charter requires that the Audit
Committee review and pre-approve all audit services and permitted non-audit
services provided by the independent registered public accounting firm to us
or
any of our subsidiaries. The Audit Committee may delegate pre-approval authority
to a member of the Audit Committee and if it does, the decisions of that member
must be presented to the full Audit Committee at its next scheduled
meeting.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto
duly
authorized.
|
|
|
Date:
April 13, 2007
|
REED’S,
INC.
a Delaware corporation
|
|
|
|
|
By: |
/s/
Christopher
J. Reed |
|
Christopher
J. Reed
Chief
Executive Officer
|
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
CHRISTOPHER
J. REED
|
|
Chief
Executive Officer, Chief Financial Officer, President and Chairman
of the
Board of Directors |
|
April
13, 2007
|
Christopher
J. Reed
|
|
(Principal
Executive Officer, Principal Financial Officer
and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
JUDY
HOLLOWAY REED
|
|
Director
|
|
April
13, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
MARK
HARRIS
|
|
Director
|
|
April
13, 2007
|
Mark
Harris
|
|
|
|
|
|
|
|
|
|
/s/
DANIEL
S.J. MUFFOLETTO
|
|
Director
|
|
April
13, 2007
|
|
|
|
|
|
|
|
|
|
|
/s/
MICHAEL
FISCHMAN
|
|
Director
|
|
April
13, 2007
|
Michael
Fischman
|
|
|
|
|