UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
x |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
For
the
quarterly period ended June 30, 2007
o |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the
transition period from__ to___
Commission
file number
Commission
file number: 001-32501
----------
REED'S
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
35-2177773
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
13000
South Spring St. Los
Angeles, Ca. 90061
(Address
of principal executive offices) (Zip Code)
(310)
217-9400
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) 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
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
There
were 8,701,045 shares of the registrant's common stock outstanding as of
August 15, 2007.
Transitional
Small Business Disclosure Format (Check one) Yes o No x
Item
1. Financial Statements
REED’S,
INC
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June
30, 2007
(Unaudited)
|
|
December
31, 2006
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
7,178,413
|
|
$
|
1,638,917
|
|
Restricted
cash
|
|
|
1,590,929
|
|
|
1,580,456 |
|
Inventory
|
|
|
1,970,957
|
|
|
1,511,230 |
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $188,000 as of June 30, 2007 and $173,253 as of
December
31, 2006
|
|
|
1,365,559
|
|
|
1,183,763 |
|
Other
receivables
|
|
|
143,388
|
|
|
24,811 |
|
Prepaid
expenses
|
|
|
133,299
|
|
|
164,462 |
|
Total
Current Assets
|
|
|
12,382,545
|
|
|
6,103,639 |
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $744,785 as of
June 30,
2007 and $663,251 as of December 31, 2006
|
|
|
2,124,260
|
|
|
1,795,163 |
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201 |
|
Other
intangibles, net of accumulated amortization of $4,840 as of June
30, 2007
and $4,467 as of December 31, 2006
|
|
|
13,774
|
|
|
14,146 |
|
Total
Other Assets
|
|
|
813,975
|
|
|
814,347 |
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
15,320,780
|
|
$
|
8,713,149
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,421,222
|
|
$
|
1,695,014
|
|
Lines
of credit
|
|
|
1,523,438
|
|
|
1,355,526 |
|
Current
portion of long term debt
|
|
|
43,936
|
|
|
71,860 |
|
Accrued
interest
|
|
|
8,703
|
|
|
27,998 |
|
Accrued
expenses
|
|
|
76,754
|
|
|
118,301 |
|
Total
Current Liabilities
|
|
|
3,074,053
|
|
|
3,268,699 |
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
830,205
|
|
|
821,362 |
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,904,258
|
|
|
4,090,061 |
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10 par value, 500,000 shares authorized, 55,540 shares outstanding
at June 30, 2007 and 58,940 shares at December 31, 2006
|
|
|
555,402
|
|
|
589,402 |
|
Common
stock, $.0001 par value, 11,500,000 shares authorized,
8,701,045 shares issued and outstanding at June 30, 2007 and
7,143,185 at December 31, 2006
|
|
|
870
|
|
|
714 |
|
Additional
paid in capital
|
|
|
17,571,155
|
|
|
9,535,114 |
|
Accumulated
deficit
|
|
|
(6,710,905
|
)
|
|
(5,502,142 |
) |
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
11,416,522
|
|
|
4,623,088 |
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
15,320,780
|
|
$
|
8,713,149
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the Three and Six Months Ended June 30, 2007 and 2006
(Unaudited)
|
|
|
|
|
|
|
|
Three
months ended
|
|
Six
months ended
|
|
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
June
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
3,472,360
|
|
$
|
3,157,818
|
|
$
|
6,485,050
|
|
$
|
5,137,089
|
|
COST
OF SALES
|
|
|
2,791,932
|
|
|
2,589,864
|
|
|
5,265,000
|
|
|
4,278,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
680,428
|
|
|
567,954
|
|
|
1,220,050
|
|
|
858,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
888,104
|
|
|
313,462
|
|
|
1,442,269
|
|
|
600,619
|
|
General &
Administrative
|
|
|
450,148
|
|
|
743,982
|
|
|
899,491
|
|
|
1,016,210
|
|
Total
Operating Expenses
|
|
|
1,338,252
|
|
|
1,057,444
|
|
|
2,341,760
|
|
|
1,616,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM
OPERATIONS
|
|
|
(657,824
|
)
|
|
(489,490
|
)
|
|
(1,121,710
|
)
|
|
(758,481
|
)
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
29,109
|
|
|
-
|
|
|
52,600
|
|
|
--
|
|
Interest
Expense
|
|
|
(64,330
|
)
|
|
(97,748
|
)
|
|
(111,883
|
)
|
|
(198,354
|
)
|
Total
Other Income (Expense)
|
|
|
(35,221
|
)
|
|
(97,748
|
)
|
|
59,283
|
|
|
(198,354
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(693,045
|
)
|
|
(587,238
|
)
|
|
(1,180,993
|
)
|
|
(956,835
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
(27,770
|
)
|
|
(29,470
|
)
|
|
(27,770
|
)
|
|
(29,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(720,815
|
)
|
$
|
(616,708
|
)
|
$
|
(1,208,763
|
)
|
$
|
(986,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE-
Available to Common Stockholders
Basic and Diluted
|
|
$
|
(.10
|
)
|
$
|
(.12
|
)
|
$
|
(.17
|
)
|
$
|
(.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
7,403,777
|
|
|
5,322,755
|
|
|
7,274,201
|
|
|
5,239,913
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the
six months ended June 30, 2007 (Unaudited)
|
|
Common
Stock
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Additional
Paid in Capital
|
|
Shares
|
|
Amount
|
|
Accumulated
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
7,143,185
|
|
$
|
714
|
|
$
|
9,535,114
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(5,502,142
|
)
|
$
|
4,623,088
|
|
Fair
Value of Common stock issued for services
|
|
|
440
|
|
|
-
|
|
|
3,783
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,783
|
|
Preferred
Stock Dividend
|
|
|
3,820
|
|
|
1
|
|
|
27,769
|
|
|
-
|
|
|
-
|
|
|
(27,770
|
)
|
|
-
|
|
Preferred
stock conversion
|
|
|
13,600
|
|
|
1
|
|
|
33,999
|
|
|
(3,400
|
)
|
|
(34,000
|
)
|
|
-
|
|
|
-
|
|
Exercise
of Warrants
|
|
|
40,000
|
|
|
4
|
|
|
104,996
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
105,000
|
|
Common
stock issued for cash, net of offering costs
|
|
|
1,500,000
|
|
|
150
|
|
|
7,862,074
|
|
|
|
|
|
|
|
|
|
|
|
7,862,224
|
|
Public
offering expenses
|
|
|
-
|
|
|
-
|
|
|
(45,000
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(45,000
|
)
|
Fair
value of vested options issued to employees
|
|
|
-
|
|
|
-
|
|
|
48,420
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
48,420
|
|
Net
Loss for the six months ended June 30, 2007
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,180,993
|
)
|
|
(1,180,993
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2007
|
|
|
8,701,045
|
|
$
|
870
|
|
$
|
17,571,155
|
|
|
55,540
|
|
$
|
555,402
|
|
$
|
(6,710,905
|
)
|
$
|
11,416,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the six months ended June 30, 2007 and 2006
(Unaudited)
|
|
Six
Months Ended
|
|
|
|
June
30,
2006
|
|
June
30,
2005
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,180,993
|
)
|
$
|
(956,835
|
) |
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
Compensation
expense from stock issuance
|
|
|
3,783
|
|
|
--
|
|
Fair
value of stock options issued to employees
|
|
|
48,420
|
|
|
--
|
|
Depreciation
and amortization
|
|
|
81,907
|
|
|
58,684
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(181,796
|
)
|
|
(447,578
|
) |
Inventory
|
|
|
(459,727
|
)
|
|
(67,800
|
) |
Prepaid
Expenses
|
|
|
31,163
|
|
|
(32,032
|
)
|
Other
receivables
|
|
|
(118,576
|
)
|
|
4,296
|
|
Accounts
payable
|
|
|
(273,792
|
)
|
|
736,612
|
|
Accrued
expenses
|
|
|
(41,547
|
)
|
|
21,565
|
|
Accrued
interest
|
|
|
(19,296
|
)
|
|
17,951
|
|
Net
cash used in operating activities
|
|
|
(2,110,454
|
)
|
|
(665,137
|
) |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(410,631
|
)
|
|
(36,969
|
) |
Increase
in restricted cash
|
|
|
(10,473
|
)
|
|
--
|
|
Net
cash used in investing activities
|
|
|
(421,104
|
)
|
|
(36,969
|
) |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from warrants exercise
|
|
|
105,000
|
|
|
--
|
|
Proceeds
received from borrowings on long term debt
|
|
|
163,276
|
|
|
--
|
|
Principal
payments on debt
|
|
|
(182,356
|
)
|
|
(53,870
|
)
|
Proceeds
received on sale of common stock
|
|
|
9,000,000
|
|
|
1,002,779
|
|
Payments
for stock offering costs
|
|
|
(1,182,777
|
)
|
|
(237,287
|
) |
Net
borrowing on lines of credit
|
|
|
167,911
|
|
|
17,508
|
|
Net
cash provided by financing activities
|
|
|
8,071,054
|
|
|
729,130
|
|
NET
INCREASE IN
CASH
|
|
|
5,539,496
|
|
|
27,024
|
|
CASH —
Beginning of period
|
|
|
1,638,917
|
|
|
27,744
|
|
|
|
|
|
|
|
|
|
CASH —
End of period
|
|
$
|
7,178,413
|
|
$
|
54,768
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
131,176
|
|
$
|
180,403
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$
|
--
|
|
$
|
29,470
|
|
Deferred
stock offering costs charged to paid in capital
|
|
$
|
--
|
|
$
|
356,238
|
|
Preferred
Stock converted to Common Stock
|
|
$
|
34,000
|
|
$
|
--
|
|
Common
stock issued in settlement of preferred stock dividend
|
|
$
|
27,770
|
|
$
|
29,470
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
Six
Months Ended June 30, 2007 and 2006 (UNAUDITED)
1. BASIS OF
PRESENTATION
The
accompanying interim condensed financial statements are unaudited, but in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position at June 30, 2007 and the results of operations and cash
flows
for the six months ended June 30, 2007 and 2006. The balance sheet as of
December 31, 2006 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Annual Report, Form 10-KSB, as filed with the Securities and
Exchange Commission on April 16, 2007.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the six months ended June 30, 2007 are not necessarily
indicative of the results of operations to be expected for the full fiscal
year
ending December 31, 2007.
Income
(Loss) per Common Share
Basic
income (loss) per share is calculated by dividing net income (loss) available
to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted income per share is calculated assuming the issuance
of
common shares, if dilutive, resulting from the exercise of stock options and
warrants. As the Company had a loss in the three and six month periods ended
June 30, 2007 and 2006, basic and diluted loss per share are the same because
the inclusion of common share equivalents would be anti-dilutive. At June 30,
2007 and 2006, potentially dilutive securities consisted of convertible
preferred stock, common stock options and warrants aggregating 2,412,896 and
1,276,159 common shares, respectively.
Adoption
of New Accounting Policy
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
48”)
—an
interpretation of FASB Statement No. 109, Accounting for Income
Taxes.”
The
Interpretation addresses the determination of whether tax benefits claimed
or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48,
we may recognize the tax benefit from an uncertain tax position only if it
is
more likely than not that the tax position will be sustained on examination
by
the taxing authorities, based on the technical merits of the position. The
tax
benefits recognized in the financial statements from such a position should
be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN
48
also
provides guidance on derecognition, classification, interest and penalties
on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of June 30, 2007, the Company does not have
a
liability for unrecognized tax benefits.
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for five years after 2002. During the periods open to
examination, the Company has net operating loss and tax credit carry
forwards for U.S. federal and state tax purposes that have attributes from
closed periods. Since these NOLs and tax credit carry forwards may
be utilized in future periods, they remain subject to
examination.
The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of June 30, 2007, the Company has no accrued interest
or penalties related to uncertain tax positions.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (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 adoption of this SFAS has not had a material change on the
Company’s results of operations, financial position, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
115”. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective
for years beginning after November 15, 2007. Management believes the adoption
will not have a material impact on the Company’s results of operations,
financial position or cash flow.
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed to
risk
for the amounts of funds held in one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess of
the
$100,000 guarantee during the six months ended June 30, 2007.
During
the three months ended June 30, 2007 and 2006, the Company had two customers,
which accounted for approximately 14% and 34% and 18% and 47% of sales,
respectively. No other customers accounted for more than 10% of sales in either
year.
During
the six months ended June 30, 2007 and 2006, the Company had two customers,
which accounted for approximately 15% and 36% and 18% and 46% of sales,
respectively . No other customers accounted for more than 10% of sales in either
year. As of June 30, 2007, the Company had approximately $187,000 and $498,000,
respectively, of accounts receivable from these customers.
2. Restricted
Cash
The
restricted cash of $1,590,929 relates to a collateral deposit for a line
of
credit facility.
3. Inventory
Inventory
consists of the following at:
|
|
June
30, 2007
|
|
December
31, 2006
|
|
Raw
Materials
|
|
$
|
757,787
|
|
$
|
593,458
|
|
Finished
Goods
|
|
|
1,213,170
|
|
|
917,772
|
|
|
|
$
|
1,970,957
|
|
$
|
1,511,230
|
|
|
|
|
|
|
|
|
|
4. Long
term
debt
In
February 2007, the Company originated a note payable with a bank in the amount
of $130,000. The note matures in February 2008. The note requires 11 principal
payments of $2,167 and one final payment in February 2008 of $106,674. The
note
carries a 5.50% interest rate and is secured by a certificate of deposit with
the bank in the amount of $130,000. The bank may offset the certificate of
deposit against the loan balance and the monies cannot be withdrawn until the
loan is repaid in full. As of June 30, 2007, this loan had been paid in full
and
the certificate of deposit had been released of any restrictions.
In
January and February 2007, the Company originated two car loans for $33,276.
The
loans have interest rates ranging from 8.85% to 9.4%. The loans have monthly
payments of approximately $298 and $352 and mature in 2012 and 2013,
respectively.
5. Stockholders’
Equity
From
May
25, 2007 through June 15, 2007, the Company completed a private placement
to
accredited investors only, on subscriptions for the sale of 1,500,000 shares
of
common stock and warrants to purchase up to 749,995 shares of common stock,
resulting in an aggregate of $9,000,000 of gross proceeds to the Company.
The
Company sold the shares at a purchase price of $6.00 per share. The warrants
issued in the private placement have a five-year term and an exercise price
of
$7.50 per share. We paid cash commissions of $900,000 to the placement
agent for
the private placement and issued warrants to the placement agent to purchase
up
to 150,000 shares of common stock with an exercise price of $6.60 per share.
We
also issued additional warrants to purchase up to 15,000 shares of common
stock
with an exercise price of $6.60 per share and paid an additional $60,000
in cash
to the placement agent as an investment banking fee. Total proceeds received,
net of underwriting commissions and the investment banking fee and excluding
other expenses of the private placement, was $8,040,000.
From
April 1, 2007 through June 30, 2007, the following additional activity occurred
with respect to our stockholders’ equity: 40,000 shares of common stock were
issued from the exercise of 40,000 warrants and the Company received $105,000;
3,400 shares of preferred stock were converted into 13,600 shares of common
stock in accordance with the conversion privileges of certain preferred
stockholders; 440 shares of common stock were issued to employees as a bonus;
and 3,820 shares of common stock were issued in payment of the $27,770 preferred
stock dividend payable June 30, 2007.
6. Stock
Based Compensation
The
impact on our results of operations of recording stock-based compensation for
the three-month period ended June 30, 2007 and 2006 was to increase selling
expenses by $16,793 and $0, respectively, and increase general and
administrative expenses by $6,500 and $0, respectively.
The
impact on our results of operations of recording stock-based compensation for
the six-month period ended June 30, 2007 and 2006 was to increase selling
expenses by $41,920 and $0, respectively, and increase general and
administrative expenses by $6,500 and $0, respectively. As of June 30, 2007,
the
Company has unvested options of 224,000, which will be reflected as compensation
cost of approximately $576,100 over the remaining vesting period of three
years.
We
calculated the fair value of each option award on the date of grant using the
Black-Scholes option pricing model. The following weighted average assumptions
were used for the six months ended June 30, 2007:
Risk-free
interest rate
|
|
4.83
|
%
|
Expected
lives (in years)
|
|
5.00
|
|
Dividend
yield
|
|
0
|
%
|
Expected
volatilty
|
|
70
|
%
|
|
|
|
|
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.
The
following table summarizes stock option activity for the six months ended June
30, 2007 :
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
363,500
|
|
$
|
3.84
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
139,000
|
|
$
|
5.90
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at June 30, 2007
|
|
|
502,500
|
|
$
|
4.41
|
|
|
3.71
|
|
$
|
1,441,225
|
|
Exercisable
at June 30, 2007
|
|
|
278,500
|
|
$
|
3.79
|
|
|
3.01
|
|
$
|
962,625
|
|
Stock
options granted under our equity incentive plans generally vest over three
years
from the date of grant, 1/3 per year and generally expire five years from the
date of grant. The weighted average exercise price of stock options granted
during the period was $5.90 per share and the related weighted average
grant date fair value was $3.65 per share.
We
calculated the fair value of each warrant award on the date of grant using
the
Black-Scholes option pricing model. The following weighted average assumptions
were used for the six months ended June 30, 2007:
Risk-free
interest rate
|
|
|
5.10
|
%
|
Expected
lives (in years)
|
|
|
5
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatilty
|
|
|
70
|
%
|
|
|
|
|
|
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
warrant, the full contract life of the warrant 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.
The
following table summarizes warrant activity for the six months ended June 30,
2007 :
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
813,241
|
|
$
|
3.74
|
|
|
-
|
|
|
-
|
|
Issued
|
|
|
914,995
|
|
$
|
7.34
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(40,000
|
)
|
$
|
2.63
|
|
|
-
|
|
|
-
|
|
Outstanding
at June 30, 2007
|
|
|
1,688,236
|
|
$
|
5.72
|
|
|
3.81
|
|
$
|
2,776,900
|
|
Exercisable
at June 30, 2007
|
|
|
1,488,236
|
|
$
|
5.60
|
|
|
3.74
|
|
$
|
2,646,900
|
|
The
warrants granted in 2007 were granted in connection with our private placement,
see note 5, and were fully vested at issuance on June 15, 2007 and expire in
June 2012. The weighted average exercise price of the warrants was $7.34. The
weighted average issue date fair value was $4.26 per warrant, resulting in
an aggregate fair value of $3,091,779. The accounting affect of this is to
both
include and deduct the amount from Additional Paid in Capital. All of the
warrants issued to the investors, 749,995 warrants, include a call provision
which the Company may exercise and will require the warrant holder, within
20
days written notice of the call provision being exercised by the Company, to
exercise the warrants or have them expire. The Company may exercise its call
provision anytime the Company’s common stock closes at or above $10.00 per share
for a period of 10 consecutive trading days.
7.
Subsequent Events
In
July
2007, the Company made an unsecured loan of $300,000 to
an unaffiliated third party. The loan requires interest to be paid
quarterly, at a rate of 7.5%. The principal is due in full in April
2008.
In
August
2007, the Company acquired a property adjacent to its Los Angeles, CA location
for approximately $1,730,000. The Company intends to use the facility to
store
finished goods inventory. No major renovations are expected to be made to
the
property in order for it to attain its intended use.
Item
2.
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 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 “Risk Factors included
in our Annual Report on Form 10-KSB for the year ended December 31,
2006
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 fiscal years 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. More
recently, we have 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, we have introduced new products that include specialty beverage
packaging options not typically available in the marketplace that have
contributed to our growth in sales. These products include Virgil’s Cream Soda
in a 12 ounce bottle, 5-liter “party keg” version of our Virgil’s Root Beer and
Virgil’s Cream Soda and 750 ml. size bottles of our Reed’s Original Ginger Brew,
Extra Ginger Brew and Spiced Apple Brew. In addition, in 2007, we launched
Virgil’s Black Cherry Cream Soda and diet versions of Virgil’s Root Beer, Cream
Soda and Black Cherry Cream Soda.
We
gauge
the financial success of our company using 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
|
For
the
six months ended June 30, 2007, our sales increased
approximately $1,348,000
over the
comparable period of the prior year, from
approximately $5,137,000 to
approximately $6,485,000.
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 the mainstream
distribution of our products. These include new distribution relationships
in the following areas: Washington state, Oregon, New York, Massachusetts,
New Hampshire, Connecticut, Pennsylvania, Ohio, Michigan, Minnesota
and
Colorado. We
also are
starting up a
co
branded marketing plan
with
these new distributors in these areas of the country..
We
hope to establish additional distributorship relationships in 10-20
new
areas by the end of 2007, and
|
· |
increases
in our direct sales to large
retailers.
|
Almost
as
important as increasing our net sales, is increasing our gross margin. We
continue to work to reduce costs related to production of our products. However,
while gross margins have increased, we have encountered difficulties in
increasing
our gross
margins due
to
certain factors, including:
· |
inefficiencies
relating to the operation of the Brewery, 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. For
the
six months ended June 30, 2007, our gross margins were 18.8% as compared to
16.7% for the six months ended June 30, 2006.
Production
costs are a significant
portion
of our
“cost
of
goods”
and
a
major
factor in determining our gross
margins.
Greater
production volumes increase our ability to negotiate more favorable production
costs. We
are
attempting
to negotiate production arrangements with third parties that may result
in
production costs savings,
which,
if successful, would
improve
our gross
margins.
In addition, our west coast Brewery facility is running at 50% 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. We believe that increased production of our Virgil’s product line
(non-Ginger Brew) has increased utilization of operating capacity at the
Brewery. As we are able to more fully utilize the Brewery, we believe that
we
will experience improvements in gross margins due to freight and production
savings. We are continuing to improve the Brewery’s operations and to work on
the issue of our Ginger Brew product flavoring. In the second quarter of 2007,
we expended approximately $100,000 for a conveyor system to improve our
packaging line.
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 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.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to the Company. The Company
sold
the shares at a purchase price of $6.00 per share. The warrants issued in the
private placement have a five-year term and an exercise price of $7.50 per
share. We paid cash commissions of $900,000 to the placement agent for the
private placement and issued warrants to the placement agent to purchase up
to
150,000 shares of common stock with an exercise price of $6.60 per share. We
also issued additional warrants to purchase up to 15,000 shares of common stock
with an exercise price of $6.60 per share and paid an additional $60,000 in
cash
to the placement agent as an investment banking fee.
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 recently launched
diet
versions of our Virgil’s Root Beer, Cream Soda and Black Cherry Cream
Soda.
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. In addition, our initial public offering, subsequent
private placement and our outstanding options and warrants, while providing
capital, also dilute the ownership of common stockholders. 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. Our use of lines of credit have been reduced
with the capital raised from our initial public offering and subsequent private
placement of common stock.
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 six months ended June 30, 2007 or 2006.
Long-Lived
Assets. Our management regularly reviews property, equipment and other
long-lived assets, including identifiable amortizing intangibles, for possible
impairment. This review occurs quarterly or more frequently if events or changes
in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment
or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result from
the use of the asset and its eventual disposition. If these cash flows are
less
than the carrying amount of the asset, an impairment loss is recognized to
write
down the asset to its estimated fair value. The fair value is estimated at
the
present value of the future cash flows discounted at a rate commensurate with
management’s estimates of the business risks. Quarterly, or earlier if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective
and
is based on management’s best estimate of assumptions concerning expected future
conditions. No impairments were identified during the six months ended June
30,
2007 or 2006.
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 estimated impact on
our
future cash flows.
Advertising.
We account for advertising production costs by expensing such production costs
the first time the related advertising is run.
Accounts
Receivable. We evaluate the collectibility of our trade accounts receivable
based on a number of factors. In circumstances where we become aware of a
specific customer’s inability to meet its financial obligations to us, a
specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount our management believes will
ultimately be collected. In addition to specific customer identification of
potential bad debts, bad debt charges are recorded based on our historical
losses and an overall assessment of past due trade accounts receivable
outstanding.
Inventories.
Inventories are stated at the lower of cost to purchase and/or manufacture
the
inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand
and/or our ability to sell the product(s) concerned and production requirements.
Demand for our products can fluctuate significantly. Factors that could affect
demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations
of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be
inaccurate, which could result in an understated or overstated provision
required for excess and obsolete inventory.
Income
Taxes. Current income tax expense is the amount of income taxes expected to
be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences of temporary differences in
the
financial reporting and tax bases of assets and liabilities. We consider future
taxable income and ongoing, prudent, and feasible tax planning strategies,
in
assessing the value of our deferred tax assets. If our management determines
that it is more likely than not that these assets will not be realized, we
will
reduce the value of these assets to their expected realizable value, thereby
decreasing net income. Evaluating the value of these assets is necessarily
based
on our management’s judgment. If our management subsequently determined that the
deferred tax assets, which had been written down, would be realized in the
future, the value of the deferred tax assets would be increased, thereby
increasing net income in the period when that determination was
made.
Results
of Operations
Three
Months Ended June 30, 2007 Compared to Three Months Ended June 30,
2006
Net
sales
increased by $314,542 or 10.0%, from $3,157,818 in the three months ended June
30, 2006 to $3,472,360 in the three months ended June 30, 2007. Net
sales
in the first
quarter
of
2007
had
increased by 52.2% from the comparable period in 2006. However, we believe
that
the amount of the percentage increase may have been unusually high between
the
periods because
approximately $500,000 of sales recorded
in the second quarter of 2006 related to unfilled orders from
the
first quarter of 2006 that
were
delayed
due to a
plant equipment retrofit.
Conversely, we also believe that the 10% increase in net sales from the second
quarter of 2006 to the second quarter of 2007 would have been higher had the
delayed sales which occurred in the second quarter of 2006 actually taken place
in the first quarter of 2006. However, as reflected below, net sales increased
by 26.2% in the six month period ended June 30, 2007 from the six month period
ended June 30, 2006. We
believe that sales for the first
half of 2007 have been within the range of our
guidance
of 20-40% growth for 2007.
The
Reed’s Ginger Brew product line decreased by 9.3% from $1,699,000 in the three
months ended June 30, 2006 to $1,541,000 in the three months ended June 30,
2007. Sales
of
our Virgil’s Root Beer product line increased by 32.3% from $1,104,000 to
$1,461,000. These sales were due to a significant increase in the Virgil’s 5
liter party keg sales that grew from $50,000 in the three months ended June
30,
2006 to $304,000 in the three months ended June 30, 2007. In
addition, the new low calorie, herbally enhanced 12 ounce bottle Virgil
line
generated $92,000 of sales.
Candy
sales decreased by $24,000 or 11.8% from $204,000 in the three months ended
June
30, 2006 to $180,000 in the three months ended June 30, 2007. Ice cream sales
increased by 9.1% from $33,000 in the three months ended June 30, 2006 to
$36,000 in the three months ended June 30, 2007.
Cost
of
sales increased by $202,068 or 7.8%, from $2,589,864 in the three months ended
June 30, 2006 to $2,791,932 in the three months ended June 30, 2007. As a
percentage of net sales, cost of sales decreased from 82.0% in the three months
ended June 30, 2006 to 80.4% in the three months ended June 30, 2007. The
decrease in the costs of sales was primarily due to our
negotiating
better freight rates
with
transporters of our products.
Gross
profit increased by $112,474 or 19.8% from $567,954 in the three months ended
June 30, 2006 to $680,428 in the three months ended June 30, 2007. As a
percentage of net sales, gross profit increased from 18.0% in the three months
ended June 30, 2006 to 19.6% in the three months ended June 30, 2007.
Our
focus
on reducing freight costs resulted in the improvement in margins. However,
in
July
2007,
our
main
co-pack production facility increased its
prices.
We
expect
this increase
to have an adverse effect on our gross
margins
in the short term. However,
we are
looking at alternative co-pack production plants to reduce production costs,
our
largest expense,
and
hope to reach arrangements with alternative co-pack facilities by the end
of
the
third quarter of 2007.
Operating
expenses increased by $280,808 or 26.7% from $1,057,444, in the three months
ended June 30, 2006 to $1,338,252 in the three months ended June 30, 2007.
Operating expenses increased as a percentage of net sales from 33.5% in the
three months ended June 30, 2006 to 38.5% in the three months ended June 30,
2007. The increase was primarily due to increases in sales salaries and
commissions as a result of an increase in our sales force (6.5%), sales expenses
(2.7%), advertising and promotional expenses (6.4%) and increased recycling
fees
(1.6%). These increases were offset by the elimination of non-recurring
expenses
which
we
incurred
in the second quarter of 2006 relating
to our rescission offer (-11.1%)
We expect to see an increase in sales force expenses as we bring on more sales
people to work with
our new
distributors.
Interest
expense decreased by $33,418 or 34.2%, from $97,748 in the three months ended
June 30, 2006 to $64,330 in the three months ended June 30, 2007. Interest
income increased from $0 in the three months ended June 30, 2006 to $29,109
in
the three months ended June 30, 2007. The
decrease in interest expense was principally
due
to
the reduction
of certain outstanding loans in the fourth quarter of 2006.
As
a
result of the foregoing, we experienced a net loss of $693,045 in the three
months ended June 30, 2007 compared to a net loss of $587,238 in the three
months ended June 30, 2006. Our net loss attributable to common stockholders
was
$(0.10) per share for the three months ended June 30, 2007 and $(0.12) per
share
for
the
three months ended June 30, 2006, inclusive of the value of our preferred stock
dividend. Our
net
loss per share attributable to common stockholders decreased from the prior
year, despite the rise in net loss, due to the increase in the number of our
outstanding shares as a result of our initial public offering and private
placement of our common
stock.
Six
Months Ended June 30, 2007 Compared to Six Months Ended June 30,
2006
Net
sales
increased by $1,347,961 or 26.2%, from $5,137,089 in the six months ended June
30, 2006 to $6,485,050 in the six months ended June 30, 2007.
Net
sales in the first
quarter
of
2007
increased by 52.2% from the comparable period in 2006. However, we believe
that
the amount of the percentage increase may have been unusually high between
the
periods because
approximately $500,000 of sales recorded
in the second quarter of 2006 related to unfilled orders from
the
first quarter of 2006 that
were
delayed
due to a
plant equipment retrofit.
Conversely, we also believe that the 10% increase in net sales from the second
quarter of 2006
to the
second quarter of 2007
would have been higher had the delayed sales which occurred in the second
quarter of 2006 actually taken place in the first quarter of 2006. However,
as
reflected above, net sales increased by 26.2% in the six month
period
ended
June 30, 2007 from
the
six month period ended June 30, 2006. We
believe that sales for the first
half of 2007 have been within the range of our
guidance
of 20-40% growth for 2007.
The
Reed’s Ginger Brew product line increased by 8.7% from $2,778,000 in the six
months ended June 30, 2006 to $3,021,000 in the six months ended June 30, 2007.
Sales of our Virgil’s Root Beer product line increased by 34.3% from $1,803,000
to $2,421,000. Candy sales increased by $27,000 or 6.6% from $410,000 in the
six
months ended June 30, 2006 to $437,000 in the six months ended June 30, 2007.
Ice cream sales were flat at $68,000.
Cost
of
sales increased by $986,259 or 23.1%, from $4,278,741 in the six months ended
June 30, 2006 to $5,265,000 in the six months ended June 30, 2007. As a
percentage of net sales, cost of sales decreased from 83.3% in the six months
ended June 30, 2006 to 81.2% in the six months ended June 30, 2007. The decrease
in the costs of sales was primarily due to our
negotiating
better freight rates with
transporters of our products.
Gross
profit increased by $361,702 or 42.1% from $858,348 in the six months ended
June
30, 2006 to $1,220,050 in the six months ended June 30, 2007. As a percentage
of
net sales, gross profit increased from 16.7% in the six months ended June 30,
2006 to 18.8% in the six months ended June 30, 2007. Our focus on reducing
freight costs resulted in the improvement in margins. However,
in
July
2007, our main co-pack
production
facility increased its
prices.
We expect this increase
to have an adverse effect on our gross
margins
in the short term. However,
we are
looking at alternative co-pack production plants to reduce production costs,
our
largest expense and
hope
to reach arrangements with alternative co-pack facilities by the end
of
the
third quarter of 2007.
Operating
expenses increased by $724,931 or 44.8% from $1,616,829, in the six months
ended
June 30, 2006 to $2,341,760 in the six months ended June 30, 2007. Operating
expenses increased as a percentage of net sales from 31.5% in the six months
ended June 30, 2006 to 36.1% in the six months ended June 30, 2007. The increase
was primarily due to increases in sales salaries and commissions as a result
of
an increase in our sales force (4.8%), sales expenses (1.9%), advertising and
promotional expenses (3.5%) and increased recycling fees (1.0%). These increases
were offset by the elimination of non-recurring
expenses
which we
incurred
in the second quarter of 2006 relating
to our rescission offer (-6.8%).
We expect to see an increase in sales force expenses as we bring on more sales
people to work with
our new
distributors.
Interest
expense decreased by $86,471 or 43.6%, from $198,354 in the six months ended
June 30, 2006 to $111,883 in the six months ended June 30, 2007. Interest income
increased from $0 in the three months ended June 30, 2006 to $52,600 in the
three months ended June 30, 2007. The decrease in interest expense was due
principally
due
to
the reduction
of certain outstanding loans in the fourth quarter of 2006.
As
a
result of the foregoing, we experienced a net loss of $1,180,993 in the six
months ended June 30, 2007 compared to a net loss of $956,835 in the six months
ended June 30, 2006. Our net loss attributable to common stockholders was
$(0.17) per share for the six months ended June 30, 2007 and $(0.19) per share
for the six months ended June 30, 2006, inclusive of the value of our preferred
stock dividend. Our net loss per share attributable to common stockholders
decreased from the prior year, despite the rise in net loss attributable to
common stockholders, due to the increase in the number of our outstanding shares
as a result of our initial public offering and private placement of our common
stock.
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.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares at
a
purchase price of $6.00 per share. The warrants issued in the private placement
have a five-year term and an exercise price of $7.50 per share. We paid cash
commissions of $900,000 to the placement agent for the private placement and
issued warrants to the placement agent to purchase up to 150,000 shares of
common stock with an exercise price of $6.60 per share. We also issued
additional warrants to purchase up to 15,000 shares of common stock with an
exercise price of $6.60 per share and paid an additional $60,000 in cash to
the
placement agent as an investment banking fee. Total proceeds received, net
of
underwriting commissions and the investment banking fee and excluding other
expenses of the private placement, was $8,040,000.
As
of
June 30, 2007, we had an accumulated deficit of $6,710,905 and we had working
capital of $9,308,492, compared to an
accumulated deficit of $5,502,142 and
working
capital of $2,834,940 as of December 31, 2006. Cash and cash equivalents
were $7,178,413 as of June 30, 2007, as compared to $1,638,917 as of December
31, 2006. This increase in our working capital and cash position was primarily
attributable to the completion of our private placement in
the
second quarter of 2007.
In
addition to our cash position, we have availability under our lines of credit
of
approximately $727,000.
Net
cash
used in operating activities during the six months ended June 30, 2007 was
$2,110,454 which was due primarily to our net loss of $1,180,993, net increases
in our accounts receivable, inventory, other receivables and a decrease in
accounts payable.
In
the
six months ended June 30, 2007, we used $421,104 of cash in investing
activities, which was due primarily to the purchase of various equipment to
support business growth.
Net
cash
provided by financing activities during the six months ended June 30, 2007
was
$8,071,054. The primary components of that were: the proceeds of our
private placement
of $9,000,000,
offset
by
related
expenses
directly associated with the private
placement,
proceeds from the exercise
of common stock purchase
warrants
of
$105,000, increases in long term debt of $163,276, and
borrowing from our lines of credit
of
$167,911, which was offset by payments of long term debt of
$182,356.
As
of
June 30, 2007, we had outstanding borrowings of $1,523,438 under our lines
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 $23,662 at June 30, 2007 and there was $26,338 available under
the
line of credit. The interest rate in effect at June 30, 2007 was
20.25%.
|
· |
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 June
30,
2007, 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
June 30, 2007). 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.
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 June 30,
2007,
the amount borrowed on this line of credit was $1,499,776. The interest
rate on this line of credit is Prime, which was 8.25% at June 30,
2007.
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 June
30,
2007, we had approximately $224 of availability on this line of credit.
During the term of this line of credit, we are required to have a
minimum
stockholders’ equity balance of
$1,500,000.
|
In
the
second quarter of 2007, we expended approximately $100,000 for new equipment
at
the Brewery for a conveyor system to improve our packaging line, but do not
consider this improvement to have been a material capital expenditure for the
purpose of improving plant capacity at the Brewery. In August 2007, we purchased
the adjacent land and building to our Los Angeles location for approximately
$1,730,000
in cash. We intend
to use
the facility to store some of our
finished
goods inventory. No major renovations are expected to be made to the property
in
order for us
to
attain the
intended
use
of the
property.
Management
recognizes that operating losses negatively impact liquidity and is working
on
decreasing operating losses, while focusing on increasing net sales. Management
believes that 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 2008.
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
and private placement 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
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (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 adoption of this SFAS
has
not had a material change on our results of operations, financial position,
or
cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
115”. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective
for years beginning after November 15, 2007. Management believes the adoption
will not have a material impact on our results of operations, financial position
or cash flow.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
Item
3.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
As
of
June 30, 2007, we carried out an evaluation, under the supervision and with
the
participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as amended).
Based
on
this evaluation, our chief
executive officer and chief
financial officer concluded
that,
as of
June
30,
2007,
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.
(b)
Changes in Internal Controls.
There
were
no
changes
in our
internal controls
over
financial reporting during
the
quarter
ended
June 30, 2007 that
materially
affected, or are
reasonably likely to materially affect, our internal controls
over
financial reporting.
Part
II OTHER
INFORMATION
Item
1.
Legal Proceedings
Reference
is made to Item 3, part I, Legal
Proceedings,
in our
Annual Report on Form 10-KSB for the year ended December 31, 2006 for
descriptions of our legal proceedings.
Except
as
set forth in such disclosure, 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
2.
Unregistered Sales of Equity Securities and Use of Proceeds
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 $8,000,000
of
the
proceeds from our initial public offering, as of June 30, 2007:
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)
|
|
|
1,705,000
|
|
Payment
to reduce line of credit (5)
|
|
|
720,000
|
|
Payment
of accounts payable and current operating expenses
(6)
|
|
|
2,298,000
|
|
Costs
of hiring of additional sales personnel (7)
|
|
|
797,000
|
|
New
product launch costs (8)
|
|
|
79,000
|
|
Sales
delivery vehicles (9)
|
|
|
20,000
|
|
Brand
advertising (10)
|
|
|
231,000
|
|
New
computer system and brewery equipment (11)
|
|
|
180,000
|
|
Total
estimated proceeds used
|
|
$
|
8,000,000
|
|
(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 restricted money market accounts in order to secure
a
line of credit with California United Bank and a note payable to City National
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.
(10)
These funds were used to advertise our products.
(11)
These funds were used to purchase a new computer system and brewery equipment.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares
at a
purchase price of $6.00 per share. The warrants issued in the private placement
have a five-year term and an exercise price of $7.50 per share. We paid cash
commissions of $900,000 to the placement agent for the private placement
and
issued warrants to the placement agent to purchase up to 150,000 shares of
common stock with an exercise price of $6.60 per share. We also issued
additional warrants to purchase up to 15,000 shares of common stock with
an
exercise price of $6.60 per share and paid an additional $60,000 in cash
to the
placement agent as an investment banking fee. Total
proceeds received, net of underwriting commissions and the investment banking
fee and excluding other expenses of the private placement, was
$8,040,000.
In
the second quarter of 2007, we issued 440 shares of
common stock as a bonus to certain of our employees. We also issued 3,820
shares
of common stock with a value of $27,770 in payment of a dividend to the holders
of our Series A Preferred Stock.
Item
3.
Defaults Upon Senior Securities
Not
applicable
Item
4.
Submission of Matters to a Vote of Security Holders
Not
applicable
Item
5.
Other Information
Not
applicable
Item
6.
Exhibits
Exhibit
Number
Description
of Document
31
Officer's
Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002
32
Officer's
Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002
SIGNATURES
In
accordance with requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
REEDS,
INC.
By
/s/
Christopher J.
Reed
Christopher
J. Reed
Chief
Executive Officer, President
and
Chief
Financial Officer
August
17, 2007