Filed
Pursuant to Rule 424 (b) (3)
Registration
No. 333-146012
2,414,995 Shares
REED’S,
INC.
Common
Stock
We
are
registering 2,414,995 shares of our common stock for sale by our stockholders
from time to time, including 1,500,000 of our outstanding shares of common
stock
and 914,995 shares of our common stock issuable upon the exercise of outstanding
common stock purchase warrants.
The
selling stockholders identified in this prospectus, or their pledgees, donees,
transferees or other successors-in-interest, may offer the shares from time
to
time through public or private transactions at prevailing market prices, at
prices related to prevailing market prices or at privately negotiated prices.
We
will not receive any proceeds from the sale of the shares. The prices at which
such selling stockholders may sell shares will be determined by the prevailing
market price for the shares or in negotiated transactions. The selling
stockholders may resell the common stock to or through underwriters,
broker-dealers, or agents, who may receive compensation in the form of
discounts, concessions, or commissions. The selling stockholders will bear
all
commissions and discounts, if any, attributable to the sales of shares. We
will
bear all costs, expenses, and fees in connection with the registration of the
shares.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 5 for certain risks and uncertainties that you should
consider.
Our
common stock is quoted on the OTC Bulletin Board under the symbol “REED.” The
last reported sale price of our common stock on November 8, 2007 was $ 6.40
per share.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is 310-217-9400.
The
date
of this prospectus is November 9, 2007
_____________________________________
TABLE
OF CONTENTS
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Page
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Summary
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1
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Special
Note Regarding Forward-Looking Statements
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4
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Risk
Factors
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5
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Use
of Proceeds
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13
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Selling
Stockholders
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13
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Plan
of Distribution
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17
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Price
Range of Common Stock
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19
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Dividend
Policy
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19
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Business
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30
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Management
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|
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44
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Certain
Relationships and Related Transactions
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51
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Security
Ownership of Certain Beneficial Owners and Management
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52
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Description
of Our Securities
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53
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Shares
Eligible for Future Sale
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|
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56
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Legal
Matters
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57
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Experts
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58
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Where
You Can Find Additional Information
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58
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Index
to Financial Statements
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F-1
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_____________________________________
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information that is different from that
contained in this prospectus. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted. The
information in this prospectus is complete and accurate only as of the date
of
the front cover regardless of the time of delivery of this prospectus or of
any
sale of shares. Except where the context requires otherwise, in this prospectus,
the “Company,” “Reed’s,” “we,” “us” and “our” refer to Reed’s Inc., a Delaware
corporation.
SUMMARY
This
summary highlights selected information from this prospectus. It does not
contain all of the information that is important to you. We encourage you to
carefully read this entire prospectus and the documents to which we refer you.
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this registration
statement.
Our
Company
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 offer 18 beverages, three candies and
three 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.
Our
current business strategy is to maintain our marketing focus in the natural
food
marketplace while expanding sales of our products in mainstream markets and
distribution channels.
We
produce certain of our soda products for the western half of the United States
at an 18,000 square foot warehouse facility owned by us in an unincorporated
area of Los Angeles County near downtown Los Angeles, known as The
Brewery.
We
also
contract with The Lion Brewery, Inc., a packing, or co-pack, facility in
Pennsylvania, to supply us with soda products for the eastern half of the United
States and nationally for soda products that we do not produce at The Brewery.
Our Ginger Juice Brews are co-packed for us at a facility in Northern
California. Our ice creams are co-packed for us at a dairy in upstate New York.
We pack our candy products at the Brewery.
We
have
not been profitable during our last two fiscal years and there is no assurance
that we will develop profitable operations in the future. Our net loss for
the
years ended December 31, 2006 and 2005 was $2,213,609 and $825,955,
respectively. Our net loss for the six months ended June 30, 2007 and 2006
was
$1,180,993 and $956,835, respectively. We cannot assure you that we will have
profitable operations in the future.
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 prospectus.
The
Offering
Securities
offered by the selling stockholders
|
2,414,995
shares of common stock 1
|
|
|
Common
stock outstanding as of the date of this prospectus
|
8,749,721
shares
|
|
|
Use
of Proceeds
|
We
will not receive any of the proceeds from the sale of the securities
owned
by the selling stockholders. We may receive proceeds in connection
with
the exercise of warrants for the underlying shares of our common
stock,
which may in turn be sold by the selling stockholders under this
prospectus. We intend to use any proceeds from the exercise of warrants
for working capital and other general corporate purposes. There is
no
assurance that any of the warrants will ever be exercised for cash,
if at
all.
|
|
|
Risk
Factors
|
An
investment in our securities involves a high degree of risk and could
result in a loss of your entire investment. Prior to making an investment
decision, you should carefully consider all of the information in
this
prospectus and, in particular, you should evaluate the risk factors
set
forth under the caption “Risk Factors” beginning on page
5.
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|
|
OTC
Bulletin Board Symbol
|
REED
|
______________________________________________________________________
1.
|
Consists
of 1,500,000 issued and outstanding shares of our common stock and
914,995
shares of our common stock issuable upon the exercise of our outstanding
common stock purchase warrants.
|
Summary
Financial Data
The
following historical financial information should be read in conjunction with
the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial statements and the
related notes included elsewhere in this prospectus. The historical results
are
not necessarily indicative of results to be expected for any future
periods:
Statements
of Operations Data:
|
|
Six
Months Ended June 30,
|
|
Years
Ended December 31,
|
|
|
|
2007
(Unaudited)
|
|
2006
(Unaudited)
|
|
2006
|
|
2005
|
|
Sales
|
|
$
|
6,485,050
|
|
$
|
5,137,089
|
|
$
|
10,484,353
|
|
$
|
9,470,285
|
|
Gross
profit
|
|
|
1,220,050
|
|
|
858,348
|
|
|
2,057,579
|
|
|
1,724,786
|
|
Operating
expenses
|
|
|
2,341,760
|
|
|
1,616,829
|
|
|
3,864,169
|
|
|
2,241,237
|
|
Loss
from operations
|
|
|
(1,121,710
|
)
|
|
(758,481
|
)
|
|
(1,806,590
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)
|
|
(516,451
|
)
|
Net
loss attributable to common stockholders
|
|
$
|
(1,208,763
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)
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$
|
(986,305
|
)
|
$
|
(2,243,079
|
)
|
$
|
(855,425
|
)
|
Net
loss per share attributable to common stockholders, basic and
diluted
|
|
$
|
(0.17
|
)
|
$
|
(0.19
|
)
|
$
|
(0.41
|
)
|
$
|
(0.18
|
)
|
Weighted
average shares used to compute net loss per share attributable
to common
stockholders, basic and diluted
|
|
|
7,274,201
|
|
|
5,239,913
|
|
|
5,522,753
|
|
|
4,885,151
|
|
Balance
Sheet Data:
|
|
June
30, 2007 (Unaudited)
|
|
December
31, 2006
|
|
Current
assets
|
|
$
|
12,382,545
|
|
$
|
6,103,639
|
|
Total
assets
|
|
|
15,320,780
|
|
|
8,713,149
|
|
Current
liabilities
|
|
|
3,074,053
|
|
|
3,268,699
|
|
Long-term
liabilities, less current portion
|
|
|
830,205
|
|
|
821,362
|
|
Stockholders’
equity
|
|
$
|
11,416,522
|
|
$
|
4,623,088
|
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. The forward-looking statements
are contained principally in, but not limited to, the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis or Plan of Operation” and
“Business.” Forward-looking statements provide our current expectations or
forecasts of future events. Forward-looking statements include statements about
our expectations, beliefs, plans, objectives, intentions, assumptions and other
statements that are not historical facts. Words or phrases such as “anticipate,”
“believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project” or similar words or phrases, or the negatives
of those words or phrases, may identify forward-looking statements, but the
absence of these words does not necessarily mean that a statement is not
forward-looking.
Forward-looking
statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results
to
differ materially from those expected or implied by the forward-looking
statements. Our actual results could differ materially from those anticipated
in
forward-looking statements for many reasons, including the factors described
in
the section entitled “Risk Factors” in this prospectus. Accordingly, you should
not unduly rely on these forward-looking statements, which speak only as of
the
date of this prospectus.
Unless
required by law, we undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date
of
this prospectus or to reflect the occurrence of unanticipated events. You
should, however, review the factors and risks we describe in the reports we
will
file from time to time with the Securities and Exchange Commission (the “SEC”)
after the date of this prospectus.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, and 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:
|
·
|
Our
ability to generate sufficient cash flow to support capital expansion
plans and general operating
activities,
|
|
·
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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
our
share of sales in the marketplace,
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|
·
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The
introduction of new products,
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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,
|
|
·
|
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,
|
|
·
|
Our
ability to penetrate new markets and maintain or expand existing
markets,
|
|
·
|
Maintaining
existing relationships and expanding the distributor network of our
products,
|
|
·
|
The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
|
|
·
|
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,
|
|
·
|
The
availability and cost of capital to finance our working capital needs
and
growth plans,
|
|
·
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The
effectiveness of our advertising, marketing and promotional
programs,
|
|
·
|
Changes
in product category consumption,
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|
·
|
Economic
and political changes,
|
|
·
|
Consumer
acceptance of new products, including taste test
comparisons,
|
|
·
|
Possible
recalls of our products, and
|
|
·
|
Our
ability to make suitable arrangements for the co-packing of any of
our
products.
|
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
RISK
FACTORS
An
investment in our common stock is very risky. Our financial condition is
unsound. You
should not invest in our common stock unless you can afford to lose your entire
investment. You
should carefully consider the risk factors described below, together with all
other information in this prospectus, before making an investment decision.
If
an active market is ever established for our common stock, the trading price
of
our common stock could decline due to any of these risks, and you could lose
all
or part of your investment. You also should refer to the other information
set
forth in this prospectus, including our financial statements and the related
notes.
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
June 30, 2007, we had an accumulated deficit of $6,710,905.
For
the
years ended December 31, 2006 and 2005, we incurred losses from operations
of $1,806,590 and $516,451, respectively. We also incurred losses from
operations of $1,121,710 during the six months ended June 30, 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
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, Inc., 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, 2009 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 in 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. 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, and 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 and Chairman of the Board.
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 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.
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 any 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 then majority stockholder, Christopher J. Reed.
Please see the “Certain Relationships and Related Transactions” section for
specific details of these transactions.
Risks
Relating to This Offering and 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.
The
rescission offer covered an aggregate of 333,156 shares of common stock issued
in connection with our initial public offering. We offered to rescind the
purchase of 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 the 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
the 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 National Association of Securities Dealers,
Inc. 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. The market price of our shares,
from time to time, 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
the
shares or might otherwise receive than if an active 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 significant percentage 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 and Chairman of the Board owns
36.69% of our common stock. Therefore, Mr. Reed will be able to 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 sale of our securities. We have 8,749,121
shares of common stock outstanding. Of the shares of our common stock currently
outstanding, 5,194,095 shares (including the shares registered in
connection with this prospectus) are “restricted securities” under the
Securities Act of 1933, as amended (the “Securities Act”). 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 2,465,736 shares of common stock (including 200,000 shares
reserved for future issuance under the underwriters’ warrant) and 48,621 shares
of Series A preferred stock that may be converted into 194,484 shares of common
stock. In addition, our outstanding shares of Series A preferred stock bear
a
dividend of 5% per year, or approximately $24,000 per year. We have the option
to pay the dividend in shares of our common stock. In 2005, 2006 and 2007,
we
paid the dividend in an aggregate of 7,362, 7,373 and 3,820 shares of common
stock in each such year, respectively. The number of shares which may be issued
as dividends on the Series A preferred stock in subsequent years will be
dependent on the value of our common stock in relation to the
dividend.
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 regulate
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, for which 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.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the issued and outstanding shares
of
our common stock or the shares issuable upon the exercise of our outstanding
common stock purchase warrants by the selling stockholders pursuant to this
prospectus. We may receive proceeds from the issuance of shares of our common
stock upon the exercise of common stock purchase warrants. These warrants are
exercisable at a weighted average exercise price of $7.34 per share. We intend
to use any proceeds from the exercise of warrants for working capital and other
general corporate purposes. These warrants are not being offered under this
prospectus; however, the shares of our common stock, issuable upon exercise
of
these warrants, are being offered under this prospectus by the selling
stockholders.
There
is
no assurance that any of the warrants will ever be exercised for cash, if at
all. If all of these outstanding warrants are exercised for cash, we would
receive aggregate gross proceeds of approximately $6,713,963.
SELLING
STOCKHOLDERS
Pursuant
to various registration rights agreements with the selling stockholders, we
have
agreed to file with the SEC a registration statement pursuant to the Securities
Act covering the resale of our registrable securities owned by such selling
stockholders that are subject to the registration rights agreements.
Accordingly, we have filed a registration statement on Form SB-2 of which this
prospectus forms a part, with respect to the resale of these securities from
time to time. In addition, we agreed in the registration rights agreements
with
the investors to register securities of ours they hold and to use our best
efforts to keep the registration statement effective until the securities they
own covered by this prospectus have been sold or may be sold without
registration or prospectus delivery requirements under the Securities Act,
subject to certain restrictions.
Selling
Stockholders Table
We
have
filed a registration statement with the SEC, of which this prospectus forms
a
part, with respect to the resale of our securities covered by this prospectus
from time to time under Rule 415 of the Securities Act. Our securities being
offered by this prospectus are being registered to permit secondary public
trading of our securities. Subject to the restrictions described in this
prospectus, the selling stockholders may offer our securities covered under
this
prospectus for resale from time to time. In addition, subject to the
restrictions described in this prospectus, the selling stockholders may sell,
transfer or otherwise dispose of all or a portion of our securities being
offered under this prospectus in transactions exempt from the registration
requirements of the Securities Act. See “Plan of Distribution.”
The
table
below presents information, as of the date of this prospectus, regarding the
selling stockholders and the securities that the selling stockholders (and
their
pledgees, assignees, transferees and other successors in interest) may offer
and
sell from time to time under this prospectus. More specifically, the following
table sets forth as to the selling stockholders:
|
·
|
the
number of shares of our common stock that the selling stockholders
beneficially owned prior to the offering for resale of any of the
shares
of our common stock being registered by the registration statement
of
which this prospectus is a part;
|
|
·
|
the
number of shares of our common stock that may be offered for resale
for
the selling stockholders’ account under this prospectus;
and
|
|
·
|
the
number and percent of shares of our common stock to be held by the
selling
stockholders after the offering of the resale securities, assuming
all of
the resale securities are sold by the selling stockholders and that
the
selling stockholders do not acquire any other shares of our common
stock
prior to their assumed sale of all of the resale
shares.
|
The
table
is prepared based on information supplied to us by the selling stockholders.
We
do not know when or in what amounts a selling stockholder may offer shares
for
sale. Although we have assumed for purposes of the table below that the selling
stockholders will sell all of the securities offered by this prospectus, because
the selling stockholders may offer from time to time all or some of its
securities covered under this prospectus, or in another permitted manner, no
assurances can be given as to the actual number of securities that will be
resold by the selling stockholders or that will be held by the selling
stockholders after completion of the resales. The selling stockholders might
not
sell any or all of the shares offered by this prospectus. In addition, the
selling stockholders may have sold, transferred or otherwise disposed of the
securities in transactions exempt from the registration requirements of the
Securities Act since the date the selling stockholders provided the information
regarding their securities holdings. However, for purposes of this table, we
have assumed that, after completion of the offering, none of the shares covered
by the prospectus will be held by the selling stockholders. Information covering
the selling stockholders may change from time to time and changed information
will be presented in a post-effective amendment to this registration statement
if and when necessary and required. Except as described above, based on
information provided to us by the selling stockholders and to our knowledge,
there are currently no agreements, arrangements or understandings with respect
to the resale of any of the securities covered by this prospectus.
Where
applicable, we have indicated in the footnotes to the following table the name
and title of the individuals which we have been advised have the power to vote
or dispose of the securities listed in the following table.
|
|
Shares
Beneficially
Owned
Before
Offering (1)
|
|
Number
of
Shares
|
|
Shares
Beneficially Owned
After
Offering (1)
|
|
Name
of Selling Security Holder
|
|
|
|
Percent
|
|
Being
Offered (2)
|
|
Number
|
|
Percent
|
|
Advantus
Capital LP (3)
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
0
|
|
|
0
|
|
Airport
Inn of Las Vegas, Inc. (4)
|
|
|
75,000
|
|
|
*
|
|
|
75,000
|
|
|
0
|
|
|
0
|
|
Eugene
Arrington
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Bruce
F. Bailey
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Tom
Bover
|
|
|
18,156
|
|
|
*
|
|
|
18,156
|
|
|
0
|
|
|
0
|
|
Philip
L. & Shearon L. Breazeale
|
|
|
24,999
|
|
|
*
|
|
|
24,999
|
|
|
0
|
|
|
0
|
|
Dr.
Edwin R. Buster, III
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Chang-Fa
J. Cheng
|
|
|
12,000
|
|
|
*
|
|
|
12,000
|
|
|
0
|
|
|
0
|
|
Fang-Chin
Chiang
|
|
|
3,750
|
|
|
*
|
|
|
3,750
|
|
|
0
|
|
|
0
|
|
Russell
E. Davis
|
|
|
3,000
|
|
|
*
|
|
|
3,000
|
|
|
0
|
|
|
0
|
|
Elias
Family Charitable Trust (5)
|
|
|
35,500
|
|
|
(4
|
)
|
|
30,000
|
|
|
5,500
|
|
|
(4
|
)
|
Alma
and Gabriel Elias JTWROS (5)
|
|
|
533,528
|
|
|
(4
|
)
|
|
472,585
|
|
|
60,943
|
|
|
(4
|
)
|
James
E. and Jennifer M. Fair Living Trust (6)
|
|
|
19,999
|
|
|
*
|
|
|
19,999
|
|
|
0
|
|
|
0
|
|
Daniel
W. Fort
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
George
L. Fotiades
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Theza
& Robert Friedman
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Joseph
M. Graham, Jr.
|
|
|
12,525
|
|
|
*
|
|
|
12,525
|
|
|
0
|
|
|
0
|
|
Great
Gable Master Fund, Ltd. (7)
|
|
|
381,402
|
|
|
4.30
|
|
|
375,000
|
|
|
6,402
|
|
|
*
|
|
Darcy
& Edward H. Han
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Henderson
Family Trust (8)
|
|
|
51,000
|
|
|
*
|
|
|
51,000
|
|
|
0
|
|
|
0
|
|
John
Reginald Hill
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Hudson
Bay Fund LP (9)
|
|
|
19,350
|
|
|
*
|
|
|
19,350
|
|
|
0
|
|
|
0
|
|
Hudson
Bay Overseas Fund Ltd. (9)
|
|
|
25,650
|
|
|
*
|
|
|
25,650
|
|
|
0
|
|
|
0
|
|
Julian
Phillip Kemble
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Richard
Krahn
|
|
|
30,000
|
|
|
*
|
|
|
30,000
|
|
|
0
|
|
|
0
|
|
Hui
Lin
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Jared
Lundgren
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
James
V. McKeon
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
D.
Herman Mobley
|
|
|
4,500
|
|
|
*
|
|
|
4,500
|
|
|
0
|
|
|
0
|
|
Nite
Capital Master, Ltd. (10)
|
|
|
105,000
|
|
|
1.20
|
|
|
105,000
|
|
|
0
|
|
|
0
|
|
Charles
Frank Nosal
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Stanley
Petsagourakis
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
0
|
|
|
0
|
|
Carol
Quelland Trust (11)
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Anthony
James Percy Reynolds
|
|
|
2,494
|
|
|
*
|
|
|
2,494
|
|
|
0
|
|
|
0
|
|
Michael
Rogers
|
|
|
4,500
|
|
|
*
|
|
|
4,500
|
|
|
0
|
|
|
0
|
|
Carl
Barth Rountree
|
|
|
75,000
|
|
|
*
|
|
|
75,000
|
|
|
0
|
|
|
0
|
|
David
H. Sanders Revocable Trust (12)
|
|
|
49,999
|
|
|
*
|
|
|
49,999
|
|
|
0
|
|
|
0
|
|
Gerald
C. Sloat
|
|
|
11,500
|
|
|
*
|
|
|
10,500
|
|
|
1,000
|
|
|
*
|
|
Donald
W. Smith
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Leroy
Stevens
|
|
|
18,750
|
|
|
*
|
|
|
18,750
|
|
|
0
|
|
|
0
|
|
Robert
Strougo
|
|
|
4,999
|
|
|
*
|
|
|
4,999
|
|
|
0
|
|
|
0
|
|
William
J. Summers, Jr.
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Steve
Talley
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
John
Tandana
|
|
|
3,750
|
|
|
*
|
|
|
3,750
|
|
|
0
|
|
|
0
|
|
Tres
Girls Limited Partnership (13)
|
|
|
50,001
|
|
|
*
|
|
|
50,001
|
|
|
0
|
|
|
0
|
|
Bradley
Van Hull
|
|
|
35,000
|
|
|
*
|
|
|
30,000
|
|
|
5,000
|
|
|
*
|
|
Thomas
Vermillion
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Doug
Waggoner
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Shi-Kuen
Wang
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Thomas
D. & Noranna B. Warner
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
John
Way
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Wholesale
Realtors Supply (5)
|
|
|
749,696
|
|
|
(4
|
)
|
|
369,999
|
|
|
379,697
|
|
|
(4
|
)
|
The
Wondra/Klimen-Wondra Trust (14)
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Ming-Chen
Wu
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
APS
Financial Corporation (15)
|
|
|
36,069
|
|
|
*
|
|
|
36,069
|
|
|
0
|
|
|
0
|
|
Aegis
Capital Corp. (16)
|
|
|
8,000
|
|
|
*
|
|
|
8,000
|
|
|
0
|
|
|
0
|
|
Peter
Aman (3)
|
|
|
31,403
|
|
|
*
|
|
|
31,403
|
|
|
0
|
|
|
0
|
|
Neil
B. Michaelsen
|
|
|
18,035
|
|
|
*
|
|
|
18,035
|
|
|
0
|
|
|
0
|
|
US
EURO Securities, Inc. (17)
|
|
|
7,000
|
|
|
*
|
|
|
7,000
|
|
|
0
|
|
|
0
|
|
Westrock
Advisors, Inc. (18)
|
|
|
64,493
|
|
|
*
|
|
|
64,493
|
|
|
0
|
|
|
0
|
|
____________________
(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 prospectus, 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
8,749,721 shares of common stock outstanding as of the date of this
prospectus.
|
(2)
|
The
shares of common stock being offered by certain of the selling
stockholders include: (A) the number of shares underlying warrants
which
have an exercise price of $7.50 per share, and are fully vested and
may be
exercised any time through June 15, 2012, as follows: Advantus
Capital LP (60,000 shares), Airport Inn of Las Vegas, Inc. (25,000
shares), Eugene Arrington (833 shares), Bruce F. Bailey (833 shares),
Tom
Bover (6,052 shares), Philip L. & Shearon L. Breazeale (8,333 shares),
Dr. Edwin R. Buster, III (5,000 shares), Chang-Fa J. Cheng (4,000
shares),
Fang-Chin Chiang (1,250 shares), Russell E. Davis (1,000 shares),
Elias
Family Charitable Trust (10,000 shares), Alma and Gabriel Elias JTWROS
(157,528 shares), James E. & Jennifer M. Fair Living Trust (6,666
shares), Daniel W. Fort (5,000 shares), George L. Fotiades (4,166
shares),
Theza & Robert Friedman (4,166 shares), Joseph M. Graham, Jr. (4,175
shares), Great Gable Master Fund, Ltd. (125,000 shares), Darcy &
Edward H. Han (5,000 shares), Henderson Family Trust (17,000 shares),
John
Reginald Hill (4,166 shares), Hudson Bay Fund LP (6,450 shares),
Hudson
Bay Overseas Fund Ltd. (8,550 shares), Julian Phillip Kemble (833
shares),
Richard
Krahn (10,000 shares),
Hui Lin (2,500 shares),
Jared Lundgren (2,500 shares),
James V. McKeon (5,000 shares),
D. Herman Mobley (1,500 shares),
Nite Capital Master, Ltd. (35,000 shares),
Charles Frank Nosal (2,500 shares),
Stanley
Petsagourakis (20,000 shares), Carol Quelland Trust (5,000 shares),
Anthony James Percy Reynolds (831 shares), Michael Rogers (1,500
shares),
Carl Barth Rountree (25,000 shares), David H. Sanders Revocable Trust
(16,666 shares), Gerald C. Sloat (3,500 shares), Donald W. Smith
(4,166
shares), Leroy Stevens (6,250 shares), Robert Strougo (1,666 shares),
William J. Summers, Jr. (2,500 shares), Steve Talley (5,000 shares),
John
Tandana (1,250 shares), Tres Girls Limited Partnership (16,667 shares),
Bradley Van Hull (10,000 shares), Thomas Vermillion (833 shares),
Doug
Waggoner (4,166 shares), Shi-Kuen Wang (2,500 shares), Thomas D.
&
Noranna B. Warner (5,000 shares), John Way (833 shares), Wholesale
Realtors Supply (83,333 shares), The Wondra/Klimen-Wondra Trust (833
shares) and Ming-Chen Wu (2,500 shares); and (B) the
number of shares underlying warrants which have an exercise price
of $6.60
per share, and are fully vested and may be exercised any time through
June
15, 2012, as follows: APS Financial Corporation (36,069 shares),
Aegis Capital Corp. (8,000 shares),
Peter Aman (31,403 shares),
Neil B. Michaelsen (18,035 shares),
US EURO Securities, Inc. (7,000 shares)
and Westrock Advisors, Inc. (64,493 shares).
|
(3)
|
Advantus
Capital LP and Peter Aman may be deemed to be affiliates of each
other for
purposes of calculating beneficial ownership of their securities
in this
table. The aggregate beneficial ownership of such stockholders may
be
deemed to include warrants to purchase up to 91,403 shares of common
stock, or 1.04% of the outstanding shares before the offering. Peter
Aman
directly
or indirectly alone or with others has power to dispose of the shares
that
Advantus
Capital LP owns.
|
(4)
|
Dario
Pini directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(5)
|
Elias
Family Charitable Trust, Alma and Gabriel Elias JTWROS and Wholesale
Realtors Supply may be deemed to be affiliates of each other for
purposes
of calculating beneficial ownership of their securities in this table.
The
aggregate beneficial ownership of such stockholders may be deemed
to
include 1,067,863 shares of common stock and warrants to purchase
up to
250,861 shares of common stock, or 14.65% of the outstanding shares
before
the offering, and 4.96% of the outstanding shares after the offering
(assuming the sale of all of the shares held by such persons which
are
registered hereby). The aggregate number of shares which may be deemed
to
be beneficially owned by such stockholders and which are registered
hereby
includes 621,723 shares of common stock and warrants to purchase
up to
250,861 shares of common stock. Gabriel Ellis directly
or indirectly alone or with others has power to dispose of the shares
that
each of Elias
Family Charitable Trust and Wholesale Realtors Supply
owns.
|
(6)
|
James
E. Fair directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(7)
|
Kevin
Goldstein directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(8)
|
James
Henderson directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(9)
|
Hudson
Bay Fund LP and Hudson Bay Overseas Fund Ltd. may be deemed to be
affiliates of each other for purposes of calculating beneficial ownership
of their securities in this table. The aggregate beneficial ownership
of
such stockholders may be deemed to include 30,000 shares of common
stock
and warrants to purchase up to 15,000 shares of common stock. Each
of Yoav
Roth and George Antonopoulos directly
or indirectly alone or with others has shared power to dispose of
the
shares that each of these selling stockholders
owns.
|
(10)
|
Keith
Goodman directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(11)
|
Shaaron
Cissel directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(12)
|
David
H. Sanders directly or indirectly alone or with others has power
to
dispose of the shares that this selling stockholder
owns.
|
(13)
|
Richard
Zitelman directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(14)
|
Ralph
Wondra directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(15)
|
APS
Financial Corporation is a wholly-owned subsidiary of American Physicians
Service Group, Inc., a publicly traded
corporation.
|
(16)
|
Robert
Eide directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(17)
|
Michael
Fugler directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(18)
|
Each
of Greg Martino and Don Hunter directly or indirectly alone or with
others
has shared power to dispose of the shares that each of these selling
stockholders owns.
|
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their securities
on any stock exchange, market or trading facility on which the shares are traded
or in private transactions. There is a limited public trading market for our
common stock. Our common stock is quoted under the symbol “REED” on the
OTCBB.
The
selling stockholders may use any one or more of the following methods when
selling securities:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted
pursuant to applicable law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder.
The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act supplementing
or
amending the list of selling stockholders to include the pledgee, transferee
or
other successors in interest as selling stockholders under this
prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed a supplement to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act supplementing or amending
the
list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares of common stock may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
The
selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed
sale
of shares of common stock by any selling stockholder. If we are notified by
any
selling stockholder that any material arrangement has been entered into with
a
broker-dealer for the sale of shares of common stock, if required, we will
file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
Under
applicable rules and regulations under the Securities Exchange Act of 1934,
as
amended (the “Exchange Act”), any person engaged in the distribution of the
resale shares may not simultaneously engage in market making activities with
respect to our common stock for a period of two business days prior to the
commencement of the distribution. In addition, the selling stockholders will
be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing
of
purchases and sales of shares of our common stock by the selling stockholders
or
any other person. We will make copies of this prospectus available to the
selling stockholders and have informed them of the need to deliver a copy of
this prospectus to each purchaser at or prior to the time of the
sale.
Each
of
Advantus Capital LP, Hudson
Bay Fund LP and Hudson Bay Overseas Fund Ltd., who were purchasers in
connection with a private placement of our securities in May and June
2007, has
represented to us that it is an affiliate of one or more registered
broker-dealers. Each of such
stockholders also has represented to us that it purchased the shares and the
warrants relating to the shares registered hereunder in the ordinary course
of
business, and at the time of the purchase of such securities, each of such
stockholders had no agreements or understandings, directly or indirectly, with
any person to distribute such securities.
We
had
engaged APS Financial Corporation (“APS”) to act as our placement agent in
connection with the May and June 2007 private placement. We agreed to issue
to
APS (and certain selected dealers which are NASD members), in connection with
the private placement, a number of warrants to purchase one share of common
stock for each 10 shares of common stock issued in connection with the private
placement. Under this arrangement, we issued to APS and such selected dealers,
which include Westrock Advisors, Inc. and US EURO Securities, Inc. (and certain
of their assignees), warrants to purchase up to 165,000 shares of our common
stock. The warrants are exercisable through July 15, 2012 at an exercise price
of $6.60 per share. Each of APS, Westrock Advisors, Inc. and US EURO Securities,
Inc., and Aegis Capital Corp. and Neil Michaelsen (two of the assignees of
APS),
has identified itself or himself to us as a registered broker-dealer, and as
a
result, each is an underwriter within the meaning of Section 2(a)(11) of the
Securities Act in connection with the sale of the shares registered hereunder
underlying such warrants. US EURO Securities, Inc. also had acted as one of
the
co-underwriters of our initial public offering in 2006. In addition, Peter
Aman,
who is one of the assignees of the warrants issued by us to APS in connection
with the private placement, has represented to us that he is an affiliate of
one
or more registered broker-dealers. Such assignee also has represented to us
that
he purchased the warrants relating to the shares registered hereunder in the
ordinary course of business, and at the time of the purchase of such securities,
such assignee had no agreements or understandings, directly or indirectly,
with
any person to distribute such securities.
PRICE
RANGE OF COMMON STOCK
Our
common stock has been listed for trading on the OTCBB, 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
|
|
Second
Quarter
|
|
$
|
9.00
|
|
$
|
6.00
|
|
Third
Quarter
|
|
$
|
10.55
|
|
$
|
6.75
|
|
On
November 8, 2007, the closing sales price for the common stock was $ 6.40,
as
reported on the website of the NASDAQ Stock Market. As of the date of this
prospectus, there were approximately 273 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 8,749,721 outstanding shares
of common stock.
DIVIDEND
POLICY
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. The number of shares which may be issued as dividends on the
Series A preferred stock in subsequent years will be dependent on the value
of
our common stock in relation to the dividend. See “Description of Our Securities
- Preferred Stock.”
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
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
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 prospectus. 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” and elsewhere
in this prospectus.
Overview
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell six unique
product lines:
|
·
|
Virgil’s
Root Beer and Cream Sodas,
|
|
·
|
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. 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 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. In addition,
in
2007, we launched Virgil’s Black Cherry Cream Soda and low calorie, herbally
enhanced versions of Virgil’s Root Beer, Cream Soda and Black Cherry Cream
Soda.
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
|
|
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 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
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 low calorie, herbally enhanced 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.
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 has 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 years ended December 31, 2006 or 2005 or 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 years ended December 31, 2006 or 2005
or
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
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 six months ended June 30, 2006 to $52,600 in the six
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 $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.
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 a lawsuit. These 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 initial
public offering and our recent private placement 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.
As
a
result of the foregoing, we experienced a net loss of $2,213,609, or 21.11%
of
net sales in the year ended December 31, 2006 compared to $825,955, or 8.72%
of
net sales in the year ended December 31, 2005. Accordingly, we experienced
a net
loss of $(0.41) and $(0.18) per share in the years ended December 31, 2006
and
2005, respectively.
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 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. We received total proceeds
of $8,040,000, net of placement commissions and the investment banking fee,
but
excluding other expenses of the private placement.
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.
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 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.
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 $303,211 in 2006.
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.
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.
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.
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
June 30, 2007, we had outstanding borrowings of $1,523,438 under our lines
of
credit agreements:
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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%.
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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.
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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 of our 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.
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At
June
30, 2007, we did not have any material commitments for capital expenditures.
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.
In
July
2007, we 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.
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 second
quarter 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:
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fund
more rapid expansion,
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fund
additional marketing expenditures,
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enhance
our operating infrastructure,
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respond
to competitive pressures, and
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acquire
other businesses.
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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.
We are
currently in the process of evaluating the effect, if any, the adoption of
SFAS
No. 157 will have 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.
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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Reed’s
Ginger Juice Brews,
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Reed’s
Ginger Candies, and
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Reed’s
Ginger Ice Creams.
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We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
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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increased
store placement with mainstream stores and
retailers,
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strong
national distributorships,
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stimulate
strong consumer demand for our existing brands and
products,
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develop
additional unique alternative beverage brands and other products,
and
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specialty
packaging like our 5-liter party kegs, our ceramic swing-lid bottle
and
our 750 ml. champagne bottle.
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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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direct
distribution by our trucks and drivers to retailers in Southern
California.
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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, 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 and
low calorie, herbally enhanced versions of Virgil’s Root Beer, Cream Soda and
Black Cherry Cream Soda in 12-ounce bottles. These new packaging options are
being utilized in our marketing efforts.
We
create
consumer demand for our products by:
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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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participating
in large public events as sponsors.
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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 prospectus.
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. In 2007, we launched the
Virgil’s low calorie, herbally enhanced soda line, including Root Beer, Cream
Soda and Black Cherry Cream Soda.
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, 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 18 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 52 weeks ended April 21, 2007, Reed’s Ginger Brews and Virgil’s Root
Beer and Cream Soda held seven of the top twelve items based on dollar sales
among all sugar/fructose sweetened sodas in the natural products industry in
the
United States, with Reed’s Ginger Brew Extra holding the number one position and
Reed’s Ginger Brews and Virgil’s Root Beer holding the top four
positions.
Our
carbonated products include six varieties of Reed’s Ginger Brews, Virgil’s Root
Beer and Cream Sodas, Virgil’s low calorie, herbally enhanced Root Beer and low
calorie, herbally enhanced 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:
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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.
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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.
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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.
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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.
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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.
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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.
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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 and Low Calorie, Herbally Enhanced 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.”
In
2007,
we launched a low calorie, herbally enhanced version of our Virgil’s Root Beer
in 12-ounce bottles.
Virgil’s
Cream Soda and Low Calorie, Herbally Enhanced 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.
In
2007,
we launched low calorie, herbally enhanced versions of our Virgil’s Cream Soda
and Black Cherry Cream Soda in 12-ounce bottles.
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,
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Reed’s
Lemon Guava Ginger Juice Brew adds guava juice from concentrate and
lemon
juice from concentrate.
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Reed’s
Strawberry Kiwi Ginger Juice Brew adds organic strawberry juice from
concentrate and organic kiwi juice from
concentrate.
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Pineapple
Orange Ginger Juice Brew adds organic pineapple juice from concentrate,
organic orange juice from concentrate, and organic lime juice from
concentrate.
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Reed’s
Cranberry Raspberry Ginger Juice Brew adds cranberry juice from
concentrate, and organic raspberry juice from
concentrate.
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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:
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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),
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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
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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.
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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:
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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
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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, 2009 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.
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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. 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 addition, increased production of our non-Ginger Brew
flavored soda products, as well as the purchase of certain production equipment
in the second quarter of 2007 has enabled us to increase plant
usage.
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.
Recently,
we brought on new distributors in the following markets: Connecticut, New
Hampshire, Oregon, Washington (state), Minnesota, Michigan, Ohio, parts of
New
York and Massachusetts, Pennsylvania, California and Texas.
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. As a result of competitive pressures in the New Age beverage
categories, we may not be able to gain market share and may lose market share
or
experience price erosion.
We
believe that our innovative beverage recipes and packaging and use of premium
ingredients and a trade secret brewing process and that our commitment to the
highest quality standards and brand innovation provide us with a competitive
advantage.
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. Any such legislative or regulatory changes may
have
a negative impact on our sales, operating costs and gross margins.
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 60 full-time employees, as follows: 3 in general management,
31
in sales and marketing support, 6 in operations and 20 in production. We employ
additional people on a part-time basis as needed. We currently have 2 part
time
employees.
We
have
never participated in a collective bargaining agreement. We believe that the
relationship with our employees is satisfactory.
Properties
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.
In
August
2007, we acquired a property adjacent to the Brewery for approximately
$1,730,000. We intend 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.
Legal
Proceedings
From
time
to time, we are a party to claims and legal proceedings arising in the ordinary
course of business. Our management evaluates our exposure to these claims and
proceedings individually and in the aggregate and provides for potential losses
on such litigation if the amount of the loss is estimable and the loss is
probable.
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
the 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. With respect
to
the offerees who rejected 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.
However, we believe the rescission offer provides us with additional meritorious
defenses against any future claims relating to these shares.
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.
MANAGEMENT
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. 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 and Chairman of the Board
|
48
|
Thierry
Foucaut
|
Chief
Operating Officer
|
42
|
David
M. Kane
|
Chief
Financial Officer
|
44
|
Rory
Ahearn
|
Senior
Vice President - Sales
|
56
|
Neal
Cohane
|
Vice
President - Sales
|
47
|
Robert
T. Reed, Jr.
|
Vice
President and National Sales Manager - Mainstream
|
51
|
Eric
Scheffer
|
Vice
President and National Sales Manager - Natural Foods
|
39
|
Robert
Lyon
|
Vice
President Sales - Special Projects
|
57
|
Judy
Holloway Reed
|
Secretary
and Director
|
47
|
Mark
Harris
|
Director
|
50
|
Dr.
Daniel 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 and Chief
Executive Officer since our incorporation in 1991. Mr. Reed also served as
our
Chief Financial Officer from our incorporation until September 2007. 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.
Thierry
Foucaut
has been
our Chief Operating Officer since May 2007. Prior to joining us, Mr. Foucaut
worked for six years as Chief Operating Officer of Village Imports, a $30
million specialty foods and beverage distributor in California, where he created
and launched a line of sparkling lemonades and managed the company’s operations
including multiple warehouses and fleets of DSD delivery trucks. Mr. Foucaut
spent 2000 with Eve.com, a leading San Francisco website specializing in retail
sales of high end cosmetics. Mr. Foucaut worked for L’Oréal Paris from 1994
through 1999 with growing marketing and sales responsibilities, including
Product Manager from September 1994 to May 1996, South Europe Marketing
Coordinator from June 1996 to July 1998 and Duty Free Key Account Executive
from
July 1998 to December 1999, managing large airport and airline clients over
several European countries. He earned a Master of Science degree from Ecole
Centrale Paris in 1988, and an MBA from Harvard Business School in
1994.
David
M. Kane
has been
our Chief Financial Officer since October 2007. Prior to joining us, Mr. Kane
had served as the Interim Chief Financial Officer of National Lampoon, Inc.
since December 2006. From April 2003 to November 2005, Mr. Kane was the Chief
Financial Officer and Associate Executive Director at the UCLA Alumni
Association. Since 2000, Mr. Kane has operated a financial consulting practice
for entertainment and media companies. Prior to his consulting practice, Mr.
Kane served as Chief Financial Officer of the Left Bank Organization, a record
label and music management company. He also served as the Chief Financial
Officer for GreatDomains.com, an internet start-up company which was eventually
sold to VeriSign. Mr. Kane spent the early part of his career working as
Director of Finance for Virgin Records and Chief Financial Officer of Focus
Affiliates, a publicly held electronics distributor. Mr. Kane holds a B.A.
degree in Psychology from the University of California at Los
Angeles.
Rory
Ahearn
has been
our Senior Vice President of Sales since August 2007. He has had approximately
30 years of experience in the beverage industry. He most recently served as
the
Director of Sales, Eastern Business Unit, for Red Bull North America. In his
seven years with Red Bull, Mr. Ahearn was responsible for building a distributor
network from New York to Virginia, as well as selecting, training and managing
an on and off premise sales force in excess of 50 persons. In addition, he
managed the brand’s expansion into the national account segment in grocery,
convenience, club, drug and non traditional channels. From 1998 through June
2000, Mr. Ahearn was the Northeast Regional Marketing Manager for Heineken
USA
and was responsible for channel programming in the off and on premise segments,
with a particular emphasis on channel grocery and convenience in the Northeast
markets. Mr. Ahearn spearheaded programming in the sports marketing area with
the Boston Bruins, and conducted significant work in marketing to the Hispanic
community. From 1987 to 1988, Mr. Ahearn held various executive positions with
the Coors Distributing Company of New York. Mr. Ahearn managed both the
distribution centers, as well as the on and off premise sales teams. Mr. Ahearn
began his career in the beverage business while employed at Joyce Beverages,
in
Forestville, Maryland and Norwalk, Connecticut, as a route salesman. Mr. Ahearn
is a graduate of Pace University, Pleasantville New York with a B.A. degree
in
Communications.
Neal
Cohane
has been
our Vice President of Sales since August 2007. From March 2001 until August
2007, Mr. Cohane served in various senior-level sales and executive positions
for PepsiCo, most recently as Senior National Accounts Manager, Eastern
Division. In this capacity, Mr. Cohane was responsible for all business
development and sales activities within the Eastern Division. From March 2001
until November 2002, Mr. Cohane served as Business Development Manager,
Non-Carbonated Division within PepsiCo where he was responsible for leading
the
non-carbonated category build-out across the Northeast Territory. From 1998
to
March 2001, Mr. Cohane spent three years at South Beach Beverage Company, most
recently as Vice President of Sales, Eastern Region. During his tenure as Vice
President of Sales, Eastern Region, Mr. Cohane managed a team of approximately
35 employees and an independent network of approximately 100 distributors to
drive increased category sales volume and market share. From 1986 to 1998,
Mr.
Cohane spent approximately twelve years at Coca-Cola of New York where he held
various senior-level sales and managerial positions, most recently as General
Manager New York. Mr. Cohane holds a B.S. degree in Business Administration
from
Merrimack College in North Andover, Massachusetts.
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. 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 and Chief Executive Officer.
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
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, and our Secretary since October
1996. 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 and Chief Executive 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.
Corporate
Governance
We
are
committed to having sound corporate governance principles. We believe that
such
principles are essential to running our business efficiently and to maintaining
our integrity in the marketplace.
Director
Qualifications
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 of Directors 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.
Director
Independence
The
Board
of Directors 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.
Board
Structure and Committee Composition
As
of the
date of this prospectus, our Board of Directors has five directors and the
following three
standing committees:
an
Audit
Committee, a Compensation Committee and a Nominations and Governance Committee.
These committees were formed in January 2007.
US
EURO
Securities, Inc., the lead underwriter in our initial public offering, will
have
the right to designate an observer to our board of directors and each of its
committees through the period ending December 12, 2011.
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 of Directors 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 and
developing plans for the 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
of Directors has
determined that all of the members of the Compensation Committee are independent
under the rules of the Nasdaq National Market. Our
Board
of Directors has adopted a written charter for the Compensation
Committee.
Nominations
and Governance Committee.
Our
Nominations and Governance Committee assists the Board of Directors 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 of Directors has determined that all of the members of the Nominations
and
Governance Committee are independent under the rules of the Nasdaq National
Market. Our
Board
of Directors has adopted a written charter for the Nominations and Corporate
Governance Committee.
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, 2005 and
2004:
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
|
|
|
|
|
2004
|
|
$
|
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, 2004, 2005 and 2006.
Option/SAR
Grants to Executive Officers
No
Named
Executive Officers has 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
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
We
have
entered into an at-will employment agreement with Thierry Foucaut, our Chief
Operating Officer, which provides for an annualized salary of approximately
$130,000 per year. In addition, we have granted Mr. Foucaut options to purchase
up to 50,000 shares of common stock which vest over a three year period ending
in 2010. Further, we have entered into an at-will employment agreement with
David M. Kane, our Chief Financial Officer, which provides for an annualized
salary of approximately $175,000 per year. In addition, we have granted Mr.
Kane
options to purchase up to 50,000 shares of common stock which vest over a three
year period ending in 2010. Further, we have entered into an at-will employment
agreement with Rory Ahearn, our Senior Vice President of Sales, which provides
for an annualized salary of approximately $205,000 per year. In addition, we
have granted Mr. Ahearn options to purchase up to 100,000 shares of common
stock
which vest over a three year period ending in 2010. Further, we have entered
into an at-will employment agreement with Neal Cohane, our Vice President of
Sales, which provides for an annualized salary of approximately $180,000 per
year. In addition, we have granted Mr. Cohane options to purchase up to 75,000
shares of common stock which vest over a three year period ending in
2010.
Except
as
set forth above, 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 (the “2001 Plan”), we are authorized to issue
options to purchase up to 500,000 shares of common stock. As of the date of
this
prospectus, 500,000 options
have been issued under the 2001 Plan, of which 206,000 options have vested.
On
August 28, 2001, our board of directors adopted the 2001 Plan and the 2001
Plan
was approved by our stockholders.
The
2001
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 to the ordinary income tax rate
schedule.
The
2001
Plan is currently administered by the board of directors. The board of directors
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 2001 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 2001 Plan on or after the
tenth anniversary of the adoption of the 2001 Plan. Incentive stock options
granted to a person owning more than 10% of the 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 board of directors 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 2001 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 2001 Plan after ten years following the earlier of
the
date the 2001 Plan was adopted by the Board of Directors or the date the 2001
Plan was approved by our stockholders.
Limitation
on Liability and 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.
Consequently,
our directors will not be personally liable to us or our stockholders for
monetary damages for any breach of fiduciary duties as directors, except
liability for the following:
|
·
|
Any
breach of their duty of loyalty to our company or our
stockholders.
|
|
·
|
Acts
or omissions not in good faith or which involve intentional misconduct
or
a knowing violation of law.
|
|
·
|
Unlawful
payments of dividends or unlawful stock repurchases or redemptions
as
provided in Section 174 of the Delaware General Corporation
Law.
|
|
·
|
Any
transaction from which the director derived an improper personal
benefit.
|
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.
The
limitation of liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty. They may also reduce
the likelihood of derivative litigation against our directors and officers,
even
though an action, if successful, might benefit us and other stockholders.
Furthermore, a stockholder’s investment may be adversely affected to the extent
that we pay the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions. At present, there
is
no pending litigation or proceeding involving any of our directors, officers
or
employees regarding which indemnification is sought, and we are not aware of
any
threatened litigation that may result in claims
for
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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 our 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. No payments were required to be made to pay Mr. Reed from
January 1, 2007 through June 30, 2007 under this agreement.
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 chose 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 the 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 the 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 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 4.44% 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 that the rescission offer provides 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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table reflects, as of the date of this prospectus, 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 directors and executive officers 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 director and listed executive
officer is 13000 South Spring Street, Los Angeles, California 90061.
Name
of Beneficial Owner
|
|
Number
of Shares
Beneficially
Owned
|
|
Percentage
of Shares
Beneficially
Owned (1)
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
Christopher
J. Reed (2)
|
|
|
3,200,000
|
|
|
36.57
|
|
Judy
Holloway Reed (2)
|
|
|
3,200,000
|
|
|
36.57
|
|
Mark
Harris (3)
|
|
|
4,319
|
|
|
*
|
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0
|
|
Michael
Fischman
|
|
|
0
|
|
|
0
|
|
Directors
and executive officers as a group (12 persons) (4)
|
|
|
3,732,101
|
|
|
41.47
|
|
|
|
|
|
|
|
|
|
5%
or greater stockholders
|
|
|
|
|
|
|
|
Joseph
Grace
|
|
|
500,000
|
|
|
5.71
|
|
Alma
and Gabriel Elias (5)
|
|
|
1,318,724
|
|
|
14.65
|
|
____________
* 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 prospectus, 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
8,749,721 shares of common stock outstanding as of the date of this
prospectus.
|
(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) 319 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)
|
Includes
three executive officers (including Robert T. Reed, Jr., our Executive
Vice-President and National Sales Manager - Mainstream (282,282 shares
of
common stock, options exercisable into 50,000 shares of common stock,
and
60,000 shares of common stock, which can be converted at any time
from
15,000 shares of Series A preferred stock), 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 527,782 shares of common
stock.
Does not include options to purchase up to 310,000 shares of common
stock
which vest in portions through the period ending December
2010.
|
(5)
|
Elias
Family Charitable Trust, Alma and Gabriel Elias JTWROS and Wholesale
Realtors Supply may be deemed to be affiliates of each other for
purposes
of calculating beneficial ownership of their securities in this table.
The
registered ownership of such stockholders is as follows: (a) Elias
Family
Charitable Trust (25,500
shares
of common stock and warrants to purchase up to 10,000 shares of common
stock), (b) Alma and Gabriel Elias JTWROS (376,000 shares of common
stock
and warrants to purchase up to 157,528 shares
of common stock), and (c) Wholesale Realtors Supply (666,363 shares
of
common stock and warrants to purchase up to 83,333 shares of common
stock).
|
DESCRIPTION
OF OUR SECURITIES
We
have
the authority to issue 12,000,000 shares of capital stock, consisting of
11,500,000 shares of common stock, $0.0001 par value per share, and 500,000
of
preferred stock, $10.00 par value per share, which can be issued from time
to
time by our board of directors on such terms and conditions as they may
determine.
As
of the
date of this prospectus, there were 8,749,721 shares of common stock
outstanding, and 48,621 shares
of
Series A preferred stock issued and outstanding.
We
will
not offer preferred stock to promoters, except on the same terms as it is
offered to all other existing stockholders or to new stockholders. We will
not
authorize the issuance of preferred stock unless such issuance is approved
by a
majority of our independent directors who do not have an interest in the
transaction and who have access, at our expense, to our legal counsel or their
independent legal counsel.
The
following description of our capital stock does not purport to be complete
and
is subject to, and is qualified by, our certificate of incorporation and
by-laws, which are filed as exhibits to the registration statement of which
this
prospectus is a part, and by the applicable provisions of Delaware
law.
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters requiring
a vote of stockholders, including the election of directors.
We
are a
Delaware corporation and our certificate of incorporation does not provide
for
cumulative voting. However, we may be subject to section 2115 of the California
Corporations Code. Section 2115 provides that, regardless of a company's legal
domicile, specified provisions of California corporations law will apply to
that
company if the company meets requirements relating to its property, payroll
and
sales in California and if more than one-half of its outstanding voting
securities are held of record by persons having addresses in California, and
such company is not listed on certain national securities exchanges or on the
Nasdaq National Market. Among other things, section 2115 may limit our ability
to elect a classified board of directors and requires cumulative voting in
the
election of directors. Cumulative voting is a voting scheme which allows
minority stockholders a greater opportunity to have board representation by
allowing those stockholders to have a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which the
stockholder's shares are entitled and to "cumulate" those votes for one or
more
director nominees. Generally, cumulative voting allows minority stockholders
the
possibility of board representation on a percentage basis equal to their stock
holding, where under straight voting those stockholders may receive less or
no
board representation. The Supreme Court of Delaware has recently ruled, on
an
issue unrelated to voting for directors, that section 2115 is
an
unconstitutional exception to the “internal affairs doctrine” that requires the
law of the incorporating state to govern disputes involving a corporation’s
internal affairs, and is therefore inapplicable to Delaware corporations. The
California Supreme Court has not definitively ruled on section 2115, although
certain lower courts of appeal have upheld section 2115. As a result, there
is a
conflict as to whether section 2115 applies to Delaware corporations. Pending
the resolution of these conflicts, we will not elect directors by cumulative
voting.
Christopher
J. Reed, our President, Chief Executive Officer and Chairman of the Board of
Directors, holds approximately 36.69% of our outstanding common stock.
Consequently, Mr. Reed, as our principal stockholder, has the power, and may
continue to have the power, to have significant control over the outcome of
any
matter on which the stockholders may vote.
Holders
of our common stock are entitled to receive dividends only if we have funds
legally available and the Board of Directors declares a dividend.
Holders
of our common stock do not have any rights to purchase additional shares. This
right is sometimes referred to as a preemptive right.
Upon
a
liquidation or dissolution, whether in bankruptcy or otherwise, holders of
common stock rank behind our secured and unsecured debt holders, and behind
any
holder of any series of our preferred stock.
There
is
a limited public market for our common stock.
Series
A Preferred Stock
Holders
of our Series A preferred stock are entitled to receive out of assets legally
available, a 5% pro-rata annual non-cumulative dividend, payable in cash or
shares, on June 30 th
of
each
year commencing on June 30, 2005.
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 their 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.
As
of
each of June 30, 2005, 2006 and 2007, we issued 7,362, 7,373 and 3,820 shares
of
our common stock in each such year, respectively, as a dividend to the holders
of our Series A preferred stock based on a $29,470 accrued annual dividend
payable for each of June 30, 2005 and 2006, and $27,770 for June 30,
2007.
In
the
event of any liquidation, dissolution or winding up of our operations, 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 will 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 upon which 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 will not, without first obtaining the approval of at least
a
majority of the holders of the Series A preferred stock:
|
·
|
amend
our certificate of incorporation or bylaws in any manner which adversely
affects the rights of the Series A preferred stock, or
|
|
·
|
authorize
or issue, or obligate ourselves to issue, any other equity security
having
a preference over, or being on a parity with, 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 shares of any senior class of preferred
stock.
|
There
is
no public market for our Series A preferred stock and we do not intend to
register such stock with the SEC or seek to establish a public market for the
Series A preferred stock.
We
will
not issue any preferred stock in the future, unless the issuance of such
preferred stock is approved by a majority our independent directors who do
not
have an interest in the transaction and have access, at our expense, to our
or
independent legal counsel.
Options
and Warrants
As
of the
date of this prospectus, we had outstanding options and warrants to purchase
an
aggregate of 2,465,736 shares of our common stock, with a range of exercise
prices from $2.00 to $10.01. The options and warrants expire at various dates
between 2009 and 2012. We have outstanding options to purchase up to 797,500
shares of common stock at a weighted average exercise price of $6.03 per share,
500,000 of which were granted pursuant to our 2001 Stock Option Plan and 297,500
of which were granted outside of the 2001 Stock Option Plan. We have outstanding
warrants to purchase up to 1,668,236 shares of common stock at a weighted
average exercise price of $5.75 per share.
Warrants
to purchase up to 749,995 shares which we issued in the second quarter of 2007
in a private placement, are callable for cancellation in whole, upon twenty
days
written notice to the warrant holders, at any time that the closing sale price
of our common stock equals or exceeds $10.00 per share (and as adjusted from
time to time pursuant to the provisions of the related warrant certificate)
for
a period of ten consecutive trading days.
Anti-Takeover
Effects of Delaware Law and Our Certificate of
Incorporation
Certain
provisions of Delaware law and our certificate of incorporation could make
more
difficult the acquisition of us by means of a tender offer or otherwise, and
the
removal of incumbent officers and directors. These provisions are expected
to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of us.
Our
Certificate of Incorporation and Bylaws include provisions that:
|
·
|
allow
the Board of Directors to issue, without further action by the
stockholders, up to 500,000 shares of undesignated preferred
stock.
|
We
are
subject to the provisions of Section 203 of the Delaware General Corporation
Law
regulating corporate takeovers. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging under certain circumstances,
in
a business combination with an interested stockholder for a period of three
years following the date the person became an interested stockholder
unless:
|
·
|
prior
to the date of the transaction, the board of directors of the corporation
approved either the business combination or the transaction which
resulted
in the stockholder becoming an interested
stockholder.
|
|
·
|
upon
completion of the transaction that resulted in the stockholder becoming
an
interested stockholder, the stockholder owned at least 85% of the
voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (1) shares owned by persons who are directors and also
officers and (2) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer.
|
|
·
|
on
or subsequent to the date of the transaction, the business combination
is
approved by the board and authorized at an annual or special meeting
of
stockholders, and not by written consent, by the affirmative vote
of at
least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
An
interested stockholder is a person who, together with affiliates and associates,
owns or, within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation’s outstanding voting securities.
The existence of this provision may have an anti-takeover effect with respect
to
transactions our board of directors does not approve in advance. Section 203
may
also discourage attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
These
provisions of Delaware law and our certificate of incorporation could have
the
effect of discouraging others from attempting hostile takeovers and, as a
consequence, they may also inhibit temporary fluctuations in the market price
of
our common stock that often result from actual or rumored hostile takeover
attempts. These provisions may also have the effect of preventing changes in
our
management. It is possible that these provisions could make it more difficult
to
accomplish transactions that stockholders may otherwise deem to be in their
best
interests.
SHARES
ELIGIBLE FOR FUTURE SALE
There
is
a limited public market for our common stock. We cannot predict the effect,
if
any, that market sales of shares or the availability of shares for sale will
have on the market price prevailing from time to time. Sales of our common
stock
in the public market after the restrictions lapse as described below, or the
perception that those sales may occur, could cause the prevailing market price
to decrease or to be lower than it might be in the absence of those sales or
perceptions.
Sale
of Restricted Shares
As
of the
date of this prospectus, there were 8,749,721 shares of common stock
outstanding. The shares of common stock being sold in this offering will be
freely tradable, other than by any of our “affiliates” as defined in Rule 144(a)
under the Securities Act, without restriction or registration under the
Securities Act. All remaining outstanding shares were issued and sold by us
in
private transactions and those shares, as well as shares issuable on exercise
of
currently outstanding options and warrants are, or will be eligible for public
sale if registered under the Securities Act or sold in accordance with Rule
144
or Rule 701 under the Securities Act. These remaining shares are “restricted
securities” within the meaning of Rule 144 under the Securities Act. Of the
shares of our common stock currently outstanding, 5,023,541 shares are
“restricted securities” under the Securities Act.
Lock-In
Arrangements
Our
officers, directors and 5% or greater stockholders have entered into a written
lock-in agreement placing restrictions on each such person from selling any
of
the shares of our common stock, warrants, options, convertible securities or
rights which may be converted into or exercised to purchase shares of our common
stock, or promotional shares, which they own or possess during the 24-month
period ending December 12, 2008.
Rule
144
In
general, under Rule 144, as currently in effect, a person who owns shares that
were acquired from us or an affiliate of us at least one year prior to the
proposed sale is entitled to sell upon expiration of the lock-in restrictions
described above, within any three-month period, a number of shares that does
not
exceed the greater of:
|
·
|
1%
of the number of shares of common stock then outstanding, or approximately
87,210 shares as of the date of this prospectus,
or
|
|
·
|
The
average weekly trading volume of the common stock during the four
calendar
weeks preceding the filing of a notice on Form 144 with respect to
such
sale.
|
Sales
under Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144 also provides that our affiliates who sell shares of our common stock
that are not restricted shares must nonetheless comply with the same
restrictions applicable to restricted shares with the exception of the holding
period requirement.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
for
purposes of the Securities Act at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold for at least
two
years, including the holding period of any prior owner other than our
affiliates, is entitled to sell such shares without complying with the manner
of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, “144(k) shares” may be sold immediately
upon the completion of this offering.
Stock
Options
We
intend
to file a registration statement on Form S-8 under the Securities Act for shares
of our common stock subject to options outstanding or reserved for issuance
under our stock plans and shares of our common stock issuable upon the exercise
of options by employees. However, any of the shares registered on Form S-8
which
are subject to selling restriction agreements will not be eligible for resale
until the expiration of such selling restriction agreements.
Transfer
Agent
We
have
engaged Transfer On-Line, Inc., Portland, Oregon, to act as our registrar and
transfer agent.
LEGAL
MATTERS
The
validity of the shares of common stock offered hereby will be passed upon for
us
by Baker & Hostetler LLP, Los Angeles, California.
EXPERTS
The
financial statements as of December 31, 2006 and for the years ended December
31, 2006 and 2005 included in the prospectus and elsewhere in the registration
statement have been included in reliance on the report of Weinberg &
Company, P.A., independent registered public accountants, given on such firm’s
authority as experts in accounting and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the shares of common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all
of
the information set forth in the registration statement or the exhibits and
schedules filed therewith. For further information about us and the common
stock
offered hereby, reference is made to the registration statement and the exhibits
and schedules filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document that is filed as an exhibit
to the registration statement are not necessarily complete, and each such
statement is qualified in all respects by reference to the full text of such
contract or other document filed as an exhibit to the registration
statement.
A
copy of
the registration statement and the exhibits and schedules filed therewith may
be
inspected without charge at the public reference room maintained by the SEC,
located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies
of
all or any part of the registration statement may be obtained from such offices
upon the payment of the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. We
also
file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC also maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
the
site is www.sec.gov.
This
prospectus includes statistical data obtained from industry publications. These
industry publications generally indicate that the authors of these publications
have obtained information from sources believed to be reliable but do not
guarantee the accuracy and completeness of their information. While we believe
these industry publications to be reliable, we have not independently verified
their data.
INDEX
TO FINANCIAL STATEMENTS
Index
to Financial Statements
|
|
|
F-1
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
Balance
Sheets
|
|
|
F-3
|
|
Statements
of Operations
|
|
|
F-4
|
|
Statements
of Changes In Stockholders’ Equity
|
|
|
F-5
|
|
Statements
of Cash Flows
|
|
|
F-6
|
|
Notes
to Financial Statements
|
|
|
F-7
|
|
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.
|
|
June
30,
2007
|
|
December
31,
|
|
|
|
(unaudited)
|
|
2006
|
|
ASSETS
|
|
|
|
|
|
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 at June 30, 2007 and $173,253 at 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 at June
30,
2007 and $663,251 at 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 at June
30, 2007
and $4,467 at 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
|
|
The
accompanying notes are an integral part of these financial
statements.
REED’S,
INC.
|
|
Six
Months
Ended
June 30,
|
|
Years
Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
SALES
|
|
$
|
6,485,050
|
|
$
|
5,137,089
|
|
$
|
10,484,353
|
|
$
|
9,470,285
|
|
COST
OF SALES
|
|
|
5,265,000
|
|
|
4,278,741
|
|
|
8,426,774
|
|
|
7,745,499
|
|
GROSS
PROFIT
|
|
|
1,220,050
|
|
|
858,348
|
|
|
2,057,579
|
|
|
1,724,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,442,269
|
|
|
600,619
|
|
|
1,352,313
|
|
|
1,124,705
|
|
General &
Administrative
|
|
|
899,491
|
|
|
1,016,210
|
|
|
2,508,856
|
|
|
992,322
|
|
Provision
for amounts due from director
|
|
|
—
|
|
|
—
|
|
|
3,000
|
|
|
124,210
|
|
Total
Operating Expenses
|
|
|
2,341,760
|
|
|
1,616,829
|
|
|
3,864,169
|
|
|
2,241,237
|
|
LOSS FROM
OPERATIONS
|
|
|
(1,121,710
|
)
|
|
(758,481
|
)
|
|
(1,806,590
|
)
|
|
(516,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
52,600
|
|
|
—
|
|
|
7,773
|
|
|
—
|
|
Interest
Expense
|
|
|
(111,883
|
)
|
|
(198,354
|
)
|
|
(414,792
|
)
|
|
(309,504
|
)
|
Total
Other Income (Expense)
|
|
|
(59,283
|
)
|
|
(198,354
|
)
|
|
(407,019
|
)
|
|
(309,504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,180,993
|
)
|
|
(956,835
|
)
|
|
(2,213,609
|
)
|
|
(825,955
|
)
|
Preferred
stock dividend
|
|
|
(27,770
|
)
|
|
(29,470
|
)
|
|
(29,470
|
)
|
|
(29,470
|
)
|
Net
Loss Attributable to Common Stockholders
|
|
$
|
(1,208,763
|
)
|
$
|
(986,305
|
)
|
$
|
(2,243,079
|
)
|
$
|
(855,425
|
)
|
Net
Loss Per Share Available to Common
Stockholders —
Basic
and Fully Diluted
|
|
$
|
(.17
|
)
|
$
|
(.19
|
)
|
$
|
(0.41
|
)
|
$
|
(0.18
|
)
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, Basic
and Fully Diluted
|
|
|
7,274,201
|
|
|
5,239,913
|
|
|
5,522,753
|
|
|
4,885,151
|
|
The
accompanying notes are an integral part of these financial
statements.
REED’S,
INC.
For
the Years Ended December 31, 2006 and 2005,
and
the Six Months Ended June 30, 2007 (Unaudited)
|
|
Common
Stock
|
|
Common
Stock
to
be
|
|
Additional
Paid
In
|
|
Preferred
Stock
|
|
Accumulated |
|
|
|
|
|
Shares
|
|
Amount
|
|
Issued
|
|
Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
Balance,
January 1, 2005
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 for the year ended
December
31, 2006
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,213,609
|
)
|
|
(2,213,609
|
)
|
Balance,
December 31, 2006
|
|
|
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 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 (Unaudited)
|
|
|
8,701,045
|
|
$
|
870
|
|
$
|
|
|
$
|
17,571,155
|
|
|
55,540
|
|
$
|
555,402
|
|
$
|
(6,710,905
|
)
|
$
|
11,416,522
|
|
The
accompanying notes are an integral part of these financial
statements.
REED’S,
INC.
|
|
For
The Six Months
Ended
June 30,
|
|
For
The Year
Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,180,993
|
)
|
$
|
(956,835
|
)
|
$
|
(2,213,609
|
)
|
$
|
(825,955
|
)
|
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
|
|
|
|
|
|
5,808
|
|
|
|
|
Depreciation
and amortization
|
|
|
81,907
|
|
|
58,684
|
|
|
155,860
|
|
|
118,517
|
|
Provision
for amounts due from director
|
|
|
|
|
|
|
|
|
3,000
|
|
|
124,210
|
|
(Increase)
decrease in operating assets and increase (decrease)
in operating liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(181,796
|
)
|
|
(447,578
|
)
|
|
(648,857
|
)
|
|
262,708
|
|
Inventory
|
|
|
(459,727
|
)
|
|
(67,800
|
)
|
|
(303,211
|
)
|
|
93,006
|
|
Prepaid
expenses
|
|
|
31,163
|
|
|
(32,032
|
)
|
|
(90,183
|
)
|
|
(68,627
|
)
|
Other
receivables
|
|
|
(118,576
|
)
|
|
4,296
|
|
|
(17,248
|
)
|
|
(7,400
|
)
|
Accounts
payable
|
|
|
(273,792
|
)
|
|
736,612
|
|
|
50,523
|
|
|
232,367
|
|
Accrued
expenses
|
|
|
(41,547
|
)
|
|
21,565
|
|
|
64,097
|
|
|
2,655
|
|
Accrued
interest
|
|
|
(19,296
|
)
|
|
17,951
|
|
|
(9,507
|
)
|
|
25,909
|
|
Net
cash used in operating activities
|
|
|
(2,110,454
|
)
|
|
(665,137
|
)
|
|
(3,003,327
|
)
|
|
(42,610
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(410,631
|
)
|
|
(36,969
|
)
|
|
(64,924
|
)
|
|
(181,654
|
)
|
Due
from director
|
|
|
|
|
|
|
|
|
|
|
|
(33,013
|
)
|
Increase
in restricted cash
|
|
|
(10,473
|
)
|
|
|
|
|
(1,580,456
|
)
|
|
|
|
Net
cash used in investing activities
|
|
|
(421,104
|
)
|
|
(36,969
|
)
|
|
(1,645,380
|
)
|
|
(214,667
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from warrants exercise
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from borrowings on long debt
|
|
|
163,276
|
|
|
|
|
|
|
|
|
295,900
|
|
Principal
payments on long debt
|
|
|
(182,356
|
)
|
|
(53,870
|
)
|
|
(327,734
|
)
|
|
(263,815
|
)
|
Proceeds
received on sale of common stock
|
|
|
9,000,000
|
|
|
1,002,779
|
|
|
7,004,611
|
|
|
196,575
|
|
Payments
for stock offering costs
|
|
|
(1,182,777
|
)
|
|
(237,287
|
)
|
|
(251,924
|
)
|
|
(332,858
|
)
|
Net
borrowings on lines of credit
|
|
|
167,911
|
|
|
17,508
|
|
|
1,081,140
|
|
|
367,731
|
|
Repayment
of previous line of credit
|
|
|
|
|
|
|
|
|
(1,171,567
|
)
|
|
|
|
Payments
on debt to related parties
|
|
|
|
|
|
|
|
|
(74,646
|
)
|
|
(21,000
|
)
|
Net
cash provided by financing activities
|
|
|
8,071,054
|
|
|
729,130
|
|
|
6,259,880
|
|
|
242,533
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
5,539,496
|
|
|
27,024
|
|
|
1,611,173
|
|
|
(14,744
|
)
|
CASH —
Beginning of period
|
|
|
1,638,917
|
|
|
27,744
|
|
|
27,744
|
|
|
42,488
|
|
CASH —
End of period
|
|
$
|
7,178,413
|
|
$
|
54,768
|
|
$
|
1,638,917
|
|
$
|
27,744
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
131,176
|
|
$
|
180,403
|
|
$
|
424,298
|
|
$
|
283,595
|
|
Taxes
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Non
cash 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
|
|
Conversion
of a line of credit to a term loan
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
50,000
|
|
Deferred
stock offering costs charged to paid in capital
|
|
$
|
|
|
$
|
356,238
|
|
$
|
608,161
|
|
$
|
196,575
|
|
Preferred
stock converted to common stock
|
|
$
|
34,000
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Common
stock issued in settlement of preferred stock
dividend
|
|
$
|
27,770
|
|
$
|
29,470
|
|
$
|
29,470
|
|
$
|
29,740
|
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$
|
|
|
$
|
29,470
|
|
$
|
|
|
$
|
|
|
The
accompanying notes are an integral part of these financial
statements
REED’S,
INC.
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(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 18 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.
The
accompanying interim financial statements for the six months ended June 30,
2007
and 2006 are unaudited, but in the opinion of management of Reeds, Inc.,
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
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.
|
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.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
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 and June 30, 2007 was $173,253 and $188,000 (Unaudited),
respectively.
|
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
|
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 occured 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 No. 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
or
for the six months ended June 30, 2007 and 2006 (Unaudited).
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
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 one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess of
the
$100,000 guarantee during the year ended December 31, 2006 and the six months
ended June 30, 2007 (Unaudited).
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.
During the six months ended June 30, 2007 and 2006 (Unaudited), those two
customers accounted for approximately 36% and 15% and 46% and 18%, of sales,
respectively. No other customer accounted for more than 10% of sales in either
year or six month period. As of December 31, 2006, the Company had approximately
$264,000 and $135,000, respectively, of accounts receivable due from these
customers. As of June 30, 2007, the Company had approximately $498,000
(Unaudited) and $187,000 (Unaudited), respectively, of accounts receivable
from
those customers.
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 and June 30, 2007 (Unaudited) 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.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
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.
For
the
six months ended June 30, 2007 and 2006 those costs approximated $120,000
(Unaudited) and $83,000 (Unaudited), 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 were 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 and June 30, 2007 (Unaudited)
no
deferred offering costs remained. During the years ended December 31, 2006
and
2005, $608,161 and $196,575, respectively, of deferred offering costs were
charged to additional paid in capital. During the six months ended June 30,
2007
and 2006, $0 (Unaudited) and $356,238 (Unaudited), respectively, of deferred
offering costs were charged to additional paid in capital.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
|
L) |
Stock
-Based Compensation
|
The
Company periodically issues stock options and warrants to employees and
non-employees.
In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS 123R”).
This statement requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. This statement
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all entities to apply a fair-value
based measurement method in accounting for share-based payment transactions
with
employees, except for equity instruments held by employee share ownership
plans.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS 123R, using the modified prospective method. Under this
method, the provisions of SFAS 123R apply to all awards granted or modified
after the date of adoption and all previously granted awards not yet vested
as
of the date of adoption. Prior periods have not been restated.
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.
Prior
to
the January 1, 2006 adoption of SFAS 123R, the Company accounted for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to
Employees” and related interpretations.
Accordingly,
no compensation expense had been recognized for stock options since all options
granted had an exercise price equal to the market price on the date of grant.
As
permitted by SFAS 123, “Accounting for Stock-Based Compensation,” stock -based
compensation was included as a pro forma disclosure in the notes to the
financial statements.
For
the
year ended December 31, 2005, 218,500 options were issued that immediately
vested. The pro forma disclosure related to the issuance and vesting of
these options is as follows:
|
|
|
|
Net
loss as reported
|
|
$
|
(825,955
|
)
|
Stock
based compensation
|
|
|
(
530,955
|
)
|
|
|
|
|
|
Pro
forma loss
|
|
$
|
(1,356,910
|
)
|
|
|
|
|
|
Primary
and fully diluted loss per share, as reported
|
|
$
|
(0.18
|
)
|
Proforma
fully and diluted loss per share
|
|
$
|
(0.28
|
)
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
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 and for the six months ended June
30,
2007 and 2006 (Unaudited) 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 and June 30, 2007 (Unaudited):
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
(unaudited)
|
|
|
|
Warrants
|
|
|
1,688,236
|
|
|
813,241
|
|
Preferred
Stock
|
|
|
222,160
|
|
|
235,760
|
|
Options
|
|
|
502,500
|
|
|
363,500
|
|
Total
|
|
|
2,412,896
|
|
|
1,412,501
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(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. Advertising costs for the six months ended June 30, 2007 and
2006
were $119,057 (Unaudited) and $33,752 (Unaudited), 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. The sales
incentives for the six months ended June 30, 2007 and 2006 approximated $556,000
(Unaudited) and $302,000 (Unaudited), 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.
|
R) |
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.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(1) |
Operations
and Summary of Significant Accounting
Policies—(continued)
|
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.
|
S) |
Recent
Accounting Pronouncements
|
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (“SFAS
No. 157”), 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.
The
Company’s restricted cash is securing the Company’s $1,500,000 line of credit,
see Note 6. As of December 31, 2006 and June 30, 2007, the restricted cash
securing this line of credit was $1,580,456 and $1,590,929 (Unaudited),
respectively. $1,575,000 of this amount cannot be withdrawn during the term
of
the line of credit. Any excess over $1,575,000 can be withdrawn, with the
bank’s
permission. The line of credit expires in June 2008.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
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 and June 30, 2007
(Unaudited):
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Raw
Materials
|
|
$
|
757,787
|
|
$
|
593,458
|
|
Finished
Goods
|
|
|
1,213,170
|
|
|
917,772
|
|
|
|
$
|
1,970,957
|
|
$
|
1,511,230
|
|
Fixed
assets are comprised of the following as of December 31, 2006 and June 30,
2007
(Unaudited):
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
409,546
|
|
$
|
409,546
|
|
Building
|
|
|
943,594
|
|
|
924,042
|
|
Vehicles
|
|
|
309,010
|
|
|
243,844
|
|
Machinery
and
equipment
|
|
|
985,505
|
|
|
757,511
|
|
Office
equipment
|
|
|
221,390
|
|
|
123,471
|
|
|
|
|
2,869,045
|
|
|
2,458,414
|
|
Accumulated
depreciation
|
|
|
(744,785
|
)
|
|
(
663,251
|
)
|
|
|
$
|
2,124,260
|
|
$
|
1,795,163
|
|
Depreciation
expense for the years ended December 31, 2006 and 2005 was $155,116 and
$117,773, respectively. Depreciation expense for the six months ended June
30,
2007 and 2006 was $81,534 (Unaudited) and $58,312 (Unaudited),
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 June 30, 2007
(Unaudited) and December 31, 2006, carrying amounts for Brand Names were
$800,201.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(5) |
Intangible
Assets—(continued)
|
Other
Intangible Assets
Other
Intangible Assets as of December 31, 2006 consist of:
Asset
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Current
Year
Amortization
|
|
Useful
Life
|
|
|
|
|
|
|
|
|
|
|
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
4,467
|
|
$
|
745
|
|
|
300
months
|
|
Other
Intangible Assets as of June 30, 2007 (Unaudited) consist of:
Asset
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Current
Period
Amortization
|
|
Useful
Life
|
|
|
|
|
|
|
|
|
|
|
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
4,840
|
|
$
|
372
|
|
|
300
months
|
|
The
estimated aggregate amortization as of December 31, 2006 for each of the
next
five years is:
Year
|
|
Amount
|
|
|
|
|
Remainder
of 2007
|
|
$
|
373
|
2008
|
|
|
745
|
2009
|
|
|
745
|
2010
|
|
|
745
|
2011
|
|
|
745
|
The
Company had outstanding borrowings of $1,523,438 (Unaudited) and $1,355,526
as
of June 30, 2007 and December 31, 2006, respectively, 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 $23,662 (Unaudited) and $24,750
at June 30, 2007 and December 31, 2006, respectively. The interest rate in
effect at December 31, 2006 was 9.75%. The line of credit expires in December
2009.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(6) |
Lines
of Credit—(continued)
|
The
Company has a line of credit with Merrill Lynch, of which the Company had
approximately $701,000 of availability at December 31, 2006 and June 30,
2007
(Unaudited). No amounts were outstanding on this line as of June 30, 2007
(Unaudited) or as of December 31, 2006. 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. During the six months ended June 30, 2007 and 2006 the interest
paid
to Mr. Reed was $ -0-(Unaudited) and $10,625 (Unaudited),
respectively.
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 June 30, 2007 and December
31,
2006, the amount borrowed on this line of credit was $1,499,776 (Unaudited)
and
$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
June 30, 2007 and December 31, 2006, the Company had approximately $224
(Unaudited) and $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
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
Long-term
debt consists of the following:
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
(unaudited)
|
|
|
|
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.
|
|
$
|
657,312
|
|
$
|
662,349
|
|
Notes
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,
2006 was 9.25% per annum. The note is secured by land and building
and
guaranteed by the majority stockholder and matures
November 2025.
|
|
|
137,914
|
|
|
139,542
|
|
Note
payable to a bank, unsecured, interest rate is prime plus 3.25%.
The
interest rate
in effect at December 31, 2006 was 11.5%. The note matures in December
2009.
|
|
|
33,063
|
|
|
38,634
|
|
Notes
payable to GMAC, secured by automobiles, payable in monthly installments
of
$758 including interest at 0.0%, with maturity in 2008.
|
|
|
4,559
|
|
|
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.
|
|
|
9,758
|
|
|
13,589
|
|
Note
payable to a bank, secured by a vehicle, payable in monthly installments
of $352 including interest at 9.4% per annum, with maturity in
2012
|
|
|
15,856
|
|
|
|
|
Note
payable to a bank, secured by a vehicle, payable in monthly installments
of $298 including interest at 8.85% per annum, with maturity in
2013
|
|
|
15,679
|
|
|
|
|
Total
|
|
|
874,141
|
|
|
893,222
|
|
Less
current portion
|
|
|
43,936
|
|
|
71,860
|
|
|
|
$
|
830,205
|
|
$
|
821,362
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(7) |
Long-term
Debt—(continued)
|
The
aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31, 2006:
Year
|
|
Amount
|
|
2007
|
|
$
|
71,860
|
|
2008
|
|
|
31,827
|
|
2009
|
|
|
25,496
|
|
2010
|
|
|
20,750
|
|
2011
|
|
|
14,651
|
|
Thereafter
|
|
|
728,638
|
|
Total
|
|
$
|
893,222
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
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 June 30, 2007 (Unaudited)
and December 31, 2006, there were 55,540 shares and 58,940 shares, respectively
issued and 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.
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 $29,470 dividend
payable
to the preferred stockholders, which management elected to pay in shares
of
common stock. This dividend was paid during fiscal 2006.
In
June
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
June
2007, the Company issued 3,820 shares of commons stock valued at $27,770
to its
preferred stockholders as a payment for a preferred stock dividend in accordance
with the terms of the preferred stock agreement.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(8) |
Stockholders’
Equity — (continued)
|
Common
Stock
Common
stock consists of $.0001 par value, 11,500,000 shares authorized. As of June
30,
2007 and December 31, 2006, there were 8,701,045 (Unaudited) and 7,143,185
shares issued and outstanding.
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 $7,200,000 in the aggregate, of which approximately $7,005,000
was
received in 2006 ($6,396,450 after offering expenses). 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
November 2006, the Company issued 9,315 shares of common stock as a result
of a
former noteholder 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.
During
the six months ended June 30, 2007, the Company incurred and paid $45,000
(Unaudited) of offering expenses related to its initial public offering.
These
expenses were charged to additional paid in capital, as the initial public
offering had been completed by June 30, 2007.
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; and 440 shares of common stock were issued to employees as
a
bonus.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(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 and the six months ended June 30, 2007
(Unaudited), the Company issued 85,000 options and 139,000 options,
respectively, to purchase the Company’s common stock to employees under the 2001
stock option plan. The aggregate value of the options vesting during the
year
ended December 31, 2006 and the six months ended June 30, 2007 (Unaudited)
was
$5,808 and $48,420, respectively, and has been reflected as compensation
cost.
As of December 31, 2006 and June 30, 2007 (Unaudited), the aggregate value
of
the unvested options of 85,000 and 224,000, respectively, was $203,292 and
$576,000, respectively, which will be amortized as compensation cost as the
options vest, over 3 years.
The
fair
value of each option award 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.
The
weighted-average grant date fair value of options granted during the year
ended
December 31, 2006 and 2005 was $2.46 and $2.44, respectively. The
weighted-average grant date fair value of options granted during the six
months
ended June 30, 2007 (Unaudited) was $3.65.
|
|
Six
months ended
June
30, 2007
|
|
Year
ended
December
31, 2006
|
|
Year
ended
December
31, 2005
|
|
Expected
volatility
|
|
|
70
|
%
|
|
70
|
%
|
|
70
|
%
|
Weighted
average volatility
|
|
|
70
|
%
|
|
70
|
%
|
|
70
|
%
|
Expected
dividends
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
5
|
|
|
5
|
|
|
5
|
|
Risk
free rate
|
|
|
4.83
|
%
|
|
4.49
|
%
|
|
4.05
|
%
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(9) |
Stock
Options and Warrants —
(continued)
|
A
summary
of option activity as of December 31, 2006 and changes during the year then
ended and as of June 30, 2007 (Unaudited) and for the six months then ended
is
presented below:
|
|
Shares
|
|
Weighted-Average
Exercise
Price
|
|
Weighted-Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2006
|
|
|
291,000
|
|
$
|
3.80
|
|
|
|
|
|
|
|
Granted
|
|
|
85,000
|
|
$
|
4.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(12,500
|
)
|
$
|
4.00
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
363,500
|
|
$
|
3.84
|
|
|
3.8
|
|
$
|
92,500
|
|
Granted
|
|
|
139,000
|
|
$
|
5.90
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
502,500
|
|
$
|
4.41
|
|
|
3.71
|
|
$
|
1,441,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
278,500
|
|
$
|
3.79
|
|
|
3.5
|
|
$
|
92,500
|
|
Exercisable
at June 30, 2007
|
|
|
278,500
|
|
$
|
3.79
|
|
|
3.01
|
|
$
|
962,625
|
|
The
aggregate intrinsic value was calculated as the difference between the market
price and the exercise price of the Company’s stock for options which were
in-the-money. As of December 31, 2006, 55,000 vested options were in-the-money.
As of June 30, 2007 (Unaudited), the number of options outstanding and
exercisable that were in-the-money was 452,500 and 278,500,
respectively.
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 then
ended
and as of June 30, 2007 (Unaudited) and for the six months then ended is
presented below:
|
|
|
|
Weighted-Ave
Grant
|
|
Nonvested
shares
|
|
Shares
|
|
Date
Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
85,000
|
|
$
|
2.46
|
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
85,000
|
|
$
|
2.46
|
|
Granted
|
|
|
139,000
|
|
$
|
3.65
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2007
|
|
|
224,000
|
|
$
|
3.20
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(9) |
Stock
Options and Warrants —
(continued)
|
During
the year ended December 31, 2006, the Company granted 200,000 warrants in
relation to an underwriting agreement (see Note 8) valued at $406,000. During
the six months ended June 30, 2007 (Unaudited), the Company granted 914,995
warrants in connection with its private placement of common stock, (see Note
8)
valued at $3,901,779. Since the warrants issued in 2006 and through the six
months ended June 30, 2007 related to the sale of common stock the value
of the
warrants were both charged and credited to Additional Paid In Capital, resulting
in no change in the balance of the account. No warrants were granted in
2005.
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.
|
|
Six
months ended
June
30, 2007
|
|
Year
ended
December
31, 2006
|
|
Expected
volatility
|
|
|
70
|
%
|
|
70
|
%
|
Weighted
average volatility
|
|
|
70
|
%
|
|
70
|
%
|
Expected
dividends
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
5
|
|
|
5
|
|
Risk
free rate
|
|
|
5.10
|
%
|
|
4.45
|
%
|
The
weighted-average grant date fair value of the warrants granted during the
year
ended December 31, 2006 and for the six months ended June 30, 2007 (Unaudited)
was $2.03 and $4.26, respectivley.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006(Unaudited)
(9) |
Stock
Options and Warrants —
(continued)
|
A
summary
of warrant activity as of December 31, 2006 and changes during the year then
ended and as of June 30, 2007 (Unaudited) and for the six months 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
|
|
$
|
2.81
|
|
|
|
|
|
|
|
Granted
|
|
|
200,000
|
|
$
|
6.60
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
813,241
|
|
$
|
3.74
|
|
|
3.0
|
|
$
|
731,617
|
|
Granted
|
|
|
914,995
|
|
$
|
7.34
|
|
|
|
|
|
|
|
Exercised
|
|
|
(40,000
|
)
|
$
|
2.63
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2007
|
|
|
1,688,236
|
|
$
|
5.72
|
|
|
3.81
|
|
$
|
2,776,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
613,241
|
|
$
|
2.80
|
|
|
2.4
|
|
$
|
731,617
|
|
Exercisable
at June 30, 2007
|
|
|
1,448,236
|
|
$
|
5.60
|
|
|
3.74
|
|
$
|
2,646,900
|
|
The
aggregate intrinsic value was calculated as the difference between the market
price and the exercise price of the Company’s stock for warrants which were
in-the-money. As of December 31, 2006, the number of warrants outstanding
and
exercisable that were in-the-money was 613,241. As of June 30, 2007 (Unaudited),
the number of warrants outstanding and exercisable that were in-the-money
was
938,241 and 738,241, respectively.
A
summary
of the status of the Company’s nonvested shares granted as warrants as of
December 31, 2006 and changes during the year then ended and as of June 30,
2007
(Unaudited) and for the six months then ended is presented below:
|
|
|
|
Weighted-Ave
Grant
|
|
Nonvested
shares
|
|
Shares
|
|
Date
Fair Value
|
|
Nonvested
at January 1, 2006
|
|
|
200,000
|
|
$
|
2.03
|
|
Granted
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2006
|
|
|
200,000
|
|
$
|
2.03
|
|
Granted
|
|
|
914,995
|
|
$
|
4.26
|
|
Vested
|
|
|
(914,995
|
)
|
$
|
4.26
|
|
Forfeited
|
|
|
|
|
|
|
|
Nonvested
at June 30, 2007
|
|
|
200,000
|
|
$
|
2.03
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
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 are as
follows:
Deferred
income tax asset:
|
|
June
30,
2007
|
|
December
31,
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
3,054,000
|
|
$
|
1,873,000
|
|
Valuation
allowance
|
|
|
(3,054,000
|
)
|
|
(1,873,000
|
)
|
Net
deferred income tax asset
|
|
$
|
—
|
|
$
|
—
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
Years
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
|
|
|
—
|
|
|
—
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(11) |
Commitments
and Contingencies
|
Lease
Commitments
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. Rental expense for the six months ended June 30, 2007 and 2006
was
$34,300 (Unaudited) and $34,492 (Unaudited), respectively.
Future
payments under these leases as of December 31, 2006 are as follows:
Year
Ending December 31,
|
|
|
|
|
|
Remainder
of 2007
|
|
$
|
15,216
|
|
2008
|
|
|
18,634
|
|
2009
|
|
|
12,365
|
|
2010
|
|
|
7,496
|
|
2011
|
|
|
6,872
|
|
Total
|
|
$
|
60,583
|
|
Legal
Proceedings
The
Company currently and from time to time is involved in litigation incidental
to
the conduct of its business. The Company is not currently a party to any
lawsuit
or proceeding which, in the opinion of its management, is likely to have
a
material adverse effect on it.
During
2006 and 2005, the Company incurred $21,629 and $30,901, respectively, of
legal
costs associated with a lawsuit which the Company has won. During the six
months
ended June 30, 2007 and 2006, the Company incurred $0 (Unaudited) and $14,797
(Unaudited), respectively, of legal costs associated with this lawsuit. 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 for the year ended
December 31, 2006.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006(Unaudited)
(11) |
Commitments
and Contingencies —
(continued)
|
From
August 3, 2005 through April 7, 2006, the Company issued 333,156 shares of
its
common stock in connection with its 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, the Company made a rescission offer to all holders of the outstanding
shares that it believes are subject to rescission, pursuant to which the
Company
offered to repurchase these shares then outstanding from the holders. At
the
expiration of its 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
Company 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, the Company 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 the Company may be required to pay.
If it
is determined that the Company 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 the 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 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.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND
2005
AND
THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006 (Unaudited)
(13) |
Subsequent
Events (unaudited)
|
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.
In
August 2007, 20,000 warrants were exercised at an
exercise price of $3.00. Consequently, the Company issued 20,000 of common
stock
and received $60,000.
Subsequent
to June 30, 2007, the Company issued an additional 335,000 options to purchase
shares of its common stock to its employees, including 110,000 options
under the
2001 Stock Option Plan with an exercise price range of $7.80 to $10.01
per
share, and 225,000 options outside of the 2001 Stock Option Plan with an
exercise price range of $7.30 to $8.50 per share.
[The
rest of this page left blank intentionally]
TABLE
OF CONTENTS
|
|
Page
|
Summary
|
|
|
1
|
|
Special
Note Regarding Forward-Looking Statements
|
|
|
4
|
|
Risk
Factors
|
|
|
5
|
|
Use
of Proceeds
|
|
|
13
|
|
Selling
Stockholders
|
|
|
13
|
|
Plan
of Distribution
|
|
|
17
|
|
Price
Range of Common Stock
|
|
|
19
|
|
Dividend
Policy
|
|
|
19
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
20
|
|
Business
|
|
|
30
|
|
Management
|
|
|
44
|
|
Certain
Relationships and Related Transactions
|
|
|
51
|
|
Security
Ownership of Certain Beneficial Owners and
Management
|
|
|
52
|
|
Description
of Our Securities
|
|
|
53
|
|
Shares
Eligible for Future Sale
|
|
|
56
|
|
Legal
Matters
|
|
|
57
|
|
Experts
|
|
|
58
|
|
Where
You Can Find Additional Information
|
|
|
58
|
|
Index
to Financial Statements
|
|
|
F-1
|
|
You
should rely only on the information contained in this document. We have not
authorized anyone to give any information that is different. This prospectus
is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
cover, but the information may change in the future.
REED’S,
INC.
2,414,995 SHARES
Common
Stock
PROSPECTUS
November
9, 2007