UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-QSB
(Mark
One)
x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
|
For
the
quarterly period ended September 30, 2007
o
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For
the
transition period from _____ to _____
Commission
file number
Commission
file number: 001-32501
(Exact
name of registrant as specified in its charter)
Delaware
|
35-2177773
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
13000
South Spring St. Los
Angeles, California. 90061
(Address
of principal executive offices) (Zip Code)
(310)
217-9400
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to
such filing requirements for the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date:
There
were 8,749,721 shares of the registrant's common stock outstanding as of
November 13, 2007.
Transitional
Small Business Disclosure Format (Check one) Yes o
No x
Part
I -
Financial Information
Item
1.
Financial Statements
REED’S,
INC.
|
|
September
30,
2007
|
|
December
31,
2006
|
|
|
|
(Unaudited)
|
|
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
Cash
|
|
$
|
2,399,060
|
|
$
|
1,638,917
|
|
Restricted
cash
|
|
|
-
|
|
|
1,580,456
|
|
Inventory
|
|
|
3,292,720
|
|
|
1,511,230
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $188,000 as of September 30, 2007 and $173,253 as
of
December 31, 2006
|
|
|
1,932,118
|
|
|
1,183,763
|
|
Note
Receivable
|
|
|
300,000
|
|
|
-
|
|
Other
receivables
|
|
|
145,172
|
|
|
24,811
|
|
Prepaid
Expenses
|
|
|
82,082
|
|
|
164,462
|
|
Total
Current Assets
|
|
|
8,151,152
|
|
|
6,103,639
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $807,140 as of
September
30, 2007 and $663,251 as of December 31, 2006
|
|
|
4,197,439
|
|
|
1,795,163
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $5,026 as of September
30,
2007 and $4,467 as of December 31, 2006
|
|
|
13,588
|
|
|
14,146
|
|
Total
Other Assets
|
|
|
813,789
|
|
|
814,347
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
13,162,380
|
|
$
|
8,713,149
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES |
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,302,684
|
|
$
|
1,695,014
|
|
Lines
of credit
|
|
|
-
|
|
|
1,355,526
|
|
Current
portion of long term debt
|
|
|
26,537
|
|
|
71,860
|
|
Accrued
interest
|
|
|
3,798
|
|
|
27,998
|
|
Accrued
expenses
|
|
|
216,180
|
|
|
118,301
|
|
Total
Current Liabilities
|
|
|
2,549,199
|
|
|
3,268,699
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
775,574
|
|
|
821,362
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
3,324,773
|
|
|
4,090,061
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10 par value, 500,000 shares authorized, 49,121 shares outstanding
at September 30, 2007 and 58,940 shares at December 31,
2006
|
|
|
491,212
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized,
8,746,721 shares issued and outstanding at September 30, 2007 and
7,143,185 at December 31, 2006
|
|
|
874
|
|
|
714
|
|
Additional
paid in capital
|
|
|
17,582,385
|
|
|
9,535,114
|
|
Accumulated
deficit
|
|
|
(8,236,864
|
)
|
|
(5,502,142
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
9,837,607
|
|
|
4,623,088
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
13,162,380
|
|
$
|
8,713,149
|
|
See
accompanying Notes to Condensed Financial
Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the Three and Nine months Ended September 30, 2007 and 2006
(Unaudited)
|
|
Three
months ended
|
|
Nine
months ended
|
|
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
September
30,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
3,881,328
|
|
$
|
2,775,955
|
|
$
|
10,366,378
|
|
$
|
7,913,045
|
|
COST
OF SALES
|
|
|
3,083,055
|
|
|
2,138,602
|
|
|
8,348,055
|
|
|
6,417,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
798,273
|
|
|
637,353
|
|
|
2,018,323
|
|
|
1,495,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
1,606,938
|
|
|
407,074
|
|
|
3,049,207
|
|
|
1,007,693
|
|
General
and Administrative
|
|
|
711,785
|
|
|
519,045
|
|
|
1,611,276
|
|
|
1,535,255
|
|
Total
Operating Expenses
|
|
|
2,318,723
|
|
|
926,119
|
|
|
4,660,483
|
|
|
2,542,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM
OPERATIONS
|
|
|
(1,520,450
|
)
|
|
(288,766
|
)
|
|
(2,642,160
|
)
|
|
(1,047,246
|
)
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
45,898
|
|
|
|
|
|
98,498
|
|
|
|
|
Interest
Expense
|
|
|
(51,407
|
)
|
|
(112,197
|
)
|
|
(163,290
|
)
|
|
(310,551
|
)
|
Total
Other Income (Expense)
|
|
|
(5,509
|
)
|
|
(112,197
|
)
|
|
(64,792
|
)
|
|
(310,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,525,959
|
)
|
|
(400,963
|
)
|
|
(2,706,952
|
)
|
|
(1,357,797
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
—
|
|
|
|
|
|
(27,770
|
)
|
|
(29,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(1,525,959
|
)
|
$
|
(400,963
|
)
|
$
|
(2,734,722
|
)
|
$
|
(1,387,267
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE-
Available to Common Stockholders
Basic and Diluted
|
|
|
(0.18
|
)
|
$
|
(0.08
|
)
|
$
|
(0.35
|
)
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
8,714,050
|
|
|
5,335,482
|
|
|
7,759,425
|
|
|
5,269,878
|
|
See
accompanying Notes to Condensed Financial
Statements
REED’S
INC.
STATEMENT
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the
nine months ended September 30, 2007 (Unaudited)
|
|
Common
Stock
|
|
Additional
Paid
in
|
|
Preferred
Stock
|
|
Accumulated |
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2007
|
|
|
7,143,185
|
|
$
|
714
|
|
$
|
9,535,114
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(5,502,142
|
)
|
$
|
4,623,088
|
|
Fair
Value of Common stock issued for services
|
|
|
440
|
|
|
-
|
|
|
3,783
|
|
|
—
|
|
|
|
|
|
|
|
|
3,783
|
|
Preferred
Stock Dividend
|
|
|
3,820
|
|
|
1
|
|
|
27,769
|
|
|
-
|
|
|
|
|
|
(27,770
|
)
|
|
|
|
Preferred
stock conversion
|
|
|
39,276
|
|
|
3
|
|
|
98,187
|
|
|
(9,819
|
)
|
|
(98,190
|
)
|
|
|
|
|
|
|
Exercise
of Warrants
|
|
|
60,000
|
|
|
6
|
|
|
164,994
|
|
|
|
|
|
|
|
|
|
|
|
165,000
|
|
Common
stock issued for cash, net of offering costs
|
|
|
1,500,000
|
|
|
150
|
|
|
7,626,392
|
|
|
|
|
|
|
|
|
|
|
|
7,626,392
|
|
Public
offering expenses
|
|
|
|
|
|
|
|
|
(45,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,000
|
)
|
Fair
value of vested options issued to employees
|
|
|
|
|
|
|
|
|
171,296
|
|
|
|
|
|
|
|
|
|
|
|
171,296
|
|
Net
Loss for the nine months ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,706,952
|
)
|
|
(2,706,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2007
|
|
|
8,746,721
|
|
$
|
874
|
|
$
|
17,582,385
|
|
|
49,121
|
|
$
|
491,212
|
|
$
|
(8,236,864
|
)
|
$
|
9,837,607
|
|
See
accompanying Notes to Condensed Financial
Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the
nine months ended September 30, 2007 and 2006 (Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
2007
|
|
September
30,
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,706,952
|
)
|
$
|
(1,357,797
|
)
|
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
|
|
|
171,296
|
|
|
|
|
Depreciation
and amortization
|
|
|
144,445
|
|
|
102,252
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(748,355
|
)
|
|
(600,154
|
)
|
Inventory
|
|
|
(1,781,490
|
)
|
|
(335,291
|
)
|
Prepaid
Expenses
|
|
|
82,380
|
|
|
(420
|
)
|
Other
receivables
|
|
|
(120,361
|
)
|
|
5,331
|
|
Accounts
payable
|
|
|
607,670
|
|
|
989,310
|
|
Accrued
expenses
|
|
|
97,879
|
|
|
16,966
|
|
Accrued
interest
|
|
|
(24,200
|
)
|
|
23,821
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(4,273,905
|
)
|
|
(1,155,982
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Increase
in Note Receivable
|
|
|
(300,000
|
)
|
|
|
|
Purchase
of property and equipment
|
|
|
(2,546,165
|
)
|
|
(44,347
|
)
|
Decrease
in restricted cash
|
|
|
1,580,456
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,265,709
|
)
|
|
(44,347
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from borrowings on long term debt
|
|
|
163,276
|
|
|
|
|
Principal
payments on debt
|
|
|
(254,387
|
)
|
|
(87,486
|
)
|
Proceeds
received on sale of common stock
|
|
|
9,000,000
|
|
|
1,002,779
|
|
Proceeds
received from the exercise of warrants
|
|
|
165,000
|
|
|
|
|
Payments
for stock offering costs
|
|
|
(1,418,606
|
)
|
|
(237,287
|
)
|
Net
(payment) borrowing on lines of credit
|
|
|
(1,355,526
|
)
|
|
571,883
|
|
Net
cash provided by financing activities
|
|
|
6,299,757
|
|
|
1,249,889
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN
CASH
|
|
|
760,143
|
|
|
49,560
|
|
CASH —
Beginning of period
|
|
|
1,638,917
|
|
|
27,744
|
|
|
|
|
|
|
|
|
|
CASH —
End of period
|
|
$
|
2,399,060
|
|
$
|
77,304
|
|
See
accompanying Notes to Condensed Financial
Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Continued)
For
the nine months ended September 30, 2007 and 2006
(Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
2007
|
|
September
30,
2006
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
187,490
|
|
$
|
286,731
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$
|
27,770
|
|
$
|
29,470
|
|
|
|
|
|
|
|
|
|
Deferred
stock offering costs charged to paid in capital
|
|
|
-
|
|
$
|
336,238
|
|
|
|
|
|
|
|
|
|
Preferred
Stock converted to Common Stock
|
|
$
|
98,190
|
|
$
|
--
|
|
See
accompanying Notes to Condensed Financial
Statements
REED’S,
INC.
Nine
months Ended September 30, 2007 and 2006 (UNAUDITED)
1. BASIS
OF PRESENTATION
The
accompanying interim condensed financial statements are unaudited, but in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position at September 30, 2007 and the results of operations and
cash
flows for the nine months ended September 30, 2007 and 2006. The balance sheet
as of December 31, 2006 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Annual Report, Form 10-KSB, as filed with the Securities and
Exchange Commission on April 16, 2007.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the nine months ended September 30, 2007 are not
necessarily indicative of the results of operations to be expected for the
full
fiscal year ending December 31, 2007.
Income
(Loss) per Common Share
Basic
income (loss) per share is calculated by dividing net income (loss) available
to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted income per share is calculated assuming the issuance
of
common shares, if dilutive, resulting from the exercise of stock options and
warrants. As the Company had a loss in the three and nine month periods ended
September 30, 2007 and 2006, basic and diluted loss per share are the same
because the inclusion of common share equivalents would be anti-dilutive. At
September 30, 2007 and 2006, potentially dilutive securities consisted of
convertible preferred stock, common stock options and warrants aggregating
2,612,220 and 1,276,159 common shares, respectively.
Adoption
of New Accounting Policy
Effective
January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN
48”)
—an
interpretation of FASB Statement No. 109, Accounting for Income
Taxes.”
The
Interpretation addresses the determination of whether tax benefits claimed
or
expected to be claimed on a tax return should be recorded in the financial
statements. Under FIN 48,
we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
taxing authorities, based on the technical merits of the position. The tax
benefits recognized in the financial statements from such a position should
be
measured based on the largest benefit that has a greater than fifty percent
likelihood of being realized upon ultimate settlement. FIN
48
also
provides guidance on derecognition, classification, interest and penalties
on
income taxes, accounting in interim periods and requires increased disclosures.
At the date of adoption, and as of September 30, 2007, the Company does not
have
a liability for unrecognized tax benefits.
The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for five years after 2002. During the periods open to
examination, the Company has net operating loss and tax credit carry
forwards for U.S. federal and state tax purposes that have attributes from
closed periods. Since these NOLs and tax credit carry forwards may
be utilized in future periods, they remain subject to
examination.
The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of September 30, 2007, the Company has no accrued
interest or penalties related to uncertain tax positions.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 157, "Fair Value Measurements,"
which provides enhanced guidance for using fair value to measure assets and
liabilities. SFAS No. 157 provides a common definition of fair value and
establishes a framework to make the measurement of fair value in generally
accepted accounting principles more consistent and comparable. SFAS No. 157
also
requires expanded disclosures to provide information about the extent to which
fair value is used to measure assets and liabilities, the methods and
assumptions used to measure fair value, and the effect of fair value measures
on
earnings. SFAS No. 157 is effective for financial statements issued in fiscal
years beginning after November 15, 2007 and to interim periods within those
fiscal years. The adoption of this SFAS has not had a material change on the
Company’s results of operations, financial position, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
115”. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective
for years beginning after November 15, 2007. Management believes the adoption
will not have a material impact on the Company’s results of operations,
financial position or cash flow.
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed to
risk
for the amounts of funds held in one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess of
the
$100,000 guarantee during the nine months ended September 30, 2007.
During
the three months ended September 30, 2007 and 2006, the Company had two
customers, which accounted for approximately 40% and 29% and 42% and 21% of
sales, respectively. No other customers accounted for more than 10% of sales
in
either year.
During
the nine months ended September 30, 2007 and 2006, the Company had two
customers, which accounted for approximately 38% and 15% and 45% and 19% of
sales, respectively. No other customers accounted for more than 10% of sales
in
either year. As of September 30, 2007, the Company had approximately $682,000
and $339,000, respectively, of accounts receivable from these
customers.
2.
Inventory
Inventory
consists of the following at:
|
|
September
30,
2007
|
|
December
31,
2006
|
|
Raw
Materials
|
|
$
|
1,289,813
|
|
$
|
593,458
|
|
Finished
Goods
|
|
|
2,002,907
|
|
|
917,772
|
|
|
|
$
|
3,292,720
|
|
$
|
1,511,230
|
|
3. Long term debt
In
February 2007, the Company originated a note payable with a bank in the amount
of $130,000. The note matures in February 2008. The note requires 11 principal
payments of $2,167 and one final payment in February 2008 of $106,674. The
note
carries a 5.50% interest rate and is secured by a certificate of deposit with
the bank in the amount of $130,000. The bank may offset the certificate of
deposit against the loan balance and the monies cannot be withdrawn until the
loan is repaid in full. As of September 30, 2007, this loan had been paid in
full and the certificate of deposit had been released of any
restrictions.
In
January and February 2007, the Company originated two car loans for $33,276.
The
loans have interest rates ranging from 8.85% to 9.4%. The loans have monthly
payments of approximately $298 and $352 and mature in 2012 and 2013,
respectively. As of September 30, 2007, these loans had been paid in
full.
4. Stockholders’
Equity
From
May
25, 2007 through June 15, 2007, the Company completed a private placement to
accredited investors only, on subscriptions for the sale of 1,500,000 shares
of
common stock and warrants to purchase up to 749,995 shares of common stock,
resulting in an aggregate of $9,000,000 of gross proceeds to the Company. The
Company sold the shares at a purchase price of $6.00 per share. The warrants
issued in the private placement have a five-year term and an exercise price
of
$7.50 per share. We paid cash commissions of $900,000 to the placement agent
for
the private placement and issued warrants to the placement agent to purchase
up
to 150,000 shares of common stock with an exercise price of $6.60 per share.
We
also issued additional warrants to purchase up to 15,000 shares of common stock
with an exercise price of $6.60 per share and paid an additional $60,000 in
cash
to the placement agent as an investment banking fee. Total proceeds received,
net of underwriting commissions and the investment banking fee and excluding
other expenses of the private placement, was $8,040,000.
From
April 1, 2007 through June 30, 2007, the following additional activity occurred
with respect to our stockholders’ equity: 40,000 shares of common stock were
issued from the exercise of 40,000 warrants and the Company received $105,000
upon their conversion; 3,400 shares of preferred stock were converted into
13,600 shares of common stock in accordance with the conversion privileges
of
certain preferred stockholders; 440 shares of common stock were issued to
employees as a bonus; and 3,820 shares of common stock were issued in payment
of
the $27,770 preferred stock dividend payable June 30, 2007.
From
July
1, 2007 through September 30, 2007, the following additional activity occurred
with respect to our stockholders’ equity: 20,000 shares of common stock were
issued from the exercise of 20,000 warrants and the Company received $60,000
upon their conversion; and 6,419 shares of preferred stock were converted into
25,676 shares of common stock in accordance with the conversion privileges
of
certain preferred stockholders.
5. Stock Based Compensation
The
impact on our results of operations of recording stock-based compensation for
the three-month period ended September 30, 2007 and 2006 was to increase selling
expenses by $103,376 and $0, respectively, and increase general and
administrative expenses by $19,500 and $0, respectively.
The
impact on our results of operations of recording stock-based compensation for
the nine-month period ended September 30, 2007 and 2006 was to increase selling
expenses by $145,296 and $0, respectively, and increase general and
administrative expenses by $26,000 and $0, respectively. As of September 30,
2007, the Company has unvested options of 469,000, which will be reflected
as
compensation cost of approximately $1,902,826 over the remaining vesting period
of five years.
We
calculated the fair value of each option award on the date of grant using the
Black-Scholes option pricing model. The following weighted average assumptions
were used for the nine months ended September 30, 2007:
Risk-free
interest rate
|
|
|
4.49
|
%
|
Expected
lives (in years)
|
|
|
5.00
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatilty
|
|
|
70
|
%
|
Expected
volatility is based on the volatilities of public entities which are in the
same
industry as the Company. For purposes of determining the expected life of the
option, the full contract life of the option is used. The risk-free rate for
periods within the contractual life of the options is based on the U. S.
Treasury yield in effect at the time of the grant.
The
following table summarizes stock option activity for the nine months ended
September 30, 2007:
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
363,500
|
|
$
|
3.84
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
424,000
|
|
$
|
7.52
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(40,000
|
)
|
$
|
3.50
|
|
|
|
|
|
|
|
Outstanding
at September 30, 2007
|
|
|
747,500
|
|
$
|
5.95
|
|
|
3.94
|
|
$
|
1,208,725
|
|
Exercisable
at September 30, 2007
|
|
|
278,500
|
|
$
|
3.79
|
|
|
2.76
|
|
$
|
906,925
|
|
Stock
options granted under our equity incentive plans vest over two and three years
from the date of grant, ½ and 1/3 per year, respectively, and generally expire
five years from the date of grant. The weighted average exercise price of stock
options granted during the period was $7.52 per share and the related
weighted average grant date fair value was $4.62 per share.
The
Company calculated the fair value of each warrant award on the date of grant
using the Black-Scholes option pricing model. The following weighted average
assumptions were used for the nine months ended September 30, 2007:
Risk-free
interest rate
|
|
|
5.10
|
%
|
Expected
lives (in years)
|
|
|
5
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatilty
|
|
|
70
|
%
|
Expected
volatility is based on the volatilities of public entities which are in the
same
industry as the Company. For purposes of determining the expected life of the
warrant, the full contract life of the warrant is used. The risk-free rate
for
periods within the contractual life of the options is based on the U. S.
Treasury yield in effect at the time of the grant.
The
following table summarizes warrant activity for the nine months ended September
30, 2007 :
|
|
Shares
|
|
Weighted
Average Exercise Price
|
|
Weighted-Average
Remaining
Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2007
|
|
|
813,241
|
|
$
|
3.74
|
|
|
-
|
|
|
-
|
|
Issued
|
|
|
914,995
|
|
$
|
7.34
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
(60,000
|
)
|
$
|
2.75
|
|
|
-
|
|
|
-
|
|
Outstanding
at September 30, 2007
|
|
|
1,668,236
|
|
$
|
5.75
|
|
|
3.59
|
|
$
|
2,508,902
|
|
Exercisable
at September 30, 2007
|
|
|
1,468,236
|
|
$
|
5.63
|
|
|
3.51
|
|
$
|
2,418,902
|
|
The
warrants granted in 2007 were granted in connection with our private placement,
see note 4, and were fully vested at issuance on June 15, 2007 and expire in
June 2012. The weighted average exercise price of the warrants was $7.34. The
weighted average issue date fair value was $4.26 per warrant, resulting in
an aggregate fair value of $3,091,779. The accounting affect of this is to
both
include and deduct the amount from additional paid in capital. All of the
warrants issued to the investors, 749,995 warrants, include a call provision
which the Company may exercise and will require the warrant holder, within
20
days written notice of the call provision being exercised by the Company, to
exercise the warrants or have them expire. The Company may exercise its call
provision anytime the Company’s common stock closes at or above $10.00 per share
for a period of 10 consecutive trading days.
5. Subsequent Event
In
October 2007, pursuant to conversion of 500 shares of Series A Preferred stock,
the Company issued 2,000 shares and paid a consultant 1,000 shares of its common
stock for services rendered valued at $73,000. In October 2007, options to
purchase 50,000 shares of common stock were issued to an employee at an exercise
price of $7.30 per share.
Item
2.
Management’s Discussion and Analysis or Plan of Operation
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes appearing elsewhere in this report. This discussion and analysis
may contain forward-looking statements based on assumptions about our future
business. Our actual results could differ materially from those anticipated
in
these forward-looking statements as a result of certain factors, including
but
not limited to those set forth under “Risk Factors included in our Annual Report
on Form 10-KSB for the year ended December 31, 2006.
Overview
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell six unique
product lines:
|
·
|
Virgil’s
Root Beer and Cream Sodas,
|
|
·
|
Reed’s
Ginger Juice Brews,
|
|
·
|
Reed’s
Ginger Candies, and
|
|
·
|
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
The
following table shows a breakdown of net sales with respect to our distribution
channels for the fiscal years set forth in the table:
|
|
|
Direct
sales to large retailer accounts
|
|
|
%
of total sales
|
|
|
Local
direct distribution
|
|
|
%
of total sales
|
|
|
Natural,
gourmet and mainstream distributors
|
|
|
%
of total
|
|
|
Total
sales
|
|
2006
|
|
$
|
1,853,439
|
|
|
18
|
|
$
|
1,039,966
|
|
|
10
|
|
$
|
7,590,948
|
|
|
72
|
|
$
|
10,484,353
|
|
2005
|
|
|
1,536,896
|
|
|
16
|
|
|
751,999
|
|
|
8
|
|
|
7,181,390
|
|
|
76
|
|
|
9,470,285
|
|
2004
|
|
|
1,983,598
|
|
|
22
|
|
|
395,601
|
|
|
4
|
|
|
6,599,166
|
|
|
74
|
|
|
8,978,365
|
|
Historically,
we have focused our marketing efforts on natural and gourmet food stores. More
recently, we have expanded our marketing efforts to include more mainstream
markets. These efforts included selling our products directly to:
|
·
|
large
retail accounts, such as Costco, BJ Wholesale, and Cost Plus World
Markets, and
|
|
·
|
the
natural food section of mainstream national supermarket chains, such
as
Safeway, Kroger’s, Ralph’s and
Albertsons.
|
In
addition, we have introduced new products that include specialty beverage
packaging options not typically available in the marketplace that have
contributed to our growth in sales. These products include Virgil’s Cream Soda
in a 12 ounce bottle, 5-liter “party keg” version of our Virgil’s Root Beer and
Virgil’s Cream Soda and 750 ml. size bottles of our Reed’s Original Ginger Brew,
Extra Ginger Brew and Spiced Apple Brew. In addition, in 2007, we launched
Virgil’s Black Cherry Cream Soda and diet versions of Virgil’s Root Beer, Cream
Soda and Black Cherry Cream Soda.
We
gauge
the financial success of our company using a number of different parameters.
Because our industry typically values companies on a top-line basis, one of
our
main company goals is to increase net sales. Our net sales have increased each
year during the period from 2002 to 2006, as follows:
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
Net
sales
|
|
$
|
6,400,000
|
|
$
|
6,800,000
|
|
$
|
9,000,000
|
|
$
|
9,500,000
|
|
$
|
10,500,000
|
|
For
the
nine months ended September 30, 2007, our sales increased approximately
$2,453,000 over the comparable period of the prior year, from approximately
$7,913,000 to approximately $10,366,000.
We
believe that the increase in net sales over this period comes from two
factors:
|
·
|
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
a
sales force to cultivate and generate sales for these new distributorship
relationships and other key geographic areas, as we identify them,
by the
end of 2008, and
|
|
·
|
increases
in our direct sales to large
retailers.
|
Almost
as
important as increasing our net sales, is increasing our gross margin. We
continue to work to reduce costs related to production of our products. However,
while gross margins have increased, we have encountered difficulties in
increasing our gross margins due
to
certain factors, including:
|
·
|
inefficiencies
relating to the operation of the Brewery, our West Coast production
facility, and
|
|
·
|
higher
freight, glass and production expenses due to the increase in the
cost of
fuel and increases in the price of ingredients in our
products.
|
In
2002,
we purchased and outfitted the Brewery, in part to help reduce both production
costs and freight costs associated with our west coast sales. Gross margins
decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
result of attaining greater functionality and efficiencies in our operation
of
the Brewery by our own personnel and being able to produce and ship products
in
the western half of the United States from a west coast facility. However,
in
2005, gross margins decreased to 18.2% as a principal result of increases in
fuel prices, which put downward pressure on our margins due to increased freight
expenses and increased glass and production costs, both of which are sensitive
to fuel costs. In February 2006, we decided to raise our prices on the Ginger
Brew line for the first time in 16 years. In 2006, gross margins recovered
to
19.6% partially as a result of a price increase on our core Reed’s Ginger Brew
line and offset by increased pressure from more expensive production,
ingredients and packaging expenses due to fuel related price increases. For
the
nine months ended September 30, 2007, our gross margins were 19.5% as compared
to 18.9% for the nine months ended September 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 nine months ended
September 30, 2007, we expended approximately $195,000 for a conveyor system
and
pasteurizer to improve our packaging line and 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 agreed to issue, to the underwriters, warrants to purchase up
to
approximately an additional 200,000 shares of common stock at an exercise price
of $6.60 per share (165% of the public offering price per share), at a purchase
price of $0.001 per warrant. The underwriters’ warrants are exercisable for a
period of five years commencing on the final closing date of the public
offering. From August 3, 2005 through April 7, 2006, we had issued 333,156
shares of our common stock in connection with the public offering. We sold
the
balance of the 2,000,000 shares in connection with the public offering
(1,666,844 shares) following October 11, 2006.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to the Company. The Company
sold
the shares at a purchase price of $6.00 per share. The warrants issued in the
private placement have a five-year term and an exercise price of $7.50 per
share. We paid cash commissions of $900,000 to the placement agent for the
private placement and issued warrants to the placement agent to purchase up
to
150,000 shares of common stock with an exercise price of $6.60 per share. We
also issued additional warrants to purchase up to 15,000 shares of common stock
with an exercise price of $6.60 per share and paid an additional $60,000 in
cash
to the placement agent as an investment banking fee.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices
- As oil
prices continue to increase, our packaging, production and ingredient costs
will
continue to rise. We have attempted to offset the rising freight costs from
fuel
price increases by creatively negotiating rates and managing freight. We will
continue to pursue alternative production, packaging and ingredient suppliers
and options to help offset the affect of rising fuel prices on these
expenses.
Low
Carbohydrate Diets and Obesity -
Our
products are not geared for the low carbohydrate market. Consumer trends have
reflected higher demand for lower carbohydrate products. Despite this trend,
we
achieved an increase in our sales growth in 2006. We monitor these trends
closely and have recently launched diet versions of our Virgil’s Root Beer,
Cream Soda and Black Cherry Cream Soda.
Distribution
Consolidation
- There
has been a recent trend towards continued consolidation of the beverage
distribution industry through mergers and acquisitions. This consolidation
results in a smaller number of distributors to market our products and
potentially leaves us subject to the potential of our products either being
dropped by these distributors or being marketed less aggressively by these
distributors. As a result, we have initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. Consolidation among natural foods
industry distributors has not had an adverse affect on our sales.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our ginger-based products are designed with this consumer demand
in
mind.
Supermarket
and Natural Food Stores
- More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in mainstream supermarkets throughout
the
United States in natural food sections. Supermarkets can require that we spend
more advertising money and they sometimes require slotting fees. We continue
to
work to keep these fees reasonable. Slotting fees in the natural food section
of
the supermarket are generally not as expensive as in other areas of the
store.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate, particularly for premium products.
There is an increase in the sophistication with respect to beverage packaging
design. While we feel that our current core brands still compete on the level
of
packaging, we continue to experiment with new and novel packaging designs such
as the 5-liter party keg and 750 ml. champagne style bottles. We have further
plans for other innovative packaging designs.
Packaging
or Raw Material Price
Increases - An increase in packaging or raw materials has caused our margins
to
suffer and has negatively impacted our cash flow and profitability. We continue
to search for packaging and production alternatives to reduce our cost of
goods.
Cash
Flow Requirements
- Our
growth will depend on the availability of additional capital infusions. We
have
a financial history of losses and are dependent on non-banking sources of
capital, which tend to be more expensive and charge higher interest rates.
In
addition, our initial public offering, subsequent private placement and our
outstanding options and warrants, while providing capital, also dilute the
ownership of common stockholders. Any increase in costs of goods will further
increase losses and will further tighten cash reserves.
Interest
Rates
- We use
lines of credit as a source of capital and are negatively impacted as interest
rates rise. Our use of lines of credit have been reduced with the capital raised
from our initial public offering and subsequent private placement of common
stock.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires
us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable
and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
Revenue
Recognition.
Revenue
is recognized on the sale of a product when the product is shipped, which is
when the risk of loss transfers to our customers, and collection of the
receivable is reasonably assured. A product is not shipped without an order
from
the customer and credit acceptance procedures performed. The allowance for
returns is regularly reviewed and adjusted by management based on historical
trends of returned items. Amounts paid by customers for shipping and handling
costs are included in sales.
Trademark
License and Trademarks.
Trademark license and trademarks primarily represent the costs we pay for
exclusive ownership of the Reed’s® registered trademark in connection with the
manufacture, sale and distribution of beverages and water and non-beverage
products. We also own the China Cola® and Virgil’s® registered trademarks. In
addition, we own a number of other trademarks in the United States, as well
as
in a number of countries around the world. We account for these items in
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under
the provisions of SFAS No. 142, we do not amortize indefinite-lived
trademark licenses and trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified during
the nine months ended September 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 nine months ended September 30, 2007
or
2006.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their estimated impact on
our
future cash flows.
Advertising.
We
account for advertising production costs by expensing such production costs
the
first time the related advertising is run.
Accounts
Receivable.
We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to
the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment
of
past due trade accounts receivable outstanding.
Inventories.
Inventories are stated at the lower of cost to purchase and/or manufacture
the
inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand
and/or our ability to sell the product(s) concerned and production requirements.
Demand for our products can fluctuate significantly. Factors that could affect
demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations
of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be
inaccurate, which could result in an understated or overstated provision
required for excess and obsolete inventory.
Income
Taxes.
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the value
of our deferred tax assets. If our management determines that it is more likely
than not that these assets will not be realized, we will reduce the value of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Results
of Operations
Three
Months Ended September 30, 2007 Compared to Three Months Ended September 30,
2006
Net
sales
increased by $1,105,373 or 39.8%, from $2,775,955 in the three months ended
September 30, 2006 to $3,881,328 in the three months ended September 30, 2007.
The increase in sales was primarily due to an increase in sales of our Virgil’s
product line of Root Beer and Cream Soda and our Reed’s Ginger Brew and Candy
product lines.
Sales
of
our Virgil’s product line increased by $809,000, or 82.3%, from approximately
$983,000 to $1,792,000. We realized a 68.3% increase in sales for Virgil’s Root
Beer and a 119.7% increase in our Virgil’s Cream Soda products. We released a
line of our Virgil’s diet sodas in 2007, resulting in approximately $76,000 of
sales in the three months ended September 30, 2007. Virgil’s diet Root Beer soda
comprised approximately $43,000 of the sales of our diet Virgil’s products. Of
the increase in Virgil’s products, sales of five liter kegs represented an
increase of approximately $120,000, or 107.1%, from $112,000 in the three months
ended September 30, 2006 to $232,000 in the three months ended September 30,
2007.
Sales
of
our Reed’s Ginger Brew product line increased by 14.9%, or $226,000, from
$1,513,000 in the three months ended September 30, 2006 to $1,739,000 in the
three months ended September 30, 2007. We realized an increase in sales of
our
Reed’s Ginger Brew and Spiced Apple products, including an increase of 10.4%
increase in sales of our Original Ginger Brew, a 10.8% increase in sales of
our
Extra Ginger Brew and a 9.8% increase in sales of our Premium Ginger Brew.
Our
Reed’s Cherry Ginger Brew, Raspberry Ginger Brew and Spiced Apple soda
collectively realized a 28.1% increase of sales.
Candy
sales increased by $69,000, or 43.1%, from $160,000 in the three months ended
September 30, 2006 to $229,000 in the three months ended September 30, 2007.
Ice
cream sales in the three months ended September 30, 2007 were $39,000, and
remained relatively constant from the same period in 2006, but represent less
than 1% of our total sales.
The
product mix for our two most significant product lines, Reed’s Ginger Brews and
Virgil’s sodas, for the three months ended September 30, 2007 was 45% and 46%,
respectively, of total sales. The product mix for our Reed’s Ginger Brews and
Virgil’s sodas for the three months ended September 30, 2006 was 54% and 35%,
respectively, of total sales.
Cost
of
sales increased by $944,453, or 44.2%, from $2,138,602 in the three months
ended
September 30, 2006 to $3,083,055 in the three months ended September 30, 2007.
As a percentage of net sales, cost of sales increased from 77.0% in the three
months ended September 30, 2006 to 79.4% in the three months ended September
30,
2007.
Gross
profit increased by $160,920, or 25.2%, from $637,353 in the three months ended
September 30, 2006 to $798,273 in the three months ended September 30, 2007.
As
a percentage of net sales, gross profit decreased from 23.0% in the three months
ended September 30, 2006 to 20.6% in the three months ended September 30, 2007.
Our product mix and reduced freight costs resulted in the improvement in
margins. However, in July 2007, some of the favorable results to gross margin
were partially offset by our main co-pack production facility’s increase in
prices. 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 first quarter of
2008.
Operating
expenses increased by $1,392,604, or 150.4%, from $926,119, in the three months
ended September 30, 2006 to $2,318,723 in the three months ended September
30,
2007. Operating expenses increased as a percentage of net sales from 33.4%
in
the three months ended September 30, 2006 to 59.7% in the three months ended
September 30, 2007. The increase was primarily due to an increase in selling
costs and general and administrative costs. Selling costs increased $1,199,864,
or 294.8%, from $407,074 for three months ended September 30, 2006 to $1,606,938
for the three months ended September 30, 2007. Our focus on increasing revenues
and diversifying our customer base from a high concentration of natural food
marketplace to more mainstream and mass-merchants has increased our selling
costs. Sales salaries and commissions for the three months ended September
30,
2007 was $911,000, compared to $238,000 for the three months ended September
30,
2006, or an increase of $673,000, or 282.7%. This increase resulted from
increases in salaries and benefits for new sales and sales support staff and
the
related non-recurring costs of their recruitment and non-cash costs of employee
stock options. Promotion expenses increased $292,000, or 297.9%, from $98,000
in
the three months ended September 30, 2006 to $390,000 for the three months
ended
September 30, 2007. The increase was mainly due to a tour to demonstrate and
sell our products with various Costco stores during the summer months in 2007
in
an effort to promote our brand and products to a wider audience of consumers.
Selling expenses increased to $306,000 in the three months ended September
30,
2007, or by $232,000, 315%, from $74,000 in the three months ended September
30,
2006. This increase was mainly due to increased travel related costs to
cultivate relationships with new and recently signed distributors and retailers
in support of the strategy to expand our brand and channels. General and
administrative costs increased $192,740, or 37.1%, from $519,045 in the three
months ended September 30, 2006 to $711,785 for the three months ended September
30, 2007. The increase was due to increased legal and accounting expenses
associated with being a public company and costs of additional support in the
form of personnel and computer systems to support the new sales and production
efforts. These increased costs also included non-cash costs of employee stock
options. The increase would have been higher but for the one-time charge in
2006
of $291,000 related to a rescission offer in connection with our recent initial
public offering.
Interest
expense decreased by $60,790, or 54.2%, from $112,197 in the three months ended
September 30, 2006 to $51,407 in the three months ended September 30, 2007.
Interest income increased from $0 in the three months ended September 30, 2006
to $45,898 in the three months ended September 30, 2007. The decrease in
interest expense was principally due to the reduction of certain outstanding
loans in the fourth quarter of 2006. The increase in interest income and other
income was due to interest earned from a higher cash balance in 2007 compared
to
the same period in 2006.
As
a
result of the foregoing, we experienced a net loss of $1,525,959 in the three
months ended September 30, 2007 compared to a net loss of $400,963 in the three
months ended September 30, 2006. Our net loss attributable to common
stockholders was $(0.18) per share for the three months ended September 30,
2007
and $(0.08) per share for the three months ended September 30, 2006.
Nine
months Ended September 30, 2007 Compared to nine months Ended September 30,
2006
Net
sales
increased by $2,453,333 or 31.0%, from $7,913,045 in the nine months ended
September 30, 2006 to $10,366,378 in the nine months ended September 30, 2007.
The increase in sales was primarily due to an increase in sales of our Virgil’s
product line of Root Beer and Cream Soda and our Reed’s Ginger Brew and Candy
product lines.
Sales
of
our Virgil’s product line increased by 66.1% from $2,710,000 to $4,499,000. We
realized a 62.4% increase in sales for Virgil’s Root Beer and a 72.9% increase
in our Virgil’s Cream Soda products. We released a line of our Virgil’s diet
sodas in 2007, resulting in approximately $220,000 of sales for the nine months
ending September 30, 2007. Virgil’s diet Root Beer soda comprised approximately
$77,000 of the sales of our diet Virgil’s products. Of the increase in Virgil’s
products, sales of five liter kegs represented an increase of approximately
$418,000, or 198.3%, from $211,000 in the nine months ended September 30, 2006
to $629,000 in the nine months ended September 30, 2007.
Sales
of
our Reed’s Ginger Brew product line increased by 12.1% from $4,301,000 in the
nine months ended September 30, 2006 to $4,820,000 in the nine months ended
September 30, 2007. We realized an increase in sales of our Reed’s Ginger Brew
and Spiced Apple products, including an increase of 7.4% increase in sales
of
our Original Ginger Brew, a 11.8% increase in sales of our Extra Ginger Brew
and
a 7.9% increase in sales of our Premium Ginger Brew. Our Reed’s Cherry Ginger
Brew, Raspberry Ginger Brew and Spiced Apple soda collectively realized a 24.0%
increase of sales.
Candy
sales increased by $100,000, or 17.8%, from $563,000 in the nine months ended
September 30, 2006 to $663,000 in the nine months ended September 30, 2007.
Ice
cream sales in the nine months ended September 30, 2007 were $105,000, and
remained relatively constant from the same period in 2006, but represent less
than 1% of our total sales.
The
product mix for our two most significant product lines, Reed’s Ginger Brews and
Virgil’s sodas, for the nine months ended September 30, 2007 was 46% and 43%,
respectively, of total sales. The product mix for our Reed’s Ginger Brews and
Virgil’s sodas for the three months ended September 30, 2006 was 54% and 34%,
respectively, of total sales.
Cost
of
sales increased by $1,930,712, or 30.1%, from $6,417,343 in the nine months
ended September 30, 2006 to $8,348,055 in the nine months ended September 30,
2007. As a percentage of net sales, cost of sales decreased from 81.1% in the
nine months ended September 30, 2006 to 80.5% in the nine months ended September
30, 2007.
Gross
profit increased by $522,621 or 34.9% from $1,495,702 in the nine months ended
September 30, 2006 to $2,018,323 in the nine months ended September 30, 2007.
As
a percentage of net sales, gross profit increased from 18.9% in the nine months
ended September 30, 2006 to 19.5% in the nine months ended September 30, 2007.
Our product mix and reduced freight costs resulted in the improvement in
margins. However, in July 2007, some of the favorable results to gross margin
were partially offset by our main co-pack production facility’s increase in
prices. 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 first quarter of
2008.
Operating
expenses increased by $2,117,535 or 83.3% from $2,542,948, in the nine months
ended September 30, 2006 to $4,660,483 in the nine months ended September 30,
2007. Operating expenses increased as a percentage of net sales from 32.1%
in
the nine months ended September 30, 2006 to 45.0% in the nine months ended
September 30, 2007. The increase was primarily due to an increase in selling
costs and general and administrative costs. Selling costs increased $2,041,514,
or 202.6% from $1,007,693 for the nine months ended September 30, 2006 to
$3,049,207 for the nine months ended September 30, 2007. Our focus on increasing
revenues and diversifying our customer base to more mainstream and mass
merchants has increased our selling costs. Sales salaries and commissions for
the nine months ended September 30, 2007 were $1,751,000 compared to $640,000
for the nine months ended September 30, 2006, or an increase of $1,111,000
or
173.6%. This increase resulted from an increase in salaries and benefits for
new
sales and sales support staff and the non-recurring costs of their recruitment
and non-cash costs of their employee stock options granted. Promotion expenses
increased $552,000, or 303.3%, from $182,000 in the nine months ended September
30, 2006 to $734,000 for the nine months ended September 30, 2007. The increase
was mainly due to a tour to demonstrate and sell our products with various
Costco stores during the summer months in 2007 in an effort to promote our
brand
and products to a wider audience of consumers. Selling expenses increased to
$480,000 in the nine months ended September 30, 2007 or by $292,000 or 155.3%
from $188,000 in the nine months ended September 30, 2006. This increase was
mainly due to increased travel related costs to cultivate relationships with
new
and recently signed distributors and retailers in support of the strategy to
expand our brand and channels. General and administrative costs increased
$76,021, or 5.0%, from $1,535,255 in the nine months ended September 30, 2006
to
$1,611,276 for the nine months ended September 30, 2007. The increase was due
to
increased professional fees such as legal and accounting expenses associated
with being a public company, additional support in the form of personnel and
computer systems to support the new sales and production efforts. These costs
also included the non-cash cost of employee stock options. The increase would
have been higher but for the one-time charge in 2006 of $660,000 related to
a
rescission offer in connection with our recent initial public
offering.
Interest
expense decreased by $147,261, or 47.4%, from $310,551 in the nine months ended
September 30, 2006 to $163,290 in the nine months ended September 30, 2007.
Interest income increased from $0 in the nine months ended September 30, 2006
to
$98,498 in the nine months ended September 30, 2007. The decrease in interest
expense was due principally due to the reduction of certain outstanding loans
in
the fourth quarter of 2006. The increase in interest income and other income
was
due to interest earned from a higher cash balance in 2007 compared to the same
period in 2006.
As
a
result of the foregoing, we experienced a net loss of $2,706,952 in the nine
months ended September 30, 2007 compared to a net loss of $1,357,797 in the
nine
months ended September 30, 2006. Our net loss attributable to common
stockholders was $(0.35) per share for the nine months ended September 30,
2007
and $(0.26) per share for the nine months ended September 30, 2006, inclusive
of
the value of our preferred stock dividend.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through private sales of common stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations. On December 12, 2006, we
completed the sale of 2,000,000 shares of our common stock at an offering price
of $4.00 per share in our initial public offering. The public offering resulted
in gross proceeds of $8,000,000 to us. In connection with the public offering,
we paid aggregate commissions, concessions and non-accountable expenses to
the
underwriters of $800,000, resulting in net proceeds of $7,200,000, excluding
other expenses of the public offering. In addition, we issued, to the
underwriters, warrants to purchase up to approximately an additional 200,000
shares of common stock at an exercise price of $6.60 per share (165% of the
public offering price per share), at a purchase price of $0.001 per warrant.
The
underwriters’ warrants are exercisable for a period of five years commencing on
the final closing date of the public offering. From August 3, 2005 through
April
7, 2006, we had issued 333,156 shares of our common stock in connection with
the
public offering. We sold the balance of the 2,000,000 shares in connection
with
the public offering (1,666,844 shares) following October 11, 2006.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares at
a
purchase price of $6.00 per share. The warrants issued in the private placement
have a five-year term and an exercise price of $7.50 per share. We paid cash
commissions of $900,000 to the placement agent for the private placement and
issued warrants to the placement agent to purchase up to 150,000 shares of
common stock with an exercise price of $6.60 per share. We also issued
additional warrants to purchase up to 15,000 shares of common stock with an
exercise price of $6.60 per share and paid an additional $60,000 in cash to
the
placement agent as an investment banking fee. Total proceeds received, net
of
underwriting commissions and the investment banking fee and excluding other
expenses of the private placement, was $8,040,000.
As
of
September 30, 2007, we had an accumulated deficit of $8,236,864 and we had
working capital of $5,601,953, 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 $2,399,060 as of September 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 $751,000.
Net
cash
used in operating activities during the nine months ended September 30, 2007
was
$4,237,905 which was due primarily to our net loss of $2,706,952, net increases
in our accounts receivable, inventory and other receivables, net of a decrease
in accounts payable.
In
the
nine months ended September 30, 2007, we used $1,265,709 of cash in investing
activities, which was due primarily to the purchase of a building and various
equipment to support business growth, net of the release of restricted cash
used
as collateral for a line of credit that we paid in full and an unsecured loan
of
$300,000 to an unrelated third party.
Net
cash
provided by financing activities during the nine months ended September 30,
2007
was $6,299,757. The primary components of that were: the proceeds of our
private placement of $9,000,000 and proceeds from the exercise of common
stock purchase warrants of $165,000, which were partially offset by related
expenses directly associated with the private placement, and payments of our
lines of credit.
As
of
September 30, 2007, we had no outstanding borrowings under our lines of credit
agreements:
|
·
|
We
have an unsecured $50,000 line of credit with US Bank which expires
in
December 2009. Interest is payable monthly at the prime rate, as
published
in the Wall Street Journal, plus 12% per annum. Our outstanding balance
was $-0- at September 30, 2007 and there was $50,000 available under
the
line of credit. The interest rate in effect at September 30, 2007
was
20.25%.
|
|
·
|
We
have a line of credit with Merrill Lynch. Robert T. Reed, Jr., our
Vice
President and National Sales Manager - Mainstream and a brother of
our
Chief Executive Officer, Christopher J. Reed, has pledged certain
securities (which do not include any of our securities which are
owned by
Mr. Reed) in his personal securities account on deposit with Merrill
Lynch
as collateral for repayment of the line of credit. The amount of
the line
of credit is based on a percentage value of such securities. At September
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
(9.06% as of September 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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In
the
nine months ended September 30, 2007, we expended approximately $195,000 for
a
conveyor system and pasteurizer to improve our packaging line and operations,
but do not consider these improvements 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 use the facility to store
some
of our finished goods inventory. No major renovations were needed to be made
to
the property in order for us to attain the intended use of the
property.
Management
recognizes that operating losses negatively impact liquidity and is working
on
decreasing operating losses, while focusing on increasing net sales. Management
believes that our current cash position and lines of credit will be sufficient
to enable us to meet our cash needs through at least the 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. The adoption of this SFAS has not had a material change on our
results of operations, financial position, or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB No.
115”. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement is effective
for years beginning after November 15, 2007. Management believes the adoption
will not have a material impact on our results of operations, financial position
or cash flow.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
Item
3.
Controls and Procedures
(a)
Evaluation of Disclosure Controls and Procedures.
As
of
September 30, 2007, we carried out an evaluation, under the supervision and
with
the participation of our principal executive officer and principal financial
officer, of the effectiveness of the design and effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under
the
Securities Exchange Act of 1934, as amended).
Based
on our evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures are designed at a
reasonable assurance level and are effective to provide reasonable assurance
that information we are required to disclose in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate, to allow timely decisions regarding required
disclosure.
(b)
Changes in Internal Controls.
There
were no changes in our internal controls over financial reporting during the
quarter ended September 30, 2007 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
Part
II OTHER INFORMATION
Item
1.
Legal Proceedings
Reference
is made to Item 3, part I, Legal
Proceedings,
in our
Annual Report on Form 10-KSB for the year ended December 31, 2006 for
descriptions of our legal proceedings.
Except
as
set forth in such disclosure, we believe that there are no material litigation
matters at the current time. Although the results of such litigation matters
and
claims cannot be predicted with certainty, we believe that the final outcome
of
such claims and proceedings will not have a material adverse impact on our
financial position, liquidity, or results of operations.
Item
2.
Unregistered Sales of Equity Securities and Use of Proceeds
Recent
Sale of Unregistered Equity Securities
In
August
2007, we issued 20,000 shares of common stock upon the exercise of outstanding
warrants at an exercise price of $3.00, resulting in gross proceeds to us of
$60,000. In September 2007, 4,619 shares of Series A preferred stock were
converted into 25,676 shares of common stock. In October 2007, 500 shares of
Series A preferred stock were converted into 2,000 shares of common stock.
In
October 2007, we issued 1,000 shares to a consultant for services rendered
valued
at
$73,000.
In
the
three months ended September 30, 2007, we issued 285,000 options to purchase
shares of common stock to our 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 175,000 options outside of the 2001 Stock Option Plan with an
exercise price of $8.50 per share. In October 2007, we issued 50,000 options
to
purchase shares of common stock to an employee with an exercise price of $7.30
per share outside of the 2001 Stock Option Plan.
The
securities were issued in reliance on exemptions from registration pursuant
to
Section 4(2) and Regulation D under the Securities Act.
Item
3.
Defaults Upon Senior Securities
Not
applicable
Item
4.
Submission of Matters to a Vote of Security Holders
Not
applicable
Item
5.
Other Information
Not
applicable
Item
6.
Exhibits
Exhibit
Number
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Description
of Document
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Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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31.2
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Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
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32
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Officer's
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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SIGNATURES
In
accordance with requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned thereunto duly
authorized.
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REEDS,
INC.
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By
/s/
Christopher J. Reed |
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Christopher
J. Reed
Chief
Executive Officer and President
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November
13, 2007
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By
/s/ David M. Kane |
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David
M. Kane
Chief
Financial Officer
November
13, 2007
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