SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-KSB
(Mark
One)
x
|
Annual
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the fiscal year ended December 31, 2007.
OR
o
|
Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934
|
For
the transition period from __________ to _________
Commission
File Number 000-32501
REED’S,
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
35-2177773
|
State
or other jurisdiction of incorporation or organization
|
|
I.R.S.
Employer Identification Number
|
|
|
|
13000
South Spring Street
|
|
|
Los
Angeles, California
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90061
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Address
of principal executive offices
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Zip
Code
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(310)
217-9400
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act: Common
Stock, par value $0.0001
Securities
registered pursuant to Section 12(g) of the Act: None
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes
x
No o
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No
x
The
issuer's revenues for the fiscal year ended December 31, 2007 were
$13,058,813.
The
aggregate market value of the voting common stock held by non-affiliates of
the
issuer as of April 10, 2008 was approximately $12,586,773 (computed based on
the
closing sale price of the common stock at $2.93 per share as of such date).
Shares of common stock held by each officer and director and each person owning
more than 10% of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of the affiliate
status is not necessarily a conclusive determination for other
purposes.
The
number of shares of Common Stock of the registrant outstanding as of April
10,
2008 was 8,907,700 shares.
Transitional
Small Business Disclosure Format (Check One): Yes o
No
x
TABLE
OF CONTENTS
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PAGE
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PART
I
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4
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Item
1. Description of Business
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23
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Item
2. Description of Property
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24
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Item
3. Legal Proceedings
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24
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Item
4. Submission of Matters to a Vote of Security Holders
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24
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PART
II
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24
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Item
5. Market for Common Equity and Related Stockholder
Matters
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24
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Item
6. Management’s Discussion and Analysis or Plan of
Operation
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26
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Item
7. Financial Statements
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36
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Item
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
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37
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Item
8A. Controls and Procedures
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37
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Item
8B. Other Information
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40
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PART
III
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41
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Item
9. Directors, Executive Officers, Promoters, Control Persons and
Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
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41
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Item
10. Executive Compensation
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46
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Item
11. Security Ownership of Certain Beneficial Owners, Management and
Related Stockholder Matters
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50
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Item
12. Certain Relationships and Related Transactions, and Director
Independence
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51
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Item
13. Exhibits
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53
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Item14.
Principal Accounting Fees and Services
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54
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND
INFORMATION
This
Annual Report on Form 10-KSB, the other reports, statements, and information
that we have previously filed or that we may subsequently file with the
Securities and Exchange Commission (“SEC”) and public announcements that we have
previously made or may subsequently make include, may include, incorporate
by
reference or may incorporate by reference certain statements that may be deemed
to be “forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995 and are intended to enjoy the benefits of that
act. The forward-looking statements included or incorporated by reference in
this Annual Report and those reports, statements, information and announcements
address activities, events or developments that Reed’s, Inc. (together with its
subsidiaries hereinafter referred to as “we,” “us,” “our” or “Reed’s”) expects
or anticipates will or may occur in the future. Any statements in this document
about expectations, beliefs, plans, objectives, assumptions or future events
or
performance are not historical facts and are forward-looking statements. These
statements are often, but not always, made through the use of words or phrases
such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will
likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,”
“intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions.
Accordingly, these statements involve estimates, assumptions and uncertainties,
which could cause actual results to differ materially from those expressed
in
them. Any forward-looking statements are qualified in their entirety by
reference to the factors discussed throughout this document. All forward-looking
statements concerning economic conditions, rates of growth, rates of income
or
values as may be included in this document are based on information available
to
us on the dates noted, and we assume no obligation to update any such
forward-looking statements.
The
risk
factors referred to in this Annual Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements
made
by us, and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which
it
is made and we do not undertake any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us
to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, involve a number of risks,
uncertainties and other factors that could cause actual results and events
to
differ materially from the statements made, including, but not limited to,
the
following, and other factors discussed elsewhere in this Annual Report,
including under the section entitled “Risk Factors:”
|
·
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Our
ability to generate sufficient cash flow to support capital expansion
plans and general operating
activities,
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·
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Decreased
demand for our products resulting from changes in consumer
preferences,
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·
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Competitive
products and pricing pressures and our ability to gain or maintain
its
share of sales in the marketplace,
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·
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The
introduction of new products,
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·
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Our
being subject to a broad range of evolving federal, state and local
laws
and regulations including those regarding the labeling and safety
of food
products, establishing ingredient designations and standards of identity
for certain foods, environmental protections, as well as worker health
and
safety. Changes in these laws and regulations could have a material
effect
on the way in which we produce and market our products and could
result in
increased costs,
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·
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Changes
in the cost and availability of raw materials and the ability to
maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of our
products,
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|
·
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Our
ability to penetrate new markets and maintain or expand existing
markets,
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·
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Maintaining
existing relationships and expanding the distributor network of our
products,
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·
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The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
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·
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Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of our products
that
they are carrying at any time,
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·
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The
availability and cost of capital to finance our working capital needs
and
growth plans,
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·
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The
effectiveness of our advertising, marketing and promotional
programs,
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·
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Changes
in product category consumption,
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·
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Economic
and political changes,
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·
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Consumer
acceptance of new products, including taste test
comparisons,
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·
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Possible
recalls of our products, and
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·
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Our
ability to make suitable arrangements for the co-packing of any of
our
products.
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Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
PART
I
Item
1. Description of Business
Background
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell five unique
product lines:
|
·
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Virgil’s
Root Beer and Cream Sodas,
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|
·
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Reed’s
Ginger Candies, and
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|
·
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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 (estimated
at
4,000 smaller or specialty stores and 3,000 supermarket format stores),
supermarket chains (estimated at 7,500 stores), retail stores and restaurants
in
the United States and, to a lesser degree, in Canada, Europe and other
international territories. 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, but have plans to direct these sales
to
distributors.
We
produce and co-pack our products in part at our company-owned facility in Los
Angeles, California, known as the Brewery, and primarily 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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Increase
our relationship with and sales to the 10,500 supermarkets that carry
our
products in natural and mainstream,
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·
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stimulate
consumer demand and awareness for our existing brands and
products,
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·
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develop
additional unique alternative and natural beverage brands and other
products, including
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·
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specialty
packaging like our 5-liter party kegs, our swing-lid bottle and our
750 ml
champagne bottle,
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·
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lower
our cost of sales for our products,
and
|
·
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optimize
the size of our sales force to manage our relationships with
distributors.
|
Our
current sales effort is focused for the next 12-18 months on building our
business in the 10,500 natural and mainstream supermarket accounts in the US
and
Canada.
In
addition, since 2003, we have introduced into the marketplace new products
and
offer specialty beverage packaging options not typically available in 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 recently
introduced three new diet flavors of Virgil’s Root Beer, Virgil’s Cream Soda and
Virgil’s Black Cherry Cream Soda and a new 7 ounce version of our Reed’s Extra
Ginger Brew for mini-bars and on-premise accounts. These new products and
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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·
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generating
free press through public
relations,
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·
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advertising
in national magazines targeting our
customers,
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·
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maintaining
a company website
(www.reedsgingerbrew.com),
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·
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participating
in large public events as sponsors;
and
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·
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partnering
with alcohol brands such as Dewars and Barcardi to create co-branded
cocktail recipes such as “Dewars and Reeds” and a “Reed’s Dark and
Stormy.”
|
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our Internet
address is (www.reedsgingerbrew.com). Information contained on our website
or
that is accessible through our website should not be considered to be part
of
this Annual Report.
Historical
Development
In
June
1987, Christopher J. Reed, our founder and Chief Executive Officer, began
development of Reed’s Original Ginger Brew, his first beverage creation. After
two years of development, the product was introduced to the market in Southern
California stores in 1989. By 1990, we began marketing our products through
natural food distributors and moved our production to a larger facility in
Boulder, Colorado.
In
1991,
we incorporated our business operations in the state of Florida under the name
of Original Beverage Corporation and moved all of our production to a co-pack
facility in Pennsylvania. We began exhibiting at national natural and specialty
food trade shows, which brought national distribution in natural, gourmet and
specialty foods and the signing of our first mainstream supermarket distributor.
Our products began to receive trade industry recognition as an outstanding
new
product. The United States National Association of the Specialty Food Trade,
or
NASFT, named Original Ginger Brew as an “Outstanding Beverage Finalist” in the
United States, and the Canadian Fancy Food Association, or CFFA, awarded us
“Best Imported Food Product.”
Throughout
the 1990’s, we continued to develop and launch new Ginger Brew varieties. Reed’s
Ginger Brews reached broad placement in natural and gourmet foods stores
nationwide through major specialty, natural/gourmet and mainstream food and
beverage distributors.
In
1997,
we began licensing the products of China Cola and eventually acquired the rights
to that product in December 2000. In addition, we launched Reed’s Crystallized
Ginger Candy, a product which we manufacture in Fiji under a proprietary,
natural, non-sulfured process. In 1999, we purchased the Virgil’s Root Beer
brand from the Crowley Beverage Company. The brand has won numerous gourmet
awards. In 2000, we began to market three new products: Reed’s Original Ginger
Ice Cream, Reed’s Cherry Ginger Brew and a beautiful designer 10-ounce gift tin
of our Reed’s Crystallized Ginger Candy. In December 2000, we purchased an
18,000 square foot warehouse property, the Brewery, in Los Angeles, California,
to house our west coast production and warehouse facility. The Brewery now
also
serves as our principal executive offices. In 2001, we changed our state of
incorporation to Delaware and also changed our name to Reed’s, Inc. We also
introduced our Reed’s Chocolate Ginger Ice Cream and Reed’s Green Tea Ginger Ice
Cream products and expanded our confectionary line with two new candy products:
Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger Candy Chews. In 2002,
we launched our Reed’s Ginger Juice Brew line, with four flavors of organic
juice blends. In November 2002, we completed our first test runs of Reed’s and
Virgil’s products at the Brewery and in January 2003, our first commercially
available products came off the Los Angeles line. In 2003, we commenced our
own
direct distribution in Southern California and introduced sales of our 5-liter
Virgil’s party keg. In 2004, we expanded our product line to include Virgil’s
Cream Soda (including in a 5-liter keg), Reed’s Spiced Apple Brew in a
750 ml. champagne bottle and draught Virgil’s Root Beer and Cream Soda. In
2006, we expanded our product line to include Virgil’s Black Cherry Cream Soda.
Progressive Grocers, a top trade publication in the grocery industry voted
this
product as the best new beverage product of 2006. On December 12, 2006, we
completed the sale of 2,000,000 shares of our common stock at an offering price
of $4.00 per share in our initial public offering. The public offering resulted
in gross proceeds of $8,000,000 to us.
In
2007,
we executed several elements of our business plan, including the hiring of
several key personnel such as a Chief Operating Officer, a Chief Financial
Officer, two Senior Vice Presidents of Sales, an Executive Vice President of
Sales and several sales personnel. In addition, we developed and launched a
line
of diet sodas of the three flavors of the Virgil’s brand and introduced a new 7
ounce package of our Extra Ginger Brew. We acquired a warehouse immediately
adjacent to our principal executive office and brewery in Los Angeles that
serves as our finished goods warehouse. We executed several agreements with
distributors that service mainstream retailers that expand our product reach
beyond our core reach of natural and specialty retailers through direct store
distribution (“DSD”). The relationships with these distributors are supported,
in large part, by one of our Senior Vice Presidents of Sales and newly hired
sales staff. We hired a Senior Vice President of Sales to develop sales into
national accounts, such as grocery store chains, club stores and other large
retailers that can be serviced either directly or through our existing natural
foods distributors or mainstream distributors. We also hired an Executive Vice
President of Sales and reassigned an existing sales executive to co-lead our
initiative to introduce our products to international customers in Europe,
Asia,
the Middle East and South America. Also in 2007, we raised a net of $7,600,000
in a private placement.
In
2008,
we announced and developed a refined sales strategy that focuses our sales
efforts on the estimated 10,500 natural and mainstream supermarket grocery
stores that carry our products. Our 2007 sales strategy had focused on a more
global effort to hit all the accounts in certain regions of the country. As
part
of our sales forces’ new direction, we consolidated roles and reduced the sales
staff by 16 people from 33 at the end of 2007 to 17 at the end of the first
quarter 2008. In 2008, we also plan to expand our draft strategy by launching
Virgil’s Root Beer to sell in bars and accounts that offer draft beer. We also
launched the peanut butter ginger chews, the second candy in the Reed’s Ginger
Chew line.
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 2007, total wholesale
dollar sales in the New Age segment were approximately $25.5 billion in
wholesale dollar sales, an increase of 11.4% over the estimated wholesale sales
in 2006 of approximately $22.9 billion.
Annual
confectionary sales (including chocolate, non-chocolate and gum sales) in the
United States were approximately $29.1 billion in 2007, of which approximately
$9.4 billion was non-chocolate candy.
According
to the International Dairy Foods Association (IDFA), total U.S. sales of ice
cream and frozen desserts were estimated at approximately $23 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.
Our
Products
We
currently manufacture and sell 14 beverages, three candies and three ice creams.
We make all of our products using premium all-natural ingredients.
We
produce carbonated soda products. According to Spence Information Services
(SPINS), which is the only sales information service catering to the natural
food trade, for the year 2007, Reed’s products were the top four items based on
dollar and unit sales among all sugar/fructose sweetened sodas in the natural
foods industry in the United States, with Reed’s Extra Ginger Brew holding the
number one position, Virgil’s Root Beer being number two, Premium Ginger Brew
being number three and Original Ginger Brew as number four.
Our
carbonated products include six varieties of Reed’s Ginger Brews, Virgil’s Root
Beer and Cream Sodas, China Cola and Cherry China Cola.
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 Drug Administration (FDA) includes ginger on their GRAS (generally
recognized as safe) list. However, neither the FDA nor any other government
agency officially endorses or recommends the use of ginger as a dietary
supplement.
We
currently manufacture and sell six varieties of Reed’s Ginger
Brews:
·
|
Reed’s
Original Ginger Brew
was our first creation, and is a Jamaican recipe for homemade ginger
ale
using 17 grams of fresh ginger root, lemon, lime, honey, fructose,
pineapple, herbs and spices. Reed’s Original Ginger Brew is 20% fruit
juice.
|
·
|
Reed’s
Extra Ginger Brew
is
the same approximate recipe, with 26 grams of fresh ginger root for
a
stronger bite. Reed’s Extra Ginger Brew is 20% fruit
juice.
|
·
|
Reed’s
Premium Ginger Brew
is
the no-fructose version of Reed’s Original Ginger Brew, and is sweetened
only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20%
fruit juice.
|
·
|
Reed’s
Raspberry Ginger Brew
is
brewed from 17 grams of fresh ginger root, raspberry juice and lime.
Reed’s Raspberry Ginger Brew is 20% raspberry juice and is sweetened with
fruit juice and fructose.
|
·
|
Reed’s
Spiced Apple Brew
uses 8 grams of fresh ginger root, the finest tart German apple juice
and
such apple pie spices as cinnamon, cloves and allspice. Reed’s Spiced
Apple Brew is 50% apple juice and sweetened with fruit juice and
fructose.
|
·
|
Reed’s
Cherry Ginger Brew
is
the newest addition to our Ginger Brew family, and is naturally brewed
from: filtered water, fructose, fresh ginger root, cherry juice from
concentrate and spices. Reed’s Cherry Ginger Brew is 22% cherry
juice.
|
All
six
of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores as
singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold by select retailers in a special 12-pack. Reed’s Spiced Apple Brew is now
available in a 750 ml. champagne bottle. The Reed’s Extra Ginger Brew is
produced in a 7-ounce bottle and sold in eight-packs and 32-bottle cases.
Virgil’s
Root Beer
Over
the
years, Virgil’s Root Beer has won numerous awards and has a reputation among
many as one of the best root beers made anywhere. Virgil’s Root Beer won the
“Outstanding Beverage” award at the NASFT’s International Fancy Food and
Confection Show in 1997.
Virgil’s
is a premium root beer. We use all-natural ingredients, including filtered
water, unbleached cane sugar, anise from Spain, licorice from France, bourbon
vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia,
wintergreen from China, sweet birch and molasses from the southern United
States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from
Peru and cassia oil from China.
We
collect these ingredients worldwide and gather them together at the brewing
and
bottling facilities we use in the United States and Germany. We combine and
brew
these ingredients under strict specifications and finally heat-pasteurize
Virgil’s Root Beer, to ensure quality.
We
sell
Virgil’s Root Beer in four packaging styles: 12-ounce bottles in a four-pack, a
special swing-lid style pint bottle and a 5-liter self-tapping party
keg.
Virgil’s
Cream Soda
We
launched Virgil’s Cream Soda in January 2004. We make this product with the same
attention to quality that makes Virgil’s Root Beer so popular. Virgil’s
Cream Soda is a gourmet cream soda. We brew Virgil’s Cream Soda the same way we
brew Virgil’s Root Beer. We use all-natural ingredients, including filtered
water, unbleached cane sugar and bourbon vanilla from Madagascar.
Virgil’s
Cream Soda is currently sold in 12-ounce long neck bottles in colorful 4-packs
and a 5-liter party keg version.
In
2006,
we expanded our product line to include Virgil’s Black Cherry Cream Soda in a
12-ounce bottle.
In
2007,
we further expanded our Virgil’s product line to include diet Root Beer, diet
Black Cherry Cream Soda and diet Cream Soda. Our diet sodas are sweetened with
Stevia and Xylitol.
China
Cola
We
consider China Cola to be the 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 and 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
2007, we discontinued offering Ginger Juice Brews.
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 hard-packs of ten candies and as individually wrapped loose pieces in bulk.
The candies come in two flavors, Reed’s Ginger Chews and Reed’s Peanut Butter
Ginger Chews. 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. In addition, the peanut butter version
includes peanut butter.
Reed’s
Ginger Ice Creams
We
make
Reed’s Ginger Ice Creams with 100% natural ingredients, using the finest
hormone-free cream and milk. We combine fresh milk and cream with the finest
natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane
sugar to make a delicious ginger ice cream with a super premium, ultra-creamy
texture and Reed’s signature spicy-sweet bite. Our ice creams are made for us,
according to our own recipes, at a dairy in upstate New York.
We
sell
three Reed’s Ginger Ice Cream products:
·
|
Reed’s
Original Ginger Ice Cream
made from milk, cream, raw cane sugar, Reed’s Crystallized Ginger Candy
(finest ginger root, raw cane sugar), ginger puree, and guar gum
(a
natural vegetable gum),
|
·
|
Chocolate
Ginger Ice Cream
made from milk, cream, raw cane sugar, finest Belgian cocoa (used
to make
Belgian chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger
root, raw cane sugar), chocolate shavings (sugar, unsweetened chocolate,
Belgian cocoa, soy lecithin and real vanilla), ginger puree, and
guar gum
(a natural vegetable gum) creating the ultimate chocolate ginger
ice
cream, and
|
·
|
Reed’s
Green Tea Ginger Ice Cream
made from milk, cream, the finest green tea, raw cane sugar, ginger
puree,
Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar),
and guar gum (a natural vegetable gum) creating the ultimate green
tea
ginger ice cream.
|
We
sell
Reed’s Ginger Ice Creams in pint containers and cases of eight pints.
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 Ice Cream, and Reed’s Ginger Candy
product lines and packaging styles. However, research and development expenses
in the last two years have been nominal. We intend to expend some, but not
a
significant amount, of funds on research and development for new products and
packaging. We intend to introduce new products and packaging as we deem
appropriate from time to time for our business plan.
Among
the
advantages of our owned and self-operated Brewery are the flexibility to try
innovative packaging and the capability to experiment with new product flavors
at less cost to our operations or capital. Currently, we sell a half-liter
Virgil’s Root Beer swing-lid bottle that is made for us in Europe. We intend to
produce several of our beverages in one-liter swing-lid bottles in the United
States. Our Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew
are available in a 750 ml champagne bottle and other products are planned to
be
available with this packaging in the near future.
Manufacture
of Our Products
We
produce our carbonated beverages at two facilities:
·
|
a
facility that we own in Los Angeles, California, known as The Brewery,
at
which we produce certain soda products for the western half of the
United
States, and
|
·
|
a
packing, or co-pack, facility in Pennsylvania, known as the Lion
Brewery,
with which they supply us with product we do not produce at The Brewery.
The term of our agreement with Lion Brewery renews automatically
for a
successive two-year term on May 31, 2007, expiring on May 31, 2009
and
renews automatically for another successive two year term unless
terminated by either party. The Lion Brewery assembles our products
and
charges us a fee, generally by the case, for the products they
produce.
|
Our
west
coast Brewery facility is running at 41%
of
capacity. We have had difficulties with the flavor of our Ginger Brew products
produced at the Brewery. As a result, we continue to supply our Ginger Brew
products at the Brewery from our east coast co-packing facility, thereby causing
us to incur increased freight and warehousing expenses on our products.
Management is committed to selling a high quality, great tasting product and
has
elected to continue to sell certain of our Ginger Brew products produced from
our east coast facility on the west coast, even though it negatively impacts
our
gross margins. As we are able to make the Brewery become more fully utilized,
we
believe that we will experience improvements in gross margins due to freight
and
production savings.
Our
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 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 and packed to our specifications in
Indonesia.
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.
In
July
2007, the FDA issued a statement that warned that fresh ginger from a specific
importer was contaminated with a banned pesticide. We import ginger from China,
but from a different importer than was named by the FDA. Our importer requires
a
pre-shipment lab test in order to perform chemical analysis. In addition to
the
pre-shipment chemical analysis, our importer has indicated to us that they
verify that every container of ginger shipped has passed the Chinese
Photosanitary inspection. Upon arrival at the Port of Long Beach, California,
the ginger we import undergoes a food safety inspection by the USDA’s
Agricultural Quality Inspection Unit. We believe the ginger we use is certified
clean and good for human consumption.
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 and Europe.
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 Oats and
Trader Joe’s. 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 to 57 direct store distributors (“DSD”) who specialize in
mainstream retailers, 55 distributors that specialize in Natural Foods and
specialty stores, 40 distribution centers of customers who handle their own
logistics, and 1,030 direct accounts locations (with our southern Californian
fleet of trucks).
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,
Cost Plus World Markets 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.
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. We are currently
analyzing our international sales and marketing plan, which is lead by our
Vice
President and National Sales Manager - Mainstream, Robert T. Reed, Jr. and
our
Executive Vice President - Sales, Mark Reed, the brothers of our Chief Executive
Officer and Chairman, Christopher J. Reed. Our analysis will explore options
that may include outsourcing the international sales effort to third or related
parties, which may or may not include Robert T. Reed, Jr. and Mark
Reed.
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. 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 Asia, Europe
and South America. We believe that these areas are a natural fit for Reed’s
ginger products, because of the importance of ginger in International, but
especially the 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
and
are in the process of discontinuing our direct distribution and redirecting
our
customers to local distributors.
One
of
the main goals of our sales and marketing efforts is to increase sales and
grow
our brands. Our sales force consists of seventeen sales personnel (down from
33
at its peak in 2007) and several outside independent food brokerage companies.
The reduction of our sales force from 2007 was instigated by the refocusing
of
our sales efforts from 2007’s global effort to market to all accounts up and
down the street in 20 markets nationally to 2008’s refocus of expanding the
sales to our existing 10,500 supermarket customers. In addition, we are working
to increase the number of stores that carry our products. To support our sales
effort to our existing supermarket customers we are actively enlisting regional
mainstream beverage distributors to carry our products. We are not abandoning
our up and down the street sales marketing approach. But in most markets, we
are
delaying that effort until after we have expanded our sales and presence in
supermarkets.
We
have
entered into agreements with our customers that commit us to fees if we
terminate the agreements early or without cause. The agreements call for our
customer to have the right to distribute our products to a defined type of
retailer within a defined geographic region. As is customary in the beverage
industry, if we should terminate the agreement or not automatically renew the
agreement, we would be obligated to make certain payments to our customers.
We
have no plans to terminate or not renew any agreement with any of our
customers.
Our
sales
force markets existing products, run promotions and introduces 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
Our
main
focus in 2008 is supermarket sales. We have a small highly trained sales force
that is directly contacting supermarket chains and setting up promotional
calendars for 2008. This is a new effort for us. In the past, the supermarkets
have had little or no direct contact with us. In addition, 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, but required us to carry the full
cost of logistics. We are currently making arrangements to transfer the Southern
California DSD effort to local third-party DSD distributors.
Southern
California sales represented approximately $1,580,000 and $1,040,000 in 2007
and
2006, 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. We are discontinuing this organization
and
moving the servicing of these accounts to a local beer distribution network.
We
found running our own trucks to be expensive and time consuming and we want
to
focus more on our core competency sales and marketing.
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
Draft 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 or in-store deli counters in Southern California. Currently, we
are
serving Virgil’s Root Beer and Virgil’s Cream Soda on draught. In addition, all
of our other carbonated drinks are available in draught format.
Proprietary
Coolers.
The
placement of in-store branded refrigerated coolers by our competitors has proven
to have a significant positive effect on their sales. We are currently testing
our own Reed’s branded coolers in a number of locations.
Competition
The
beverage industry is highly competitive. The principal areas of competition
are
pricing, packaging, development of new products and flavors and marketing
campaigns. Our products compete with a wide range of drinks produced by a
relatively large number of manufacturers. Most of these brands have enjoyed
broad, well-established national recognition for years, through well-funded
ad
and other branding campaigns. In addition, the companies manufacturing these
products generally have greater financial, marketing and distribution resources
than we do.
Important
factors affecting our ability to compete successfully include taste and flavor
of products, trade and consumer promotions, rapid and effective development
of
new, unique cutting edge products, attractive and different packaging, branded
product advertising and pricing. We also compete for distributors who will
concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the New Age beverage categories could cause
our products to be unable to gain or to lose market share or we could experience
price erosion.
We
believe that our innovative beverage recipes and packaging and use of premium
ingredients and a trade secret brewing process provide us with a competitive
advantage and that our commitments to the highest quality standards and brand
innovation are keys to our success.
Our
premium New Age beverage products compete generally with all liquid refreshments
and in particular with numerous other New Age beverages, including: SoBe,
Snapple, Mistic, IBC, Stewart’s, Henry Weinhard, Arizona, Hansen’s, Knudsen
& Sons and Jones Sodas.
Our
Virgil’s and China Cola lines compete with a number of other natural soda
companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and
Natural Brews.
We
also
generally compete with other traditional soft drink manufacturers and
distributors, such as Coke, Pepsi and Cadbury Schweppes.
Reed’s
Crystallized Ginger Candy competes primarily with other candies and snacks
in
general and, in particular, with other ginger candies. The main competitors
in
ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and
Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one
among these brands that is sulfur-free.
Reed’s
Ginger Ice Creams compete primarily with other premium and super-premium ice
cream brands. Our principal competitors in the ice cream business are
Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of
smaller natural food ice cream companies.
Proprietary
Rights
We
own
trademarks that we consider material to our business, including Reed’s, Virgil’s
and China Cola. Three of our material trademarks are registered trademarks
in
the U.S. Patent and Trademark Office: Virgil’s®, Reed’s® and China Cola®.
Registrations for trademarks in the United States will last indefinitely as
long
as we continue to use and police the trademarks and renew filings with the
applicable governmental offices. We have not been challenged in our right to
use
any of our material trademarks in the United States. We intend to obtain
international registration of certain trademarks in foreign jurisdictions,
as we
see fit.
In
addition, we consider our finished product and concentrate formulae, which
are
not the subject of any patents, to be trade secrets. Our brewing process is
a
trade secret. This process can be used to brew flavors of beverages other than
ginger ale and ginger beer, such as root beer, cream soda, cola, and other
spice
and fruit beverages. We have not sought any patents on our brewing processes
because we would be required to disclose our brewing process in patent
applications.
We
generally use non-disclosure agreements with employees and distributors to
protect our proprietary rights.
Government
Regulation
The
production, distribution and sale in the United States of many of our products
is subject to the Federal Food, Drug and Cosmetic Act, the Dietary Supplement
Health and Education Act of 1994, the Occupational Safety and Health Act,
various environmental statutes and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. California
law
requires that a specific warning appear on any product that contains a component
listed by the State as having been found to cause cancer or birth defects.
The
law exposes all food and beverage producers to the possibility of having to
provide warnings on their products because the law recognizes no generally
applicable quantitative thresholds below which a warning is not required.
Consequently, even trace amounts of listed components can expose affected
products to the prospect of warning labels. Products containing listed
substances that occur naturally in the product or that are contributed to the
product solely by a municipal water supply are generally exempt from the warning
requirement. While none of our beverage products are required to display
warnings under this law, we cannot predict whether an important component of
any
of our products might be added to the California list in the future. We also
are
unable to predict whether or to what extent a warning under this law would
have
an impact on costs or sales of our products.
Measures
have been enacted in various localities and states that require that a deposit
be charged for certain non-refillable beverage containers. The precise
requirements imposed by these measures vary. Other deposit, recycling or product
stewardship proposals have been introduced in certain states and localities
and
in Congress, and we anticipate that similar legislation or regulations may
be
proposed in the future at the local, state and federal levels, both in the
United States and elsewhere.
Our
facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which
approximated $175,000 and $185,000 in 2007 and 2006, respectively. 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.
In
the
year ended December 31, 2007, we upgraded our lighting system to an energy
efficient and shatter proof system throughout the Brewery and the offices.
We
also initiated a trash recycling program for both the Brewery and the
offices.
Employees
We
currently have 60 full-time employees, as follows: three in general management,
33 in sales and marketing support, eight in admin and operations and 16 in
production. We employ additional people on a part-time basis as
needed.
We
have
never participated in a collective bargaining agreement. We believe that the
relationship with our employees is good.
Risk
Factors
The
risks
described below could materially and adversely affect our business, financial
condition, results of operations and the trading price of our common stock.
You
should carefully consider the following risk factors and all other information
contained in this Annual Report. The risks and uncertainties described below
are
not the only ones we face, and there may be additional risks not presently
known
to us or that we currently believe are immaterial to our business.
THERE
IS
A LIMITED PUBLIC MARKET FOR OUR COMMON STOCK. PERSONS WHO MAY OWN OR INTEND
TO
PURCHASE SHARES OF COMMON STOCK IN ANY MARKET WHERE THE COMMON STOCK MAY TRADE
SHOULD CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER WITH OTHER INFORMATION
CONTAINED ELSEWHERE IN OUR REPORTS, PROXY STATEMENTS AND OTHER AVAILABLE PUBLIC
INFORMATION, AS FILED WITH THE COMMISSION, PRIOR TO PURCHASING SHARES OF OUR
COMMON STOCK:
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain or expand
operations according to our business plan.
As
of
December 31, 2007, we had an accumulated deficit of $11,081,141. For the years
ended December 31, 2007 and 2006, we incurred losses from operations of
$5,488,889 and $1,806,590, respectively. We may not generate sufficient revenues
from product sales in the future to achieve profitable operations. If we are
not
able to achieve profitable operations at some point in the future, we eventually
may have insufficient working capital to maintain our operations as we presently
intend to conduct them or to fund our expansion and marketing and product
development plans. In addition, our losses may increase in the future as we
expand our manufacturing capabilities and fund our marketing plans and product
development. These losses, among other things, have had and will continue to
have an adverse effect on our working capital, total assets and stockholders’
equity. If we are unable to achieve profitability, the market value of our
common stock will decline and there would be a material adverse effect on our
financial condition.
If
we
need to raise additional financing to support our operations, we cannot assure
you that additional financing will be available on terms favorable to us, or
at
all. If adequate funds are not available or if they are not available on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
We
may not be able to develop successful new beverage products which are important
to our growth.
An
important part of our strategy is to increase our sales through the development
of new beverage products. We cannot assure you that we will be able to continue
to develop, market and distribute future beverage products that will enjoy
market acceptance. The failure to continue to develop new beverage products
that
gain market acceptance could have an adverse impact on our growth and materially
adversely affect our financial condition. We may have higher obsolescent product
expense if new products fail to perform as expected due to the need to write
off
excess inventory of the new products.
Our
results of operations may be impacted in various ways by the introduction of
new
products, even if they are successful, including the following:
·
|
sales
of new products could adversely impact sales of existing
products,
|
·
|
We
may incur higher cost of goods sold and selling, general and
administrative expenses in the periods when we introduce new products
due
to increased costs associated with the introduction and marketing
of new
products, most of which are expensed as incurred,
and
|
·
|
when
we introduce new platforms and bottle sizes, we may experience increased
freight and logistics costs as our co-packers adjust their facilities
for
the new products.
|
The
beverage business is highly competitive.
The
premium beverage and carbonated soft drink industries are highly competitive.
Many of our competitors have substantially greater financial, marketing,
personnel and other resources than we do. Competitors in the soft drink industry
include bottlers and distributors of nationally advertised and marketed
products, as well as chain store and private label soft drinks. The principal
methods of competition include brand recognition, price and price promotion,
retail space management, service to the retail trade, new product introductions,
packaging changes, distribution methods, and advertising. We also compete for
distributors, shelf space and customers primarily with other premium beverage
companies. As additional competitors enter the field, our market share may
fail
to increase or may decrease.
The
growth of our revenues is dependent on acceptance of our products by mainstream
consumers.
We
have
dedicated significant resources to introduce our products to the mainstream
consumer. As such, we have increased our sales force and executed agreements
with distributors who, in turn, distribute to mainstream consumers at grocery
stores, club stores and other retailers. If our products are not accepted by
the
mainstream consumer, our business could suffer.
Our
failure to accurately estimate demand for our products could adversely affect
our business and financial results.
We
may
not correctly estimate demand for our products. Our ability to estimate demand
for our products is imprecise, particularly with new products, and may be less
precise during periods of rapid growth, particularly in new markets. If we
materially underestimate demand for our products or are unable to secure
sufficient ingredients or raw materials including, but not limited to, glass,
labels, flavors or packing arrangements, we might not be able to satisfy demand
on a short-term basis. Moreover, industry-wide shortages of certain juice
concentrates and sweeteners have been and could, from time to time in the
future, be experienced, which could interfere with and/or delay production
of
certain of our products and could have a material adverse effect on our business
and financial results. We do not use hedging agreements or alternative
instruments to manage this risk.
The
loss of our largest customers would substantially reduce
revenues.
Our
customers are material to our success. If we are unable to maintain good
relationships with our existing customers, our business could suffer. Unilateral
decisions could be taken by our distributors, and/or convenience chains, grocery
chains, specialty chain stores, club stores and other customers to discontinue
carrying all or any of our products that they are carrying at any time, which
could cause our business to suffer.
United
Natural Foods, the parent of certain of our retailers, accounted for
approximately 35% and 39% of our sales in each of 2007 and 2006. Trader Joe’s
accounted for approximately 14% of our 2007 sales and approximately 17% of
our
sales in 2006. 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 35% and 39% of our sales in
2007
and 2006. 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 and packaging 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.
We
also
depend upon an uninterrupted supply of packaging materials, such as glass for
our bottles and kegs for our 5 liter party kegs. We obtain our bottles
domestically and our kegs from Europe. Any decrease in supply of these materials
or increase in the prices of the materials, as a result of decreased supply
or
increased demand, 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 82%
and 72%
of our total case production in 2007 and 2006, respectively,
|
·
|
if
any of those co-packers were to terminate our co-packing arrangement
or
have difficulties in producing beverages for us, our ability to produce
our beverages would be adversely affected until we were able to make
alternative arrangements, and
|
·
|
Our
business reputation would be adversely affected if any of the co-packers
were to produce inferior quality
products.
|
We
compete in an industry that is brand-conscious, so brand name recognition and
acceptance of our products are critical to our success.
Our
business is substantially dependent upon awareness and market acceptance of
our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. Although we believe that we have been
relatively successful towards establishing our brands as recognizable brands
in
the New Age beverage industry, it may be too early in the product life cycle
of
these brands to determine whether our products and brands will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of our product name brands will
also be substantially dependent upon acceptance of our product name brands.
Accordingly, any failure of our brands to maintain or increase acceptance or
market penetration would likely have a material adverse affect on our revenues
and financial results.
We
compete in an industry characterized by rapid changes in consumer preferences
and public perception, so our ability to continue to market our existing
products and develop new products to satisfy our consumers’ changing preferences
will determine our long-term success.
Consumers
are seeking greater variety in their beverages. Our future success will depend,
in part, upon our continued ability to develop and introduce different and
innovative beverages. In order to retain and expand our market share, we must
continue to develop and introduce different and innovative beverages and be
competitive in the areas of quality and health, although there can be no
assurance of our ability to do so. There is no assurance that consumers will
continue to purchase our products in the future. Additionally, many of our
products are considered premium products and to maintain market share during
recessionary periods, we may have to reduce profit margins, which would
adversely affect our results of operations. In addition, there
is
increasing awareness and concern for the health consequences of obesity. This
may reduce demand for our non-diet beverages, which could affect our
profitability. Product
lifecycles for some beverage brands and/or products and/or packages may be
limited to a few years before consumers’ preferences change. The beverages we
currently market are in varying stages of their lifecycles and there can be
no
assurance that such beverages will become or remain profitable for us. The
beverage industry is subject to changing consumer preferences and shifts in
consumer preferences may adversely affect us if we misjudge such preferences.
We
may be unable to achieve volume growth through product and packaging
initiatives. We also may be unable to penetrate new markets. If our revenues
decline, our business, financial condition and results of operations will be
materially and adversely affected.
Our
quarterly operating results may fluctuate significantly because of the
seasonality of our business.
Our
highest revenues occur during the spring and summer, the second and third
quarters of each fiscal year. These seasonality issues may cause our financial
performance to fluctuate. In addition, beverage sales can be adversely affected
by sustained periods of bad weather.
Our
business is subject to many regulations and noncompliance is
costly.
The
production, marketing and sale of our unique beverages, including contents,
labels, caps and containers, are subject to the rules and regulations of various
federal, provincial, state and local health agencies. If a regulatory authority
finds that a current or future product or production run is not in compliance
with any of these regulations, we may be fined, or production may be stopped,
thus adversely affecting our financial conditions and operations. Similarly,
any
adverse publicity associated with any noncompliance may damage our reputation
and our ability to successfully market our products. Furthermore, the rules
and
regulations are subject to change from time to time and while we closely monitor
developments in this area, we have no way of anticipating whether changes in
these rules and regulations will impact our business adversely. Additional
or
revised regulatory requirements, whether labeling, environmental, tax or
otherwise, could have a material adverse effect on our financial condition
and
results of operations.
Rising
fuel and freight costs may have an adverse impact on our sales and
earnings.
The
recent volatility in the global oil markets has resulted in rising fuel and
freight prices, which many shipping companies are passing on to their customers.
Our shipping costs, and particularly our fuel expenses, have been increasing
and
we expect these costs may continue to increase. Due to the price sensitivity
of
our products, we do not anticipate that we will be able to pass all of these
increased costs on to our customers. The increase in fuel and freight costs
could have a material adverse impact on our financial
condition.
Our
manufacturing process is not patented.
None
of
the manufacturing processes used in producing our products are subject to a
patent or similar intellectual property protection. Our only protection against
a third party using our recipes and processes is confidentiality agreements
with
the companies that produce our beverages and with our employees who have
knowledge of such processes. If our competitors develop substantially equivalent
proprietary information or otherwise obtain access to our knowledge, we will
have greater difficulty in competing with them for business, and our market
share could decline.
We
face risks associated with product liability claims and product
recalls.
Other
companies in the beverage industry have experienced product liability litigation
and product recalls arising primarily from defectively manufactured products
or
packaging. We maintain product liability insurance insuring our operations
from
any claims associated with product liability and we believe that the amount
of
this insurance is sufficient to protect us. We do not maintain product recall
insurance. In the event we were to experience additional product liability
or
product recall claim, our business operations and financial condition could
be
materially and adversely affected.
Our
intellectual property rights are critical to our success, the loss of such
rights could materially, adversely affect our business.
We
regard
the protection of our trademarks, trade dress and trade secrets as critical
to
our future success. We have registered our trademarks in the United States
that
are very important to our business. We also own the copyright in and to portions
of the content on the packaging of our products. We regard our trademarks,
copyrights and similar intellectual property as critical to our success and
attempt to protect such property with registered and common law trademarks
and
copyrights, restrictions on disclosure and other actions to prevent
infringement. Product packages, mechanical designs and artwork are important
to
our success and we would take action to protect against imitation of our
packaging and trade dress and to protect our trademarks and copyrights, as
necessary. We also rely on a combination of laws and contractual restrictions,
such as confidentiality agreements, to establish and protect our proprietary
rights, trade dress and trade secrets. However, laws and contractual
restrictions may not be sufficient to protect the exclusivity of our
intellectual property rights, trade dress or trade secrets. Furthermore,
enforcing our rights to our intellectual property could involve the expenditure
of significant management and financial resources. There can be no assurance
that other third parties will not infringe or misappropriate our trademarks
and
similar proprietary rights. If we lose some or all of our intellectual property
rights, our business may be materially and adversely affected.
If
we are not able to retain the full time services of our management team,
including 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 our management
team, including Christopher J. Reed, our founder, President, Chief Executive
Officer and Chairman of the Board. We depend on our management team, but
especially 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 any member of our management team or Mr. Reed. In
addition, we do not maintain key person life insurance on any of our management
team or Mr. Reed. Therefore, in the event of the loss or unavailability of
any
member of the management team to us, there can be no assurance that we would
be
able to locate in a timely manner or employ qualified personnel to replace
him.
The loss of the services of any member of our management team 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 84% and 80% of
our
aggregate revenues in 2007 and 2006, respectively. This gross margin places
pressure upon our cash flow and cash reserves when our sales increase. If we
are
to expand our operations, such expansion would place a significant strain on
our
management, operational and financial resources. Such expansion would also
require improvements in our operational, accounting and information systems,
procedures and controls. If we fail to manage this anticipated expansion
properly, it could divert our limited management, cash, personnel, and other
resources from other responsibilities and could adversely affect our financial
performance.
Our
business may be negatively impacted by a slowing economy or by unfavorable
economic conditions or developments in the United States and/or in other
countries in which we operate.
A
general
slowdown in the economy in the United States or unfavorable economic conditions
or other developments may result in decreased consumer demand, business
disruption, supply constraints, foreign currency devaluation, inflation or
deflation. A slowdown in the economy or unstable economic conditions in the
United States or in the countries in which we operate could have an adverse
impact on our business results or financial condition. Our foreign sales (except
for Canada) accounted for less than 1.0% of our sales for the years ended
December 31, 2007 and 2006, respectively.
We
have operated without independent directors in the past.
We
have
not had two independent directors through a large portion of our history. As
a
result, certain material agreements between related parties have not been
negotiated with the oversight of independent directors and were entered into
at
the absolute discretion of the majority stockholder, Christopher J. Reed. Please
see the “Certain Relationships and Related Transactions” section for specific
details of these transactions.
Risks
Relating to Our Securities
We
recently conducted a rescission offer for shares issued in our initial public
offering. Although we have completed the rescission offer, we may continue
to be
subject to claims related to the circumstances related to the rescission
offer.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering. The shares issued in
connection with the initial public offering may have been issued in violation
of
either federal or state securities laws, or both, and may be subject to
rescission. In order to address this issue, we made a rescission offer to the
holders of these shares.
Our
rescission covered an aggregate of 333,156 shares of common stock issued in
connection with our initial public offering. These securities represented all
of
the shares issued in connection with the initial public offering prior to
October 11, 2006. We offered to rescind the shares of our common stock that
were
subject to the rescission offer for an amount equal to the price paid for the
shares plus interest, calculated from the date of the purchase through the
date
on which the rescission offer expires, at the applicable statutory interest
rate
per year. If our rescission offer had been accepted by all offerees, we would
have been required to make an aggregate payment to the holders of these shares
of up to approximately $1,332,624, plus statutory interest.
On
August
12, 2006, we made a rescission offer to all holders of the outstanding shares
that we believe are subject to rescission, pursuant to which we offered to
repurchase these shares then outstanding from the holders. At the expiration
of
our rescission offer on September 18, 2006, the rescission offer was accepted
by
32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. The shares that were tendered for
rescission were agreed to be purchased by others and not from our
funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. Accordingly,
although the rescission offer may have been accepted or rejected by some of
the
offerees, we may continue to be liable under federal and state securities laws
for up to an amount equal to the value of all shares of common stock issued
in
connection with the initial public offering, plus any statutory interest we
may
be required to pay. If it is determined that we offered securities without
properly registering them under federal or state law, or securing an exemption
from registration, regulators could impose monetary fines or other sanctions
as
provided under these laws.
There
has been a very limited public trading market for our securities and the market
for our securities, may continue to be limited, and be sporadic and highly
volatile.
There
is
currently a limited public market for our common stock. Our common stock was
previously listed for trading on the Over-the-Counter Bulletin Board (the
“OTCBB”) from January 3, 2007 to November 26, 2007. Since November 27, 2007, our
common stock has been listed for trading on the NASDAQ Capital Market. We cannot
assure you that an active market for our shares will be established or
maintained in the future. Holders of our common stock may, therefore, have
difficulty selling their shares, should they decide to do so. In addition,
there
can be no assurances that such markets will continue or that any shares, which
may be purchased, may be sold without incurring a loss. Any such market price
of
our shares may not necessarily bear any relationship to our book value, assets,
past operating results, financial condition or any other established criteria
of
value, and may not be indicative of the market price for the shares in the
future.
In
addition, the market price of our common stock may be volatile, which could
cause the value of our common stock to decline. Securities markets experience
significant price and volume fluctuations. This market volatility, as well
as
general economic conditions, could cause the market price of our common stock
to
fluctuate substantially. Many factors that are beyond our control may
significantly affect the market price of our shares. These factors
include:
·
|
price
and volume fluctuations in the stock
markets,
|
·
|
changes
in our earnings or variations in operating
results,
|
·
|
any
shortfall in revenue or increase in losses from levels expected by
securities analysts,
|
·
|
changes
in regulatory policies or law,
|
·
|
operating
performance of companies comparable to us,
and
|
·
|
general
economic trends and other external
factors.
|
Even
if
an active market for our common stock is established, stockholders may have
to
sell their shares at prices substantially lower than the price they paid for
it
or might otherwise receive than if a broad public market existed.
Future
financings could adversely affect common stock ownership interest and rights
in
comparison with those of other security holders.
Our
board
of directors has the power to issue additional shares of common or preferred
stock without stockholder approval. If additional funds are raised through
the
issuance of equity or convertible debt securities, the percentage ownership
of
our existing stockholders will be reduced, and these newly issued securities
may
have rights, preferences or privileges senior to those of existing
stockholders.
If
we
issue any additional common stock or securities convertible into common stock,
such issuance will reduce the proportionate ownership and voting power of each
other stockholder. In addition, such stock issuances might result in a reduction
of the book value of our common stock.
Because
Christopher J. Reed controls a large portion 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
35.9% of our common stock. Therefore, Mr. Reed will be able to control the
outcome, or greatly influence the outcome, on all matters requiring stockholder
approval, including the election of directors, amendment of our certificate
of
incorporation, and any merger, consolidation or sale of all or substantially
all
of our assets or other transactions resulting in a change of control of our
company. In addition, as our Chairman and Chief Executive Officer, Mr. Reed
has
and will continue to have significant influence over our strategy, technology
and other matters. Mr. Reed’s interests may not always coincide with the
interests of other holders of our common stock.
A
substantial number of our shares are available for sale in the public market
and
sales of those shares could adversely affect our stock
price.
Sales
of
a substantial number of shares of common stock into the public market, or the
perception that such sales could occur, could substantially reduce our stock
price in the public market for our common stock, and could impair our ability
to
obtain capital through a subsequent financing of our securities. We have
8,755,707 shares of common stock outstanding as of March 14, 2008. Of the shares
of our common stock currently outstanding, 5,983,103 shares are “restricted
securities” under the Securities Act. Some of these “restricted securities” will
be subject to restrictions on the timing, manner, and volume of sales of such
shares.
In
addition, we have issued and outstanding options and warrants that may be
exercised into 2,417,236 shares of common stock and 48,121 shares of Series
A
preferred stock that may be converted into 192,484 shares of common stock.
In
addition, our outstanding shares of Series A preferred stock bear a dividend
of
5% per year, or approximately $27,770 per year. We have the option to pay the
dividend in shares of our common stock. In 2007 and 2006, we paid the dividend
in an aggregate of 3,820 and 7,373 shares of common stock in each such year,
respectively, and anticipate that we will be obligated to issue at least this
many shares annually to the holders of the Series A preferred stock so long
as
such shares are issued and outstanding.
If
we fail to maintain an effective system of internal controls, we may not be
able
to accurately report our financial results or prevent
fraud.
We
are
subject to reporting obligations under the U.S. securities laws. The SEC, as
required by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules
requiring every public company to include a management report of such company’s
internal controls over financial reporting in its annual report, which contains
management’s assessment of the effectiveness of the company’s internal controls
over financial reporting. This requirement applies to us beginning with our
annual report on Form 10-KSB for the year ended December 31, 2007. In addition,
in the future, an independent registered public accounting firm will be required
to attest to and report on management’s assessment of the effectiveness of the
company’s internal controls over financial reporting. Our management may
conclude that our internal controls over our financial reporting are not
effective. Moreover, even if our management concludes that our internal controls
over financial reporting are effective, our independent registered public
accounting firm may still decline to attest to our management’s assessment or
may issue a report that is qualified if it is not satisfied with our controls
or
the level at which our controls are documented, designed, operated, or reviewed,
or if it interprets the relevant requirements differently from us. Our reporting
obligations as a public company will place a significant strain on our
management, operational, and financial resources and systems for the foreseeable
future. Effective internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial reports and
are
important to help prevent fraud. As a result, our failure to achieve and
maintain effective internal controls over financial reporting could result
in
the loss of investor confidence in the reliability of our financial statements,
which in turn could harm our business and negatively impact the trading price
of
our stock. Furthermore, we anticipate that we will incur considerable costs
and
use significant management time and other resources in an effort to comply
with
Section 404 and other requirements of the Sarbanes-Oxley Act.
Item
2. Description of Property
We
own an
18,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street
in an unincorporated area of Los Angeles County, near downtown Los Angeles.
The
property is located in the Los Angeles County Mid-Alameda Corridor Enterprise
Zone. Businesses located in the enterprise zone are eligible for certain
economic incentives designed to stimulate business investment, encourage growth
and development and promote job creation.
We
purchased the facility in December 2000 for a purchase price of $850,000,
including a down payment of $102,000. We financed approximately $750,000 of
the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a building
improvement loan for $168,000 from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. Christopher J. Reed, our
founder and Chief Executive Officer, personally guaranteed both loans. Both
loans are due and payable on November 29, 2025, with interest at the New York
prime rate plus 1%, adjusted monthly, with no cap or floor. As of December
31,
2007, the principal and interest payments on the two loans combined were $7,113
per month. This facility serves as our principal executive offices, our West
Coast Brewery and bottling plant and our Southern California warehouse facility
until August 2007.
In
August
2007, we purchased the building immediately adjacent to the Brewery on South
Spring Street for $1,700,000 in cash. Since its purchase, this facility serves
as our warehouse for mainly finished goods and raw materials. In March 2008,
we
borrowed a total of $1,770,000 from Lehman Brothers secured by our real estate.
The loan is personally guaranteed by Christopher J. Reed, our Chief Executive
Officer. We have used the proceeds of the loan to pay off the outstanding loan
on the Brewery and as working capital. The new loan is payable over a 30 year
term, bears interest at 8.41% per annum and carries a prepayment penalty of
3%
if the loan is repaid within five years.
Item
3. Legal
Proceedings
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserted claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contended that we negligently manufactured the soda resulting in at
least
one personal injury. Consac sought $2.6 million in damages, plus interest and
attorneys fees. In January 2007, we settled the lawsuit for $450,000, of which
$300,000 was paid by us and $150,000 was paid by our insurance carrier. The
$300,000 was accrued as of December 31, 2006 and is included in legal costs
in
the statement of operations for the year ended December 31, 2006.
Except
as
set forth above, we believe that there are no material litigation matters at
the
current time. Although the results of such litigation matters and claims cannot
be predicted with certainty, we believe that the final outcome of such claims
and proceedings will not have a material adverse impact on our financial
position, liquidity, or results of operations.
Item
4.
Submission
of Matters to a Vote of Security Holders
The
annual meeting of stockholders of the Company was held on November 19, 2007.
At
the meeting, the following individuals were elected as directors of the Company
and received the number of votes set opposite their respective
names:
|
|
Votes For
|
|
Votes Against
|
|
Christopher
J. Reed
|
|
|
6,866,464
|
|
|
12,597
|
|
Judy
Holloway Reed
|
|
|
6,865,214
|
|
|
13,147
|
|
Mark
Harris
|
|
|
6,866,614
|
|
|
11,497
|
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
|
6,851,116
|
|
|
20,266
|
|
|
|
|
6,864,464
|
|
|
13,597
|
|
In
addition, at the meeting our stockholders approved the Reeds 2007 Stock
Incentive Award Plan by a vote of 4,836,802 for and 50,822 against.
In
addition, at the meeting, our stockholders ratified an amendment to our articles
of incorporation to increase the authorized number of shares of common stock
from 11,500,000 shares to 19,500,000 by a vote of 4,899,513 for and 28,621
against.
PART
II
Item
5.
Market
for Common Equity and Related Stockholder Matters
Trading
History
Our
Common stock is currently traded on the NASDAQ Capital Market under the symbol
“REED”.
On
November 27, 2007, we qualified for trading on the NASDAQ Capital Market. Prior
to that time and since January 3, 2007, our common stock was listed for trading
on the National Association of Securities Dealers, Inc. Over-The-Counter
Bulletin Board, or the OTC Bulletin Board. 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 by the NASDAQ Capital Market and the OTC Bulletin Board, as
applicable 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
Ended December
31, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
7.17
|
|
$
|
3.00
|
|
Second
Quarter
|
|
|
9.00
|
|
|
6.00
|
|
Third
Quarter
|
|
|
10.55
|
|
|
6.75
|
|
Fourth
Quarter
|
|
|
7.35
|
|
|
5.35
|
|
On
April
10, 2008, the closing sales price for the common stock was $2.93, as reported
on
the website of the NASDAQ Stock Market. As of April 10, 2008, there were
approximately 261 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 8,907,700 outstanding shares of common
stock.
Dividends
We
have
never declared or paid dividends on our common stock. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we
do
not anticipate declaring or paying any dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board
of
directors after taking into account various factors, including the terms of
our
credit facility and our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock in either cash or additional shares
of common stock at our discretion. In 2007 and 2006, we paid the dividend in
an
aggregate of 3,820 and 7,373 shares of common stock in each such year,
respectively, and anticipate that we will be obligated to issue at least this
many shares annually to the holders of the Series A preferred stock so long
as
such shares are issued and outstanding.
Recent
Issuances of Unregistered Securities
In
the
months of October 2007 and December 2007, 500 shares of Series A preferred
stock
were converted into a total of 4,000 shares of common stock. In October 2007,
we
issued 1,000 shares, valued
at
$7,250, to
a
consultant for services rendered in conjunction with the purchase of a
building.
In
March
2008, we issued 150,000 shares of common stock to a consultant pursuant to
a
research and analysis services agreement. The shares were issued pursuant to
an
exemption from registration under Section 4(2) of the Securities
Act.
In
January 2008, we entered into an agreement for future consulting services.
We
have agreed to pay 11,960 shares of common stock over the six month engagement
and agreed to register the shares with the SEC in our next registration
statement. From January to March 2008, we issued 5,979 shares of
common stock to the consultant under the agreement. The shares were issued
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
Item
6.
Management’s
Discussion and Analysis or Plan of Operation
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes appearing elsewhere in this Annual Report. This discussion and
analysis may contain forward-looking statements based on assumptions about
our
future business. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under the heading of “Risk Factors”
in the “Business” section in this Annual Report.
Overview
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell five unique
product lines:
·
|
Virgil’s
Root Beer and Cream Sodas,
|
·
|
Reed’s
Ginger Candies, and
|
·
|
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores (estimated
at
4,000 smaller or specialty stores and 3,000 supermarket format), supermarket
chains (estimated at 7,500 stores), retail stores and restaurants in the United
States and, to a lesser degree, in Canada, Europe and other international
territories. 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, but we have plans to direct these sales to
distributors.
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
|
|
2007
|
|
$
|
3,395,110
|
|
|
26
|
|
$
|
1,567,058
|
|
|
12
|
|
$
|
8,096,645
|
|
|
62
|
|
$
|
13,058,813
|
|
2006
|
|
|
1,853,439
|
|
|
18
|
|
|
1,039,966
|
|
|
10
|
|
|
7,590,948
|
|
|
72
|
|
|
10,484,353
|
|
2005
|
|
|
1,536,896
|
|
|
16
|
|
|
751,999
|
|
|
8
|
|
|
7,181,390
|
|
|
76
|
|
|
9,470,285
|
|
2004
|
|
|
1,983,598
|
|
|
22
|
|
|
395,601
|
|
|
4
|
|
|
6,599,166
|
|
|
74
|
|
|
8,978,365
|
|
Historically,
we have focused our marketing efforts on natural and gourmet food stores. In
2003, we expanded our marketing efforts to include more mainstream markets.
These efforts included selling our products directly to:
·
|
large
retail accounts, such as Costco, BJ Wholesale, and Cost Plus World
Markets, and
|
·
|
the
natural food section of mainstream supermarket chains, such as Safeway,
Kroger’s, and several other national and regional chains, such as Ralph’s
and Bristol Farms.
|
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 2003 to 2007, as follows:
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
2007
|
|
Net
sales
|
|
$
|
6,800,000
|
|
$
|
9,000,000
|
|
$
|
9,500,000
|
|
$
|
10,500,000
|
|
$
|
13,059,000
|
|
We
believe that the increase in net sales over this period comes from three
factors:
·
|
increases
in our core of national distribution to natural and gourmet food
stores,
|
·
|
increases
in our mainstream supermarket chains,
and
|
·
|
increases
in our direct sales to large
retailers.
|
Almost
as
important as increasing our net sales are increasing our gross margins. We
continue to work to reduce costs related to production of our products. However,
we have encountered difficulties in increasing our gross margins due to certain
factors, including:
·
|
inefficiencies
commensurate with a start-up period for the Brewery that we purchased
in
2002 as our West Coast production
facility,
|
·
|
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,
and
|
·
|
increases
in the use of promotions and discounting,
|
In
2002,
we purchased and outfitted the Brewery, in part to help reduce both production
costs and freight costs associated with our west coast sales. Gross margins
decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
result of attaining greater functionality and efficiencies in our operation
of
the Brewery by our own personnel and being able to produce and ship products
in
the western half of the United States from a west coast facility. However,
in
2005, gross margins decreased to 18.2% as a principal result of increases in
fuel prices, which put downward pressure on our margins due to increased freight
expenses and increased glass and production costs, both of which are sensitive
to fuel costs. In February 2006, we decided to raise our prices on the Ginger
Brew line for the first time in 16 years. In 2006, gross margins recovered
to
19.6% partially as a result of a price increase on our core Reed’s Ginger Brew
line and offset by increased pressure from more expensive production,
ingredients and packaging expenses due to fuel related price increases. In
2007,
our gross margins decreased to 15.5% partially as a result of increased
promotions and increased freight and commodity costs.
In
addition, our west coast Brewery facility is running at 41% of capacity. We
have
had difficulties with the flavor of our Ginger Brew products produced at the
Brewery. As a result, we continue to supply our Ginger Brew products at the
Brewery from our east coast co-packing facility, thereby causing us to incur
increased freight and warehousing expenses on our products. Management is
committed to selling a high quality, great tasting product and has elected
to
continue to sell certain of our Ginger Brew products produced from our east
coast facility on the west coast, even though it negatively impacts our gross
margins. As we are able to make the Brewery become more fully utilized, we
believe that we will experience improvements in gross margins due to freight
and
production savings.
On
December 12, 2006, we completed the sale of 2,000,000 shares of our common
stock
at an offering price of $4.00 per share in our initial public offering. The
public offering resulted in gross proceeds of $8,000,000 to us. In connection
with the public offering, we paid aggregate commissions, concessions and
non-accountable expenses to the underwriters of $800,000, resulting in net
proceeds of $7,200,000, excluding other expenses of the public offering. In
addition, we have agreed to issue, to the underwriters, warrants to purchase
up
to approximately an additional 200,000 shares of common stock at an exercise
price of $6.60 per share (165% of the public offering price per share), at
a
purchase price of $0.001 per warrant. The underwriters’ warrants are exercisable
for a period of five years commencing on the final closing date of the public
offering. From August 3, 2005 through April 7, 2006, we had issued 333,156
shares of our common stock in connection with the public offering. We sold
the
balance of the 2,000,000 shares in connection with the public offering
(1,666,844 shares) following October 11, 2006.
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. We 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.
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 2007. We monitor these trends
closely and have started developing low-carbohydrate versions of some of our
beverages, although we do not have any currently marketable low-carbohydrate
products.
Distribution
Consolidation
- There
has been a recent trend towards continued consolidation of the beverage
distribution industry through mergers and acquisitions. This consolidation
results in a smaller number of distributors to market our products and
potentially leaves us subject to the potential of our products either being
dropped by these distributors or being marketed less aggressively by these
distributors. As a result, we have initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. Consolidation among natural foods
industry distributors has not had an adverse affect on our sales.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our ginger-based products are designed with this consumer demand
in
mind.
Supermarket
and Natural Food Stores
- More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in mainstream supermarkets throughout
the
United States in natural food sections. Supermarkets can require that we spend
more advertising money and they sometimes require slotting fees. We continue
to
work to keep these fees reasonable. Slotting fees in the natural food section
of
the supermarket are generally not as expensive as in other areas of the
store.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate, particularly for premium products.
There is an increase in the sophistication with respect to beverage packaging
design. While we feel that our current core brands still compete on the level
of
packaging, we continue to experiment with new and novel packaging designs such
as the 5-liter party keg and 750 ml. champagne style bottles. We have further
plans for other innovative packaging designs.
Packaging
or Raw Material Price Increases
- An
increase in packaging or raw materials has caused our margins to suffer and
has
negatively impacted our cash flow and profitability. We continue to search
for
packaging and production alternatives to reduce our cost of goods.
Cash
Flow Requirements
- Our
growth will depend on the availability of additional capital infusions. We
have
a financial history of losses and are dependent on non-banking sources of
capital, which tend to be more expensive and charge higher interest rates.
Any
increase in costs of goods will further increase losses and will further tighten
cash reserves.
Interest
Rates -
We use
lines of credit as a source of capital and are negatively impacted as interest
rates rise.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires
us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable
and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
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, 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, 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 impact on our future
cash flows.
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. 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 product returned. The allowance
for
doubtful accounts and returns and discounts as of December 31, 2007 was
approximately $407,000.
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.
Results
of Operations
Twelve
Months Ended December 31, 2007 Compared to Twelve Months Ended December 31,
2006
Net
sales
increased by $2,574,460, or 24.6%, to $13,058,813 in 2007 from $10,484,353
in
2006. The increase in net sales was primarily due to an increase in our Virgil’s
product line of Root Beer and Cream Sodas, our Reed’s Ginger Brews and ginger
Candies. The increase in sales was also primarily due to an increase in net
sales due to newly introduced mainstream distributors and an increase in our
existing distribution channels of natural food distributors and retailers,
partially offset by a decrease in sales to international customers.
The
Virgil’s brand, which includes Root Beer, Cream Soda and Black Cherry Cream
soda, Diet Root Beer, Diet Cream Soda and Diet Black Cherry Cream Soda, realized
an increase in net sales of $1,715,000, or 44.9% from $3,823,000 in 2006 to
$5,538,000 in 2007. The increase was the result of increased sales in Root
Beer
of $985,000 or 33.3% to $3,945,000 in 2007 from $2,960,000 in 2006, increased
sales in Cream Soda of $201,000 or 31.8% to $834,000 in 2007 from $633,000
in
2006, and increased sales in Black Cherry Cream Soda of $193,000 or 86.5% to
$416,000 in 2007 from $223,000 in 2006. The increase in the Virgil’s Root Beer
was due, in part, to an increase in five-liter party kegs of $316,000 or 71.9%,
to $756,000 in 2007 from $440,000 in 2006. In addition, the increase in sales
in
the Virgil’s Brand was the result of three diet products introduced in 2007. The
three new products include Diet Root Beer, which realized $99,000 in net sales
for 2007, Diet Cream Soda and Black Cherry Cream soda which realized net sales
of $57,000 and $52,000, respectively in 2007.
The
Reeds
Ginger Brew Line increased $720,000 or 13.2% from $5,450,000 in 2006 to
$6,170,000 in 2007. The increase was the result of increased sales across all
Reed’s line of products, but mostly due to increased sales of Reed’s Extra
Ginger Brew of $317,000 or 11.8% to $3,011,000 in 2007 from $2,694,000 in 2006,
Reed’s Original Ginger Brew of $86,000 or 6.8% to $1,350,000 in 2007 from
$1,264,000 in 2006 and Reed’s Premium Ginger Brew of $84,000 or 9.4% to $978,000
in 2007 from $894,000 in 2006. The Reed’s Cherry Ginger Brew and Reed’s Spice
Apple Cider realized an increase in sales of 20.3% and 2.5%, respectively,
from
2007 to 2006.
Net
sales
of candy increased $110,000, or 13.7% from $802,000 in 2006 to $912,000 in
2007.
The increase in candy sales was mostly due to increased crystallized ginger
sales of $93,000 or 17.2% to $633,000 in 2007 from $540,000 in
2006.
The
product mix for our two most significant product lines, Reed’s Ginger Brews and
Virgil’s sodas was 47.2% and 42.4%, respectively of net sales in 2007 and was
52.0% and 36.5%, respectively of net sales in 2006.
Commencing
in 2007, the Company executed several distribution contracts with distributors
who service retailers that cater to the mainstream consumer. In 2007, of the
sales noted above, net sales to distributors that cater to mainstream consumers
totaled $428,000. For sales to distributors that specialize in natural foods,
net sales increased $1,857,000 or 23.6% from $7,874,000 in 2006 to $9,731,000
in
2007. For sales to other mainstream customers, including chains, club stores
and
mass merchants, net sales increased $534,000 or 21.9% from $2,437,000 in 2006
to
$2,971,000 in 2007. These increases were partially offset by a decrease in
net
sales to international customers of $52,000 or 29.8% to $122,000 in 2007 from
$174,000 in 2006.
We
expect
to increase sales in 2008. Our new direction in sales is to focus our sales
efforts predominantly in the grocery channels, where we have an estimated 10,500
supermarket stores carrying our products.
Cost
of
sales increased by $2,612,803, or 31.0%, from $8,426,774 in 2006 to $11,039,577
in 2007. As a percentage of net sales, cost of sales increased from 80.4% in
2006 to 84.5% in 2007. Cost of sales as a percentage of net sales increased
by
4.1%, primarily as a result of increased discounting and promotions, increased
production expenses, increased packaging costs and increased ingredient
costs.
Gross
profit decreased $38,343 or 1.9% from $2,057,579 in 2006 to $2,019,236 in 2007.
As a percentage of net sales, gross profit decreased from 19.6% in 2006 to
15.5%
in 2007. Fuel and commodity price increases have caused an increase in our
costs
of production from our co-packer. Fuel price increases have increased our costs
of delivery. In addition, we had increased costs of packaging costs. If fuel
and
commodity prices continue to increase, we will have more pressure on our
margins.
Our
gross
profit for beverages before the affects of promotions and discounting was
approximately 40% for 2007. After promotions and discounts, we realized gross
margin of 15.5%. To improve gross margins in 2008, we have set a date to raise
prices on the Reed’s Ginger Brew line by 13% bringing it more in line with our
competitors in the natural soda category. The impact of the price increase
will
raise our gross margin before the affects of promotions and discounting to
45%
with the expectation of increasing the net gross margin 2008. In addition,
we
are implementing systems to track and manage the approval and use of promotions
and discounting to maintain a higher net gross margin. Finally, we are
performing a competitive bidding process for our third party co-packing
production. We expect to select a co-packer by the third quarter 2008. We expect
to lower our costs of production, thus further improving our gross margin while
maintaining our product quality.
Operating
expenses increased by $3,643,956, or 94.3%, from $3,864,169 in 2006 to
$7,508,125 in 2007 and increased as a percentage of net sales from 36.9% in
2006
to 57.5% in 2007. The increase was primary the result of increased selling
and
general and administrative expenses, partially offset by one-time charges in
2006. Based on the reduction in the sales staff and other sales support staff,
we do not anticipate an increase in operating expenses in 2008.
Selling
expensed increased by $3,234,293 or 239.2%, from $1,352,313 in 2006 to
$4,586,806 in 2007. The increase in selling expenses is due to increased
salaries of sales personnel, general selling expenses, promotional costs,
non-cash stock option amortization expense, recruiting costs of sales personnel
and public relations. Salaries of sales personnel increased $1,572,000 or 236.6%
from $664,000 in 2006 to $2,236,000 in 2007. This increase was due to increased
personnel to support the initiative to increase sales of our product to the
mainstream consumer through mainstream stores and distributors that support
mainstream retailers. General selling expenses increased $779,000 or 226.5%
from
$344,000 in 2006 to $1,123,000 in 2007. The increase in general selling expenses
was due to the increased support for the increased sales personnel such as
travel, road-shows and trade shows. Promotional expenses increased $335,000
or
177.2%, from $189,000 in 2006 to $524,000 in 2007. The increase in promotional
expenses was due to increased activities of advertising, demonstrations and
sampling. Non-cash stock option amortization expense increased $344,000 or
5,733.3% from $6,000 in 2006 to $350,000 in 2007. This increase is due to stock
options issued to new sales personnel in 2007. Also, selling expense increased
from 2007 versus 2006 due to new initiatives in 2007 of public relations and
recruiting fees for selling personnel of $104,000 and $66,000, respectively.
In
March 2008, we announced our new strategic direction in sales, whereby our
focus
is to strengthen our product placements in our estimated 10,500 supermarkets
nationwide. This strategy replaces our strategy in 2007 that focused on both
the
supermarkets and a direct store delivery (DSD) effort. Since March 2008, our
sales organization has been reduced by 16 compared to the level we had at
December 31, 2007. We have found that our brand performs most efficiently in
grocery stores. We have our products in many supermarket stores across the
country and our new direction for 2008 is to remain focused on these accounts
while opening new business with other grocery stores leveraging our brand
equity. We feel that the trend in grocery stores to offer their customers
natural products can be served with our products. Our sales personnel are
leveraging our success at natural food grocery stores to establish new
relationships with mainstream grocery stores
General
and administrative expenses increased by $109,463 or 4.4% from $2,511,856 in
2006 to $2,621,319 in 2007. The increase in general and administrative expenses
is due to increased legal, accounting and investor relations expenses, salaries,
general office expenses and non-cash stock option amortization expense partially
offset by one-time charges in 2006 of legal costs associated with the rescission
offer of our initial public offering. Legal, accounting and investor relations
expenses increased $738,000 or 476.1% from $155,000 in 2006 to $893,000 in
2007.
The increase in legal, accounting and investor relation expenses was due to
a
new initiative in 2007 for investor relations that resulted in an increase
of
general and administrative expenses of $140,000. The remaining increase in
legal
and accounting costs mostly related to the increased costs of reporting and
compliance with the Securities and Exchange Commission and NASDAQ. Salaries
increased by $372,000 or 67.4% from $552,000 in 2006 to $924,000 in 2007. The
increase was due to additional personnel including the newly hired Chief
Operating and Chief Financial Officers. General office expenses increased
$390,000 or 113.0% from $345,000 in 2006 to $735,000 in 2007. This increase
was
mainly due to increased costs to support the additional personnel such as
computers and telephones. In addition, in 2007, we incurred additional
information technology costs as part of our general ledger conversion. Non-cash
stock option expense increased by $46,000 or 85.2%, from $54,000 in 2006 to
$100,000 in 2007. The increase in non-cash stock option expense relates to
the
options issued to personnel hired in 2007. These increases in general and
administrative expenses were partially offset by the one-time charges in 2006
of
$835,000 and $300,000 relating to the rescission offer of our initial public
offering 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.
In
the
year ended December 31, 2007, we funded and wrote-off a note-receivable for
$300,000. This note was made by a company that developed and owned certain
intellectual property in the form of recipes and marketing materials of energy
drinks. Even though we are pursing collection of this note, we have determined
that the collectablility of this note and the usefulness of the collateral
are
doubtful and have therefore fully reserved for the entire balance
due.
Interest
expense was $414,792 in 2006, compared to interest expense of $182,402 in 2007.
We had less interest expense in 2007 due to decreased borrowings, a result
of
our receiving funds from our initial public offering in 2006 and our private
placement in 2007. In 2006, we had an outstanding balance on a receivable line
of credit which was paid-off in June 2007. We expect to have an increase in
interest expenses in 2008 due to our increased borrowings.
Interest
income increased $112,289 or 1,444.6% from $7,773 in 2006 to $120,062 in 2007.
The increase in interest income was the result of increased balances in cash
and
cash equivalents throughout 2007 versus 2006, mainly due to the proceeds
received in our initial public offering in 2006 and private placement in 2007.
We expect to have less interest income in 2008 due to our expectation of having
less cash on hand than in 2007.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through the sale 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
December 31, 2007, we had an accumulated deficit of $11,081,141. As of December
31, 2007, we had working capital of $2,942,909, compared to working capital
of
$2,834,940 as of December 31, 2006. The increase in our working capital was
primarily attributable to the completion of our private placement in the second
quarter of 2007 partially offset by our net loss. Cash and cash equivalents
were
$742,719 as of December 31, 2007, as compared to $1,638,917 as December 31,
2006.
Net
cash
used in operating activities increased to $5,806,185 in the year ended December
31, 2007 from $3,003,327 in the year ended December 31, 2006. This increase
was
primarily due to our net loss in 2007 of $5,551,229 and increase in inventory
of
$1,517,220, net of an increase in accounts payable.
We
used
$2,950,807 in investing activities in the year ended December 31, 2007, as
compared to $64,924 in the year ended December 31, 2006. The increase was
primarily a result of the purchase of a warehouse and other equipment for a
total of $2,650,807 and funding of a loan for $300,000.
Cash
flow
provided from financing activities was $7,860,792 in the year ended December
31,
2007, as compared to $4,679,424 in the year ended December 31, 2006. The
increase resulted primarily from the receipt of $9,000,000 in gross proceeds
from our private placement and the liquidation of an investment of $1,580,456
in
a restricted money market account which secured a line of credit facility,
offset by the payment of offering costs and the payments of our lines of
credit.
As
of
December 31, 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 December 31, 2007 and there was $50,000 available under
the
line of credit.
In
the
year ended December 31, 2007, we expended approximately $500,000 for equipment
including 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. At
December 31, 2007, we did not have any material commitments for capital
expenditures. In March 2008, we borrowed a total of $1,770,000 from Lehman
Brothers secured by our real estate. The loan is personally guaranteed by
Christopher J. Reed, our Chief Executive Officer. We have used the proceeds
of
the loan to pay off the outstanding loan on the Brewery and as working capital.
The new loan is payable over a 30 year term, bears interest at 8.41% per annum
and carries a prepayment penalty of 3% if the loan is repaid within five
years.
Subsequent
to December 31, 2007, we obtained a loan of $1.7 million secured by our real
estate which netted approximately $1.0 million after the repayment of debt.
We
do not have a line of credit for our working capital, receivables or inventory.
However, we are negotiating to obtain a line of credit facility secured by
our
receivables and inventory. There can be no assurance that we will be offered
or
accept the terms of a line of credit. However, we believe that we will be able
to obtain a line of credit which would be based on the amount of our eligible
receivables and inventory of up to $3 million. In addition, if necessary, we
believe we can borrow additional amounts on our real estate and equipment.
In
January 2008, we obtained an appraisal of our buildings that estimated their
value at approximately $4 million. Giving effect to the existing $1.7 million
loan on the property, we would have equity of $2.3 million for an additional
debt facility. However, we cannot be certain that we will be able to obtain
a
loan for the full amount of the equity or that the equity in the real estate
will remain at that level. Except for the use of this equity as additional
collateral for the working capital lines of credit, we have not sought to
further encumber our real estate or equipment. If presented with a borrowing
opportunity, there can be no assurance that we will accept the terms of a
facility on our real estate.
We
recognize that operating losses negatively impact liquidity and are working
on
decreasing operating losses. In the first quarter of 2008, we implemented a
cost
reduction program, including a reduction of our staff. Our current business
plan
assumes an increase in sales. Assuming an increase in sales and a reduction
in
our operating costs, we expect to reduce our operating losses in 2008 compared
to 2007. If the increase in sales does not materialize, we will need to further
reduce our operating costs.
If
we
have an increase in sales in 2008 and a reduction in operating expenses, we
believe our current working capital and cash position and our ability to obtain
a new line of credit will be sufficient to enable us to meet our cash needs
through December 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, private placement and borrowings may be insufficient to support our
ability to expand our business operations as rapidly as we would deem necessary
at any time, unless we are able to obtain additional financing. There can be
no
assurance that we will be able to obtain such financing on acceptable terms,
or
at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to pursue our business objectives and would be
required to reduce our level of operations, including reducing infrastructure,
promotions, personnel and other operating expenses. These events could adversely
affect our business, results of operations and financial condition.
In
addition, some or all of the elements of our expansion plan may have to be
curtailed or delayed unless we are able to find alternative external sources
of
working capital. We would need to raise additional funds to respond to business
contingencies, which may include the need to:
·
|
fund
more rapid expansion,
|
·
|
fund
additional marketing expenditures,
|
·
|
enhance
our operating infrastructure,
|
·
|
respond
to competitive pressures, and
|
·
|
acquire
other businesses.
|
We
cannot
assure you that additional financing will be available on terms favorable to
us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Recent
Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements”,
which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The FASB has deferred the implementation
of
SFAS No. 157 by one year for certain non-financial assets and liabilities such
that this will be effective for the fiscal year beginning January 1, 2009.
The
Company is currently evaluating the effect of adopting SFAS No. 157 on its
financial statements.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115” (SFAS No. 159), which permits entities to choose to
measure many financial instruments and certain other items at fair value. The
provisions of SFAS No.159 are effective as of the beginning of our 2008 fiscal
year. The Company is currently evaluating the impact of adopting SFAS No. 159
on
its consolidated financial statements.
In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited.
In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51”. SFAS No. 160 establishes accounting and reporting standards
that require that the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent’s equity; the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented
on
the face of the consolidated statement of income; and changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently. SFAS No. 160 also requires
that any retained noncontrolling equity investment in the former subsidiary
be
initially measured at fair value when a subsidiary is deconsolidated. SFAS
No. 160 also sets forth the disclosure requirements to identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but
will
affect only those entities that have an outstanding noncontrolling interest
in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited.
SFAS No. 160 must be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements are
applied retrospectively for all periods presented.
Management
believes the adoption of the above mentioned accounting policies will not have
a
material impact on the Company’s results of operations, financial position or
cash flow.
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
ITEM
7:
FINANCIAL
STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1
|
|
|
BALANCE
SHEET
|
F-2
|
|
|
STATEMENTS
OF OPERATIONS
|
F-3
|
|
|
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
|
F-4
|
|
|
STATEMENTS
OF CASH FLOWS
|
F-5
|
|
|
NOTES
TO FINANCIAL STATEMENTS
|
F-6
|
Report
of Independent Registered Public Accounting Firm
We
have
audited the accompanying balance sheet of Reed’s, Inc. as of December 31, 2007
and the related statements of operations, changes in stockholders’ equity and
cash flows for the years ended December 31, 2007 and 2006. 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. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures
that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. 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,
2007 and the results of its operations and its cash flows for the years ended
December 31, 2007 and 2006 in conformity with accounting principles generally
accepted in the United States of America.
/s/
WEINBERG & COMPANY, P.A.
Weinberg
& Company, P.A.
Los
Angeles, California
March
14,
2008
REED’S,
INC.
BALANCE
SHEET
December 31,
2007
ASSETS
|
|
|
|
Cash
|
|
$
|
742,719
|
|
Inventory
|
|
|
3,028,450
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $407,480
|
|
|
1,160,940
|
|
Other
receivables, net of allowance for doubtful accounts of
$300,000
|
|
|
16,288
|
|
Prepaid
expenses
|
|
|
76,604
|
|
Total
Current Assets
|
|
|
5,025,001
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $867,769
|
|
|
4,248,702
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $5,212
|
|
|
13,402
|
|
Total
Other Assets
|
|
|
813,603
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
10,087,306
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
Accounts
payable
|
|
$
|
1,996,849
|
|
Current
portion of long term debt
|
|
|
27,331
|
|
Accrued
interest
|
|
|
3,548
|
|
Accrued
expenses
|
|
|
54,364
|
|
Total
Current Liabilities
|
|
|
2,082,092
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
765,753
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
2,847,845
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 48,121 shares
issued
and outstanding, liquidation preference of $10.00 per
share
|
|
|
481,212
|
|
Common
stock, $.0001 par value, 19,500,000 shares authorized,
8,751,721 shares issued and outstanding
|
|
|
874
|
|
|
|
|
|
|
Additional
paid in capital
|
|
|
17,838,516
|
|
Accumulated
deficit
|
|
|
(11,081,141
|
) |
Total
stockholders’ equity
|
|
|
7,239,461
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
10,087,306
|
|
STATEMENTS
OF OPERATIONS
For
the Years Ended December 31, 2007 and 2006
|
|
Year
Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
SALES
|
|
$
|
13,058,813
|
|
$
|
10,484,353
|
|
COST
OF SALES
|
|
|
11,039,577
|
|
|
8,426,774
|
|
GROSS
PROFIT
|
|
|
2,019,236
|
|
|
2,057,579
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling
|
|
|
4,586,806
|
|
|
1,352,313
|
|
General and
Administrative
|
|
|
2,621,319
|
|
|
2,511,856
|
|
Write-off
note receivable
|
|
|
300,000
|
|
|
-
|
|
Total
Operating Expenses
|
|
|
7,508,125
|
|
|
3,864,169
|
|
|
|
|
|
|
|
|
|
LOSS FROM
OPERATIONS
|
|
|
(5,488,889
|
)
|
|
(1,806,590
|
) |
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
120,062
|
|
|
7,773
|
|
Interest
Expense
|
|
|
(182,402
|
)
|
|
(414,792
|
) |
Total
Other Income (Expense)
|
|
|
(62,340
|
)
|
|
(407,019
|
) |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(5,551,229
|
)
|
|
(2,213,609
|
) |
Preferred
Stock Dividend
|
|
|
(27,770
|
)
|
|
(29,470
|
) |
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(5,578,999
|
)
|
$
|
(2,243,079
|
) |
|
|
|
|
|
|
|
|
NET
LOSS PER SHARE AVAILABLE TO COMMON STOCKHOLDERS—
Basic
And Diluted
|
|
$
|
(0.70
|
)
|
$
|
(0.41
|
) |
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING,
Basic
and Fully Diluted
|
|
|
8,009,009
|
|
|
5,522,753
|
|
The
accompanying notes are an integral part of these financial
statements
STATEMENTS
OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2007 and
2006
|
|
|
|
|
|
Common
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Stock to
be
|
|
Paid
|
|
Preferred Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Issued
|
|
In Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
Balance, January 1, 2006
|
|
|
5,042,197
|
|
$
|
503
|
|
$
|
29,470
|
|
$
|
2,788,683
|
|
|
58,940
|
|
$
|
589,402
|
|
$
|
(3,259,063
|
)
|
$
|
148,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, issued in connection with the June 30, 2006 preferred stock
dividend
|
|
|
7,373
|
|
|
1
|
|
|
—
|
|
|
29,469
|
|
|
—
|
|
|
—
|
|
|
(29,470
|
)
|
|
—
|
|
Common
stock, issued in connection with the June 30, 2005 preferred stock
dividend
|
|
|
7,362
|
|
|
1
|
|
|
(29,470
|
)
|
|
29,469
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common
stock issued upon debt conversion
|
|
|
140,859
|
|
|
14
|
|
|
—
|
|
|
285,430
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
285,444
|
|
Common
stock issued for cash, net of offering costs
|
|
|
1,945,394
|
|
|
195
|
|
|
—
|
|
|
6,396,255
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,396,450
|
|
Fair
value of options issued to employees
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,808
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,213,609
|
)
|
|
(2,213,609
|
)
|
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 and equipment
|
|
|
1,440
|
|
|
—
|
|
|
—
|
|
|
11,032
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,032
|
|
Common
stock issued in connection with the June 30, 2007 preferred stock
dividend
|
|
|
3,820
|
|
|
—
|
|
|
—
|
|
|
27,770
|
|
|
—
|
|
|
—
|
|
|
(27,770
|
)
|
|
—
|
|
Common
stock issued upon conversion of preferred stock
|
|
|
43,276
|
|
|
4
|
|
|
—
|
|
|
108,186
|
|
|
(10,819
|
)
|
|
(108,190
|
)
|
|
—
|
|
|
—
|
|
Common
stock issued upon exercise of warrants
|
|
|
60,000
|
|
|
6
|
|
|
—
|
|
|
164,994
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
165,000
|
|
Common
stock issued for cash, net of offering costs
|
|
|
1,500,000
|
|
|
150
|
|
|
—
|
|
|
7,626,243
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,626,393
|
|
Public
Offering expenses
|
|
|
|
|
|
|
|
|
|
|
|
(55,394
|
)
|
|
|
|
|
|
|
|
|
|
|
(55,394
|
)
|
Fair
value of vesting of options issued to employees
|
|
|
|
|
|
|
|
|
|
|
|
420,571
|
|
|
|
|
|
|
|
|
|
|
|
420,571
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,551,229
|
)
|
|
(5,551,229
|
)
|
Balance,
December 31, 2007
|
|
|
8,751,721
|
|
$
|
874
|
|
$
|
—
|
|
$
|
17,838,516
|
|
|
48,121
|
|
$
|
481,212
|
|
$
|
(11,081,141
|
)
|
$
|
7,239,461
|
|
The
accompanying notes are an integral part of these financial
statements
REED’S,
INC.
STATEMENTS
OF CASH FLOWS
|
|
Year
Ended
December 31
,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(5,551,229
|
)
|
$
|
(2,213,609
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
205,262
|
|
|
155,860
|
|
Provision
for amounts due from director
|
|
|
—
|
|
|
3,000
|
|
Fair
value of stock options issued to employees
|
|
|
420,571
|
|
|
5,808
|
|
Fair
value of common stock issued for services or bonuses
|
|
|
3,782
|
|
|
—
|
|
Write
off of note receivable
|
|
|
300,000
|
|
|
—
|
|
(Increase)
decrease in operating assets and increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
22,823
|
|
|
(648,857
|
)
|
Inventory
|
|
|
(1,517,220
|
)
|
|
(303,211
|
)
|
Prepaid
expenses
|
|
|
87,858
|
|
|
(90,183
|
)
|
Other
receivables
|
|
|
8,523
|
|
|
(17,248
|
)
|
Accounts
payable
|
|
|
301,834
|
|
|
50,523
|
|
Accrued
expenses
|
|
|
(63,937
|
)
|
|
64,097
|
|
Accrued
interest
|
|
|
(24,450
|
)
|
|
(9,507
|
)
|
Net
cash used in operating activities
|
|
|
(5,806,183
|
)
|
|
(3,003,327
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(2,650,807
|
)
|
|
(64,924
|
)
|
Increase
in Note Receivable
|
|
|
(300,000
|
)
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(2,950,807
|
)
|
|
(64,924
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceed
received from borrowings on debt
|
|
|
163,276
|
|
|
—
|
|
Payments
for public offering
|
|
|
(55,394
|
)
|
|
—
|
|
Decrease
(increase) in restricted cash
|
|
|
1,580,456
|
|
|
(1,580,456
|
)
|
Deferred
offering costs
|
|
|
|
|
|
(251,924
|
)
|
Principal
payments on debt
|
|
|
(263,413
|
)
|
|
(327,734
|
)
|
Proceeds
from issuance of common stock
|
|
|
7,626,393
|
|
|
7,004,611
|
|
Proceeds
from issuance of common stock upon conversion of warrants
|
|
|
165,000
|
|
|
—
|
|
Payoff
of previous line of credit
|
|
|
|
|
|
(1,171,567
|
)
|
Net
borrowings (repayments) on existing lines of credit
|
|
|
(1,355,526
|
)
|
|
1,081,140
|
|
Payments
on debt to related parties
|
|
|
—
|
|
|
(74,646
|
)
|
Net
cash provided by financing activities
|
|
|
7,860,792
|
|
|
4,679,424
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(896,198
|
)
|
|
1,611,173
|
|
CASH —
Beginning of year
|
|
|
1,638,917
|
|
|
27,744
|
|
CASH —
End of year
|
|
$
|
742,719
|
|
$
|
1,638,917
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
206,852
|
|
$
|
424,298
|
|
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
|
|
Preferred
Stock converted to common stock
|
|
$
|
108,190
|
|
$
|
—
|
|
Common
Stock issued in settlement of preferred stock
dividend
|
|
$
|
27,770
|
|
$
|
29,470
|
|
Deferred
stock offering costs charged to paid in capital
|
|
$
|
-
|
|
$
|
608,161
|
|
Common
Stock issued in acquisition of property and equipment
|
|
$
|
7,250
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these financial
statements
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
(1) Operations
and Summary of Significant Accounting Policies
A) Nature
of Operations
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 6 Reed’s Ginger Brew flavors
(Original, Premium, Extra, Cherry Ginger, Raspberry Ginger and Spiced Apple
Ginger), 7 Virgil’s Root Beer and Cream Sodas beverages (Root Beer, Cream Soda,
Black Cherry Cream Soda, the same three in a Diet version, plus the Special
Edition Bavarian Nutmeg Root Beer) , 2 China Cola beverages (regular and
cherry), 2 kinds of ginger candies (crystallized ginger and ginger chews),
and 3 flavors of ginger ice cream (Original, Green Tea, and
Chocolate).
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 Europe
and Canada.
B) Cash
and Cash Equivalents
Cash
and
cash equivalents include unrestricted deposits and short-term investments with
an original maturity of three months or less.
C) Use
of Estimates
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.
D) Accounts
Receivable
The
Company evaluates the collectibility of its trade accounts receivable based
on a
number of factors. In circumstances where the Company becomes aware of a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded, which reduces the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The
allowance for doubtful accounts and returns and discounts is established through
a provision for returns and discounts charged against sales. Receivables are
charged off against the allowance when payments are received or products
returned. The allowance for doubtful accounts and returns and discounts as
of
December 31, 2007 was approximately $407,000.
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.
F) Intangible
Assets
The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible
Assets.” Goodwill and other intangible assets deemed to have indefinite lives
are not subject to annual amortization. The Company reviews, at least quarterly,
its investment in brand names and other intangible assets for impairment and
if
impairment is deemed to have occurred the impairment is charged to expense.
Intangible assets which have finite lives are amortized on a straight line
basis
over their remaining useful life; they are also subject to annual impairment
reviews. See Note 4.
Management
applies the impairment tests contained in SFAS Number 142 to determine if an
impairment has occurred. Accordingly, management compares the carrying value
of
the asset to its fair value in determining the amount of the impairment. No
impairments were identified for the years ended December 31, 2007 and
2006.
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.
G) 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 bank accounts in excess of the insurance limit.
In assessing the risk, the Company’s policy is to maintain cash balances with
high quality financial institutions. The Company had cash balances in excess
of
the $100,000 guarantee during the year ended December 31,
2007.
During
the years ended December 31, 2007 and 2006 the Company had two customers,
which accounted for approximately 35% and 14%, and 39% and 17%, respectively,
of
the Company’s total sales. No other customer accounted for more than 10% of
sales in either year. As of December 31, 2007, the Company had $660,123 (42%)
and $100,224 (6%), respectively, of accounts receivable due from these
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 has outfitted 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, 2007 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.
I) Cost
of sales
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, 2007 and 2006 those costs
were approximately $225,000 and $179,000, respectively.
In
addition, the Company classifies purchasing and receiving costs, inspection
costs, warehousing costs, freight costs, internal transfer costs and other
costs
associated with product distribution as costs of sales. Certain of these costs
become a component of the inventory cost and are expensed to costs of sales
when
the product to which the cost has been allocated is sold.
Expenses
not related to the production of our products are classified as operating
expenses.
J) 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. 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) 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.
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, 2007 and 2006 approximated $955,000 and $697,000,
respectively.
L) Net
Loss Per Share
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, 2007 and 2006 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, 2007:
Warrants
|
|
|
1,668,236
|
|
Preferred
Stock
|
|
|
192,484
|
|
Options
|
|
|
749,000
|
|
Total
|
|
|
2,609,720
|
|
M) Advertising
Costs
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 $174,000 and $51,739, for the years ended December 31, 2007 and 2006,
respectively.
N) 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. Management believes we operate in one
segment and evaluates its revenues and expenses in only one segment.
O) Stock
Compensation Expense
The
Company periodically issues stock options and warrants to employees and
non-employees in non-capital raising transactions for services and for financing
costs. The Company adopted Statement of Financial Accounting Standards (SFAS)
No. 123R effective January 1, 2006, and is using the modified prospective method
in which compensation cost is recognized beginning with the effective date
(a)
based on the requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No. 123R
for
all awards granted to employees prior to the effective date of SFAS No. 123R
that remained unvested on the effective date. The Company accounts for stock
option and warrant grants issued and vesting to non-employees in accordance
with
EITF No. 96-18: "Accounting for Equity Instruments that are Issued to Other
Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees” whereas the value of the stock
compensation is based upon the measurement date as determined at either a)
the
date at which a performance commitment is reached, or b) at the date at which
the necessary performance to earn the equity instruments is
complete.
P) 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.
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.
In
December 2007, the FASB issued FASB Statement No. 141 (R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141 (R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited.
In
December 2007, the FASB issued SFAS No. 160,“Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB
No. 51”. SFAS No. 160 establishes accounting and reporting standards
that require that the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parent’s equity; the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented
on
the face of the consolidated statement of income; and changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently. SFAS No. 160 also requires
that any retained noncontrolling equity investment in the former subsidiary
be
initially measured at fair value when a subsidiary is deconsolidated. SFAS
No. 160 also sets forth the disclosure requirements to identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. SFAS No. 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but
will
affect only those entities that have an outstanding noncontrolling interest
in
one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited.
SFAS No. 160 must be applied prospectively as of the beginning of the
fiscal year in which it is initially applied, except for the presentation and
disclosure requirements. The presentation and disclosure requirements are
applied retrospectively for all periods presented.
Management
believes the adoption of the above mentioned accounting policies will not have
a
material impact on the Company’s results of operations, financial position or
cash flow.
(2) Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or market, and is comprised
of the following as of December 31, 2007:
Raw
Materials
|
|
$
|
1,179,580
|
|
Finished
Goods
|
|
|
1,848,870
|
|
|
|
$
|
3,028,450
|
|
(3) Fixed
Assets
Fixed
assets are comprised of the following as of December 31, 2007:
Land
|
|
$
|
1,409,546
|
|
Building
|
|
|
1,743,420
|
|
Vehicles
|
|
|
339,624
|
|
Machinery
and equipment
|
|
|
1,250,076
|
|
Office
equipment
|
|
|
373,805
|
|
|
|
|
5,116,471
|
|
Accumulated
depreciation
|
|
|
(867,769
|
)
|
|
|
$
|
4,248,702
|
|
Depreciation
expense for the years ended December 31, 2007 and 2006 was $204,517 and
$155,116, respectively.
(4) Intangible
Assets
Brand
Names
Brand
Names consist of two (2) trademarks for natural beverages which the Company
acquired in previous years. As long as the Company continues to renew its
trademarks, these intangible assets will have an indefinite life. Accordingly,
they are not subject to amortization. The Company determines fair value for
Brand Names by reviewing the net sales of the associated beverage and applying
industry multiples for which similar beverages are sold. As of December 31,
2007, carrying amounts for Brand Names were $800,201.
Other
Intangible Assets
At
December 31, 2007, Other Intangible Assets consist of:
Asset
|
|
Gross
Amount
|
|
Accumulated
Amortization
|
|
Current
Year
Amortization
|
|
Useful
Life
|
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
5,212
|
|
$
|
745
|
|
|
300
months
|
|
The
estimated aggregate amortization as of December 31, 2007 for each of the
next five years is:
Year
|
|
Amount
|
|
2008
|
|
$
|
745
|
|
2009
|
|
|
745
|
|
2010
|
|
|
745
|
|
2011
|
|
|
745
|
|
2012
|
|
|
745
|
|
(5) Lines
of Credit
During
the year ending December 31, 2007, the Company utilized the following line
of credit agreements available:
The
Company has an unsecured $50,000 line of credit with a 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. The Company’s outstanding balance
was $24,750 at December 31, 2006 and was paid off in the year ending
December 31, 2007. As of December 31, 2007, there was $50,000 available under
the line of credit.
During
the year ending December 31, 2007, the Company paid off and closed a line of
credit with a bank. This line of credit allowed the Company to borrow a maximum
amount of $1,500,000. The interest rate on this line of credit was at the Prime
rate.
(6) Long-term
Debt
Long-term
debt consists of the following as of December 31, 2007:
Note
payable to the Small Business Association 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 $5,976, subject to annual adjustments.
The interest rate in effect at December 31, 2007 was 8.5%. The note
is secured by land and building and guaranteed by the majority
stockholder. The note matures November 2025.
|
|
$
|
650,483
|
|
|
|
|
|
|
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
$1,137;
subject to annual adjustments. The rate in effect at December 31,
2007 was 7.08% per annum. The note is secured by land and building
and
guaranteed by the majority stockholder and matures
November 2025.
|
|
|
136,525
|
|
|
|
|
|
|
Note
payable to GMAC, secured by an automobile, payable in monthly installments
of $384 including interest at 0.0%, with maturity in 2008.
|
|
|
384
|
|
|
|
|
|
|
|
|
|
5,692
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
793,084
|
|
|
|
|
|
|
Less
current portion
|
|
|
27,331
|
|
|
|
$
|
765,753
|
|
The
aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31, 2007:
2008
|
|
$
|
27,331
|
|
2009
|
|
|
20,061
|
|
2010
|
|
|
22,006
|
|
2011
|
|
|
24,139
|
|
2012
|
|
|
26,479
|
|
Thereafter
|
|
|
673,068
|
|
Total
|
|
$
|
793,084
|
|
(7) Stockholders’
Equity
Preferred
Stock
Preferred
stock consists of 500,000 shares authorized to Series A, $10.00 par
value, 5% non-cumulative, participating, preferred stock. As of December 31,
2007 there were 48,121 shares outstanding, with a liquidation preference of
$10.00.
These
preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend
can be paid in cash or, in the sole and absolute discretion of our board of
directors, in shares of common stock based on its then fair market value. We
cannot declare or pay any dividend on shares of our securities ranking junior
to
the preferred stock until the holders of our preferred stock have received
the
full non-cumulative dividend to which they are entitled. In addition, the
holders of our preferred stock are entitled to receive pro rata distributions
of
dividends on an “as converted” basis with the holders of our common stock.
During the year ended December 31, 2007, the Company accrued and paid a $27,770
dividend payable to the preferred shareholders, which management has elected
to
pay through the issuance of 3,820 shares of its common stock. 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
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.
Since
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. During the
year ended December 31, 2007, 10,819 shares of preferred stock was converted
into 43,276 shares of common 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.
Common
Stock
Common
stock consists of $.0001 par value, 19,500,000 shares authorized,
8,751,721 shares issued and outstanding as of December 31, 2007.
During the year ending December 31, 2007, a majority of the Company’s
shareholders approved an increase of its authorized shares from 11,500,000
to
19,500,000.
During
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 of
common stock 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. The Company paid 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. The Company received
proceeds after commissions of approximately $8,100,000 in the aggregate, of
which approximately $7,626,000 was received net of offering costs.
During
the year ended December 31, 2007, 440 shares of common stock with a value of
$3,782 were issued to employees as a bonus, 1,000 shares with a value of $7,250
were issued to a consultant for services rendered related to the acquisition
of
real estate and 60,000 shares of common stock were issued from the exercise
of
60,000 warrants and the Company received $165,000 upon their
conversion.
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 Company
received proceeds after commissions of approximately $7,200,000 in the
aggregate, of which approximately $7,005,000 was received in 2006 ($6,396,460
after commissions). In addition, the Company granted warrants to purchase
200,000 shares of common stock to the underwriters. These warrants have an
exercise price of $6.60. During the 2007 year, the Company incurred an
additional $55,394 in costs in relation to this public offering.
In
November 2006, the Company issued 9,315 shares of common stock as a result
of a
former note holder who converted his note and accrued interest, in the amount
of
$22,355, to common stock in accordance with the original note terms. During
2006, the Company converted related party debt and associated accrued interest,
in the amount of $263,089, to common stock. The total shares issued were 140,859
at a value of $285,444. (See Note 11)
(8) Stock
Options and Warrants
A) Stock
Options
In
2001,
the Company adopted the Original Beverage Corporation 2001 Stock Option Plan
and
in 2007 the Company adopted the Reed’s Inc 2007 Stock Option Plan (the “Plans”).
The options under both plans 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 and 1,500,000, respectively for the Original
Beverage Corporation 2001 Stock Option Plan and the Reed’s Inc 2007 Stock Option
Plan.
During
the year ended December 31, 2007, the Company issued 474,000 options to purchase
the Company's common stock at a weighted average price of $7.50 to employees
under the Plans. The aggregate value of the options vesting during the year
ended December 31, 2007 and 2006 was $420,571 and $5,808, respectively, and
has
been reflected as compensation cost. As of December 31, 2007, the aggregate
value of unvested options was $1,798,399, which will be amortized as
compensation cost as the options vest, over 3 years.
The
weighted-average grant date fair value of options granted during 2007 and 2006
was $4.68 and $2.46, respectively.
|
Year
ended
December
31, 2007
|
Year
ended
December
31, 2006
|
Expected
volatility
|
70%-90%
|
70%
|
Weighted
average volatility
|
72.14%
|
70%
|
Expected
dividends
|
—
|
—
|
Expected
term (in years)
|
5
|
5
|
Risk
free rate
|
4.48%
|
4.49%
|
A
summary
of option activity as of December 31, 2007 and changes during the year then
ended is presented below:
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2006
|
|
|
291,000
|
|
$
|
3.80
|
|
|
|
|
|
|
|
Granted
|
|
|
85,000
|
|
$
|
4.00
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(12,500
|
)
|
$
|
4.00
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
363,500
|
|
$
|
3.84
|
|
|
3.8
|
|
$
|
92,500
|
|
Exercisable
at December 31, 2006
|
|
|
278,500
|
|
$
|
3.79
|
|
|
3.5
|
|
$
|
92,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
363,500
|
|
$
|
3.84
|
|
|
|
|
|
|
|
Granted
|
|
|
474,000
|
|
$
|
7.50
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(88,500
|
)
|
$
|
5.01
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
749,000
|
|
$
|
6.02
|
|
|
3.8
|
|
$
|
732,760
|
|
Exercisable
at December 31, 2007
|
|
|
298,333
|
|
$
|
3.81
|
|
|
2.7
|
|
$
|
609,233
|
|
A
summary
of the status of the Company’s nonvested shares granted under the Company’s
stock option plan as of December 31, 2007 and changes during the year ended
December 31, 2007 is presented below:
|
|
Shares
|
|
Weighted-Average Grant
Date
Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2007
|
|
|
85,000
|
|
$
|
2.46
|
|
Granted
|
|
|
474,000
|
|
$
|
4.68
|
|
Vested
|
|
|
(28,333
|
)
|
$
|
2.46
|
|
Forfeited
|
|
|
(80,000
|
)
|
$
|
3.17
|
|
Nonvested
at December 31, 2007
|
|
|
450,667
|
|
$
|
4.67
|
|
Additional
information regarding options outstanding as of December 31, 2007 is as follows:
Options
outstanding
|
|
Options
exercisable
|
|
Exercise
price
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual
life (years)
|
|
Weighted
average
exercise price
|
|
Number
exercisable
|
|
Weighted
average
exercise price
|
|
$2.00
to $2.99
|
|
|
37,500
|
|
|
1.55
|
|
$
|
2.00
|
|
|
37,500
|
|
$
|
2.00
|
|
$3.00
to $3.99
|
|
|
26,500
|
|
|
2.30
|
|
|
3.24
|
|
|
17,500
|
|
|
3.00
|
|
$4.00
to $4.99
|
|
|
282,500
|
|
|
3.23
|
|
|
4.00
|
|
|
225,833
|
|
|
4.00
|
|
$5.00
to $5.99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$6.00
to $6.99
|
|
|
17,500
|
|
|
1.42
|
|
|
6.00
|
|
|
17,500
|
|
|
6.00
|
|
$7.00
to $7.99
|
|
|
200,000
|
|
|
4.64
|
|
|
7.61
|
|
|
-
|
|
|
-
|
|
$8.00
to $8.99
|
|
|
175,000
|
|
|
4.63
|
|
|
8.50
|
|
|
-
|
|
|
-
|
|
$9.00
to $9.99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$10.00
to $10.99
|
|
|
10,000
|
|
|
4.60
|
|
|
10.01
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
749,000
|
|
|
3.79
|
|
$
|
6.02
|
|
|
298,333
|
|
$
|
3.81
|
|
B) Warrants
During
the year ended December 31, 2007, the Company granted 914,995 warrants to
investors and underwriters in relation to an underwriting agreement (see Note
7)
valued at $3,901,779.
The
fair
value of each warrant is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table.
Expected volatility is based on the volatilities of public entities which are
in
the same industry as the Company. For purposes of determining the expected
life
of the option, the full contract life of the option is used. The risk-free
rate
for periods within the contractual life of the options is based on the U. S.
Treasury yield in effect at the time of the grant.
|
|
Year
ended
December 31, 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 warrants granted during 2007 and
2006
was $4.27 and $2.03, respectively.
A
summary
of warrant activity as of December 31, 2007 and changes during the year then
ended is presented below:
|
|
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining Contractual
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2006
|
|
|
613,241
|
|
$
|
2.80
|
|
|
|
|
|
|
|
Granted
|
|
|
200,000
|
|
$
|
6.60
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
813,241
|
|
$
|
3.74
|
|
|
3.0
|
|
$
|
731,617
|
|
Exercisable
at December 31, 2006
|
|
|
613,241
|
|
$
|
2.80
|
|
|
2.4
|
|
$
|
731,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2007
|
|
|
813,241
|
|
$
|
3.74
|
|
|
|
|
|
|
|
Granted
|
|
|
914,995
|
|
$
|
7.34
|
|
|
|
|
|
|
|
Exercised
|
|
|
(60,000
|
)
|
$
|
2.75
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,668,236
|
|
$
|
5.75
|
|
|
3.4
|
|
$
|
1,674,580
|
|
Exercisable
at December 31, 2007
|
|
|
1,668,236
|
|
$
|
5.75
|
|
|
3.4
|
|
$
|
1,674,580
|
|
The
aggregate intrinsic value was calculated, as of December 31, 2007, as the
difference between the market price and the exercise price of the Company’s
stock for the 553,241 warrants which were in-the-money.
A
summary
of the status of the Company’s nonvested shares granted as warrants as of
December 31, 2007 and changes during the year ended December 31, 2007 is
presented below:
|
|
Shares
|
|
Weighted-Average Grant
Date
Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested
at January 1, 2007
|
|
|
200,000
|
|
$
|
2.03
|
|
Granted
|
|
|
914,995
|
|
$
|
4.27
|
|
Vested
|
|
|
(1,114,995
|
)
|
$
|
3.86
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
Nonvested
at December 31, 2007
|
|
|
—
|
|
|
—
|
|
Additional
information regarding warrants outstanding as of December 31, 2007 is as
follows:
Warrants
outstanding
|
|
Warrants
exercisable
|
|
Exercise
price
|
|
Number
outstanding
|
|
Weighted
average
remaining
contractual
life
(years)
|
|
Weighted
average
exercise
price
|
|
Number
exercisable
|
|
Weighted
average
exercise
price
|
|
$2.00
to $2.99
|
|
|
104,876
|
|
|
1.50
|
|
$
|
2.00
|
|
|
104,876
|
|
$
|
2.00
|
|
$3.00
to $3.99
|
|
|
446,865
|
|
|
1.50
|
|
|
3.00
|
|
|
446,865
|
|
|
3.00
|
|
$4.00
to $4.99
|
|
|
1,500
|
|
|
1.50
|
|
|
4.00
|
|
|
1,500
|
|
|
4.00
|
|
$5.00
to $5.99
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
$6.00
to $6.99
|
|
|
365,000
|
|
|
4.18
|
|
|
6.60
|
|
|
365,000
|
|
|
6.60
|
|
$7.00
to $7.99
|
|
|
749,995
|
|
|
4.46
|
|
|
7.50
|
|
|
749,995
|
|
|
7.50
|
|
Total
|
|
|
1,668,236
|
|
|
3.42
|
|
$
|
5.75
|
|
|
1,668,236
|
|
$
|
5.75
|
|
(9) Income
Taxes
At
December 31, 2007, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $10,400,000 for Federal purposes and $9,300,000
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.
SFAS
No. 109 requires that a valuation allowance be established when it is more
likely than not that all or a portion of deferred tax assets will not be
realized. Due to restrictions imposed by Internal Revenue Code Section 382
regarding substantial changes in ownership of companies with loss
carry-forwards, the utilization of the Company’s net operating loss
carry-forwards will likely be limited as a result of cumulative changes in
stock
ownership. The company has not recognized a deferred tax asset and, as a
result, the change in stock ownership has not resulted in any
changes to valuation allowances.
Upon
the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards and will recognize a deferred tax asset at that
time.
Significant
components of the Company’s deferred income tax assets as of December 31, 2007
are as follows:
Deferred
income tax asset:
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
4,800,000
|
|
Valuation
allowance
|
|
|
(4,800,000
|
)
|
Net
deferred income tax asset
|
|
$
|
—
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
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
|
|
|
—
|
|
|
—
|
|
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 December
31,
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 December 31, 2007, the Company has no accrued
interest or penalties related to uncertain tax positions.
(10) Commitments
and Contingencies
The
Company leases machinery under non-cancelable operating leases. Rental expense
for the years ended December 31, 2007 and 2006 was $53,861 and $67,707,
respectively.
Future
payments under these leases as of December 31, 2007 are as
follows:
Year
Ending
|
|
|
|
December
31,
|
|
|
|
2008
|
|
$
|
18,634
|
|
2009
|
|
|
12,365
|
|
2010
|
|
|
7,496
|
|
2011
|
|
|
6,872
|
|
2012
|
|
|
-
|
|
Total
|
|
$
|
45,367
|
|
Other
Commitments
The
Company has entered into contracts with customers with clauses that commit
the
Company to fees if the Company terminates the agreement early or without cause.
The contracts call for the customer to have the right to distribute the
Company’s products to a defined type of retailer within a defined geographic
region. If the Company should terminate the contract or not automatically renew
the agreements, amounts would be due to the customer. As of December 31, 2007,
the Company has no plans to terminate or not renew any agreement with any of
their customers, therefore no fees have been accrued in the accompanying
financial statements.
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.
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
was included in legal costs on the Statement of Operations for the year ended
December 31, 2006.
As
of
December 31, 2007, the Company has a $300,000 note receivable from an entity
that is partly owned by an advisor to the board of directors. The note is
secured by all the entity’s assets and intellectual property. The note is
payable on March 25, 2008 and bears interest at 7.50% per annum with quarterly
interest payments. As of December 31, 2007, the Company has determined that
the
note may be deemed uncollectible and the collateral worthless, and has created
a
reserve for uncollectible amounts for the entire balance due.
For
the
year ending December 31, 2007, the Company employed three family members of
the
majority shareholder and Chief Executive officer of the Company in sales and
administrative roles. The three members were paid approximately $232,000,
$80,000 and $15,000, respectively. In addition, for the year ending December
31,
2007, these family members were granted 0, 100,000 and 0 options, respectively,
to purchase the Company’s common stock which vest over three years and expire in
2012.
The
Company had notes payable to Robert T. Reed, Sr., the father of the Company’s
President. During 2006 these notes payable and related accrued interest were
either converted to common stock or fully repaid. $177,710 of notes payable
was
converted to 88,855 shares of common stock, in accordance with the original
terms of the note. In addition, $85,379 of accrued interest was converted to
42,689 shares of common stock, in accordance with the original terms of the
note. $74,648 of notes payable and $25,625 of accrued interest were
repaid.
(12) Subsequent
Events
In
January 2008, the Company entered into an agreement for future consulting
services. The Company has agreed to pay 11,960 shares of common stock over
the
six month engagement and agreed to register the shares with the Securities
and
Exchange Commission in its next registration statement. From January
to March 2008, we issued 5,979 shares of common stock to the consultant
under the agreement.
In
March
2008, the Company borrowed a total of $1,770,000 from a bank secured by the
Company’s real estate and personally guaranteed by Chris Reed, the Company’s CEO
and founder. The 30 year financing bears interest at 8.41% per annum and carries
a prepayment penalty of 3% if the loan is repaid within five years. The amounts
presented as Long Term debt on the accompanying balance sheet as of December
31,
2007 will be repaid as a condition of this financing.
In
March
2008, options to purchase a total of 193,000 shares of company stock were issued
to employees from the Plans with strike prices from $3.48 to
$5.00.
In
March
2008, we issued 150,000 shares of common stock to a consultant pursuant to
a
research and analysis services agreement.
Item
8.
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not
applicable.
Item
8A(T). Controls and Procedures
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining an adequate system
of
internal control over financial reporting. Our system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in the United States of America.
Our
internal controls over financial reporting include those policies and procedures
that:
|
·
|
pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect our transactions and dispositions of our assets;
|
|
·
|
provide
reasonable assurance that our transactions are recorded as necessary
to
permit preparation of our financial statements in accordance with
accounting principles generally accepted in the United States of
America,
and that our receipts and expenditures are being made only in accordance
with authorizations of our management and our directors; and
|
|
·
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that
could
have a material effect on the financial statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time. Our system
contains self monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Our
Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of the system of internal control over financial reporting based
on the framework in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on
this
evaluation, our management concluded that our system of internal control over
financial reporting was ineffective as of December 31, 2007.
In
October 2007, we engaged an internal controls consultant to assist in our
compliance with the Sarbanes-Oxley Act of 2002. Specifically, the consultant
was
engaged to document our system of internal controls, identify material
weaknesses, propose and implement remediation of the weaknesses, develop tests
of our key controls, analyze the testing and train our personnel to maintain the
system and tests. In December 2007, we received a report from our internal
controls consultant that stated that we have material weaknesses in our system
of internal controls. A material weakness, as defined in standards established
by the Public Company Accounting Oversight Board (United States), has been
identified. A material weakness is a deficiency in internal control over
financial reporting that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not
be
prevented or detected.
Based
upon the report of the consultant and managements assessment, we have identified
the following material weaknesses:
|
·
|
insufficient
disaster recovery or backup of core business
functions,
|
|
·
|
lack
of segregation of duties,
|
|
·
|
lack
of a purchase order system or procurement
process,
|
|
·
|
lack
of documented and reviewed system of internal controls,
and
|
|
·
|
accounting
for the allowance for bad debts and the application of credit memos
and
chargebacks.
|
Management
is continuing to work with our internal controls consultant to remediate these
material weaknesses in our system of internal controls. The following is a
summary of the material weaknesses identified in the report.
Insufficient
disaster recovery or backup of core business functions.
In
December 2007, we experienced instability with our computer system back up
systems due to an upgrade of several of our computer servers. We have selected
a
new back up solution, which we expect to be implemented by the second quarter
of
2008.
Lack
of segregation of duties.
Under
the supervision of our Chief Executive Officer, in June 2007, we purchased
and
implemented a new accounting system. We believe this system is more robust
than
our previous accounting system. In our informal post implementation analysis,
we
have determined that the migration to this new accounting system omitted several
key elements such as training of our accounting, operations and management
staff
of key processes, such as the generation of management reports, implementation
of modules and user access to the general ledger. The lack of these processes
created a lack of segregation of duties. To remediate this deficiency, we have
engaged internal control and information systems support personnel to train
our
staff, design reports, develop processes and document our system of internal
controls. This process is ongoing and expected to be complete by the fourth
quarter of 2008.
Immediately
after the implementation of the new accounting system, all users were assigned
“super user” rights, meaning that there were no limitations or restrictions to
what modules or menu items our users could access. This “super user” right is
usually reserved for system administrators because a user with “super user”
access can enter, modify or approve any journal entry, without restriction.
To
remediate this internal control deficiency, we have defined job descriptions
for
each user of our accounting system and restricted access related to job
responsibilities and functions, so there are no unauthorized transactions posted
and a review process is in place. The restricted menus for each user were
implemented in the first quarter of 2008. We are currently reviewing the list
of
processes and menus assigned to each staff member and expect the review will
be
complete by the end of the second quarter of 2008.
Lack
of a purchase order system or procurement process.
We do
not utilize a purchase order system to initiate, track, and approve our
purchases. Although we use a purchase order for the procurement and production
of our inventory, the purchase orders generated are not integrated into our
accounting system, compared to our budget and forecast process or reviewed
by
management. To address the lack of a purchase order system or process, we have
assigned consultants to implement the purchase order process and module within
the accounting system to initiate, approve, and track the purchasing of all
goods and services. Management has identified individuals within the company
who
will be authorized to initiate and approve the purchasing of goods and services
from vendors. In addition, we have informed most of our vendors that we will
require an approved, system generated purchase order before any goods, products
or services can be procured. For individuals approving purchase orders, dollar
amount limits have been assigned within the accounting system consistent with
their approval level and job function. We expect that we will complete and
implement the purchase order module by the end of the second quarter of
2008.
It
is
common in the beverage industry for sales personnel to provide discounts,
promotions, cooperative advertising or incentives to a company’s customers. Our
sales personnel often commit us to these types of programs to increase sales
or
introduce new products. However, our accounting personnel have not been
regularly informed of this commitment until after the customer has deducted
the
cost of the program from their remittances. We believe that these undocumented
commitments have created a material weakness in our internal control over
financial reporting. We also have experienced difficulty reconciling the
deduction taken by our customers and the undocumented commitment by our sales
personnel, thereby creating the potential for unauthorized discounts and the
resulting loss of revenue. To remediate this weakness, we are designing a
purchase order system whereby our sales personnel will be required to provide
our customers with an approved and documented purchase order for committed
programs. This system is anticipated to be designed and implemented over two
phases. The first phase of the system will be manual (paper based) and not
be
electronically integrated into the accounting system. This first phase was
designed in the first quarter of 2008 and will be completed in the second
quarter of 2008. The next phase of the system will be designed in the second
quarter of 2008 and is expected to be integrated into the accounting
system.
Lack
of documented and reviewed system of internal controls.
Our
internal controls consultant reported that we have a material weakness in our
internal controls due to the lack of a documented and reviewed system of
internal controls, and further advised us that if we had a documented and
reviewed system of internal controls, it would indicate that we do not perform
several key accounting processes. We have determined that to perform the
processes and remediate this internal control deficiency, we would either need
to hire additional accounting personnel or train our existing accounting
personnel and reallocate their functions. We have not yet performed an analysis
to determine if we can perform this function with our existing staff. However,
we expect to perform this analysis in the second and third quarters of 2008.
Examples of key processes that are not performed include:
Reconciliation
of accounts receivable activity
Since
July 2007, when we implemented a new accounting system, we have not had a
process to reconcile activity with our customers, which include collection
of
past due amounts and follow-up with deductions. For example, when our customers
take deductions for programs and do not provide documentation with their
remittance, we do not have a process to reconcile, document and account for
the
deduction. Further, if the deductions were unauthorized, we have no process
to
dispute or collect from our customers. In addition, we do not have a process
to
collect from our customers for past-due amounts.
For
several months in 2007, we incorrectly applied customer payments so that our
reports of open invoices were not reliable. In order to fix the incorrectly
applied payments, we will need to perform a reconciliation that may take several
weeks. No resources have been allocated for this reconciliation, but we are
expecting to assign resources in the second quarter of 2008 and complete the
reconciliation in the third quarter of 2008. Since October 2007, we have
correctly applied our customer payments.
Month-end,
quarterly and periodic reporting
Since
July 2007, when we implemented a new accounting system, we have not had a
documented process for our month-end and quarter-end close. We plan to document
and implement the quarter-end close process in the second quarter of 2008 and
a
month-end close process in the third-quarter of 2008.
Management
reports
We
do not
produce several key management reports to analyze the performance of sales
and
operations and the estimate of liabilities, such as recycling fees. We are
currently designing reports with a consultant on an as-needed, ad hoc basis.
We
will need additional reports so management can make decisions about the success
of marketing initiatives, sales personnel and operational efficiencies, which
we
plan to design through the third quarter of 2008.
Accounts
Payable
We
do not
pay vendor’s invoices in a timely manner which results in accounts payable aging
errors, errors in processing, lost discounts and potential threats of business
disruptions. To address untimely payment of vendor’s invoices, management is
implementing the above mentioned purchase order system and developing an
accounts payable process for entering invoices timely to track payments due
to
vendors to avoid business disruption and improved tracking of liabilities.
In
addition, our Chief Executive Officer is the only approved check signer. When
he
is not in the office, we need to rely on alternative methods of payments, such
as wire transfers or overnight couriers. If we are unable to rely on these
alternative methods of payments, we are unable to process payments to our
vendors, which can create untimely payments to vendors. We expect to develop
the
accounts payable process in the second quarter of 2008. However, we do not
expect to authorize additional check signers in the near future.
Beginning
with the fourth quarter of 2007, we implemented remediation plans in order
to
eliminate these material weaknesses, including the following:
|
·
|
we
hired a consultant to evaluate our system of internal controls and
hired a
Chief Financial Officer and replaced our
Controller,
|
|
·
|
additional
information systems personnel have been engaged and system issues,
including necessary alternatives, have been evaluated and revised
or
corrected, and
|
|
·
|
we
have prepared process documentation related to our key assumptions,
estimates and accounting policies and procedures.
|
As
of
December 31, 2007, we believe that we have identified and started the
remediation of the material weaknesses related to improved process documentation
surrounding our accounting policies and procedures. We will continue to
implement remediation plans to address the identified material weakness during
the remainder of 2008.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC to provide only
management’s report in this annual report.
With
regard to the identified material weakness, we did not restate any financial
results for any prior periods and believe that the identified material weakness
did not have any material effect on the accuracy of our financial statements
prepared with respect to any prior fiscal period.
Management’s
Evaluation of Disclosure Controls and Procedures
As
of
December 31, 2007, we carried out an evaluation, under the supervision and
with
the participation of our management, including our Chief Executive Officer
and
Chief Financial Officer, of the effectiveness of the design and operation of
our
“disclosure controls and procedures,” as such term is defined under Exchange Act
Rules 13a-15(e) and 15d-15(e).
In
making
this evaluation, we considered the material weaknesses of our system of internal
controls identified by our internal controls consultant. Despite the lack of
the
complete implementation of recommended improvements to the identified weaknesses
in our internal control procedures, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2007, such disclosure
controls and procedures were effective to ensure that information required
to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the rules and forms of the SEC, and accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
There
were no changes in our internal controls over financial reporting during the
quarter ended December 31, 2007 that materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting
.
Except
as
set forth above, we did not make any changes in our internal control over
financial reporting during the three months ended December 31, 2007 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Not
applicable.
PART
III
Item
9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange
Act
General
Our
directors currently have terms which will end at our next annual meeting of
the
stockholders or until their successors are elected and qualify, subject to
their
death, resignation or removal. Officers serve at the discretion of the board
of
directors. Except as described below, there are no family relationships among
any of our directors and executive officers. Our board members are encouraged
to
attend meetings of the board of directors and the annual meeting of
stockholders. The board of directors held seven meetings and adopted two
unanimous written consents in lieu of meetings in 2007.
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
|
|
45
|
Rory
Ahearn
|
|
Vice
President - Sales
|
|
56
|
Neal
Cohane
|
|
Vice
President - Sales
|
|
47
|
Mark
Reed
|
|
Executive
Vice President - Sales
|
|
46
|
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
|
|
51
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
Director
|
|
52
|
Michael
Fischman
|
|
Director
|
|
51
|
Christopher
J. Reed
founded
our company in 1987. Mr. Reed has served as our Chairman, President and Chief
Executive Officer since our incorporation in 1991. Until October 2007, Mr.
Reed
also served as the Company’s Chief Financial Officer. 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 L¹Oréal 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. 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 Vice President of Sales since August 2007. He has 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. In March 2008, Mr. Ahearn terminated his employment with the
Company.
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.
Mark
Reed has
been
our Executive Vice President - International Sales since August
2007. Prior to joining Reed’s, Mr. Reed was a Sales Director for
Greenplum, a database software company, from January 2007 to August 2007.
Mr. Reed worked as Vice President of Sales for 1Answer Solutions, a technology
consulting company, where he managed a sales force from September 2004 to
December 2006. Mr. Reed was a National Account Manager with Hyperion
Solutions from 2001 to 2004 and a Senior Account Executive with SunGard Data
Systems from 1998 to 2001. Mr. Reed worked as a Sales Executive for
Prairie Systems, from 1996 to 1997 and for the Aeroquip Corporation from 1993
to
1995. Prior to his positions in sales, Mr. Reed worked as an
Industrial Engineer for several Aerospace companies including Raytheon, Hughes
Missile Systems, General Dynamics and Rockwell International. Mr. Reed
received a B.S. in Industrial and Systems Engineering from the University of
Florida in 1985. Mr. Reed is the brother of Christopher J. Reed, our Chairman,
President and Chief Executive Officer and Robert T. Reed, Jr. our Vice President
- International Sales.
Robert
T. Reed,
Jr. has
been our Vice President and National Sales Manager - Mainstream since January
2004. In September 2007, Mr. Reed joined Mark Reed to develop an
International sales capability for Reed’s Inc. Prior to joining us, Mr. Reed was
employed with SunGard Availability Services from 1987 through 2003. While
at SunGard, Mr. Reed held several sales and executive management positions.
He
earned a Bachelors of Science degree in Business and Finance from Mount Saint
Mary’s University. Mr. Reed is the brother of Christopher J. Reed, our
Chairman, President and Chief Executive Officer and Mark Reed, our Executive
Vice President - International Sales.
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. In February 2008, Mr. Scheffer
terminated his employment with Company.
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 a 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, Mark 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.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
requires our directors and executive officers and beneficial holders of more
than 10% of our common stock to file with the SEC initial reports of ownership
and reports of changes in ownership of our equity securities. Directors,
executive officers and persons who own more than 10% of our common stock are
required by Securities and Exchange Commission regulations to furnish to us
copies of all Section 16(a) forms they file.
To
our
knowledge, based solely upon review of the copies of such reports received
or
written representations from the reporting persons, we believe that during
the
year ended December 31, 2007 our directors, executive officers and persons
who
own more than 10% of our common stock complied with all Section 16(a) filing
requirements with the exception of the following:
Messrs.
Christopher J. Reed, Rory Ahearn, Robert Lyon, Neal Cohane, David Kane, Mark
Reed, Robert T. Reed, Jr., Eric Scheffer, Mark Harris, Michael Fischman and
Thierry Foucaut and Ms. Judy Holloway Reed filed their initial statement of
beneficial ownership of securities (Form 3) late.
Item
10. Executive Compensation
Executive
Compensation
The
following table sets forth certain information concerning compensation of
certain of our executive officers, including our Chief Executive Officer and
all
other executive officers, or the Named Executives, whose total annual salary
and
bonus exceeded $100,000, for the years ended December 31, 2007 and
2006:
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Stock
Awards
|
|
Option
Awards
($)(1)
|
|
Non-Equity
Incentive
Plan
Compensation
|
|
Non-Qualified
Deferred
Compensation
Earnings
|
|
All
Other
Compensation
(6)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Reed, Chief Executive Officer
|
|
|
2007
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,616
|
|
$
|
154,616
|
|
|
|
|
2006
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,616
|
|
$
|
154,616
|
|
Robert
T. Reed, Jr. Executive Vice President
|
|
|
2007
|
|
$
|
167,000
|
|
$
|
65,000
|
|
|
|
|
$
|
24,600
|
|
|
|
|
|
|
|
|
|
|
$
|
256,600
|
|
Thierry
Foucaut, Chief Operating Officer (2)
|
|
|
2007
|
|
$
|
83,000
|
|
$
|
34,000
|
|
|
|
|
$
|
43,500
|
|
|
|
|
|
|
|
|
|
|
$
|
160,500
|
|
Robert
Lyon, Vice President
|
|
|
2007
|
|
$
|
90,000
|
|
$
|
65,000
|
|
|
|
|
$
|
24,600
|
|
|
|
|
|
|
|
|
|
|
$
|
179,600
|
|
Eric
Scheffer, Vice President
|
|
|
2007
|
|
$
|
80,000
|
|
$
|
65,000
|
|
|
|
|
$
|
20,500
|
|
|
|
|
|
|
|
|
|
|
$
|
165,500
|
|
Mark
Reed, Executive Vice President (3)
|
|
|
2007
|
|
$
|
80,192
|
|
|
|
|
|
|
|
$
|
70,000
|
|
|
|
|
|
|
|
|
|
|
$
|
150,192
|
|
Neal
Cohane, Senior Vice President (4)
|
|
|
2007
|
|
$
|
65,554
|
|
|
|
|
|
|
|
$
|
78,750
|
|
|
|
|
|
|
|
|
|
|
$
|
144,304
|
|
Rory
Ahearn, Senior Vice President (5)
|
|
|
2007
|
|
$
|
63,945
|
|
$
|
70,000
|
|
|
|
|
$
|
73,538
|
|
|
|
|
|
|
|
|
|
|
$
|
207,483
|
|
|
(1)
|
The
amounts represent the current year unaudited compensation expense
for all
share-based payment awards based on estimated fair values, computed
in
accordance with Financial Accounting Standards Board Statement No.
123
(revised 2004), “Share-Based Payment” (“SFAS No. 123R”), excluding any
impact of assumed forfeiture rates. We record compensation expense
for
employee stock options based on the estimated fair value of the options
on
the date of grant using the Black-Scholes-Merton option pricing formula
with the following assumptions: 0% dividend yield; 70.0% expected
volatility; 4.26%-4.91% risk free interest rate; 5 years expected
lives
and 0% forfeiture rate.
|
|
(2)
|
Mr.
Foucaut was hired in June 2007. Amounts represent payments pursuant
to an
at will employment agreement since his hire
date.
|
|
(3)
|
Mr.
Mark Reed was hired in August 2007. Amounts represent payments pursuant
to
an at will employment agreement since his hire
date.
|
|
(4)
|
Mr.
Cohane was hired in August 2007. Amounts represent payments pursuant
to an
at will employment agreement since his hire
date.
|
|
(5)
|
Mr.
Ahearn was hired in September 2007. Amounts represent payments pursuant
to
an at will employment agreement since his hire
date.
|
|
(6)
|
Mr.
Reed is provided an automobile.
|
None
of
our other employees received total compensation in excess of $100,000 during
the
years ended December 31, 2007 and 2006.
Outstanding
Equity Awards At Fiscal Year-End
The
following table provides information concerning unexercised options for each
of
our Named Executive Officers outstanding as of December 31, 2007:
Name
and Position
|
|
Number
of Securities Underlying Unexercised Options
(#)
Exercisable
|
|
Number
of Securities Underlying Unexercised Options
(#)
Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
|
|
Option
Exercise
Price
|
|
Option
Expiration
Date
|
|
Number of
Shares or Units
of Stock that
Have Not
Vested (#)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David
M. Kane, Chief Financial Officer
|
|
|
-
|
|
|
50,000
|
(1)
|
|
-
|
|
|
7.30
|
|
|
10/8/2012
|
|
|
|
|
Thierry
Foucaut, Chief Operating Officer
|
|
|
-
|
|
|
50,000
|
(2)
|
|
-
|
|
|
7.55
|
|
|
6/3/2012
|
|
|
|
|
Rory
Ahearn, Sr. Vice President
|
|
|
-
|
|
|
100,000
|
(3)
|
|
|
|
|
7.80
|
|
|
9/3/2012
|
|
|
|
|
Neal
Cohane, Sr. Vice President
|
|
|
-
|
|
|
75,000
|
(4)
|
|
|
|
|
8.50
|
|
|
8/16/2012
|
|
|
|
|
Mark
Reed, Executive Vice President
|
|
|
-
|
|
|
100,000
|
(5)
|
|
|
|
|
8.50
|
|
|
8/16/2012
|
|
|
|
|
Robert
T. Reed, Jr.
|
|
|
50,000
10,000
|
|
|
-
20,000
|
|
|
|
|
|
4.00
4.00
|
|
|
12/1/2010
12/6/2011
|
|
|
|
|
Robert
Lyon
|
|
|
60,000
10,000
|
|
|
-
20,000
|
|
|
|
|
|
4.00
4.00
|
|
|
12/1/2010
12/6/2011
|
|
|
|
|
Eric
Scheffer
|
|
|
75,000
8,333
|
|
|
-
16,667
|
|
|
|
|
|
4.00
4.00
|
|
|
12/1/2010
12/6/2011
|
|
|
|
|
Notes:
(1)
|
Vest
as follows: 16,666 on October 8, 2008, 16,666 on October 8, 2009
and
16,667 on October 8, 2010
|
(2)
|
Vest
as follows: 16,666 on June 3, 2008, 16,666 on June 3, 2009 and 16,667
on
June 3, 2010
|
(3)
|
These
options will not vest as Mr. Ahearn terminated his employment in
March
2008, before these options vest
|
(4)
|
Vest
as follows: 37,500 on August 17, 2008 and 37,500 on August 17,
2009
|
(5)
|
Vest
as follows: 33,333 on August 16, 2008, 33,333 on August 16, 2009
and
33,334 on August 16, 2010
|
Director
Compensation
The
following table summarizes the compensation paid to our directors, other than
Christopher J. Reed for the fiscal year ended December 31, 2007:
Name
|
|
Fees
Earned
or
Paid
in
Cash
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Judy
Holloway Reed
|
|
$
|
2,025
|
|
|
|
|
|
|
|
|
|
|
$
|
14,735
|
(1)
|
$
|
16,760
|
|
Mark
Harris
|
|
$
|
2,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,100
|
|
Dr.
D.S.J. Muffoletto, ND
|
|
$
|
3,678
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,678
|
|
Michael
Fischman
|
|
$
|
1,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,825
|
|
Notes:
(1)
|
Prior
to the engagement of a part time human resource consultant, Ms. Reed
was
paid for performing human resource consulting services on an at-will
basis
to us during 2007.
|
(2)
|
Since
November 2007, Dr. Muffoletto receives $833 per month to serve as
the
Chairman of the Audit Committee.
|
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 two year period ending in 2009. 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 two year period ending in 2009. Further, we
have
entered into an at-will employment agreement with Mark Reed, our Executive
Vice
President of Sales, which provides for an annualized salary of approximately
$225,000 per year. In addition, we have granted Mark Reed options to purchase
up
to 100,000 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 and 2007 Stock Option Plan
Pursuant
to our 2001 Stock Option Plan, we are authorized to issue options to purchase
up
to 500,000 shares of common stock and under our 2007 Stock Option Plan, we
are
authorized to issue options to purchase up to 1,500,000 shares of common stock.
As of the date of this Annual Report, 676,500 options have been issued and
remain outstanding under these plans, of which 225,833 options have vested.
On
August 28, 2001, our board of directors adopted the 2001 Stock Option Plan
and
the plan was approved by our stockholders. On October 8, 2007, our board of
directors adopted the 2007 Stock Option Plan and the plan was approved by our
stockholders on November 19, 2007.
The
plans
permit the grant of options to our employees, directors and consultants. The
options may constitute either “incentive stock options” within the meaning of
Section 422 of the Internal Revenue Code or “non-qualified stock options.”
The primary difference between “incentive stock options” and “non-qualified
stock options” is that once an option is exercised, the stock received under an
“incentive stock option” has the potential of being taxed at the more favorable
long-term capital gains rate, while stock received by exercising a
“non-qualified stock option” is taxed according the ordinary income tax rate
schedule.
The
plans
are currently administered by the board of directors. The plan administrator
has
full and final authority to select the individuals to receive options and to
grant such options as well as a wide degree of flexibility in determining the
terms and conditions of options, including vesting provisions.
The
exercise price of an option granted under the plan cannot be less than 100%
of
the fair market value per share of common stock on the date of the grant of
the
option. The exercise price of an incentive stock option granted to a person
owning more than 10% of the total combined voting power of the common stock
must
be at least 110% of the fair market value per share of common stock on the
date
of the grant. Options may not be granted under the plan on or after the tenth
anniversary of the adoption of the plan. Incentive stock options granted to
a
person owning more than 10% of the combined voting power of the Common Stock
cannot be exercisable for more than five years.
When
an
option is exercised, the purchase price of the underlying stock will be paid
in
cash, except that the plan administrator may permit the exercise price to be
paid in any combination of cash, shares of stock having a fair market value
equal to the exercise price, or as otherwise determined by the plan
administrator.
If
an
optionee ceases to be an employee, director, or consultant with us, other than
by reason of death, disability, or retirement, all vested options must be
exercised within three months following such event. However, if an optionee’s
employment or consulting relationship with us terminates for cause, or if a
director of ours is removed for cause, all unexercised options will terminate
immediately. If an optionee ceases to be an employee or director of, or a
consultant to us, by reason of death, disability, or retirement, all vested
options may be exercised within one year following such event or such shorter
period as is otherwise provided in the related agreement.
When
a
stock award expires or is terminated before it is exercised, the shares set
aside for that award are returned to the pool of shares available for future
awards.
No
option
can be granted under the plan after ten years following the earlier of the
date
the plan was adopted by the Board of Directors or the date the plan was approved
by our stockholders.
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.
Item 11.
Security
Ownership of Certain Beneficial Owners, Management and Related Stockholder
Matters
The
following table reflects, as of the date of this Annual Report, the beneficial
common stock ownership of: (a) each of our directors, (b) each named executive
officer, (c) each person known by us to be a beneficial holder of 5% or more
of
our common stock, and (d) all of our executive officers and directors as a
group.
Except
as
otherwise indicated below, the persons named in the table have sole voting
and
investment power with respect to all shares of common stock held by them. Unless
otherwise indicated, the principal address of each listed executive officer
and
director is 13000 South Spring Street, Los Angeles, California 90061
.
Name
of Beneficial Owner
|
|
Beneficially Owned
|
|
Percentage
of Shares
Beneficially
Owned (1)
|
|
|
|
|
|
|
|
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
Christopher
J. Reed (2)
|
|
|
3,200,000
|
|
|
35.92
|
|
Judy
Holloway Reed (2)
|
|
|
3,200,000
|
|
|
35.92
|
|
Mark
Harris (3)
|
|
|
4,319
|
|
|
*
|
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0.00
|
|
Michael
Fischman
|
|
|
0
|
|
|
0.00
|
|
David
M. Kane
|
|
|
0
|
|
|
0.00
|
|
Thierry
Foucaut
|
|
|
0
|
|
|
0.00
|
|
Neal
Cohane
|
|
|
0
|
|
|
0.00
|
|
Rory
Ahearn
|
|
|
0
|
|
|
0.00
|
|
Robert
T. Reed, Jr. (4)
|
|
|
402,282
|
|
|
4.46
|
|
Mark
Reed(4)
|
|
|
60,909
|
|
|
*
|
|
Robert
Lyon
|
|
|
70,000
|
|
|
*
|
|
Eric
Scheffer(4)
|
|
|
83,833
|
|
|
*
|
|
Directors
and executive officers as a group (12 persons) (4)
|
|
|
3,821,343
|
|
|
41.60
|
|
|
|
|
|
|
|
|
|
5%
or greater stockholders
|
|
|
|
|
|
|
|
Joseph
Grace (5)
|
|
|
500,000
|
|
|
5.61
|
|
Alma
and Gabriel Elias(6)
|
|
|
1,318,724
|
|
|
14.40
|
|
*
Less than 1%.
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this Annual Report, are
deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder's
name.
Unless otherwise indicated, the officers, directors and stockholders
can
be reached at our principal offices. Percentage of ownership is based
on
8,907,700 shares of common stock outstanding as of April 10,
2008.
|
(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.
|
(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
four executive officers (including Robert T. Reed, Jr., our Executive
Vice-President (282,282 shares of common stock, options exercisable
into
60,000 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 70,000 shares), Mark Reed, our Executive Vice President
- International (60,909 shares of common stock) and Eric Scheffer,
our
Vice President and National Sales Manager - Natural Foods (500 shares
and
options to purchase up to 83,333 shares)) who beneficially own in
the
aggregate of 617,024 shares of common stock. Does not include options
to
purchase up to 431,667 shares of common stock which vest in portions
through the period ending October 2012 for these and the other executive
officers.
|
|
The
address for Mr. Grace is 1900 West Nickerson Street, Suite 116, PMB
158,
Seattle, Washington 98119.
|
(6)
|
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).
|
Equity
Compensation Plan Information
The
following table provides information, as of December 31, 2007, with respect
to
options outstanding and available under the 2001 Plan and 2007 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
|
|
|
676,500
|
|
$
|
6.32
|
|
|
1,323,500
|
|
Equity
compensation plans not approved by security holders
|
|
|
1,740,736
|
|
$
|
5.64
|
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
2,417,236
|
|
$
|
5.83
|
|
|
1,323,500
|
|
Item 12.
Certain
Relationships and Related Transactions, and Director
Independence
We
had
three loans payable to Robert T. Reed, Sr., the father of our founder, President
and Chief Executive Officer, Christopher J. Reed, in the aggregate principal
amount of $252,358. These loans were made at various times between 1991 and
2003.
In
November and December 2006, we issued an aggregate of 131,544 shares of common
stock to Robert T. Reed, Sr., with respect to the conversion of an aggregate
of
$263,089 of the obligations, including $177,710 of principal and $85,379 of
accrued interest, on such notes. In addition, we repaid $74,648 of principal
and
$25,625 of accrued interest, on the balance of such notes.
We
had
issued warrants to Mr. Reed to purchase up to 262,500 shares at $0.02 for his
work in 1991 in helping the start up of our company. The original term of the
warrants was until December 31, 1997. We extended the term of these warrants
twice, once to December 31, 2000 and again to June 1, 2005. These extensions
were granted in consideration of the extensions Mr. Reed had granted us on
the
repayment of his various loans made to us. These warrants were exercised in
full
on May 31, 2005.
In
September 2004, Robert T. Reed Jr., our Vice President and National Sales
Manager - Mainstream and a brother of Christopher J. Reed, pledged certain
securities (which do not include any of our securities which are owned by Mr.
Reed) in his personal securities account on deposit with Merrill Lynch as
collateral for repayment of the line of credit. The amount of the line of credit
is based on a percentage value of such securities. At December 31, 2006, the
outstanding balance on the line of credit was $-0-, and there was approximately
$701,000 available under the line of credit. The line of credit bears interest
at a rate of 3.785% per annum plus LIBOR (9.1% as of December 31, 2006). In
consideration for Mr. Reed’s pledging his stock account at Merrill Lynch as
collateral, we have agreed to pay Mr. Reed 5% per annum of the amount we
borrow from Merrill Lynch, as a loan fee. During the years ended December 31,
2006 and 2005, we paid Mr. Reed $28,125 and $15,250, respectively, under this
agreement. In addition, Christopher J. Reed has pledged all of his shares of
common stock to Robert T. Reed, Jr. as collateral for the shares pledged by
Robert T. Reed, Jr. This loan was paid off in 2006.
We
believe that the terms of each of the foregoing transactions were as favorable
to us as the terms that would have been available to us from unaffiliated
parties.
Beginning
in January 2000, we extended an interest-free line of credit to one of our
consultants, Peter Sharma, III who was a member of our board until January
27,
2006. In July 2005, a repayment schedule began at $1,000 per month and was
to
end with a balloon payment for the remaining balance, due on December 31, 2007.
As of December 31, 2005, management has chosen to reserve the entire amount
of
the outstanding balance of $124,210. Management is pursuing collection efforts.
Mr. Sharma was a registered representative of Brookstreet Securities Corporation
until May 4, 2006. Brookstreet was one of the underwriters in our initial public
offering. Mr. Sharma received compensation of approximately $28,000 through
his
former relationship with Brookstreet.
At
the
time of each of the transactions listed above, except for the loan in October
2003 from Robert T. Reed, Sr., we did not have any independent directors to
ratify such transactions.
In
2005,
we added three independent directors to our board. We will maintain at least
two
independent directors on our board in the future. The Board of Directors,
inclusive of at least a majority of these independent directors, who did not
have an interest in the transactions and had access, at our expense, to our
or
independent legal counsel, resolved to reauthorize all material ongoing and
past
transactions, arrangements and relationships listed above. In addition, all
future material affiliated transactions and loans: (i) will be made or entered
into on terms that are no less favorable to us than those that can be obtained
from unaffiliated third parties, (ii) and any forgiveness of loans must be
approved by a majority of our independent directors who do not have an interest
in the transactions and who have access, at our expense, to our or independent
legal counsel, and (iii) will comply with the Sarbanes-Oxley Act and other
securities laws and regulations.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of common stock
in connection with this offering. The shares may have been issued in violation
of federal or state securities laws, or both, and may be subject to rescission.
On August 12, 2006, we made a rescission offer to all holders of the outstanding
shares that we believe are subject to rescission, pursuant to which we offered
to repurchase these shares then outstanding from the holders. At the expiration
of our rescission offer on September 18, 2006, the rescission offer was accepted
by 32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. This exposure amount was calculated
by reference to the acquisition price of $4.00 per share for the common stock
in
connection with the earlier offering, plus accrued interest at the applicable
statutory rate. If our rescission offer had been accepted by all offerees,
we
would have been required to make an aggregate payment to the holders of these
options and shares of up to approximately $1,332,624, plus statutory
interest.
We
had
entered into agreements with Mark Reed and Robert T. Reed, Jr. (the “designated
purchasers”) that they would irrevocably commit to purchase up to all of the
shares in the rescission offer that are tendered to us for rescission. Each
of
the designated purchasers is a brother of Christopher J. Reed, our Chief
Executive Officer 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 4.46% 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, our Executive Vice President - International, agreed to purchase all
of
the rescission shares from stockholders who accepted the rescission offer.
The
shares that were tendered for rescission were agreed to be purchased by others
and not from our funds. The rescission shares, purchased by the designated
purchasers in the rescission offer, are deemed to be registered shares for
the
benefit of the designated purchasers pursuant to the registration statement
filed by us relating to the rescission offer under the Securities Act, effective
as of the commencement date of the rescission offer without any further action
on the part of the designated purchasers. There are no assurances that we will
not be subject to penalties or fines relating to these issuances. We believe
our
anticipated rescission offer could provide us with additional meritorious
defenses against any future claims relating to these shares. This transaction
was ratified by a majority of our independent directors who did not have an
interest in the transactions and who had access, at our expense, to our or
independent legal counsel.
Item
13 Exhibits
|
Certificate
of Incorporation 1
|
3.2
|
Amendment
to Certificate of Incorporation 1
|
3.3
|
Certificate
of Designations 1
|
3.4
|
Certificate
of Correction to Certificate of Designations 1
|
3.5
|
Bylaws,
as amended 1
|
4.1
|
Form
of common stock certificate 1
|
4.2
|
Form
of Series A preferred stock certificate 1
|
4.3
|
2001
Employee Stock Option Plan 1
|
10.1
|
Purchase
Agreement for Virgil’s Root Beer 1
|
10.2
|
Brewing
Agreement dated as of May 15, 2001 between the Company and The Lion
Brewery, Inc. 1
|
10.3
|
Loan
Agreement with U.S. Bank National Association for purchase of the
Brewery
1
|
10.4
|
Loan
Agreement with U.S. Bank National Association for improvements at
the
Brewery 1
|
10.5
|
Loan
Agreement with California United Bank 2
|
10.6
|
Credit
Agreement with Merrill Lynch 1
|
10.7
|
Form
of Promotional Share Lock-In Agreement 1
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed 1
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr. 1
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr. 1
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma, III 1
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace 1
|
10.7(f)
|
Promotional
Share Lock-In Agreement for Judy Holloway Reed 1
|
10.7(g)
|
Promotional
Share Lock-In Agreement for Eric Scheffer 1
|
10.7(h)
|
Promotional
Share Lock-In Agreement for Mark Harris 3
|
|
Agreement
to Assume Repurchase Obligations 2
|
10.9(a)
|
Promissory
with Lehman Brothers for 13000 South Spring Street and 12930 South
Spring
Street *
|
14.1
|
Code
of Ethics 3
|
21
|
Subsidiaries
of Reed’s, Inc. *
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 *
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 *
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 *
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 *
|
*
|
Filed
herewith
|
1.
|
Filed
as part of the Registrant’s Registration Statement on Form SB-2 (File No.
333-120451).
|
2.
|
Previously
filed as part of the Registrant’s Registration Statement on Form SB-2
(File No. 333-146012).
|
3.
|
Filed
as part of the Registrant’s Registration Statement on Form SB-2 (File No.
333-135186).
|
Item 14.
Principal
Accounting Fees and Services
Weinberg
& Company, P.A. (“Weinberg”) was our independent registered public
accounting firm for the years ended December 31, 2007 and 2006.
The
following table shows the fees paid or accrued by us for the audit and other
services provided by Weinberg for the years ended December 31, 2007 and
2006.
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Audit
Fees
|
|
$
|
146,000
|
|
$
|
153,000
|
|
Audit-Related
Fees
|
|
|
0
|
|
|
0
|
|
Tax
Fees
|
|
|
0
|
|
|
0
|
|
All
Other Fees
|
|
|
0
|
|
|
0
|
|
Total
|
|
$
|
146,000
|
|
$
|
153,000
|
|
As
defined by the SEC, (i) “audit fees” are fees for professional services rendered
by our principal accountant for the audit of our annual financial statements
and
review of financial statements included in our Form 10-QSB, or for services
that
are normally provided by the accountant in connection with statutory and
regulatory filings or engagements for those fiscal years; (ii) “audit-related
fees” are fees for assurance and related services by our principal accountant
that are reasonably related to the performance of the audit or review of our
financial statements and are not reported under “audit fees;” (iii) “tax fees”
are fees for professional services rendered by our principal accountant for
tax
compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for
products and services provided by our principal accountant, other than the
services reported under “audit fees,” “audit-related fees,” and “tax
fees.”
Audit
Fees
Services
provided to us by Weinberg with respect to such periods consisted of the audits
of our financial statements and limited reviews of the financial statements
included in Quarterly Reports on Form 10-QSB. Weinberg also provided services
with respect to the filing of our registration statements in 2005 and 2006.
Charges by Weinberg with respect to these matters aggregated approximately
$146,000 and $153,000, respectively, for the years ended December 31, 2007
and
2006.
Audit
Related Fees
Weinberg
did not provide any professional services to us with which would relate to
“audit related fees.”
Tax
Fees
Weinberg
did not provide any professional services to us with which would relate to
“tax
fees.”
All
Other Fees
Weinberg
did not provide any professional services to us with which would relate to
“other fees.”
Audit
Committee Pre-Approval Policies and Procedures
Under
the
SEC’s rules, the Audit Committee is required to pre-approve the audit and
non-audit services performed by the independent registered public accounting
firm in order to ensure that they do not impair the auditors’ independence. The
Commission’s rules specify the types of non-audit services that an independent
auditor may not provide to its audit client and establish the Audit Committee’s
responsibility for administration of the engagement of the independent
registered public accounting firm.
Consistent
with the SEC’s rules, the Audit Committee Charter requires that the Audit
Committee review and pre-approve all audit services and permitted non-audit
services provided by the independent registered public accounting firm to us
or
any of our subsidiaries. The Audit Committee may delegate pre-approval authority
to a member of the Audit Committee and if it does, the decisions of that member
must be presented to the full Audit Committee at its next scheduled
meeting.
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date:
April 14, 2008
|
REED’S,
INC.
a
Delaware corporation
|
|
|
|
|
By:
|
/s/
Christopher J. Reed
|
|
|
Christopher
J. Reed
Chief
Executive Officer
|
In
accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the
dates indicated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
CHRISTOPHER J. REED
|
|
Chief
Executive Officer, President and Chairman
of
the Board of Directors
|
|
April
14, 2008
|
Christopher
J. Reed
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
DAVID M. KANE
|
|
Chief
Financial Officer
|
|
April
14, 2008
|
David
M. Kane
|
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/s/
JUDY HOLLOWAY REED
|
|
Director
|
|
April
14, 2008
|
Judy
Holloway Reed
|
|
|
|
|
|
|
|
|
|
/s/
MARK HARRIS
|
|
Director
|
|
April
14, 2008
|
Mark
Harris
|
|
|
|
|
|
|
|
|
|
/s/
DANIEL S.J. MUFFOLETTO
|
|
Director
|
|
April
14, 2008
|
Daniel
S.J. Muffoletto
|
|
|
|
|
|
|
|
|
|
/s/
MICHAEL FISCHMAN
|
|
Director
|
|
April
14, 2008
|
Michael
Fischman
|
|
|
|
|