Unassociated Document
As
filed with the Securities and Exchange Commission on November 19,
2008
Registration
No. 333-146012
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST
EFFECTIVE AMENDMENT NO. 3 TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Reed’s,
Inc.
(Name
of
small business issuer in its charter)
Delaware
|
2086
|
35-2177773
|
(State or jurisdiction of
incorporation or organization)
|
(Primary Standard Industrial
Classification Code Number)
|
(I.R.S. Employer
Identification Number)
|
13000
South Spring Street
Los
Angeles, California 90061
(310) 217-9400
(Address
and telephone number of principal executive offices and principal place of
business)
Christopher
J. Reed
Chief
Executive Officer
13000
South Spring Street
Los
Angeles, California 90061
(310) 217-9400
(Name,
address and telephone number of agent for service)
With
copies to:
Peter
Hogan, Esq.
Ruba
Qashu, Esq.
Richardson
& Patel, LLP
10900
Wilshire Boulevard, Suite 500
Los
Angeles, CA 90024
(310)
208-1182
Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after the effective date of this Registration
Statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b2 of the Exchange Act.
o
Large
accelerated filer Accelerated filer o
o
Non-accelerated
filer (Do not check if a smaller reporting company) Smaller reporting
company x
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
2,414,995 Shares
REED’S,
INC.
Common
Stock
We
are
registering 2,414,995 shares of our common stock for sale by our stockholders
from time to time, including 1,500,000 of our outstanding shares of common
stock
and 914,995 shares of our common stock issuable upon the exercise of outstanding
common stock purchase warrants.
The
selling stockholders identified in this prospectus, or their pledgees, donees,
transferees or other successors-in-interest, may offer the shares from time
to
time through public or private transactions at prevailing market prices, at
prices related to prevailing market prices or at privately negotiated prices.
We
will not receive any proceeds from the sale of the shares. The prices at which
such selling stockholders may sell shares will be determined by the prevailing
market price for the shares or in negotiated transactions. The selling
stockholders may resell the common stock to or through underwriters,
broker-dealers, or agents, who may receive compensation in the form of
discounts, concessions, or commissions. The selling stockholders will bear
all
commissions and discounts, if any, attributable to the sales of shares. We
will
bear all costs, expenses, and fees in connection with the registration of the
shares.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 5 for certain risks and uncertainties that you should
consider.
Our
common stock is quoted on the NASDAQ Capital Market under the symbol “REED.” The
last reported sale price of our common stock on November 17, 2008 was $1.48
per
share.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is 310-217-9400.
The
date
of this prospectus is November 19, 2008
_____________________________________
TABLE
OF CONTENTS
|
Page
|
Summary
|
2
|
Special
Note Regarding Forward-Looking Statements
|
3
|
Risk
Factors
|
5
|
Use
of Proceeds
|
16
|
Selling
Stockholders
|
16
|
Plan
of Distribution
|
21
|
Market
for Common Stock and Related Stockholder Matters
|
24
|
Dividend
Policy
|
24
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
26
|
Business
|
41
|
Management
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57
|
Certain
Relationships and Related Transactions
|
66
|
Security
Ownership of Certain Beneficial Owners and Management
|
68
|
Description
of Our Securities
|
70
|
Legal
Matters
|
73
|
Experts
|
73
|
|
74
|
Index
to Financial Statements
|
F-1
|
____________________________________
You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information that is different from that
contained in this prospectus. This prospectus is not an offer to sell these
securities and is not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
The
information in this prospectus is complete and accurate only as of the date
of
the front cover regardless of the time of delivery of this prospectus or of
any
sale of shares. Except where the context requires otherwise, in this prospectus,
the “Company,” “Reed’s,” “we,” “us” and “our” refer to Reed’s Inc., a Delaware
corporation.
SUMMARY
This
summary highlights selected information from this prospectus. It does not
contain all of the information that is important to you. We encourage you to
carefully read this entire prospectus and the documents to which we refer you.
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this registration
statement.
Our
Company
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently offer 18 beverages, three candies and
three ice creams. We sell most of our products in specialty gourmet and natural
food stores, supermarket chains, retail stores and restaurants in the United
States and, to a lesser degree, in Canada.
We
primarily sell our products through a network of natural, gourmet and
independent distributors. We also maintain an organization of in-house sales
managers who work mainly in the stores serviced by our natural, gourmet and
mainstream distributors and with our distributors. We also work with regional,
independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
Our
current business strategy is to maintain our marketing focus in the natural
food
marketplace while expanding sales of our products in mainstream markets and
distribution channels.
We
produce certain of our soda products for the western half of the United States
at an 18,000 square foot warehouse facility owned by us in an unincorporated
area of Los Angeles County near downtown Los Angeles, known as The
Brewery.
We
also
contract with The Lion Brewery, Inc., a packing, or co-pack, facility in
Pennsylvania, to supply us with soda products for the eastern half of the United
States and nationally for soda products that we do not produce at The Brewery.
Our Ginger Juice Brews are co-packed for us at a facility in Northern
California. Our ice creams are co-packed for us at a dairy in upstate New York.
We pack our candy products at the Brewery.
We
have
not been profitable during our last two fiscal years and there is no assurance
that we will develop profitable operations in the future. Our net loss for
the
years ended December 31, 2007 and 2006 was $5,551,229 and $2,213,609,
respectively. Our net loss attributable to common shareholders for the nine
months ended September 30, 2008 and 2007 was $2,678,907 and $2,734,722,
respectively. We cannot assure you that we will have profitable operations
in
the future.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is 310-217-9400. Our Internet
address is www.reedsgingerbrew.com
.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
The
Offering
Securities
offered by the selling stockholders
|
|
2,414,995
shares of common stock 1
|
|
|
|
Common
stock outstanding as of the date of this
prospectus
|
|
8,928,591
shares
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any of the proceeds from the sale of the securities
owned
by the selling stockholders. We may receive proceeds in connection
with
the exercise of warrants for the underlying shares of our common
stock,
which may in turn be sold by the selling stockholders under this
prospectus. We intend to use any proceeds from the exercise of warrants
for working capital and other general corporate purposes. There is
no
assurance that any of the warrants will ever be exercised for cash,
if at
all.
|
|
|
|
Risk
Factors
|
|
An
investment in our securities involves a high degree of risk and could
result in a loss of your entire investment. Prior to making an investment
decision, you should carefully consider all of the information in
this
prospectus and, in particular, you should evaluate the risk factors
set
forth under the caption “Risk Factors” beginning on page
5.
|
|
|
|
NASDAQ
Capital Market Symbol
|
|
REED
|
(1) |
Consists
of 1,500,000 issued and outstanding shares of our common stock
and 914,995
shares of our common stock issuable upon the exercise of our outstanding
common stock purchase warrants.
|
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements. The forward-looking statements
are contained principally in, but not limited to, the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis or Plan of Operation” and
“Business.” Forward-looking statements provide our current expectations or
forecasts of future events. Forward-looking statements include statements about
our expectations, beliefs, plans, objectives, intentions, assumptions and other
statements that are not historical facts. Words or phrases such as “anticipate,”
“believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project” or similar words or phrases, or the negatives
of those words or phrases, may identify forward-looking statements, but the
absence of these words does not necessarily mean that a statement is not
forward-looking.
Forward-looking
statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results
to
differ materially from those expected or implied by the forward-looking
statements. Our actual results could differ materially from those anticipated
in
forward-looking statements for many reasons, including the factors described
in
the section entitled “Risk Factors” in this prospectus. Accordingly, you should
not unduly rely on these forward-looking statements, which speak only as of
the
date of this prospectus.
Unless
required by law, we undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date
of
this prospectus or to reflect the occurrence of unanticipated events. You
should, however, review the factors and risks we describe in the reports we
will
file from time to time with the Securities and Exchange Commission (the “SEC”)
after the date of this prospectus.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, and involve a number of
risks, uncertainties and other factors that could cause actual results and
events to differ materially from the statements made, including, but not limited
to, the following:
|
·
|
Our
ability to generate sufficient cash flow to support capital expansion
plans and general operating
activities,
|
|
·
|
Decreased
demand for our products resulting from changes in consumer
preferences,
|
|
·
|
Competitive
products and pricing pressures and our ability to gain or maintain
our
share of sales in the marketplace,
|
|
·
|
The
introduction of new products,
|
|
·
|
Our
being subject to a broad range of evolving federal, state and local
laws
and regulations including those regarding the labeling and safety
of food
products, establishing ingredient designations and standards of identity
for certain foods, environmental protections, as well as worker health
and
safety. Changes in these laws and regulations could have a material
effect
on the way in which we produce and market our products and could
result in
increased costs,
|
|
·
|
Changes
in the cost and availability of raw materials and the ability to
maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of our
products,
|
|
·
|
Our
ability to penetrate new markets and maintain or expand existing
markets,
|
|
·
|
Maintaining
existing relationships and expanding the distributor network of our
products,
|
|
·
|
The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
|
|
·
|
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of our products
that
they are carrying at any time,
|
|
·
|
The
availability and cost of capital to finance our working capital needs
and
growth plans,
|
|
·
|
The
effectiveness of our advertising, marketing and promotional
programs,
|
|
·
|
Changes
in product category consumption,
|
|
·
|
Economic
and political changes,
|
|
·
|
Consumer
acceptance of new products, including taste test
comparisons,
|
|
·
|
Possible
recalls of our products, and
|
|
·
|
Our
ability to make suitable arrangements for the co-packing of any of
our
products.
|
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
RISK
FACTORS
An
investment in our common stock is very risky. Our financial condition is
unsound. You should not invest in our common stock unless you can afford to
lose
your entire investment. You should carefully consider the risk factors described
below, together with all other information in this prospectus, before making
an
investment decision. If an active market is ever established for our common
stock, the trading price of our common stock could decline due to any of these
risks, and you could lose all or part of your investment. You also should refer
to the other information set forth in this prospectus, including our financial
statements and the related notes.
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain or expand
operations according to our business plan.
As
of
September 30, 2008, we had an accumulated deficit of $13,760,048. For the
years
ended December 31, 2007 and 2006, we incurred losses from operations of
$5,488,889 and $1,806,590, respectively. We also incurred losses from operations
of $2,457,692 and $2,642,160 during the nine months ended September 30, 2008
and
2007, respectively.
As
of
September 30, 2008, we had outstanding borrowings of $1,290,082 under our
secured line of credit agreement with First Capital Western Region
LLC.
We
recognize that operating losses negatively impact liquidity and we are working
on decreasing operating losses, while focusing on increasing net sales. We
are
currently borrowing near the maximum on our line of credit. We have
approximately $500,000 to $1,000,000 in excess inventory over our normal
inventory levels. We believe the operations of the Company are running at
approximately breakeven, after adjusting for non-cash expenses. Between the
reduction of our inventory to more normal levels and our current breakeven
operating status, we believe that our current cash position and lines of credit
will be sufficient to enable us to meet our cash needs through at least the
end
of 2008.
We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If we are not able to achieve profitable operations
at
some point in the future, we eventually may have insufficient working capital
to
maintain our operations as we presently intend to conduct them or to fund our
expansion and marketing and product development plans. In addition, our losses
may increase in the future as we expand our manufacturing capabilities and
fund
our marketing plans and product development. These losses, among other things,
have had and will continue to have an adverse effect on our working capital,
total assets and stockholders’ equity. If we are unable to achieve
profitability, the market value of our common stock will decline and there
would
be a material adverse effect on our financial condition.
If
we
continue to suffer losses from operations, the proceeds from our public offering
and private placement may be insufficient to support our ability to expand
our
business operations as rapidly as we would deem necessary at any time, unless
we
are able to obtain additional financing. There can be no assurance that we
will
be able to obtain such financing on acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, we may not
be
able to pursue our business objectives and would be required to reduce our
level
of operations, including reducing infrastructure, promotions, personnel and
other operating expenses. These events could adversely affect our business,
results of operations and financial condition.
In
addition, some or all of the elements of our expansion plan may have to be
curtailed or delayed unless we are able to find alternative external sources
of
working capital. We would need to raise additional funds to respond to business
contingencies, which may include the need to:
fund
more
rapid expansion,
fund
additional marketing expenditures,
enhance
our operating infrastructure,
respond
to competitive pressures, and
acquire
other businesses.
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, acting Chief Financial 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 OTC 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, acting Chief Financial Officer,
and Chairman of the Board owns approximately 36% 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
8,928,591 shares of common stock outstanding as of October 27, 2008. Of the
shares of our common stock currently outstanding, 5,628,282 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 2,520,736 shares of common stock and 47,121 shares of Series
A
preferred stock that may be converted into 188,484 shares of common stock.
In
addition, our outstanding shares of Series A preferred stock bear a dividend
of
5% per year, or approximately $24,000 per year. We have the option to pay the
dividend in shares of our common stock. In 2008 and 2007, we paid the dividend
in an aggregate of 10,910 and 3,820 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.
We
identified material weaknesses in our system of internal control over financial
reporting for the fiscal year ended December 31, 2007, which material weaknesses
we believe we have remedied as of the date of this prospectus. If we fail
to
maintain an effective system of internal control over financial reporting,
we
may not be able to maintain effective disclosure controls and procedures
and
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
system of internal control over financial reporting in its annual report,
which
contains management’s assessment of the effectiveness of the Company’s system of
internal control over financial reporting. This requirement began to apply
to us
beginning with our annual report on Form 10-KSB for the year ended December
31,
2007.
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 control consultant to assist in our compliance with the
Sarbanes-Oxley Act of 2002. Specifically, the consultant was engaged to document
our system of internal control, 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 control consultant
that stated that we have material weaknesses in our system of internal control
over financial reporting A material weakness, as defined in standards
established by the Public Company Accounting Oversight Board (United States)
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 identified
the
following material weaknesses as of December 31, 2007:
|
· |
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 control,
and
|
|
· |
Timely
accounting for the allowance for bad debts and the application
of credit
memos and chargebacks.
|
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. Despite 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.
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 control
over
financial reporting
|
|
· |
additional
information systems personnel were engaged and system issues,
including
necessary alternatives, were evaluated and revised or corrected,
and
|
|
· |
we
prepared process documentation related to our key assumptions,
estimates
and accounting policies and
procedures.
|
As
of the
date of this prospectus, Christopher J. Reed, our Chief Executive Officer
and
Chief Financial Officer, conducted an evaluation of our remediation efforts
identified above and has determined we have eliminated the material weaknesses
in our system of internal control over financial reporting identified above,
more specifically as follows:
|
· |
Insufficient
disaster recovery or backup of core business functions. We
have addressed completely our previous deficiency with respect
to disaster
recovery and backup of our core business functions, resulting
in us having
off-site backup and log-in capabilities to access our core business
function data. Consequently, we no longer consider this deficiency
to be a
material weakness.
|
|
· |
Lack
of segregation of duties.
The nature of our business currently and our staffing complement
will not
allow complete segregation of duties typically found in larger
companies.
However, we no longer consider the lack of segregation of duties
to be a
material weakness because we have instituted a variety of review
procedures conducted by members of the management team. These
management
review procedures are designed to detect and correct errors which
may
result from a lack of segregation of
duties.
|
|
· |
Lack
of a purchase order system or procurement process. We
have instituted a purchase order system for material purchases.
Consequently, we no longer consider this to be a material
weakness.
|
|
· |
Lack
of documented and reviewed system of internal control. We
have documented our internal control procedures. However, we
do not have a
formal system of internal audit. We believe the management review
procedures designed to mitigate our lack of segregation of duties
provide
adequate review to mitigate the lack of an internal audit function.
Consequently, we no longer consider this to be a material
weakness.
|
|
· |
Timely
accounting for the allowance for bad debts and the application
of credit
memos and chargebacks.
We
have hired personnel to maintain our accounts receivable. This
maintenance
includes timely recording of credit memos and chargebacks and
the analysis
of accounts receivable to timely account for an allowance for
bad debt.
Consequently, we not longer consider this area to be a material
weakness.
|
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 system of internal control over financial reporting. Our management
may conclude that our system of internal control over our financial reporting
is
not effective. Moreover, even if our management concludes that our system
of
internal control over financial reporting is 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. An effective system of internal control, particularly as it relates
to
revenue recognition, is necessary for us to produce reliable financial reports
and is important to help prevent fraud. As a result, our failure to achieve
and
maintain effective system of internal control 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.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale of the issued and outstanding shares
of
our common stock or the shares issuable upon the exercise of our outstanding
common stock purchase warrants by the selling stockholders pursuant to this
prospectus. We may receive proceeds from the issuance of shares of our common
stock upon the exercise of common stock purchase warrants. These warrants are
exercisable at a weighted average exercise price of $7.34 per share. We intend
to use any proceeds from the exercise of warrants for working capital and other
general corporate purposes. These warrants are not being offered under this
prospectus; however, the shares of our common stock, issuable upon exercise
of
these warrants, are being offered under this prospectus by the selling
stockholders.
There
is
no assurance that any of the warrants will ever be exercised for cash, if at
all. If all of these outstanding warrants are exercised for cash, we would
receive aggregate gross proceeds of approximately $6,713,963.
SELLING
STOCKHOLDERS
Pursuant
to various registration rights agreements with the selling stockholders, we
have
agreed to file with the SEC a registration statement pursuant to the Securities
Act covering the resale of our registrable securities owned by such selling
stockholders that are subject to the registration rights agreements.
Accordingly, we have filed a registration statement on Form S-1 of which this
prospectus forms a part, with respect to the resale of these securities from
time to time. In addition, we agreed in the registration rights agreements
with
the investors to register securities of ours they hold and to use our best
efforts to keep the registration statement effective until the securities they
own covered by this prospectus have been sold or may be sold without
registration or prospectus delivery requirements under the Securities Act,
subject to certain restrictions.
Selling
Stockholders Table
We
have
filed a registration statement with the SEC, of which this prospectus forms
a
part, with respect to the resale of our securities covered by this prospectus
from time to time under Rule 415 of the Securities Act. Our securities being
offered by this prospectus are being registered to permit secondary public
trading of our securities. Subject to the restrictions described in this
prospectus, the selling stockholders may offer our securities covered under
this
prospectus for resale from time to time. In addition, subject to the
restrictions described in this prospectus, the selling stockholders may sell,
transfer or otherwise dispose of all or a portion of our securities being
offered under this prospectus in transactions exempt from the registration
requirements of the Securities Act. See “Plan of Distribution.”
The
table
below presents information, as of the date of this prospectus, regarding the
selling stockholders and the securities that the selling stockholders (and
their
pledgees, assignees, transferees and other successors in interest) may offer
and
sell from time to time under this prospectus. More specifically, the following
table sets forth as to the selling stockholders:
|
· |
the
number of shares of our common stock that the selling stockholders
beneficially owned prior to the offering for resale of any of the
shares
of our common stock being registered by the registration statement
of
which this prospectus is a part;
|
|
· |
the
number of shares of our common stock that may be offered for resale
for
the selling stockholders’ account under this prospectus;
and
|
|
· |
the
number and percent of shares of our common stock to be held by
the selling
stockholders after the offering of the resale securities, assuming
all of
the resale securities are sold by the selling stockholders and
that the
selling stockholders do not acquire any other shares of our common
stock
prior to their assumed sale of all of the resale
shares.
|
The
table
is prepared based on information supplied to us by the selling stockholders.
We
do not know when or in what amounts a selling stockholder may offer shares
for
sale. Although we have assumed for purposes of the table below that the selling
stockholders will sell all of the securities offered by this prospectus, because
the selling stockholders may offer from time to time all or some of its
securities covered under this prospectus, or in another permitted manner, no
assurances can be given as to the actual number of securities that will be
resold by the selling stockholders or that will be held by the selling
stockholders after completion of the resales. The selling stockholders might
not
sell any or all of the shares offered by this prospectus. In addition, the
selling stockholders may have sold, transferred or otherwise disposed of the
securities in transactions exempt from the registration requirements of the
Securities Act since the date the selling stockholders provided the information
regarding their securities holdings. However, for purposes of this table, we
have assumed that, after completion of the offering, none of the shares covered
by the prospectus will be held by the selling stockholders. Information covering
the selling stockholders may change from time to time and changed information
will be presented in a post-effective amendment to this registration statement
if and when necessary and required. Except as described above, based on
information provided to us by the selling stockholders and to our knowledge,
there are currently no agreements, arrangements or understandings with respect
to the resale of any of the securities covered by this
prospectus.
Where
applicable, we have indicated in the footnotes to the following table the name
and title of the individuals which we have been advised have the power to vote
or dispose of the securities listed in the following table.
|
|
Shares Beneficially
Owned
Before Offering (1)
|
|
|
|
Shares Beneficially
Owned
After Offering (1)
|
|
|
|
Number
|
|
Number of Shares
|
|
|
|
Name of Selling Security Holder
|
|
Percent
|
|
Being Offered (2)
|
|
Number
|
|
Percent
|
|
Advantus Capital
LP (3)
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
0
|
|
|
0
|
|
Airport
Inn of Las Vegas, Inc. (4)
|
|
|
75,000
|
|
|
*
|
|
|
75,000
|
|
|
0
|
|
|
0
|
|
Eugene
Arrington
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Bruce
F. Bailey
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Tom
Bover
|
|
|
18,156
|
|
|
*
|
|
|
18,156
|
|
|
0
|
|
|
0
|
|
Philip
L. & Shearon L. Breazeale
|
|
|
24,999
|
|
|
*
|
|
|
24,999
|
|
|
0
|
|
|
0
|
|
Dr.
Edwin R. Buster, III
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Chang-Fa
J. Cheng
|
|
|
12,000
|
|
|
*
|
|
|
12,000
|
|
|
0
|
|
|
0
|
|
Fang-Chin
Chiang
|
|
|
3,750
|
|
|
*
|
|
|
3,750
|
|
|
0
|
|
|
0
|
|
Russell
E. Davis
|
|
|
3,000
|
|
|
*
|
|
|
3,000
|
|
|
0
|
|
|
0
|
|
Elias
Family Charitable Trust (5)
|
|
|
35,500
|
|
|
(4
|
)
|
|
30,000
|
|
|
5,500
|
|
|
(4
|
)
|
Alma
and Gabriel Elias JTWROS (5)
|
|
|
533,528
|
|
|
(4
|
)
|
|
472,585
|
|
|
60,943
|
|
|
(4
|
)
|
James
E. and Jennifer M. Fair Living Trust (6)
|
|
|
19,999
|
|
|
*
|
|
|
19,999
|
|
|
0
|
|
|
0
|
|
Daniel
W. Fort
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
George
L. Fotiades
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Theza
& Robert Friedman
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Joseph
M. Graham, Jr.
|
|
|
12,525
|
|
|
*
|
|
|
12,525
|
|
|
0
|
|
|
0
|
|
Great
Gable Master Fund, Ltd. (7)
|
|
|
381,402
|
|
|
4.3
|
|
|
375,000
|
|
|
6,402
|
|
|
*
|
|
Darcy
& Edward H. Han
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Henderson
Family Trust (8)
|
|
|
51,000
|
|
|
*
|
|
|
51,000
|
|
|
0
|
|
|
0
|
|
John
Reginald Hill
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Hudson
Bay Fund LP (9)
|
|
|
19,350
|
|
|
*
|
|
|
19,350
|
|
|
0
|
|
|
0
|
|
Hudson
Bay Overseas Fund Ltd. (9)
|
|
|
25,650
|
|
|
*
|
|
|
25,650
|
|
|
0
|
|
|
0
|
|
Julian
Phillip Kemble
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Richard
Krahn
|
|
|
30,000
|
|
|
*
|
|
|
30,000
|
|
|
0
|
|
|
0
|
|
Hui
Lin
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Jared
Lundgren
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
James
V. McKeon
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
D.
Herman Mobley
|
|
|
4,500
|
|
|
*
|
|
|
4,500
|
|
|
0
|
|
|
0
|
|
Nite
Capital Master, Ltd. (10)
|
|
|
105,000
|
|
|
1.2
|
|
|
105,000
|
|
|
0
|
|
|
0
|
|
Charles
Frank Nosal
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Stanley
Petsagourakis
|
|
|
60,000
|
|
|
*
|
|
|
60,000
|
|
|
0
|
|
|
0
|
|
Carol
Quelland Trust (11)
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
Anthony
James Percy Reynolds
|
|
|
2,494
|
|
|
*
|
|
|
2,494
|
|
|
0
|
|
|
0
|
|
Michael
Rogers
|
|
|
4,500
|
|
|
*
|
|
|
4,500
|
|
|
0
|
|
|
0
|
|
Carl
Barth Rountree
|
|
|
75,000
|
|
|
*
|
|
|
75,000
|
|
|
0
|
|
|
0
|
|
David
H. Sanders Revocable Trust (12)
|
|
|
49,999
|
|
|
*
|
|
|
49,999
|
|
|
0
|
|
|
0
|
|
Gerald
C. Sloat
|
|
|
11,500
|
|
|
*
|
|
|
10,500
|
|
|
1,000
|
|
|
*
|
|
Donald
W. Smith
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Leroy
Stevens
|
|
|
18,750
|
|
|
*
|
|
|
18,750
|
|
|
0
|
|
|
0
|
|
Robert
Strougo
|
|
|
4,999
|
|
|
*
|
|
|
4,999
|
|
|
0
|
|
|
0
|
|
William
J. Summers, Jr.
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Steve
Talley
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
John
Tandana
|
|
|
3,750
|
|
|
*
|
|
|
3,750
|
|
|
0
|
|
|
0
|
|
Tres
Girls Limited Partnership (13)
|
|
|
50,001
|
|
|
*
|
|
|
50,001
|
|
|
0
|
|
|
0
|
|
Bradley
Van Hull
|
|
|
35,000
|
|
|
*
|
|
|
30,000
|
|
|
5,000
|
|
|
*
|
|
Thomas
Vermillion
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Doug
Waggoner
|
|
|
12,499
|
|
|
*
|
|
|
12,499
|
|
|
0
|
|
|
0
|
|
Shi-Kuen
Wang
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
Thomas
D. & Noranna B. Warner
|
|
|
15,000
|
|
|
*
|
|
|
15,000
|
|
|
0
|
|
|
0
|
|
John
Way
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Wholesale
Realtors Supply (5)
|
|
|
749,696
|
|
|
(4
|
)
|
|
369,999
|
|
|
379,697
|
|
|
(4
|
)
|
The
Wondra/Klimen-Wondra Trust (14)
|
|
|
2,499
|
|
|
*
|
|
|
2,499
|
|
|
0
|
|
|
0
|
|
Ming-Chen
Wu
|
|
|
7,500
|
|
|
*
|
|
|
7,500
|
|
|
0
|
|
|
0
|
|
APS
Financial Corporation (15)
|
|
|
36,069
|
|
|
*
|
|
|
36,069
|
|
|
0
|
|
|
0
|
|
Aegis
Capital Corp. (16)
|
|
|
8,000
|
|
|
*
|
|
|
8,000
|
|
|
0
|
|
|
0
|
|
Peter
Aman (3)
|
|
|
31,403
|
|
|
*
|
|
|
31,403
|
|
|
0
|
|
|
0
|
|
Neil
B. Michaelsen
|
|
|
18,035
|
|
|
*
|
|
|
18,035
|
|
|
0
|
|
|
0
|
|
US
EURO Securities, Inc. (17)
|
|
|
7,000
|
|
|
*
|
|
|
7,000
|
|
|
0
|
|
|
0
|
|
Westrock
Advisors, Inc. (18)
|
|
|
64,493
|
|
|
*
|
|
|
64,493
|
|
|
0
|
|
|
0
|
|
____________________
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this prospectus, are deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder's
name.
Unless otherwise indicated, the officers, directors and stockholders
can
be reached at our principal offices. Percentage of ownership is based
on
approximately 8,928,591 shares of common stock outstanding as of
the date
of this prospectus.
|
(2)
|
The
shares of common stock being offered by certain of the selling
stockholders include: (A) the number of shares underlying warrants
which
have an exercise price of $7.50 per share, and are fully vested and may be
exercised any time through June 15, 2012, as follows: Advantus Capital
LP
(60,000 shares), Airport Inn of Las Vegas, Inc. (25,000 shares),
Eugene
Arrington (833 shares), Bruce F. Bailey (833 shares), Tom Bover (6,052
shares), Philip L. & Shearon L. Breazeale (8,333 shares), Dr. Edwin R.
Buster, III (5,000 shares), Chang-Fa J. Cheng (4,000 shares), Fang-Chin
Chiang (1,250 shares), Russell E. Davis (1,000 shares), Elias Family
Charitable Trust (10,000 shares), Alma and Gabriel Elias JTWROS (157,528
shares), James E. & Jennifer M. Fair Living Trust (6,666 shares),
Daniel W. Fort (5,000 shares), George L. Fotiades (4,166 shares),
Theza
& Robert Friedman (4,166 shares), Joseph M. Graham, Jr. (4,175
shares), Great Gable Master Fund, Ltd. (125,000 shares), Darcy &
Edward H. Han (5,000 shares), Henderson Family Trust (17,000 shares),
John
Reginald Hill (4,166 shares), Hudson Bay Fund LP (6,450 shares),
Hudson
Bay Overseas Fund Ltd. (8,550 shares), Julian Phillip Kemble (833
shares),
Richard Krahn (10,000 shares), Hui Lin (2,500 shares), Jared Lundgren
(2,500 shares), James V. McKeon (5,000 shares), D. Herman Mobley
(1,500
shares), Nite Capital Master, Ltd. (35,000 shares), Charles Frank
Nosal
(2,500 shares), Stanley Petsagourakis (20,000 shares), Carol Quelland
Trust (5,000 shares), Anthony James Percy Reynolds (831 shares),
Michael
Rogers (1,500 shares), Carl Barth Rountree (25,000 shares), David
H.
Sanders Revocable Trust (16,666 shares), Gerald C. Sloat (3,500 shares),
Donald W. Smith (4,166 shares), Leroy Stevens (6,250 shares), Robert
Strougo (1,666 shares), William J. Summers, Jr. (2,500 shares), Steve
Talley (5,000 shares), John Tandana (1,250 shares), Tres Girls Limited
Partnership (16,667 shares), Bradley Van Hull (10,000 shares), Thomas
Vermillion (833 shares), Doug Waggoner (4,166 shares), Shi-Kuen Wang
(2,500 shares), Thomas D. & Noranna B. Warner (5,000 shares), John Way
(833 shares), Wholesale Realtors Supply (83,333 shares), The
Wondra/Klimen-Wondra Trust (833 shares) and Ming-Chen Wu (2,500 shares);
and (B) the number of shares underlying warrants which have an exercise
price of $6.60 per share, and are fully vested and may be exercised
any
time through June 15, 2012, as follows: APS Financial Corporation
(36,069
shares), Aegis Capital Corp. (8,000 shares), Peter Aman (31,403 shares),
Neil B. Michaelsen (18,035 shares), US EURO Securities, Inc. (7,000
shares) and Westrock Advisors, Inc. (64,493
shares).
|
(3)
|
Advantus
Capital LP and Peter Aman may be deemed to be affiliates of each
other for
purposes of calculating beneficial ownership of their securities
in this
table. The aggregate beneficial ownership of such stockholders may
be
deemed to include warrants to purchase up to 91,403 shares of common
stock, or 1.01% of the outstanding shares before the offering. Peter
Aman
directly or indirectly alone or with others has power to dispose
of the
shares that Advantus Capital LP
owns.
|
(4)
|
Dario
Pini directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(5)
|
Elias
Family Charitable Trust, Alma and Gabriel Elias JTWROS and Wholesale
Realtors Supply may be deemed to be affiliates of each other for
purposes
of calculating beneficial ownership of their securities in this table.
The
aggregate beneficial ownership of such stockholders may be deemed
to
include 1,067,863 shares of common stock and warrants to purchase
up to
250,861 shares of common stock, or 14.37% of the outstanding shares
before
the offering, and 5.00% of the outstanding shares after the offering
(assuming the sale of all of the shares held by such persons which
are
registered hereby). The aggregate number of shares which may be deemed
to
be beneficially owned by such stockholders and which are registered
hereby
includes 621,723 shares of common stock and warrants to purchase
up to
250,861 shares of common stock. Gabriel Ellis directly or indirectly
alone
or with others has power to dispose of the shares that each of Elias
Family Charitable Trust and Wholesale Realtors Supply
owns.
|
(6)
|
James
E. Fair directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(7)
|
Kevin
Goldstein directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(8)
|
James
Henderson directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(9)
|
Hudson
Bay Fund LP and Hudson Bay Overseas Fund Ltd. may be deemed to be
affiliates of each other for purposes of calculating beneficial ownership
of their securities in this table. The aggregate beneficial ownership
of
such stockholders may be deemed to include 30,000 shares of common
stock
and warrants to purchase up to 15,000 shares of common stock. Each
of Yoav
Roth and George Antonopoulos directly or indirectly alone or with
others
has shared power to dispose of the shares that each of these selling
stockholders owns.
|
(10)
|
Keith
Goodman directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(11)
|
Shaaron
Cissel directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(12)
|
David
H. Sanders directly or indirectly alone or with others has power
to
dispose of the shares that this selling stockholder
owns.
|
(13)
|
Richard
Zitelman directly or indirectly alone or with others has power to
dispose
of the shares that this selling stockholder
owns.
|
(14)
|
Ralph
Wondra directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(15)
|
APS
Financial Corporation is a wholly-owned subsidiary of American Physicians
Service Group, Inc., a publicly traded
corporation.
|
(16)
|
Robert
Eide directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(17)
|
Michael
Fugler directly or indirectly alone or with others has power to dispose
of
the shares that this selling stockholder
owns.
|
(18)
|
Each
of Greg Martino and Don Hunter directly or indirectly alone or with
others
has shared power to dispose of the shares that each of these selling
stockholders owns.
|
PLAN
OF DISTRIBUTION
The
selling stockholders may, from time to time, sell any or all of their securities
on any stock exchange, market or trading facility on which the shares are traded
or in private transactions. There is a limited public trading market for our
common stock. Our common stock is quoted under the symbol “REED” on the NASDAQ
Capital Market.
The
selling stockholders may use any one or more of the following methods when
selling securities:
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number
of such
shares at a stipulated price per
share;
|
|
·
|
a
combination of any such methods of sale;
and
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. The
selling stockholders do not expect these commissions and discounts to exceed
what is customary in the types of transactions involved. Any profits on the
resale of shares of common stock by a broker-dealer acting as principal might
be
deemed to be underwriting discounts or commissions under the Securities Act.
Discounts, concessions, commissions and similar selling expenses, if any,
attributable to the sale of shares will be borne by a selling stockholder.
The
selling stockholders may agree to indemnify any agent, dealer or broker-dealer
that participates in transactions involving sales of the shares if liabilities
are imposed on that person under the Securities Act.
The
selling stockholders may from time to time pledge or grant a security interest
in some or all of the shares of common stock owned by them and, if they default
in the performance of their secured obligations, the pledgees or secured parties
may offer and sell the shares of common stock from time to time under this
prospectus after we have filed a supplement to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act supplementing
or
amending the list of selling stockholders to include the pledgee, transferee
or
other successors in interest as selling stockholders under this
prospectus.
The
selling stockholders also may transfer the shares of common stock in other
circumstances, in which case the transferees, pledgees or other successors
in
interest will be the selling beneficial owners for purposes of this prospectus
and may sell the shares of common stock from time to time under this prospectus
after we have filed a supplement to this prospectus under Rule 424(b)(3) or
other applicable provision of the Securities Act supplementing or amending
the
list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this
prospectus.
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares of common stock may be deemed to be “underwriters” within the
meaning of the Securities Act in connection with such sales. In such event,
any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares of common stock purchased by them may be deemed to be
underwriting commissions or discounts under the Securities Act.
We
are
required to pay all fees and expenses incident to the registration of the shares
of common stock. We have agreed to indemnify the selling stockholders against
certain losses, claims, damages and liabilities, including liabilities under
the
Securities Act.
The
selling stockholders have advised us that they have not entered into any
agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed
sale
of shares of common stock by any selling stockholder. If we are notified by
any
selling stockholder that any material arrangement has been entered into with
a
broker-dealer for the sale of shares of common stock, if required, we will
file
a supplement to this prospectus. If the selling stockholders use this prospectus
for any sale of the shares of common stock, they will be subject to the
prospectus delivery requirements of the Securities Act.
Each
of
Advantus Capital LP, Hudson Bay Fund LP and Hudson Bay Overseas Fund Ltd.,
who
were purchasers in connection with a private placement of our securities in
May
and June 2007, has represented to us that it is an affiliate of one or more
registered broker-dealers. Each of
such
stockholders also has represented to us that it purchased the shares and the
warrants relating to the shares registered hereunder in the ordinary course
of
business, and at the time of the purchase of such securities, each of such
stockholders had no agreements or understandings, directly or indirectly, with
any person to distribute such securities.
We
had
engaged APS Financial Corporation (“APS”) to act as our placement agent in
connection with the May and June 2007 private placement. We agreed to issue
to
APS (and certain selected dealers which are NASD members), in connection with
the private placement, a number of warrants to purchase one share of common
stock for each 10 shares of common stock issued in connection with the private
placement. Under this arrangement, we issued to APS and such selected dealers,
which include Westrock Advisors, Inc. and US EURO Securities, Inc. (and certain
of their assignees), warrants to purchase up to 165,000 shares of our common
stock. The warrants are exercisable through July 15, 2012 at an exercise price
of $6.60 per share. Each of APS, Westrock Advisors, Inc. and US EURO Securities,
Inc., and Aegis Capital Corp. and Neil Michaelsen (two of the assignees of
APS),
has identified itself or himself to us as a registered broker-dealer, and as
a
result, each is an underwriter within the meaning of Section 2(a)(11) of the
Securities Act in connection with the sale of the shares registered hereunder
underlying such warrants. US EURO Securities, Inc. also had acted as one of
the
co-underwriters of our initial public offering in 2006. In addition, Peter
Aman,
who is one of the assignees of the warrants issued by us to APS in connection
with the private placement, has represented to us that he is an affiliate of
one
or more registered broker-dealers. Such assignee also has represented to us
that
he purchased the warrants relating to the shares registered hereunder in the
ordinary course of business, and at the time of the purchase of such securities,
such assignee had no agreements or understandings, directly or indirectly,
with
any person to distribute such securities.
MARKET
OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our
common stock has been listed for trading on the OTC Bulletin Board, under the
symbol “REED.OB” since January 3, 2007. Since November 27, 2007, our common
stock has been listed for trading on the NASDAQ Capital Market. Trading under
the symbol “REED”. The following is a summary of the high and low bid prices of
our common stock on the OTC Bulletin Board during the periods presented and
the
high and low sales prices of our common stock on the NASDAQ Capital Market
for
the periods presented. OTC Bulletin Board bid prices represent inter-dealer
prices, without retail mark-up, mark down or commissions, and may not
necessarily represent actual transactions:
|
|
Bid Price
(OTC Bulletin
Board)
|
|
|
|
High
|
|
Low
|
|
Year
Ending December
31, 2007
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
7.17
|
|
|
3.00
|
|
Second
Quarter
|
|
|
9.00
|
|
|
6.00
|
|
Third
Quarter
|
|
|
10.55
|
|
|
6.75
|
|
Fourth
Quarter
|
|
|
7.35
|
|
|
5.35
|
|
|
|
Sales Price
(NASDAQ Capital
Market)
|
|
Year
Ending December
31, 2008
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
First
Quarter
|
|
|
6.24
|
|
|
1.50
|
|
Second
Quarter
|
|
|
3.18
|
|
|
1.92
|
|
Third
Quarter
|
|
|
3.30
|
|
|
1.45
|
|
On
October 27, 2008, the closing sales price for the common stock was $1.49 on
the
NASDAQ Capital Market. As of the date of this prospectus, there were
approximately 248 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 approximately 8,928,591 outstanding shares of
common stock.
DIVIDEND
POLICY
We
have
never declared or paid dividends on our common stock. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we
do
not anticipate declaring or paying any dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board
of
directors after taking into account various factors, including the terms of
our
credit facility and our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock in either cash or additional shares
of common stock at our discretion. In 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. See “Description of Our Securities -
Preferred 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 Stock Option Plan and 2007
Stock Option 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
|
|
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 prospectus, 505,000 options have been issued and remain
outstanding under these plans, of which 156,667 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.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes appearing elsewhere in this prospectus. This discussion and
analysis may contain forward-looking statements based on assumptions about
our
future business. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under “Risk Factors” and elsewhere
in this prospectus.
Overview
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks, and water. We currently manufacture, market and sell six unique
product lines:
|
·
|
Virgil’s
Root Beer and Cream Sodas,
|
|
·
|
Reed’s
Ginger Juice Brews,
|
|
·
|
Reed’s
Ginger Candies, and
|
|
·
|
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
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. 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.
Consumers
Demanding More Natural Foods - The rapid growth of the natural foods industry
has been fueled by the growing consumer awareness of the potential health
problems due to the consumption of chemicals in the diet. Consumers are reading
ingredient labels and choosing products based on them. We design products with
these consumer concerns in mind. We feel this trend toward more natural products
is one of the main trends behind our growth. Recently, this trend in drinks
has
not only shifted to products using natural ingredients, but also to products
with added ingredients possessing a perceived positive function like vitamins,
herbs and other nutrients. Our ginger-based products are designed with this
consumer demand in mind.
Supermarket
and Natural Food Stores - More and more supermarkets, in order to compete with
the growing natural food industry, have started including natural food sections.
As a result of this trend, our products are now available in mainstream
supermarkets throughout the United States in natural food sections. Supermarkets
can require that we spend more advertising money and they sometimes require
slotting fees. We continue to work to keep these fees reasonable. Slotting
fees
in the natural food section of the supermarket are generally not as expensive
as
in other areas of the store.
Beverage
Packaging Changes - Beverage packaging has continued to innovate, particularly
for premium products. There is an increase in the sophistication with respect
to
beverage packaging design. While we feel that our current core brands still
compete on the level of packaging, we continue to experiment with new and novel
packaging designs such as the 5-liter party keg and 750 ml. champagne style
bottles. We have further plans for other innovative packaging
designs.
Packaging
or Raw Material Price Increases - An increase in packaging or raw materials has
caused our margins to suffer and has negatively impacted our cash flow and
profitability. We continue to search for packaging and production alternatives
to reduce our cost of goods.
Cash
Flow
Requirements - Our growth will depend on the availability of additional capital
infusions. We have a financial history of losses and are dependent on
non-banking sources of capital, which tend to be more expensive and charge
higher interest rates. Any increase in costs of goods will further increase
losses and will further tighten cash reserves.
Interest
Rates - We use lines of credit as a source of capital and are negatively
impacted as interest rates rise.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires
us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable
and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
Revenue
Recognition. Revenue is recognized on the sale of a product when the product
is
shipped, which is when the risk of loss transfers to our customers, and
collection of the receivable is reasonably assured. A product is not shipped
without an order from the customer and credit acceptance procedures performed.
The allowance for returns is regularly reviewed and adjusted by management
based
on historical trends of returned items. Amounts paid by customers for shipping
and handling costs are included in sales.
Trademark
License and Trademarks. Trademark license and trademarks primarily represent
the
costs we pay for exclusive ownership of the Reed’s® trademark in connection with
the manufacture, sale and distribution of beverages and water and non-beverage
products. We also own the Virgil’s® trademark and the China Cola® trademark. In
addition, we own a number of other trademarks in the United States as well
as in
a number of countries around the world. We account for these items in accordance
with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the
provisions of SFAS No. 142, we do not amortize indefinite-lived trademark
licenses and trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by
the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified
during
the nine months ended September 30, 2008 or September 30,
2007.
Long-Lived
Assets. Our management regularly reviews property, equipment and other
long-lived assets, including identifiable amortizing intangibles, for possible
impairment. This review occurs quarterly or more frequently if events or
changes
in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment of property and equipment
or
amortizable intangible assets, then management prepares an estimate of future
cash flows (undiscounted and without interest charges) expected to result
from
the use of the asset and its eventual disposition. If these cash flows are
less
than the carrying amount of the asset, an impairment loss is recognized to
write
down the asset to its estimated fair value. The fair value is estimated at
the
present value of the future cash flows discounted at a rate commensurate
with
management’s estimates of the business risks. Quarterly, or earlier, if there is
indication of impairment of identified intangible assets not subject to
amortization, management compares the estimated fair value with the carrying
amount of the asset. An impairment loss is recognized to write down the
intangible asset to its fair value if it is less than the carrying amount.
Preparation of estimated expected future cash flows is inherently subjective
and
is based on management’s best estimate of assumptions concerning expected future
conditions. No impairments were identified during the nine months ended
September 30, 2008 or 2007.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising.
We account for advertising production costs by expensing such production costs
the first time the related advertising is run.
Accounts
Receivable. We evaluate the collectability of our trade accounts receivable
based on a number of factors. In circumstances where we become aware of a
specific customer’s inability to meet its financial obligations to us, a
specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount our management believes will
ultimately be collected. In addition to specific customer identification of
potential bad debts, bad debt charges are recorded based on our historical
losses and an overall assessment of past due trade accounts receivable
outstanding.
Inventories.
Inventories are stated at the lower of cost to purchase and/or manufacture
the
inventory or the current estimated market value of the inventory. We regularly
review our inventory quantities on hand and record a provision for excess and
obsolete inventory based primarily on our estimated forecast of product demand
and/or our ability to sell the product(s) concerned and production requirements.
Demand for our products can fluctuate significantly. Factors that could affect
demand for our products include unanticipated changes in consumer preferences,
general market conditions or other factors, which may result in cancellations
of
advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be
inaccurate, which could result in an understated or overstated provision
required for excess and obsolete inventory.
Income
Taxes. Current income tax expense is the amount of income taxes expected to
be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences of temporary differences in
the
financial reporting and tax bases of assets and liabilities. We consider future
taxable income and ongoing, prudent, and feasible tax planning strategies,
in
assessing the value of our deferred tax assets. If our management determines
that it is more likely than not that these assets will not be realized, we
will
reduce the value of these assets to their expected realizable value, thereby
decreasing net income. Evaluating the value of these assets is necessarily
based
on our management’s judgment. If our management subsequently determined that the
deferred tax assets, which had been written down, would be realized in the
future, the value of the deferred tax assets would be increased, thereby
increasing net income in the period when that determination was
made.
Results
of Operations
Three
Months Ended September 30, 2007 Compared to Three Months Ended September
30,
2008
Gross
sales increased by $573,168, or 13.5%, from $4,236,429 in the three months
ended
September 30, 2007 to $4,809,597 in the three months ended September 30,
2008. The three months ended September 30, 2007 included $251,401 in Costco
Roadshows which are promotional sales that we decided against in 2008. In
calculating our core business growth, we would exclude these
sales.
Product
discounting increased by $222,651, or 62.6%, from $355,491 in the three months
ended September 30, 2007 to $578,142 in the three months ended September
30,
2008. As a percentage of gross sales the product discounting increased from
8.4%
in the first three months ended September 30, 2007 to 12.0% in the first
three
months ended September 30, 2008.The increase was due to greater promotional
activity of the brands in the marketplace.
Net
sales
increased by $351,858, or 9.0%, from $3,881,328 in the three months ended
September 30, 2007 to $4,233,186 in the three months ended September 30,
2008.
The increase in net sales was primarily due to an increase in our Virgil’s
product line and our Reed’s Ginger Brews line. 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.
The
Virgil’s brand, which includes Root Beer, Real Cola, Cream Soda and Black Cherry
Cream soda, Diet Root Beer, Diet Real Cola, Diet Cream Soda and Diet Black
Cherry Cream Soda, realized an increase in net sales of $151,000, or 8% to
$1,983,000 in the three months ended September 30, 2008 from $1,832,000 in
the
three months ended September 30, 2007. The increase was the result of increased
sales in 12 ounce Root Beer of $86,000 or 9% from $1,003,000 in the three
months
ended September 30, 2007 to $1,089,000 in the three months ended September
30,
2008, increased sales in Cream Soda of $49,000 or 18% from $271,000 in the
three
months ended September 30, 2007 to $320,000 in the three months ended September
30, 2008, and decreased sales in Black Cherry Cream Soda of $20,000 or 12%
from
$163,000 in the three months ended September 30, 2007 to $143,000 in the
three
months ended September 30, 2008. Also, the Virgil’s Root Beer five-liter party
kegs decreased $150,000 or 66%, from $228,000 in the three months ended
September 30, 2007 to $78,000 in the three months ended September 30, 2008.
In
addition, the increase in sales in the Virgil’s Brand was the result of launch
of Virgil’s Real Cola in 2008 which realized net sales of $127,000 in the three
months ended September 30, 2008. Virgil’s diet sodas, the new stevia sweetened
versions, sales increased $47,000 or 61% from $77,000 in the three months
ended
September 30, 2007 to $124,000 in the three months ended September 30,
2008.
The
Reeds
Ginger Brew Line increased $433,000 or 24% to $2,223,000 in the three months
ended September 30, 2008 from $1,790,000 in the three months ended September
30,
2007.
Net
sales
of candy increased $25,000, or 11% to $261,000 in the three months ended
September 30, 2008 from $236,000 in the three months ended September 30,
2007.
The
product mix for our two most significant product lines, Reed’s Ginger Brews and
Virgil’s sodas was 48.6% and 43.3%, respectively of net sales in the three
months ended September 30, 2008 and was 45.1% and 46.2%, respectively of
net
sales in the three months ended September 30, 2007.
Cost
of
sales decreased by $145,368, or 4.7%, to $2,937,687 in the three months ended
September 30, 2008 from $3,083,055 in the three months ended September 30,
2007.
As a percentage of net sales, cost of sales decreased to 69.3% in the three
months ended September 30, 2008 from 79.4% in the three months ended September
30, 2007. Cost of sales as a percentage of net sales decreased by 10.1%,
primarily as a result of the price increase on April 1, 2008 for the Reed’s
Ginger Brew line of beverages offset by fuel and commodity price increases
which
have caused an increase in our costs of production from our co-packer. Fuel
price increases have also increased our costs of delivery. In addition, we
had
increased costs of packaging. If fuel and commodity prices continue to increase,
we will have more pressure on our margins.
Gross
profit increased $497,226 or 62.3% to $1,295,499 in the three months ended
September 30, 2008 from $798,273 in the three months ended September 30,
2007.
As a percentage of net sales, gross profit increased to 30.7% in the first
three
months of 2008 from 20.6% in the first three months of 2007.
To
improve gross margins in 2008, we have raised prices on the Reed’s Ginger Brew
line by 20% bringing it more in line with our competitors in the natural
soda
category. 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 have renegotiated our production costs from our largest
co-packer and expect an increase in gross margins between 5-6% as we move
through our current inventory. The contract is effective November 1,
2008.
Operating
expenses decreased by $941,267, or 40.7%, to $1,377,456 in the three months
ended September 30, 2008 from $2,318,723 in the three months ended September
30,
2007 and decreased as a percentage of net sales to 32.5% in the three months
ended September 30, 2008 from 59.8% in the three months ended September 30,
2007. The decrease was primary the result of decreased selling and general
and
administrative expenses. In March of 2008, we reduced our staff by 17 employees,
mostly from the sales staff.
During
the first quarter of 2008, we implemented a cost reduction strategy to reduce
unnecessary expenses and revised our budget for 2008. We reduced selling
expenses by reducing our work force by 17 employees. We expect to save
approximately $2,000,000 in annual expense with this sales force reduction.
Operating expenses decreased by $743,640 or 30.3%, to $1,710,634 in the three
months ended June 30, 2008 from $2,454,274 in the three months ended March
31,
2008. Operating expenses decreased by $333,178 or 19.5%, to $1,377,456 in
the
three months ended September 30, 2008 from $1,710,634 in the three months
ended
June 30, 2008. We expect to stabilize at this level of operating expense
for the
next few quarters and increase in 2009 in later quarters due to increased
gross
profits expected in 2009.
Selling
expenses decreased by $787,576 or 49.0%, to $819,362 in the three months
ended
September 30, 2008 from $1,606,938 in the three months ended September 30,
2007.
The decrease in selling expenses is due to our decreased sales force size
and
reduced promotions at Costco which caused sales salaries, sales contractors,
hiring expenses, road show, demos and travel expenses to reduce partially
offset
by increased commissions to outside sales organizations as we outsourced
some of
our sales efforts. Sales salaries expenses decreased $238,398 or 44.5% to
$297,490 in the three months ended September 30, 2008 from $535,888 in the
three
months ended September 30, 2007. This decrease was due to the reduction of
the
sales force. Contract and Hiring expenses decreased $124,986 or 96.8% to
$4,172
in the three months ended September 30, 2008 from $129,158 in the three months
ended September 30, 2007. The decrease in contract and hiring expenses was
due
to the reduction of sales staff. Road show expenses decreased $153,592 or
100.0%, to $0 in the three months ended September 30, 2008 from $153,592
in the
three months ended September 30, 2007. We did not run any road shows in the
three months ended September 30, 2008 . Travel expenses decreased $148,343
or
73.6%, to $53,198 in the three months ended September 30, 2008 from $201,541
in
the three months ended September 30, 2007. The decrease in travel expenses
was
due to decreased sales force. Brokerage commission expenses increased $57,354
or
75.8%, to $133,000 in the three months ended September 30, 2008 from $75,646
in
the three months ended September 30, 2007. The increase in brokerage commission
expenses was due to increased use of outside food brokers to represent us
to the
supermarket trade. Demo expenses decreased $224,636 or 113.8% to ($27,218)
in the three months ended September 30, 2008 from $197,418 in the three months
ended September 30, 2007. This decrease is due to the reduction of use of
demos
and a credit due to prior over charging by a demo company. 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 the three months ended
September 30, 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
the
most effective sales efforts are to grocery stores. We have our products
in more
than 10,500 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 decreased by $153,691 or 21.6% to $558,094 in
the
three months ended September 30, 2008 from $711,785 in the first three months
ended September 30, 2007. The decrease in general and administrative expenses
is
due to decreased legal, accounting and investor relations expenses, officer
salaries, and travel expenses. Legal, accounting and investor relations
expenses decreased $114,866 or 54.7% to $95,030 in the three months ended
September 30, 2008 from $209,896 in the three months ended September 30,
2007.
The decrease in legal, accounting and investor relation expenses was due
to
decreased legal and accounting costs mostly related to the decreased costs
of
reporting and compliance with the Securities and Exchange Commission and
NASDAQ
as we changed firms and renegotiated fees. Officer salaries decreased by
$26,251
or 27.3% to $69,982 in the three months ended September 30, 2008 from $96,233
in
the three months ended September 30, 2007. The decrease was due to the leaving
of a Chief Operating Officer in April 2008. Travel expenses decreased by
$21,513
or 100% to $0 in the three months ended September 30, 2008 from $21,513 in
the
three months ended September 30, 2007. The decrease was due to non traveling
of
office personnel during the three months ended September 30,
2008.
Interest
expense was $92,201 in the three months ended September 30, 2008, compared
to
interest expense of $51,407 in the three months ended September 30, 2007.
Interest income dropped to $-0- in the three months ended September 30, 2008,
compared to interest income of $45,898 in the three months ended September
30,
2007.
Interest
income decreased because of our overall decrease in cash and corresponding
decrease in interest bearing cash accounts. Interest expenses will probably
increase due to the increased reliance of the Company to finance operations
with
its $3,000,000 inventory and accounts receivable line of credit with First
Capital LLC.
Nine
Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
2008
Gross
sales increased by $2,261,779, or 19.9%, from $11,359,958 in the three months
ended September 30, 2007 to $13,621,737 in the three months ended September
30,
2008.
Product
discounting increased by $260,056, or 26.2%, from $993,579 in the three months
ended September 30, 2007 to $1,253,635 in the three months ended September
30,
2008. As a percentage of gross sales the product discounting increased from
8.7%
in the first nine months ended September 30, 2007 to 9.2% in the first nine
months ended September 30, 2008. The increase was due to greater promotional
activity of the brands in the marketplace.
Net
sales
increased by $2,001,724, or 19.3%, from $10,366,378 in the first nine months
ended September 30, 2007 to $12,368,102 in the first nine months ended September
30, 2008. The increase in net sales was primarily due to an increase in our
Virgil’s product line and our Reed’s Ginger Brews line. 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.
The
Virgil’s brand, which includes Root Beer, Real Cola, Cream Soda and Black Cherry
Cream soda, Diet Root Beer, Diet Real Cola, Diet Cream Soda and Diet Black
Cherry Cream Soda, realized an increase in net sales of $1231,000, or 27%
to
$5,791,000 in first nine months ended September 30, 2008 from $4,560,000
in
first nine months ended September 30, 2007. The increase was the result of
increased sales in 12 ounce Root Beer of $305,000 or 12% from $2,570,000
in
first nine months ended September 30, 2007 to $2,875,000 in first nine months
ended September 30, 2008, increased sales in Cream Soda of $176,000 or 28%
from
$625,000 in the first nine months of 2007 to $801,000 in the first nine months
of 2008, and increased sales in Black Cherry Cream Soda of $25,000 or 7%
from
$359,000 in the first nine months of 2007 to $384,000 in the first nine months
of 2008. Also, the Virgil’s Root Beer five-liter party kegs increased $381,000
or 61%, from $620,000 in first nine months ended September 30, 2007 to
$1,001,000 in first nine months ended September 30, 2008. In addition, the
increase in sales in the Virgil’s Brand was the result of launch of Virgil’s
Real Cola in 2008 which realized net sales of $228,000 in the first nine
months
ended September 30, 2008. Virgil’s diet sodas, the new stevia sweetened
versions, sales increased $103,000 or 60.6% from $170,000 in the nine
months ended September 30, 2007 to $273,000 in the nine months ended September
30, 2008.
The
Reeds
Ginger Brew Line increased $1,173,000 or 24% to $6,110,000 in first nine
months
ended September 30, 2008 from $4,937,000 in first nine months ended September
30, 2007.
Net
sales
of candy increased $69,000, or 10% to $746,000 in first nine months ended
September 30, 2008 from $677,000 in first nine months ended September 30,
2007.
The
product mix for our two most significant product lines, Reed’s Ginger Brews and
Virgil’s sodas was 47.2% and 44.7%, respectively of net sales in first nine
months ended September 30, 2008 and was 49.6% and 43.3%, respectively of
net
sales in first nine months ended September 30, 2007.
Cost
of
sales increased by $935,405, or 11.2%, to $9,283,460 in first nine months
ended
September 30, 2008 from $8,348,055 in first nine months ended September 30,
2007. As a percentage of net sales, cost of sales decreased to 75.1% in first
nine months ended September 30, 2008 from 80.5% in first nine months ended
September 30, 2007. Cost of sales as a percentage of net sales decreased
by
5.4%,
primarily as a result of the price increase on April 1, 2008 for the Reed’s
Ginger Brew line of beverages offset by fuel and commodity price increases
which
have caused an increase in our costs of production from our co-packer. Fuel
price increases have also increased our costs of delivery. In addition, we
had
increased costs of packaging. If fuel and commodity prices continue to increase,
we will have more pressure on our margins.
Gross
profit increased $1,066,319 or 52.8% to $3,084,642 in first nine months ended
September 30, 2008 from $2,018,323 in first nine months ended September 30,
2007. As a percentage of net sales, gross profit increased to 24.9% in the
first
nine months of 2008 from 19.5% in the first nine months of
2007.
To
improve gross margins in 2008, we have raised prices on the Reed’s Ginger Brew
line by 20% on April 1, 2008 bringing it more in line with our competitors
in
the natural soda category. 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 have renegotiated our production costs from
our
largest co-packer and expect an increase in gross margins between 5-6% as
we
move through our current inventory. The contract is effective November 1,
2008.
Operating
expenses increased by $881,851 or 18.9%, to $5,542,334 in first nine months
ended September 30, 2008 from $4,660,483 in first nine months ended September
30, 2007 and decreased as a percentage of net sales
to 44.8%
in first nine months ended September 30, 2008 from 44.9% in first nine months
ended September 30, 2007. The increase was primary the result of increased
selling and general and administrative expenses. In March of 2008, we reduced
our staff by 17 employees, mostly from the sales staff. During the first
quarter
of 2008, we implemented a cost reduction strategy to reduce unnecessary expenses
and revised its budget for 2008. We reduced selling expenses by reducing
our
work force by 17 employees. We expect to save approximately $2,000,000 in
annual
expense with this reduction. During the last nine months ending September
30,
2008 we had an average monthly operating expense of $615,650. During the
three
months ended September 30, 2008 we had an average monthly operating expense
of
$459,044. We believe we are reaching operating expense levels that allow
for
good growth while maintaining a lean environment.
Selling
expenses decreased by $54,709 or 1.8%, to $2,994,498 in first nine months
ended
September 30, 2008 from $3,049,207 in first nine months ended September 30,
2007. The decrease in selling expenses is due to decreased road show, demo,
stock option, contract services, and auto expenses offset by increased
salary, promotion, trade show, travel, broker commission and telephone expenses.
Road show expenses decreased $134,473 or 97.1% to $4,308 in first nine months
ended September 30, 2008 from $138,781 in first nine months ended September
30,
2007. This decrease was due to not running as many Costco road shows in 2008.
Demo expenses decreased $196,821 or 71.8% to $76,767 in first nine months
ended
September 30, 2008 from $273,588 in first nine months ended September 30,
2007.
The decrease in demo expenses was due to decreased use of demoing in our
marketing in 2008. Stock option expenses decreased $146,817 or 101.0%, to
($1,522) in first nine months ended September 30, 2008 from $145,295 in first
nine months ended September 30, 2007. This decrease was due to the stock
options
that were forfeited. Contract services expenses decreased $112,131 or 75.2%,
to
$37,727 in first nine months ended September 30, 2008 from $149,858 in first
nine months ended September 30, 2007. The decrease in contract services expenses
was due to reduced useage of contract services. Hiring expenses decreased
$61,788 or 98.7%, to $825 in first nine months ended September 30, 2008 from
$62,613 in first nine months ended September 30, 2007. The decrease in hiring
expenses was due to inactivity in hiring for sales in 2008. Auto expenses
decreased $105,527 or 44.5%, to $131,459 in first nine months ended September
30, 2008 from $236,986 in first nine months ended September 30, 2007. The
decrease in auto expenses was due the reduction in the sales force in March
of
2008. These decreases were offset by increases in the following expenses.
Salary
expense increased $229,927 or 22.8% to $1,234,667 in first nine months ended
September 30, 2008 from $1,004,740 in first nine months ended September 30,
2007. This decrease is due to the build up of sales employees in late 2007.
Promotional expense increased $186,518 or 432.5% to $229,952 in first nine
months ended September 30, 2008 from $43,434 in first nine months ended
September 30, 2007. This increase is due to increased promotionally spending
with supermarkets as we implement increased marketing programs with our
supermarket partners. Trade show expenses increased $43,896 or 68.8% to $107,718
in first nine months ended September 30, 2008 from $63,822 in first nine
months
ended September 30, 2007. This increase is due to a increase in the number
of
trade shows we are attending including first time showings at the drug store
chain national trade show in 2008. Travel expenses increased $21,826 or 8.2%
to
$282,089 in first nine months ended September 30, 2008 from $260,263 in first
nine months ended September 30, 2007. This increase is due to a increase
in the
sales force in the earlier part of 2008. Brokerage commission expenses increased
$180,163 or 96.7% to $366,396 in first nine months ended September 30, 2008
from
$186,233 in first nine months ended September 30, 2007. This increase is
due to
a increase use of brokerage firms to help penetrate and manage our supermarket
busines in 2008. Telephone and postage expenses increased $29,554 or 69.1%
to
$72,314 in first nine months ended September 30, 2008 from $42,760 in first
nine
months ended September 30, 2007. This increase is due to a increase in the
number of sales people toward the end of 2007 and also the increase in samples
and mailing due to aggressive telemarketing. 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 first nine months ended September 30, 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 the most effective sales efforts
are to
grocery stores. We have our products in more than 10,500 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 $936,560 or 58.0% to $2,547,836
in
first nine months ended September 30, 2008 from $1,611,276 in the first nine
months of 2007. The increase in general and administrative expenses is due
to
increased legal, accounting and investor relations expenses, officer salaries,
general liability insurance, stock options, and one time expenses of our
First
Capital line of credit set up expense. Legal, accounting and investor relations
expenses increased $623,027 or 168.2% to $993,338 in first nine months ended
September 30, 2008 from $370,311 in first nine months ended September 30,
2007.
The increase in legal, accounting and investor relation expenses was due
to
increased legal and accounting costs mostly related to the increased costs
of
reporting and compliance with the Securities and Exchange Commission and
NASDAQ,
in addition, we had a one-time non cash expense of $320,762 for consulting
services, for which we issued stock. Officer salaries increased by $168,236
or
86.6% to $362,412 in first nine months ended September 30, 2008 from $194,176
in
first nine months ended September 30, 2007 The increase was due to the hiring
of
a Chief Operating Officer in May 2007 and a Chief Financial Officer in October
2007. Liability insurance expenses increased $84,539 or 209.9% to $124,820
in
first nine months ended September 30, 2008 from $40,281 in first nine months
ended September 30, 2007. This increase was mainly due to increased sales
and
coverage. Stock option expenses increased $32,500 or 125.0% to $58,500 in
first
nine months ended September 30, 2008 from $26,000 in first nine months ended
September 30, 2007. This increase was due to the hiring of a Chief Operating
Officer in May 2007 and a Chief Financial Officer in October 2007. We had
one
time expenses with the new line of credit with First Capital in first nine
months ended September 30, 2008 of $30,122.
Interest
expense was $198,629 in the nine months ended September 30, 2008, compared
to
interest expense of $163,290 in the nine months ended September 30, 2007.
Interest income dropped to $975 in the nine months ended September 30, 2008,
compared to interest income of $98,498 in the nine months ended September
30,
2007.
Interest
income decreased because of our overall decrease in cash and corresponding
decrease in interest bearing cash accounts. Interest expenses will probably
increase due to the increased reliance of the company to finance operations
with
its $3,000,000 inventory accounts receivable line of credit with First Capital
LLC.
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 collectability 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 private sales of common
stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations. On December 12, 2006, we
completed the sale of 2,000,000 shares of our common stock at an offering
price
of $4.00 per share in our initial public offering. The public offering resulted
in gross proceeds of $8,000,000 to us. In connection with the public offering,
we paid aggregate commissions, concessions and non-accountable expenses to
the
underwriters of $800,000, resulting in net proceeds of $7,200,000, excluding
other expenses of the public offering. In addition, we issued, to the
underwriters, warrants to purchase up to approximately an additional 200,000
shares of common stock at an exercise price of $6.60 per share (165% of the
public offering price per share), at a purchase price of $0.001 per warrant.
The
underwriters’ warrants are exercisable for a period of five years commencing on
the final closing date of the public offering. From August 3, 2005 through
April
7, 2006, we had issued 333,156 shares of our common stock in connection with
the
public offering. We sold the balance of the 2,000,000 shares in connection
with
the public offering (1,666,844 shares) following October 11,
2006.
From
May
25, 2007 through June 15, 2007, we completed a private placement to accredited
investors only, on subscriptions for the sale of 1,500,000 shares of common
stock and warrants to purchase up to 749,995 shares of common stock, resulting
in an aggregate of $9,000,000 of gross proceeds to us. We sold the shares
at a
purchase price of $6.00 per share. The warrants issued in the private placement
have a five-year term and an exercise price of $7.50 per share. We paid cash
commissions of $900,000 to the placement agent for the private placement
and
issued warrants to the placement agent to purchase up to 150,000 shares of
common stock with an exercise price of $6.60 per share. We also issued
additional warrants to purchase up to 15,000 shares of common stock with
an
exercise price of $6.60 per share and paid an additional $60,000 in cash
to the
placement agent as an investment banking fee. Total proceeds received, net
of
underwriting commissions and the investment banking fee and excluding other
expenses of the private placement, was $8,040,000.
As
of
September 30, 2008, we had an accumulated deficit of $13,760,048 and we had
working capital of $1,656,096, compared to an accumulated deficit of $11,081,141
and working capital of $2,942,909 as of December 31, 2007. Cash and cash
equivalents were $83,091 as of September 30, 2008, as compared to $742,719
as of
December 31, 2007. This decrease in our working capital and cash position
was
primarily attributable to our net loss for the nine months ended September
30,
2008. In addition to our cash position on September 30,2008, we had availability
under our line of credit of approximately $273,000.
Net
cash
used in operating activities during the nine months ended September 30, 2008
was
$2,737,415 which was due primarily to our net loss of $2,655,346. In the
nine
months ended September 30, 2008, we used $186,313 of cash in investing
activities, which was due primarily to the purchase of various equipment
to
support business growth.
Net
cash
provided by financing activities during the nine months ended September 30,
2008
was $2,264,100. The primary components of that were the net proceeds from
the
refinancing of our land and buildings and our obtaining of a line of
credit.
As
of
September 30, 2008, we had outstanding borrowings of $1,290,082 under our
line
of credit agreement. Our line of credit lender is a privately held, Senior
Secured Commercial Lender. Our lender has communicated to us that they are
not a
bank and are not subject to banking regulations. They have also communicated
to
us that they have over $1billion dollars in assets and has approximately
20% of
equity capital. They communicated that they have adequate lines of credits
in
place with banks to achieve their business goals. They communicated that
there
are no requirements in place for them to repurchase any of their outstanding
stock. Based on these communications, we believe that our lending source
will be
able to fund the full extent of our line of credit, should we meet the
requirements for such funding.
We
recognize that operating losses negatively impact liquidity and we are working
on decreasing operating losses, while focusing on increasing net sales. We
are
currently borrowing near the maximum on our line of credit. We have
approximately $500,000 to $1,000,000 in excess inventory over our normal
inventory levels. We believe the operations of the company are running at
approximately breakeven, after adjusting for non-cash expenses . Between
the
reduction of our inventory to more normal levels and our current breakeven
operating status, we believe that our current cash position and lines of
credit
will be sufficient to enable us to meet our cash needs through at least the
end
of 2008. We believe that if the need arises we can raise money through the
equity markets.
We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If we are not able to achieve profitable operations
at
some point in the future, we eventually may have insufficient working capital
to
maintain our operations as we presently intend to conduct them or to fund
our
expansion and marketing and product development plans. In addition, our losses
may increase in the future as we expand our manufacturing capabilities and
fund
our marketing plans and product development. These losses, among other things,
have had and will continue to have an adverse effect on our working capital,
total assets and stockholders’ equity. If we are unable to achieve
profitability, the market value of our common stock will decline and there
would
be a material adverse effect on our financial condition.
If
we
continue to suffer losses from operations, the proceeds from our public offering
and private placement may be insufficient to support our ability to expand
our
business operations as rapidly as we would deem necessary at any time, unless
we
are able to obtain additional financing. There can be no assurance that we
will
be able to obtain such financing on acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, we may
not be
able to pursue our business objectives and would be required to reduce our
level
of operations, including reducing infrastructure, promotions, personnel and
other operating expenses. These events could adversely affect our business,
results of operations and financial condition.
In
addition, some or all of the elements of our expansion plan may have to be
curtailed or delayed unless we are able to find alternative external sources
of
working capital. We would need to raise additional funds to respond to business
contingencies, which may include the need to:
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fund
more rapid expansion,
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fund
additional marketing
expenditures,
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enhance
our operating infrastructure,
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respond
to competitive pressures, and
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acquire
other businesses.
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We
cannot
assure you that additional financing will be available on terms favorable
to us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Recent
Accounting Pronouncements
References
to the “FASB”, and “SFAS” herein refer to the “Financial Accounting Standards
Board”, and “Statement of Financial Accounting Standards”,
respectively.
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.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
No. 133”). The objective of SFAS No. 161 is to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items
are
accounted for under SFAS No. 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses
on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 applies to all derivative
financial instruments, including bifurcated derivative instruments (and
nonderivative instruments that are designed and qualify as hedging instruments
pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items
accounted for under SFAS No. 133 and its related interpretations. SFAS No.
161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. SFAS No. 161
encourages, but does not require, comparative disclosures for earlier periods
at
initial adoption.
The
Company does not believe the adoption of the above recent pronouncements,
will
have a material effect on the Company’s results of operations, financial
position, or cash flows.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
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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Reed’s
Ginger Candies, and
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Reed’s
Ginger Ice Creams.
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We
sell
most of our products in specialty gourmet and natural food stores (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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stimulate
consumer demand and awareness for our existing brands and
products,
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develop
additional unique alternative and natural beverage brands and other
products, including
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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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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.
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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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generating
free press through public
relations,
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advertising
in national magazines targeting our
customers,
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maintaining
a company website
(www.reedsgingerbrew.com),
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participating
in large public events as sponsors;
and
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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.”
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Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our Internet
address is (www.reedsgingerbrew.com). Information contained on our website
or
that is accessible through our website should not be considered to be part
of
this prospectus.
Historical
Development
In
June
1987, Christopher J. Reed, our founder and Chief Executive Officer, began
development of Reed’s Original Ginger Brew, his first beverage creation. After
two years of development, the product was introduced to the market in Southern
California stores in 1989. By 1990, we began marketing our products through
natural food distributors and moved our production to a larger facility in
Boulder, Colorado.
In
1991,
we incorporated our business operations in the state of Florida under the name
of Original Beverage Corporation and moved all of our production to a co-pack
facility in Pennsylvania. We began exhibiting at national natural and specialty
food trade shows, which brought national distribution in natural, gourmet and
specialty foods and the signing of our first mainstream supermarket distributor.
Our products began to receive trade industry recognition as an outstanding
new
product. The United States National Association of the Specialty Food Trade,
or
NASFT, named Original Ginger Brew as an “Outstanding Beverage Finalist” in the
United States, and the Canadian Fancy Food Association, or CFFA, awarded us
“Best Imported Food Product.”
Throughout
the 1990’s, we continued to develop and launch new Ginger Brew varieties. Reed’s
Ginger Brews reached broad placement in natural and gourmet foods stores
nationwide through major specialty, natural/gourmet and mainstream food and
beverage distributors.
In
1997,
we began licensing the products of China Cola and eventually acquired the rights
to that product in December 2000. In addition, we launched Reed’s Crystallized
Ginger Candy, a product which we manufacture in Fiji under a proprietary,
natural, non-sulfured process. In 1999, we purchased the Virgil’s Root Beer
brand from the Crowley Beverage Company. The brand has won numerous gourmet
awards. In 2000, we began to market three new products: Reed’s Original Ginger
Ice Cream, Reed’s Cherry Ginger Brew and a beautiful designer 10-ounce gift tin
of our Reed’s Crystallized Ginger Candy. In December 2000, we purchased an
18,000 square foot warehouse property, the Brewery, in Los Angeles, California,
to house our west coast production and warehouse facility. The Brewery now
also
serves as our principal executive offices. In 2001, we changed our state of
incorporation to Delaware and also changed our name to Reed’s, Inc. We also
introduced our Reed’s Chocolate Ginger Ice Cream and Reed’s Green Tea Ginger Ice
Cream products and expanded our confectionary line with two new candy products:
Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger Candy Chews. In 2002,
we launched our Reed’s Ginger Juice Brew line, with four flavors of organic
juice blends. In November 2002, we completed our first test runs of Reed’s and
Virgil’s products at the Brewery and in January 2003, our first commercially
available products came off the Los Angeles line. In 2003, we commenced our
own
direct distribution in Southern California and introduced sales of our 5-liter
Virgil’s party keg. In 2004, we expanded our product line to include Virgil’s
Cream Soda (including in a 5-liter keg), Reed’s Spiced Apple Brew in a
750 ml. champagne bottle and draught Virgil’s Root Beer and Cream Soda. In
2006, we expanded our product line to include Virgil’s Black Cherry Cream Soda.
Progressive Grocers, a top trade publication in the grocery industry voted
this
product as the best new beverage product of 2006. 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:
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Reed’s
Original Ginger Brew
was our first creation, and is a Jamaican recipe for homemade ginger
ale
using 17 grams of fresh ginger root, lemon, lime, honey, fructose,
pineapple, herbs and spices. Reed’s Original Ginger Brew is 20% fruit
juice.
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Reed’s
Extra Ginger Brew
is
the same approximate recipe, with 26 grams of fresh ginger root for
a
stronger bite. Reed’s Extra Ginger Brew is 20% fruit
juice.
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Reed’s
Premium Ginger Brew
is
the no-fructose version of Reed’s Original Ginger Brew, and is sweetened
only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20%
fruit juice.
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Reed’s
Raspberry Ginger Brew
is
brewed from 17 grams of fresh ginger root, raspberry juice and lime.
Reed’s Raspberry Ginger Brew is 20% raspberry juice and is sweetened with
fruit juice and fructose.
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Reed’s
Spiced Apple Brew
uses 8 grams of fresh ginger root, the finest tart German apple juice
and
such apple pie spices as cinnamon, cloves and allspice. Reed’s Spiced
Apple Brew is 50% apple juice and sweetened with fruit juice and
fructose.
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Reed’s
Cherry Ginger Brew
is
the newest addition to our Ginger Brew family, and is naturally brewed
from: filtered water, fructose, fresh ginger root, cherry juice from
concentrate and spices. Reed’s Cherry Ginger Brew is 22% cherry
juice.
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All
six
of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores as
singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold by select retailers in a special 12-pack. Reed’s Spiced Apple Brew is now
available in a 750 ml. champagne bottle. 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.
Properties
We
own an
18,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street
in an unincorporated area of Los Angeles County, near downtown Los Angeles.
The
property is located in the Los Angeles County Mid-Alameda Corridor Enterprise
Zone. Businesses located in the enterprise zone are eligible for certain
economic incentives designed to stimulate business investment, encourage growth
and development and promote job creation.
We
purchased the facility in December 2000 for a purchase price of $850,000,
including a down payment of $102,000. We financed approximately $750,000 of
the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a building
improvement loan for $168,000 from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. Christopher J. Reed, our
founder and Chief Executive Officer, personally guaranteed both loans. Both
loans are due and payable on November 29, 2025, with interest at the New York
prime rate plus 1%, adjusted monthly, with no cap or floor. As of December
31,
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.
Legal
Proceedings
From
time
to time, we are a party to claims and legal proceedings arising in the ordinary
course of business. Our management evaluates our exposure to these claims and
proceedings individually and in the aggregate and provides for potential losses
on such litigation if the amount of the loss is estimable and the loss is
probable.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering. These securities
represented all of the shares issued in connection with the initial public
offering prior to October 11, 2006. These shares issued in connection with
the
initial public offering may have been issued in violation of either federal
or
state securities laws, or both, and may be subject to rescission.
On
August
12, 2006, we made a rescission offer to all holders of the outstanding shares
that we believe are subject to rescission, pursuant to which we offered to
repurchase these shares then outstanding from the holders. At the expiration
of
the rescission offer on September 18, 2006, the rescission offer was accepted
by
32 of the offerees to the extent of 28,420 shares for an aggregate of
$118,711.57, including statutory interest. The shares that were tendered for
rescission were agreed to be purchased by others and not from our
funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. With respect
to
the offerees who rejected the rescission offer, we may continue to be liable
under federal and state securities laws for up to an amount equal to the value
of all shares of common stock issued in connection with the initial public
offering plus any statutory interest we may be required to pay. If it is
determined that we offered securities without properly registering them under
federal or state law, or securing an exemption from registration, regulators
could impose monetary fines or other sanctions as provided under these laws.
However, we believe the rescission offer provides us with additional meritorious
defenses against any future claims relating to these shares.
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.
MANAGEMENT
General
Our
directors currently have terms which will end at our next annual meeting of
the
stockholders or until their successors are elected and qualify, subject to
their
death, resignation or removal. Officers serve at the discretion of the board
of
directors. Except as described below, there are no family relationships among
any of our directors and executive officers. 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, acting Chief Financial Officer and Chairman
of
the Board
|
|
48
|
Thierry
Foucaut
|
|
Chief
Operating Officer
|
|
42
|
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 and since
April 17, 2008, Mr. Reed also has 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.
Neal
Cohane
has been
our Sr.Vice President of Sales since March 2008. Prior, he seved as 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.
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. Mr. Ahearn
subsequently resigned effective March 25, 2008.
|
|
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:
|
|
|
|
Number of
|
|
Equity Incentive
|
|
|
|
|
|
|
|
|
|
Number of
|
|
Securities
|
|
Plan Awards:
|
|
|
|
|
|
|
|
|
|
Securities
|
|
Underlying
|
|
Number of
|
|
|
|
|
|
Number of
|
|
|
|
Underlying
|
|
Unexercised
|
|
Securities
|
|
|
|
|
|
Shares or Units
|
|
|
|
Unexercised
|
|
Options
|
|
Underlying
|
|
Option
|
|
Option
|
|
of Stock that
|
|
|
|
Options (#)
|
|
(#)
|
|
Unexercised
|
|
Exercise
|
|
Expiration
|
|
Have Not
|
|
Name and Position
|
|
Exercisable
|
|
Unexercisable
|
|
Unearned Options
|
|
Price
|
|
Date
|
|
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
|
|
|
-
|
|
|
|
|
|
4.00
|
|
|
12/1/2010
|
|
|
|
|
|
|
|
10,000
|
|
|
20,000
|
|
|
|
|
|
4.00
|
|
|
12/6/2011
|
|
|
|
|
Robert
Lyon
|
|
|
60,000
|
|
|
-
|
|
|
|
|
|
4.00
|
|
|
12/1/2010
|
|
|
|
|
|
|
|
10,000
|
|
|
20,000
|
|
|
|
|
|
4.00
|
|
|
12/6/2011
|
|
|
|
|
Eric
Scheffer
|
|
|
75,000
|
|
|
-
|
|
|
|
|
|
4.00
|
|
|
12/1/2010
|
|
|
|
|
|
|
|
8,333
|
|
|
16,667
|
|
|
|
|
|
4.00
|
|
|
12/6/2011
|
|
|
|
|
Notes:
(1)
|
These
options will not vest as Mr. Kane resigned as Chief Financial Officer
April 15, 2008.
|
(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 resigned effective March 25,
2008.
|
(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:
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
|
|
|
Non-Equity
|
|
|
|
|
|
|
|
Paid in
|
|
Stock
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
|
|
|
Cash
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
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
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 entered into an at-will employment agreement with David M. Kane, our then
current Chief Financial Officer, which provided for an annualized salary of
approximately $175,000 per year. In addition, we granted Mr. Kane options to
purchase up to 50,000 shares of common stock which vest over a three year period
ending in 2010. David M. Kane subsequently resigned as Chief Financial Officer
effective April 15, 2008.
Further,
we 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. Mr. Ahearn subsequently resigned as Senior Vice President
of Sales effective March 25, 2008.
Further,
we 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 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.
Securities
Authorized for Issuance under 2001 Stock Option Plan and 2007 Stock Option
Plan
For
information regarding securities authorized for issuance under our 2001 Stock
Option Plan and 2007 Stock Option Plan see “Market for Common Equity and Related
Stockholder Matters.”
Limitation
on Liability and Indemnification of Directors and Officers
Our
amended certificate of incorporation provides that, to the fullest extent
permitted by Delaware law, as it may be amended from time to time, none of
our
directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Consequently,
our directors will not be personally liable to us or our stockholders for
monetary damages for any breach of fiduciary duties as directors, except
liability for the following:
|
·
|
Any
breach of their duty of loyalty to our company or our
stockholders.
|
|
·
|
Acts
or omissions not in good faith or which involve intentional misconduct
or
a knowing violation of law.
|
|
·
|
Unlawful
payments of dividends or unlawful stock repurchases or redemptions
as
provided in Section 174 of the Delaware General Corporation
Law.
|
|
·
|
Any
transaction from which the director derived an improper personal
benefit.
|
Our
amended certificate of incorporation also provides discretionary indemnification
for the benefit of our directors, officers, and employees, to the fullest extent
permitted by Delaware law, as it may be amended from time to time. Insofar
as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, or persons controlling us, pursuant
to
the foregoing provisions, we have been informed that in the opinion of the
SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Pursuant
to our amended bylaws, we are required to indemnify our directors, officers,
employees and agents, and we have the discretion to advance his or her related
expenses, to the fullest extent permitted by law.
The
limitation of liability and indemnification provisions in our certificate of
incorporation and bylaws may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty. They may also reduce
the likelihood of derivative litigation against our directors and officers,
even
though an action, if successful, might benefit us and other stockholders.
Furthermore, a stockholder’s investment may be adversely affected to the extent
that we pay the costs of settlement and damage awards against directors and
officers as required by these indemnification provisions. At present, there
is
no pending litigation or proceeding involving any of our directors, officers
or
employees regarding which indemnification is sought, and we are not aware of
any
threatened litigation that may result in claims for
indemnification.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
During
the nine months ended September 30, 2008, the Company employed one family
member
of the majority shareholder, Chief Executive Officer and Chief Financial
Officer
of the Company in a sales role. He was paid approximately $112,500 during
the
nine months ended September 30, 2008 . No stock options were granted to him
during the nine months ended September 30, 2008. The family member was not
employed by the Company during the three months ended September 30,
2008.
On
May 1,
2008, the Company entered into an agreement for the distribution of its products
internationally. The agreement is between the Company and a company controlled
by two brothers of Christopher Reed, President and Chief Financial Officer
of
the Company. The agreement remains in effect until terminated by either party
and requires the Company to pay the greater of $10,000 per month or 10% of
the
defined sales of the previous month. During the nine months ended September
30,
2008, the Company paid $30,000 for these services and granted 200,000 warrants
in connection with this distribution agreement. The warrants are issuable
only
upon the attainment of certain international product sales. No warrants have
vested as of the date of this prospectus..
As
of
December 31, 2007, we had 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 March 31, 2008, we determined that the note is deemed uncollectible and
the
collateral worthless, and have written off the entire balance and associated
accrued interest.
For
the
three months ended March 31, 2008, we employed one family member of the majority
shareholder, Chief Executive Officer and Chief Financial Officer of the Company
in a sales role. He was paid approximately $56,250. No stock options were
granted to him during the three months ended March 31, 2008.
For
the
year ending December 31, 2007, the Company employed three family members of
the
majority shareholder, Chief Executive Officer, and acting Chief Financial
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.
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 4.1% 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.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table reflects, as of the date of this prospectus, the beneficial
common stock ownership of: (a) each of our directors, (b) each named executive
officer, (c) each person known by us to be a beneficial holder of 5% or more
of
our common stock, and (d) all of our 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
|
|
|
35.8
|
|
Judy
Holloway Reed (2)
|
|
|
3,200,000
|
|
|
35.8
|
|
Mark
Harris (3)
|
|
|
4,319
|
|
|
|
*
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0.0
|
|
Michael
Fischman
|
|
|
0
|
|
|
0.0
|
|
Thierry
Foucaut
|
|
|
0
|
|
|
0.0
|
|
Neal
Cohane
|
|
|
0
|
|
|
0.0
|
|
Robert
T. Reed, Jr. (4)
|
|
|
367,500
|
|
|
4.
1
|
|
Mark
Reed (4)
|
|
|
60,909
|
|
|
|
*
|
Robert
Lyon
|
|
|
70,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
Directors
and executive officers as a group (9 persons) (4)
|
|
|
3,702,728
|
|
|
40.6
|
|
|
|
|
|
|
|
|
|
5%
or greater stockholders
|
|
|
|
|
|
|
|
Joseph
Grace (5)
|
|
|
500,000
|
|
|
5.6
|
|
Alma
and Gabriel Elias (6)
|
|
|
872,584
|
|
|
9.5
|
|
*
Less than 1%.
(1)
|
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this prospectus, are deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder's
name.
Unless otherwise indicated, the officers, directors and stockholders
can
be reached at our principal offices. Percentage of ownership is based
on
8,928,591 shares of common stock outstanding as of October 27,
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
three executive officers (including Robert T. Reed, Jr., our Executive
Vice-President (247,500 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), and Mark Reed, our Executive Vice
President – International (60,909 shares of common stock) who
beneficially own in the aggregate of 498,409 shares of common stock.
Does
not include options to purchase up to 265,000 shares of common stock
which
vest in portions through the period ending August 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 (20,000 shares of common stock and warrants to purchase
up to 10,000 shares of common stock), (b) Alma and Gabriel Elias
JTWROS
(315,057 shares of common stock and warrants to purchase up to
157,528 shares of common stock), and (c) Wholesale Realtors Supply
(286,666 shares of common stock and warrants to purchase up to 83,333
shares of common stock). The address for these aforementioned
entities is c/o APS Financial Services 1301 Capital of Texas Hwy,
Ste
B-220 Austin, Texas 78746.
|
DESCRIPTION
OF OUR SECURITIES
We
have
the authority to issue 20,000,000 shares of capital stock, consisting of
19,500,000 shares of common stock, $0.0001 par value per share, and 500,000
of
preferred stock, $10.00 par value per share, which can be issued from time
to
time by our board of directors on such terms and conditions as they may
determine.
As
of the
date of this prospectus, there were approximately 8,928,591 shares of common
stock outstanding, and 47,121
shares
of Series A preferred stock issued and outstanding.
We
will
not offer preferred stock to promoters, except on the same terms as it is
offered to all other existing stockholders or to new stockholders. We will
not
authorize the issuance of preferred stock unless such issuance is approved
by a
majority of our independent directors who do not have an interest in the
transaction and who have access, at our expense, to our legal counsel or their
independent legal counsel.
The
following description of our capital stock does not purport to be complete
and
is subject to, and is qualified by, our certificate of incorporation and
by-laws, which are filed as exhibits to the registration statement of which
this
prospectus is a part, and by the applicable provisions of Delaware
law.
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters requiring
a vote of stockholders, including the election of directors.
We
are a
Delaware corporation and our certificate of incorporation does not provide
for
cumulative voting. However, we may be subject to section 2115 of the California
Corporations Code. Section 2115 provides that, regardless of a company's legal
domicile, specified provisions of California corporations law will apply to
that
company if the company meets requirements relating to its property, payroll
and
sales in California and if more than one-half of its outstanding voting
securities are held of record by persons having addresses in California, and
such company is not listed on certain national securities exchanges or on the
NASDAQ National Market. Among other things, section 2115 may limit our ability
to elect a classified board of directors and requires cumulative voting in
the
election of directors. Cumulative voting is a voting scheme which allows
minority stockholders a greater opportunity to have board representation by
allowing those stockholders to have a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which the
stockholder's shares are entitled and to "cumulate" those votes for one or
more
director nominees. Generally, cumulative voting allows minority stockholders
the
possibility of board representation on a percentage basis equal to their stock
holding, where under straight voting those stockholders may receive less or
no
board representation. The Supreme Court of Delaware has recently ruled, on
an
issue unrelated to voting for directors, that section 2115 is an
unconstitutional exception to the “internal affairs doctrine” that requires the
law of the incorporating state to govern disputes involving a corporation’s
internal affairs, and is therefore inapplicable to Delaware corporations. The
California Supreme Court has not definitively ruled on section 2115, although
certain lower courts of appeal have upheld section 2115. As a result, there
is a
conflict as to whether section 2115 applies to Delaware corporations. Pending
the resolution of these conflicts, we will not elect directors by cumulative
voting.
Christopher
J. Reed, our President, Chief Executive Officer and Chairman of the Board of
Directors, holds approximately 36% of our outstanding common stock.
Consequently, Mr. Reed, as our principal stockholder, has the power, and may
continue to have the power, to have significant control over the outcome of
any
matter on which the stockholders may vote.
Holders
of our common stock are entitled to receive dividends only if we have funds
legally available and the Board of Directors declares a
dividend.
Holders
of our common stock do not have any rights to purchase additional shares. This
right is sometimes referred to as a preemptive right.
Upon
a
liquidation or dissolution, whether in bankruptcy or otherwise, holders of
common stock rank behind our secured and unsecured debt holders, and behind
any
holder of any series of our preferred stock.
There
is
a limited public market for our common stock.
Series
A Preferred Stock
Holders
of our Series A preferred stock are entitled to receive out of assets legally
available, a 5% pro-rata annual non-cumulative dividend, payable in cash or
shares, on June 30 th
of each
year commencing on June 30,
2005.
The dividend can be paid in cash or, in the sole and absolute discretion of
our
board of directors, in shares of common stock based on their then fair market
value. We cannot declare or pay any dividend on shares of our securities ranking
junior to the preferred stock until the holders of our preferred stock have
received the full non-cumulative dividend to which they are entitled. In
addition, the holders of our preferred stock are entitled to receive pro rata
distributions of dividends on an “as converted” basis with the holders of our
common stock.
As
of
each of June 30, 2005, 2006, 2007 and 2008, we issued 7,362, 7,373, 3,820 and
10,910 shares of our common stock in each such year, respectively, as a dividend
to the holders of our Series A preferred stock based on a $29,470 accrued annual
dividend payable for each of June 30, 2005 and 2006, $27,770 for June 30, 2007
and $23,561 for June 30, 2008.
In
the
event of any liquidation, dissolution or winding up of our operations, or if
there is a change of control event, then, subject to the rights of the holders
of our more senior securities, if any, the holders of our Series A preferred
stock are entitled to receive, prior to the holders of any of our junior
securities, $10.00 per share plus all accrued and unpaid dividends. Thereafter,
all remaining assets will be distributed pro rata among all of our security
holders.
At
any
time after June 30, 2007, we have the right, but not the obligation, to redeem
all or any portion of the Series A preferred stock by paying the holders thereof
the sum of the original purchase price per share, which was $10.00, plus all
accrued and unpaid dividends.
The
Series A preferred stock may be converted, at the option of the holder, at
any
time after issuance and prior to the date upon which such stock is redeemed,
into four shares of common stock, subject to adjustment in the event of stock
splits, reverse stock splits, stock dividends, recapitalization,
reclassification, and similar transactions. We are obligated to reserve out
of
our authorized but unissued shares of common stock a sufficient number of such
shares to effect the conversion of all outstanding shares of Series A preferred
stock.
Except
as
provided by law, the holders of our Series A preferred stock do not have the
right to vote on any matters, including, without limitation, the election of
directors. However, so long as any shares of Series A preferred stock are
outstanding, we will not, without first obtaining the approval of at least
a
majority of the holders of the Series A preferred stock:
|
·
|
amend
our certificate of incorporation or bylaws in any manner which adversely
affects the rights of the Series A preferred stock,
or
|
|
·
|
authorize
or issue, or obligate ourselves to issue, any other equity security
having
a preference over, or being on a parity with, the Series A preferred
stock
with respect to dividends, liquidation, redemption or voting, including
any other security convertible into or exercisable for any equity
security
other than shares of any senior class of preferred
stock.
|
There
is
no public market for our Series A preferred stock and we do not intend to
register such stock with the SEC or seek to establish a public market for the
Series A preferred stock.
We
will
not issue any preferred stock in the future, unless the issuance of such
preferred stock is approved by a majority our independent directors who do
not
have an interest in the transaction and have access, at our expense, to our
or
independent legal counsel.
Options
and Warrants
As
of the
date of this prospectus, we had outstanding options and warrants to purchase
an
aggregate of 2,520,736 shares of our common stock, with a range of exercise
prices from $1.99 to $8.50. The options and warrants expire at various dates
between 2009 and 2013. We have outstanding options to purchase up to 652,500
shares of common stock at a weighted average exercise price of $3.85 per share,
505,000 of which were granted pursuant to our 2001 and 2007 Stock Option Plans
and 147,500 of which were granted outside of the 2001 Stock Option
Plan.
We
have
outstanding warrants to purchase up to 1,868,236 shares of common stock at
a
weighted average exercise price of $5.41 per share.
Warrants
to purchase up to 749,995 shares which we issued in the second quarter of 2007
in a private placement, are callable for cancellation in whole, upon twenty
days
written notice to the warrant holders, at any time that the closing sale price
of our common stock equals or exceeds $10.00 per share (and as adjusted from
time to time pursuant to the provisions of the related warrant certificate)
for
a period of ten consecutive trading days.
Anti-Takeover
Effects of Delaware Law and Our Certificate of
Incorporation
Certain
provisions of Delaware law and our certificate of incorporation could make
more
difficult the acquisition of us by means of a tender offer or otherwise, and
the
removal of incumbent officers and directors. These provisions are expected
to
discourage certain types of coercive takeover practices and inadequate takeover
bids and to encourage persons seeking to acquire control of us.
Our
Certificate of Incorporation and Bylaws include provisions that:
|
·
|
allow
the Board of Directors to issue, without further action by the
stockholders, up to 500,000 shares of undesignated preferred
stock.
|
We
are
subject to the provisions of Section 203 of the Delaware General Corporation
Law
regulating corporate takeovers. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging under certain circumstances,
in
a business combination with an interested stockholder for a period of three
years following the date the person became an interested stockholder
unless:
|
·
|
prior
to the date of the transaction, the board of directors of the corporation
approved either the business combination or the transaction which
resulted
in the stockholder becoming an interested
stockholder.
|
|
·
|
upon
completion of the transaction that resulted in the stockholder becoming
an
interested stockholder, the stockholder owned at least 85% of the
voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (1) shares owned by persons who are directors and also
officers and (2) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer.
|
|
·
|
on
or subsequent to the date of the transaction, the business combination
is
approved by the board and authorized at an annual or special meeting
of
stockholders, and not by written consent, by the affirmative vote
of at
least 66 2
/3
% of the outstanding voting stock which is not owned by the interested
stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
An
interested stockholder is a person who, together with affiliates and associates,
owns or, within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation’s outstanding voting securities.
The existence of this provision may have an anti-takeover effect with respect
to
transactions our board of directors does not approve in advance. Section 203
may
also discourage attempts that might result in a premium over the market price
for the shares of common stock held by stockholders.
These
provisions of Delaware law and our certificate of incorporation could have
the
effect of discouraging others from attempting hostile takeovers and, as a
consequence, they may also inhibit temporary fluctuations in the market price
of
our common stock that often result from actual or rumored hostile takeover
attempts. These provisions may also have the effect of preventing changes in
our
management. It is possible that these provisions could make it more difficult
to
accomplish transactions that stockholders may otherwise deem to be in their
best
interests.
TRANSFER
AGENT
We
have
engaged Transfer On-Line, Inc., 317 SW Alder Street, 2nd Floor, Portland,
Oregon, 92704 to act as our registrar and transfer agent.
LEGAL
MATTERS
The
validity of the shares of common stock offered hereby was previously passed
upon
for us by Baker & Hostetler LLP, Los Angeles, California.
EXPERTS
The
financial statements as of December 31, 2007 and for the years ended December
31, 2007 and 2006 included in the prospectus and elsewhere in the registration
statement have been included in reliance on the report of Weinberg &
Company, P.A., independent registered public accountants, given on such firm’s
authority as experts in accounting and auditing.
DISCLOSURE
OF COMMISSION POSITION OF INDEMNIFICATION FOR
SECURITIES
ACT LIABILITIES
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.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion
of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim
for
indemnification against such liabilities (other than the payment of expenses
incurred or paid by a director, officer or controlling person in a successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, we
will, unless in the opinion of our counsel the matter has been settled by
controlling precedent, submit to the court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We
have
filed with the SEC a registration statement on Form S-1 under the Securities
Act
with respect to the shares of common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all
of
the information set forth in the registration statement or the exhibits and
schedules filed therewith. For further information about us and the common
stock
offered hereby, reference is made to the registration statement and the exhibits
and schedules filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document that is filed as an exhibit
to the registration statement are not necessarily complete, and each such
statement is qualified in all respects by reference to the full text of such
contract or other document filed as an exhibit to the registration
statement.
A
copy of
the registration statement and the exhibits and schedules filed therewith may
be
inspected without charge at the public reference room maintained by the SEC,
located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies
of
all or any part of the registration statement may be obtained from such offices
upon the payment of the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. We
also
file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC also maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
the
site is www.sec.gov .
This
prospectus includes statistical data obtained from industry publications. These
industry publications generally indicate that the authors of these publications
have obtained information from sources believed to be reliable but do not
guarantee the accuracy and completeness of their information. While we believe
these industry publications to be reliable, we have not independently verified
their data.
INDEX
TO FINANCIAL STATEMENTS
|
|
|
|
Condensed
Balance Sheets as of September 30, 2008 (unaudited) and December
31,
2007
|
F-2
|
|
|
Condensed
Statements of Operations for the three and nine months
|
|
ended
September 30, 2008 and 2007 (unaudited)
|
F-3
|
|
|
Condensed
Statement of Changes in Stockholders’ Equity
|
|
for
the nine months ended September 30, 2008 (unaudited)
|
F-4
|
|
|
Condensed
Statements of Cash Flows for the nine months
|
|
ended
September 30, 2008 and 2007 (unaudited)
|
F-5
|
|
|
Notes
to Condensed Financial Statements (unaudited)
|
F-6
|
|
|
ANNUAL
FINANCIAL INFORMATION
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-12
|
|
|
Balance
Sheet as of December 31, 2007
|
F-13
|
|
|
Statements
of Operations for the years ended December 31, 2007 and
2006
|
F-14
|
|
|
Statement
of Stockholders’ Equity for the years
|
|
ended
December 31, 2007 and 2006
|
F-15
|
|
|
Statements
of Cash Flows for the years ended December 31, 2007 and
2006
|
F-16
|
|
|
Notes
to Financial Statements
|
F-17
|
REED’S,
INC
CONDENSED
BALANCE SHEETS
|
|
September 30,
2008
(Unaudited)
|
|
December 31,
2007
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
83,091
|
|
$
|
742,719
|
|
Inventory
|
|
|
2,994,507
|
|
|
3,028,450
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns
and discounts of $165,000 as of September 30, 2008 and $407,480
as of
December 31, 2007
|
|
|
1,281,662
|
|
|
1,160,940
|
|
Other
Receivable
|
|
|
4,255
|
|
|
16,288
|
|
Prepaid
Expenses
|
|
|
62,857
|
|
|
76,604
|
|
Total
Current Assets
|
|
|
4,426,372
|
|
|
5,025,001
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $1,075,342
as of
September 30, 2008 and $867,769 as of December 31, 2007
|
|
|
4,207,441
|
|
|
4,248,702
|
|
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
|
|
|
|
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $ 15,984 as of
September
30, 2008 and $5,212 as of December 31, 2007
|
|
|
72,166
|
|
|
13,402
|
|
Total
Other Assets
|
|
|
872,367
|
|
|
813,603
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
9,506,180
|
|
$
|
10,087,306
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,328,774
|
|
$
|
1,996,849
|
|
Lines
of credit
|
|
|
1,290,082
|
|
|
-
|
|
Current
portion of long term debt
|
|
|
9,421
|
|
|
27,331
|
|
Accrued
interest
|
|
|
24,691
|
|
|
3,548
|
|
Accrued
expenses
|
|
|
117,308
|
|
|
54,364
|
|
Total
Current Liabilities
|
|
|
2,770,276
|
|
|
2,082,092
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
1,757,681
|
|
|
765,753
|
|
|
|
|
|
|
|
|
|
Total
Liabilities
|
|
|
4,527,957
|
|
|
2,847,845
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10 par value, 500,000 shares authorized, 47,121 shares
outstanding
at September 30, 2008 and 48,121 shares at December 31,
2007
|
|
|
471,212
|
|
|
481,212
|
|
Common
stock, $.0001 par value, 19,500,000 shares authorized,
8,928,591 shares issued and outstanding at September 30, 2008 and
8,751,721 at December 31, 2007
|
|
|
892
|
|
|
874
|
|
Additional
paid in capital
|
|
|
18,266,167
|
|
|
17,838,516
|
|
Accumulated
deficit
|
|
|
(13,760,048
|
)
|
|
(11,081,141
|
)
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
4,978,223
|
|
|
7,239,461
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
9,506,180
|
|
$
|
10,087,306
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For
the Three and Nine months Ended September 30, 2008 and
2007
(Unaudited)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
SALES
|
|
$
|
4,233,186
|
|
$
|
3,881,328
|
|
$
|
12,368,102
|
|
$
|
10,366,378
|
|
COST
OF SALES
|
|
|
2,937,687
|
|
|
3,083,055
|
|
|
9,283,460
|
|
|
8,348,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
1,295,499
|
|
|
798,273
|
|
|
3,084,642
|
|
|
2,018,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
819,362
|
|
|
1,606,938
|
|
|
2,994,498
|
|
|
3,049,207
|
|
General
and Administrative
|
|
|
558,094
|
|
|
711,785
|
|
|
2,547,836
|
|
|
1,611,276
|
|
Total
Operating Expenses
|
|
|
1,377,456
|
|
|
2,318,723
|
|
|
5,542,334
|
|
|
4,660,483
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM
OPERATIONS
|
|
|
(81,957
|
)
|
|
(1,520,450
|
)
|
|
(2,457,692
|
)
|
|
(2,642,160
|
)
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
-
|
|
|
45,898
|
|
|
975
|
|
|
98,498
|
|
Interest
Expense
|
|
|
(92,201
|
)
|
|
(51,407
|
)
|
|
(198,629
|
)
|
|
(163,290
|
)
|
Total
Other Income (Expense)
|
|
|
(92,201
|
)
|
|
(5,509
|
)
|
|
(197,654
|
)
|
|
(64,792
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(174,158
|
)
|
|
(1,525,959
|
)
|
|
(2,655,346
|
)
|
|
(2,706,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
-
|
|
|
—
|
|
|
(23,561
|
)
|
|
(27,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(174,158
|
)
|
$
|
(1,525,959
|
) |
$
|
(2,678,907
|
) |
$
|
(2,734,722
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
PER SHARE
-
Available to Common Stockholders Basic
and Diluted
|
|
$
|
(0.02
|
)
|
$
|
(0.18
|
)
|
$
|
(0.30
|
)
|
$
|
(0.35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
8,928,591
|
|
|
8,714,050
|
|
|
8,868,381
|
|
|
7,759,425
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For
the
nine months ended September 30, 2008 (Unaudited)
|
|
Common Stock
|
|
Additional
|
|
Preferred Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid in Capital
|
|
Shares
|
|
Amount
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2008
|
|
|
8,751,721
|
|
$
|
874
|
|
$
|
17,838,516
|
|
|
48,121
|
|
$
|
481,212
|
|
$
|
(11,081,141
|
)
|
$
|
7,239,461
|
|
Fair
value of common stock issued for services
|
|
|
161,960
|
|
|
16
|
|
|
335,439
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
335,455
|
|
Preferred
stock dividend
|
|
|
10,910
|
|
|
1
|
|
|
23,560
|
|
|
-
|
|
|
-
|
|
|
(23,561
|
)
|
|
-
|
|
Preferred
stock conversion
|
|
|
4,000
|
|
|
1
|
|
|
9,999
|
|
|
(1,000
|
)
|
|
(10,000
|
)
|
|
-
|
|
|
-
|
|
Fair
value of options issued to employees
|
|
|
-
|
|
|
-
|
|
|
58,653
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
58,653
|
|
Net
Loss for the nine months ended September 30, 2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,655,346
|
)
|
|
(2,655,346
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
September 30, 2008
|
|
|
8,928,591
|
|
$
|
892
|
|
$
|
18,266,167
|
|
|
47,121
|
|
$
|
471,212
|
|
$
|
(13,760,048
|
)
|
$
|
4,978,223
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
For
the nine months ended September 30, 2008 and 2007
(Unaudited)
|
|
Nine months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(2,655,346
|
)
|
$
|
(2,706,952
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Compensation
expense from stock issuance
|
|
|
335,455
|
|
|
3,783
|
|
Fair
value of stock options issued to employees
|
|
|
58,653
|
|
|
171,296
|
|
Depreciation
and amortization
|
|
|
256,959
|
|
|
144,445
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(120,722
|
)
|
|
(748,335
|
)
|
Inventory
|
|
|
33,943
|
|
|
(1,781,490
|
)
|
Prepaid
Expenses
|
|
|
13,747
|
|
|
82,380
|
|
Other
receivables
|
|
|
12,033
|
|
|
(120,361
|
)
|
Other
Intangibles
|
|
|
(88,149
|
)
|
|
-
|
|
Accounts
payable
|
|
|
(668,075
|
)
|
|
607,670
|
|
Accrued
expenses
|
|
|
62,944
|
|
|
97,879
|
|
Accrued
interest
|
|
|
21,143
|
|
|
(24,200
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(2,737,415
|
)
|
|
(4,273,905
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Increase
in note receivable
|
|
|
-
|
|
|
(300,000
|
)
|
Purchase
of property and equipment
|
|
|
(186,313
|
)
|
|
(2,546,165
|
)
|
Increase
in restricted cash
|
|
|
-
|
|
|
1,580,456
|
|
Net
cash used in investing activities
|
|
|
(186,313
|
)
|
|
(1,265,709
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
received from warrants exercised
|
|
|
-
|
|
|
165,000
|
|
Proceeds
received from borrowings on long term debt
|
|
|
1,770,000
|
|
|
163,276
|
|
Principal
payments on debt
|
|
|
(795,982
|
)
|
|
(254,387
|
)
|
Proceeds
received on sale of common stock
|
|
|
-
|
|
|
9,000,000
|
|
Payments
for stock offering costs
|
|
|
-
|
|
|
(1,418,606
|
)
|
Net
borrowing (payment) on lines of credit
|
|
|
1,290,082
|
|
|
(1,355,526
|
)
|
Net
cash provided by financing activities
|
|
|
2,264,100
|
|
|
6,299,757
|
|
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN
CASH
|
|
|
(659,628
|
)
|
|
760,143
|
|
CASH —
Beginning of period
|
|
|
742,719
|
|
|
1,638,917
|
|
|
|
|
|
|
|
|
|
CASH —
End of period
|
|
$
|
83,091
|
|
$
|
2,399,060
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
177,486
|
|
$
|
187,490
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Noncash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
Common
stock to be issued in settlement of preferred stock
dividend
|
|
$
|
-
|
|
$
|
27,770
|
|
Preferred
Stock converted to Common Stock
|
|
|
10,000
|
|
$
|
98,190
|
|
Common
stock issued in settlement of preferred stock dividend
|
|
|
23,561
|
|
$
|
-
|
|
See
accompanying Notes to Condensed Financial Statements
REED’S,
INC.
NOTES
TO CONDENSED FINANCIAL STATEMENTS
Nine
months Ended September 30, 2008 and 2007 (UNAUDITED)
The
accompanying interim condensed financial statements are unaudited, but
in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly
the
financial position at September 30, 2008 and the results of operations
and cash
flows for the three and nine months ended September 30, 2008 and 2007. The
balance sheet as of December 31, 2007 is derived from the Company’s audited
financial statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included
in
the Company’s Annual Report, Form 10-KSB, as filed with the Securities and
Exchange Commission on April 15, 2008.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the
reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the three and nine months ended September 30,
2008 are not necessarily indicative of the results of operations to be
expected
for the full fiscal year ending December 31, 2008.
Income
(Loss) per Common Share
Basic
income (loss) per share is calculated by dividing net income (loss) available
to
common stockholders by the weighted average number of common shares outstanding
during the year. Diluted income per share is calculated assuming the issuance
of
common shares, if dilutive, resulting from the exercise of stock options
and
warrants. As the Company had a loss in the three and nine month periods
ended
September 30, 2008 and 2007, basic and diluted loss per share are the same
because the inclusion of common share equivalents would be anti-dilutive.
At
September 30, 2008 and 2007, potentially dilutive securities consisted
of
convertible preferred stock, common stock options and warrants aggregating
2,709,220 and 2,612,220 common shares, respectively.
Fair
Value of Financial Instruments
The
carrying amount of financial instruments, including cash, accounts and
other
receivables, accounts payable and accrued liabilities, approximate fair
value
because of their short maturity. The carrying amounts of notes payable
approximate fair value because the related effective interest rates on
these
instruments approximate the rates currently available to the
Company.
Effective
January 1, 2008, the Company adopted Statement of Financial Accounting
Standards
(SFAS) No. 157, "Fair Value Measurements." This Statement defines fair
value for
certain financial and nonfinancial assets and liabilities that are recorded
at
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This guidance applies to other
accounting pronouncements that require or permit fair value measurements.
On
February 12, 2008, the FASB finalized FASB Staff Position (FSP) No.157-2,
“
Effective Date of FASB Statement No. 157.” This Staff Position delays the
effective date of SFAS No. 157 for nonfinancial assets and liabilities
to fiscal
years beginning after November 15, 2008 and interim periods within those
fiscal
years, except for those items that are recognized or disclosed at fair
value in
the financial statements on a recurring basis (at least annually). The
adoption
of SFAS No. 157 had no effect on the Company’s financial position or results of
operations.
Recent
Accounting Pronouncements
References
to the “FASB” and “SFAS” herein refer to the “Financial Accounting Standards
Board”, and “Statement of Financial Accounting Standards”,
respectively.
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.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No.
161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS
No. 133”). The objective of SFAS No. 161 is to provide users of financial
statements with an enhanced understanding of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items
are
accounted for under SFAS No. 133 and its related interpretations, and how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. SFAS No. 161 requires
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses
on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative agreements. SFAS No. 161 applies to all derivative
financial instruments, including bifurcated derivative instruments (and
nonderivative instruments that are designed and qualify as hedging instruments
pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items
accounted for under SFAS No. 133 and its related interpretations. SFAS No.
161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective
for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged. SFAS No. 161
encourages, but does not require, comparative disclosures for earlier periods
at
initial adoption.
The
Company does not believe the adoption of the above recent pronouncements,
will
have a material effect on the Company’s results of operations, financial
position, or cash flows.
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000. The Company may be exposed
to risk
for the amounts of funds held in one bank in excess of the insurance limit.
In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess
of the
$250,000 guarantee during the nine months ended September 30,
2008.
During
the three months ended September 30, 2008 and 2007, the Company had two
customers, which accounted for approximately 36% and 14% and 40% and 29%
of
sales, respectively. No other customers accounted for more than 10% of
sales in
either year.
During
the nine months ended September 30, 2008 and 2007, the Company had two
customers, which accounted for approximately 32% and 13% and 38% and 15%
of
sales, respectively . No other customers accounted for more than 10% of
sales in
either year. As of September 30, 2008, the Company had approximately $310,100
and $175,000, respectively, of accounts receivable from these
customers.
Inventory
consists of the following at:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
Raw
Materials
|
|
$
|
1,152,136
|
|
$
|
1,179,580
|
|
Finished
Goods
|
|
|
1,842,371
|
|
|
1,848,870
|
|
|
|
$
|
2,994,507
|
|
$
|
3,028,450
|
|
In
March
2008, the Company originated a note payable with a bank in the amount of
$1,770,000. The note matures in February 2038. The note carries an 8.41%
per
annum interest rate, requires a monthly payment of principal and interest
of
$13,651, and is secured by all of the land and buildings owned by the Company.
The previous debt of $650,483 for the land and building and a building
improvement loan of $136,525 that were secured by land and building were
paid
off in March 2008 as a condition of obtaining this loan. As of September
30,
2008, $1,767,102 was due under this debt obligation, of which $9,421 has
been
reflected as current.
In
May
2008 the Company entered into a Credit and Security Agreement under which
the
Company was provided with a $2 million revolving credit facility. In July
2008,
the line of credit was increased to $3 million. The amount available to
borrow
is based on a calculation of eligible accounts receivable and
inventory.
At
September 30, 2008, aggregate amounts outstanding under the line of credit
was
$1,290,082 and the Company had approximately $273,000 of availability on
this
line of credit . Interest accrues on outstanding loans under the credit
facility
at a rate equal to 5.75% per annum plus the greater of 2% or the LIBOR
rate.
Borrowings under the credit facility are secured by all of the Company's
assets. The agreement terminates May 2010, and the Company is subject to an
early termination fee if the loan is terminated before such
date.
The
Company is required to comply with a number of affirmative, negative and
financial covenants. Among other things, these covenants require the Company
to
achieve minimum quarterly net income as set forth in the Credit Agreement,
required the Company to maintain a minimum Debt Service Coverage Ratio
(as
defined in the Credit Agreement), and require the Company to maintain minimum
levels of tangible net worth. The Company was in compliance with these
covenants
as of September 30, 2008 .
For
the
nine months ended September 30, 2008, the following stock transactions
occurred:
The
Company issued 161,960 shares of common stock in exchange for consulting
services. The value of the stock was based on the closing price of the
stock on
the issuance date. The total value of $335,455 was charged to consulting
expenses.
The
Company issued 10,910 shares of common stock valued at $23,561 to its preferred
stockholders, in accordance with the dividend provision of the preferred
stock
agreement.
The
Company issued 4,000 of common stock, resulting from the conversion of
1,000
shares of preferred stock.
6.
|
Stock
Based Compensation
|
Stock
options
The
following table summarizes stock option activity for the nine months ended
September 30, 2008:
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted-
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2008
|
|
|
749,000
|
|
$
|
6.02
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
275,000
|
|
$
|
1.99
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Forfeited
|
|
|
(371,500
|
)
|
$
|
6.83
|
|
|
-
|
|
|
-
|
|
Outstanding
at September 30, 2008
|
|
|
652,500
|
|
$
|
3.85
|
|
|
3.70
|
|
$
|
62,250
|
|
Exercisable
at September 30, 2008
|
|
|
266,667
|
|
$
|
4.64
|
|
|
2.68
|
|
$
|
7,500
|
|
Stock
options granted under our equity incentive plans vest over two and three
years
from the date of grant, ½ and 1/3 per year, respectively, and generally expire
five years from the date of grant.
During
the nine months ended September 30, 2008, the Company recognized $56,978
of
compensation cost relating to the vesting of options.
As
of
September 30, 2008, the Company has unvested options of 385,833, which
will be
reflected as compensation cost of approximately $751,000 over the remaining
vesting period of three years.
The
impact on our results of operations of recording stock-based compensation
for
the three-month period ended September 30, 2008 was to increase selling
expenses
by $98,526, and increase general and administrative expenses by $19,500.
The
impact on our results of operations of recording stock-based compensation
for
the three-month period ended September 30, 2007 was to increase selling
expenses
by $103,376 and increase general and administrative expenses by
$19,500.
The
impact on our results of operations of recording stock-based compensation
for
the nine-month period ended September 30, 2008 was to decrease selling
expenses
by $1,522 and increase general and administrative expenses by $58,500.
The
impact on our results of operations of recording stock-based compensation
for
the nine-month period ended September 30, 2007 was to increase selling
expenses
by $145,296 and increase general and administrative expenses by
$26,000.
The
reduction in compensation expense resulted from a change in estimated
forfeitures of our total expected stock option compensation expense. In
accordance with FAS 123R, the company recalculated its expected compensation
for
all options outstanding at September 30, 2008 and compared it to previously
recorded compensation expense for options in that option pool. The change
in
forfeiture assumption resulted from a significant forfeiture of stock options
due to many of the option holders leaving the employ of the company before
they
became vested in those options.
The
amount of the cumulative adjustment to reflect the effect of the forfeited
options is approximately $238,000. The amount of compensation expense which
would have been recognized if the cumulative adjustment was not made would
have
been approximately $295,000.
We
calculated the fair value of each option award on the date of grant using
the
Black-Scholes option pricing model. The weighted average grant date fair
value
of options granted during the nine months ended September 30, 2008 was
$1.59.
The following weighted average assumptions were used for the nine months
ended September 30, 2008:
Risk-free
interest rate
|
|
|
3.76
|
%
|
Expected
lives (in years)
|
|
|
5.00
|
|
Dividend
yield
|
|
|
0
|
%
|
Expected
volatility
|
|
|
109.81
|
%
|
Expected
volatility is based on the actual volatility based on the closing price
of the
Company’s stock. 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.
Stock
Warrants
The
following table summarizes warrant activity for the nine months ended
September 30, 2008:
|
|
Shares
|
|
Weighted
Average Exercise
Price
|
|
Weighted-Average
Remaining Contractual
Term (Years )
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at January 1, 2008
|
|
|
1,668,236
|
|
$
|
5.75
|
|
|
-
|
|
|
-
|
|
Granted
|
|
|
200,000
|
|
$
|
2.54
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Outstanding
at September 30, 2008
|
|
|
1,868,236
|
|
$
|
5.41
|
|
|
2.85
|
|
$
|
20,975
|
|
Exercisable
at September 30, 2008
|
|
|
1,668,236
|
|
$
|
5.75
|
|
|
2.64
|
|
$
|
20,975
|
|
The
200,000 warrants granted during the nine months ended September 30, 2008,
were
granted in connection with a distribution agreement between the Company
and a
company which is owned by two brothers of Christopher Reed, President and
Chief
Financial Officer of the Company. The warrants are issuable only upon the
attainment of certain international product sales. No warrants vested during
the
nine months ended September 30, 2008. Accordingly, no expense was recorded
for
these warrants. The warrants will be valued and a corresponding expense
will be
recorded upon the attainment of the sales goals identified when the warrants
were granted.
7.
|
Related
Party Activity
|
For
the
nine months ended September 30, 2008, the Company employed one family member
of
the majority shareholder, Chief Executive Officer and Chief Financial Officer
of
the Company in a sales role. He was paid approximately $112,500 during
the nine
months ended September 30, 2008 . No stock options were granted to him
during
the nine months ended September 30, 2008. The family member was not employed
by
the Company during the three months ended September 30, 2008.
During
the nine months ended September 30, 2008, the Company entered into an agreement
for the distribution of its products internationally. The agreement is
between
the Company and a company controlled by two brothers of Christopher Reed,
President and Chief Financial Officer of the Company. The agreement remains
in
effect until terminated by either party and requires the Company to pay
the
greater of $10,000 per month or 10% of the defined sales of the previous
month.
During the nine months ended September 30, 2008, the Company paid $30,000
for
these services. 200,000 warrants were granted during the nine months ended
September 30, 2008, in connection with this distribution agreement. The
warrants
are issuable only upon the attainment of certain international product
sales. No
warrants vested during the nine months ended September 30, 2008. The warrants
will be valued and a corresponding expense will be recorded upon the attainment
of the sales goals identified when the warrants were
granted.
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
|
|
REED’S,
INC.
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock to
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
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
|
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.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The
Company evaluates the collectibility of its trade accounts receivable based
on a
number of factors. In circumstances where the Company becomes aware of a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded, which reduces
the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification
of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The
allowance for doubtful accounts and returns and discounts is established
through
a provision for returns and discounts charged against sales. Receivables
are
charged off against the allowance when payments are received or products
returned. The allowance for doubtful accounts and returns and discounts as
of
December 31, 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.
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.
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.
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.
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.
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.
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
|
|
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.
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
|
|
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.
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
|
|
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.
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
|
|
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
|
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
|
|
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
|
|
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
|
|
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.
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.
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.
TABLE
OF CONTENTS
|
|
Page
|
Summary
|
|
2
|
Special
Note Regarding Forward-Looking Statements
|
|
3
|
Risk
Factors
|
|
5
|
Use
of Proceeds
|
|
16
|
Selling
Stockholders
|
|
16
|
Plan
of Distribution
|
|
21
|
Market
for Common Stock and Related Stockholder Matters
|
|
24
|
Dividend
Policy
|
|
24
|
Management’s
Discussion and Analysis of Financial Condition
|
|
|
and
Results of Operations
|
|
26
|
Business
|
|
41
|
Management
|
|
57
|
Certain
Relationships and Related Transactions
|
|
66
|
Security
Ownership of Certain Beneficial Owners and
Management
|
|
68
|
Description
of Our Securities
|
|
70
|
Legal
Matters
|
|
73
|
Experts
|
|
73
|
Where
You Can Find Additional Information
|
|
74
|
Index
to Financial Statements
|
|
F-1
|
You
should rely only on the information contained in this document. We have not
authorized anyone to give any information that is different. This prospectus
is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any state where the offer or sale is not permitted. The
information in this prospectus is complete and accurate as of the date on the
cover, but the information may change in the future.
REED’S,
INC.
2,414,995
SHARES
Common
Stock
PROSPECTUS
November
19, 2008
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 24.
Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law (the “DGCL”), as the same exists or
may hereafter be amended, provides that a Delaware corporation may indemnify
any
persons who were, or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he or
she
reasonably believed to be in or not opposed to the corporation’s best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, a party to
any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request
of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in
or
not opposed to the corporation’s best interests, provided that no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee, or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
or
her against the expenses which such officer or director has actually and
reasonably incurred.
Section
145 of the DGCL further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him or her and incurred by him or her
in
any such capacity, arising out of his or her status as such, whether or not
the
corporation would otherwise have the power to indemnify him or her under Section
145 of the DGCL.
Our
amended certificate of incorporation provides that, to the fullest extent
permitted by Delaware law, as it may be amended from time to time, none of
our
directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Our
amended certificate of incorporation also provides discretionary indemnification
for the benefit of our directors, officers, and employees, to the fullest extent
permitted by Delaware law, as it may be amended from time to time. Insofar
as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, or persons controlling us, pursuant
to
the foregoing provisions, we have been informed that in the opinion of the
SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Pursuant
to our 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.
We
do not
currently provide liability insurance coverage for our directors and officers.
However, we intend to use a portion of the proceeds of this offering to obtain
such coverage for our directors and officers. We also intend to enter into
separate indemnification agreements with each of our directors and executive
officers that provide the maximum indemnity allowed to directors and executive
officers by Section 145 of the DGCL and which allow for certain additional
procedural protections.
These
indemnification provisions and the indemnification agreements which we may
enter
into with our officers and directors may be sufficiently broad to permit
indemnification of our officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
The
following is a schedule of the estimated expenses (all of which will be borne
by
us) incurred in connection with the offering of the securities registered
hereby.
|
|
Amount to be
Paid
|
|
|
|
|
|
SEC
registration fee
|
|
$
|
570.88
|
|
Postage
and printing expenses
|
|
$
|
1,000.00
|
|
Legal
fees
|
|
$
|
100,000.00
|
|
Accounting
fees
|
|
$
|
12,500.00
|
|
|
|
|
|
|
TOTAL
|
|
$
|
114,070.88
|
|
Item 26.
Recent Sales of Unregistered Securities
The
following sets forth information regarding securities sold by us since January
1, 2005.
On
May
31, 2005, Robert T. Reed, Sr., the father of our Chief Executive Officer,
Christopher J. Reed, converted warrants previously granted in 1991 into 262,500
shares of common stock. The exercise price was $0.02 per share. We believe
the
securities were issued in reliance from exemptions from registration pursuant
to
Section 4(2) or Regulation D under the Securities Act.
In
December 2005, we issued options to purchase up to 218,500 shares of common
stock to nine of our employees pursuant to our 2001 stock option plan. The
exercise price of these options is $4.00 and the options expire in December
2010. In accordance with the Company’s policy for accounting for stock options,
no compensation expense was recorded. We believe the securities were issued
in
reliance from exemptions from registration pursuant to Section 4(2) or
Regulation D under the Securities Act.
In
September 2005, we declared a dividend of 7,362 shares of our common stock
as a
dividend to the holders of our Series A preferred stock based on a $29,470
accrued annual dividend payable. We issued the stock dividend in May 2006.
As of
June 30, 2006, we declared and issued a dividend of 7,373 shares of our common
stock as a dividend to the holders of our Series A preferred stock based on
a
$29,470 accrued annual dividend payable. As of June 30, 2007, we declared and
issued a dividend of 3,820 shares of our common stock as a dividend to the
holders of our Series A preferred stock based on a $27,770 accrued annual
dividend payable. The Series A preferred stock bears a 5% annual, non-cumulative
dividend that may be in cash or in shares of our common stock based on its
then
fair market value. We believe the securities were issued in reliance from
exemptions from registration pursuant to Section 4(2) or Regulation D under
the
Securities Act.
In
November and December 2006, we issued an aggregate of 140,859 shares of common
stock to holders of our convertible notes with respect to the conversion of
an
aggregate of $285,444 of the obligations, including principal and accrued
interest, on such notes. These note conversions included the conversion by
Robert T. Reed, Sr., the father of Christopher J. Reed, of an aggregate of
$263,089 of the obligations, including principal and accrued interest, on such
notes into an aggregate of 131,544 shares of common stock. The securities were
issued in reliance on exemptions from registration pursuant to Section 4(2)
and
Regulation D under the Securities Act.
In
December 2006 we issued 85,000 options to purchase shares of our common stock
to
our employees under the 2001 Stock Option Plan at an exercise price of $4.00
per
share. The options and shares were issued in reliance on exemptions from
registration pursuant to Section 4(2) and Regulation D under the Securities
Act.
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. The securities were issued in
reliance on exemptions from registration pursuant to Section 4(2) and Regulation
D under the Securities Act.
In
January 2007, we issued 49,000 options to purchase shares of our common stock
to
our employees with an exercise price range of $3.50 to $3.70 per share. In
May
and June 2007, we issued 90,000 options to purchase shares of our common stock
to our employees with an exercise price range of $6.74 to $7.55 per share.
In
August through October 2007, we issued an additional 335,000 options to purchase
shares of our common stock to our employees, including 110,000 options under
the
2001 Stock Option Plan with an exercise price range of $7.80 to $10.01 per
share, and 225,000 options outside of the 2001 Stock Option Plan with an
exercise price range of $7.30 to $8.50 per share. The shares were issued
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
In
April 2007, we issued 440 shares of common stock as a bonus to certain of our
employees. From April 20, 2007 to December 21, 2007, 10,819 shares of Series
A
preferred stock were converted into a total of 43,276 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. The shares
were issued pursuant to an exemption from registration under Section 4(2) of
the
Securities Act.
In
August
2007, we issued 20,000 shares of common stock upon the exercise of outstanding
warrants at an exercise price of $3.00, resulting in gross proceeds to us of
$60,000. In June 2007, we issued 40,000 shares of common stock upon the exercise
of outstanding warrants at an exercise price range of $2.00 to $3.00, resulting
in gross proceeds to us of $105,000. The shares were issued pursuant to an
exemption from registration under Section 4(2) of the Securities
Act.
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. The shares
were issued in reliance on exemptions from registration pursuant to Section
4(2)
and Regulation D under the Securities Act.
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.
During
May and June 2008, the Company issued 3,986 shares of common stock for
consulting services, 4,000 shares of common stock upon the conversion of 1,000
shares of preferred stock and 10,910 shares of common stock as a dividend to
its
preferred stockholder’s, in accordance with the preferred stock terms. The
shares were issued pursuant to an exemption from registration under Section
4(2)
of the Securities Act.
During
May and June of 2008, the Company granted 475,000 options to purchase stock
at
exercise prices of $1.99 and $2.54. The shares were issued pursuant to an
exemption from registration under Section 4(2) of the Securities
Act.
The
following exhibits are included herein or incorporated herein by
reference:
|
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
|
5.1
|
Legal
opinion of Jenkens & Gilchrist, LLP 2
|
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 4
|
10.10
|
Loan
and Security Agreement between Reed’s Inc. and First Capital Western
Region LLC dated May 30, 2008 6
|
10.11
|
Amendment
Number One to Loan and Security Agreement between Reed’s Inc. and First
Capital Western Region LLC dated June 16, 2008 7
|
10.12
|
Amendment
Number Two to Loan and Security Agreement between Reed’s Inc. and First
Capital Western Region LLC dated June 16, 2008 2
|
14.1
|
Code
of Ethics 3
|
21
|
Subsidiaries
of Reed’s, Inc. 5
|
23.1
|
Consent
of Weinberg & Co., P.A.*
|
23.2
|
Consent
of Jenkens & Gilchrist, LLP (contained in Exhibit 5.1) 2
|
*
|
Filed
herewith
|
1.
|
Previously
Filed as part of the Registrant’s Registration Statement on Form SB-2
(File No. 333-120451).
|
2.
|
Previously
filed as part of this Registration Statement on Form SB-2 (File No.
333-146012).
|
3.
|
Previously
filed as part of the Registrant’s Registration Statement on Form SB-2
(File No. 333-135186).
|
4.
|
Incorporated
by reference to Exhibit 10.9(a) to the Company’s Form 10KSB for the period
ended December 31, 2007
|
5.
|
Incorporated
by reference to Exhibit 21.1 to the Company’s Form 10KSB for the period
ended December 31, 2007
|
6.
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K
dated July 16, 2008
|
7
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K
dated July 23, 2008
|
Item
28. Undertakings
(a)
The
undersigned Registrant hereby undertakes:
|
(1)
|
To
file, during any period in which offers or sales are being made,
a
post-effective amendment to this registration
statement:
|
|
|
|
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933, as amended (the “Securities Act”);
|
|
|
|
|
(ii)
|
To
reflect in the prospectus any facts or events which, individually
or
together, represent a fundamental change in the information in this
registration statement. Notwithstanding the foregoing, any increase
or
decrease in volume of securities offered (if the total dollar value
of
securities offered would not exceed that which was registered) and
any
deviation from the low or high end of the estimated maximum offering
range
may be reflected in the form of prospectus file with the Securities
and
Exchange Commission (“SEC”) pursuant to Rule 424(b), if in the aggregate,
the changes in volume and price represent no more than a 20% change
in the
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration statement;
and
|
|
|
|
|
(iii)
|
Include
any additional or changed material information on the plan of
distribution.
|
|
|
|
|
(2)
|
For
purposes of determining liability under the Securities Act, to treat
each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the
initial
bona fide offering.
|
|
|
|
|
(3)
|
To
remove from registration by means of a post-effective amendment any
of the
securities being registered which remain unsold at the termination
of the
offering.
|
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the foregoing provisions, or otherwise, the Company has been advised that
in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Company of expenses incurred or paid by a director, officer
or
controlling person of the Company in the successful defense of any action,
suit
or proceeding) is asserted by such director, officer or controlling person
in
connection with the securities being registered, the Company will, unless in
the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Each
prospectus filed pursuant to Rule 424(b) as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectuses filed in reliance on Rule 430A, shall be deemed
to be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided, however, that no statement made in a
registration statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by reference into
the
registration statement or prospectus that is part of the registration statement
will, as to a purchaser with a time of contract of sale prior to such first
use,
supersede or modify any statement that was made in the registration statement
or
prospectus that was part of the registration statement or made in any such
document immediately prior to such date of first use.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of
the
requirements for filing on Form S-1 and authorized this registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized,
in the
City of Los Angeles, State of California, on November 19, 2008.
|
REED’S, INC.
|
|
|
|
|
By:
|
/s/
Christopher J. Reed
|
|
|
Christopher J. Reed
|
|
Chief Executive Officer
|
In
accordance with the requirements of the Securities Act of 1933, as amended,
this
Registration Statement was signed by the following persons in the capacities
and
on the dates stated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Christopher J. Reed
|
|
Chief Executive Officer, Chief Financial Officer and
|
|
November
19, 2008
|
Christopher J. Reed
|
|
Chairman of the Board of Directors (Principal Executive
|
|
|
|
|
Officer and Principal Accounting Officer)
|
|
|
|
|
|
|
|
/s/ Judy Holloway Reed
|
|
Director
|
|
November
19, 2008
|
Judy Holloway Reed
|
|
|
|
|
|
|
|
|
|
/s/ Mark Harris
|
|
Director
|
|
November
19, 2008
|
Mark Harris
|
|
|
|
|
|
|
|
|
|
/s/ Daniel S.J. Muffoletto
|
|
Director
|
|
November
19, 2008
|
Daniel S.J. Muffoletto
|
|
|
|
|
|
|
|
|
|
/s/ Michael Fischman
|
|
Director
|
|
November
19, 2008
|
Michael Fischman
|
|
|
|
|
EXHIBIT
INDEX
3.1
|
Certificate
of Incorporation 1
|
3.2
|
Amendment
to Certificate of Incorporation 1
|
3.3
|
Certificate
of Designations 1
|
3.4
|
Certificate
of Correction to Certificate of Designations 1
|
3.5
|
Bylaws,
as amended 1
|
4.1
|
Form
of common stock certificate 1
|
4.2
|
Form
of Series A preferred stock certificate 1
|
4.3
|
2001
Employee Stock Option Plan 1
|
5.1
|
Legal
opinion of Jenkens & Gilchrist, LLP 2
|
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
|
10.8
|
Agreement
to Assume Repurchase Obligations 2
|
10.9(a)
|
Promissory
with Lehman Brothers for 13000 South Spring Street and 12930 South
Spring
Street 4
|
10.10
|
Loan
and Security Agreement between Reed’s Inc. and First Capital Western
Region LLC dated May 30, 2008 6
|
10.11
|
Amendment
Number One to Loan and Security Agreement between Reed’s Inc. and First
Capital Western Region LLC dated June 16, 2008 7
|
10.12
|
Amendment
Number Two to Loan and Security Agreement between Reed’s Inc. and First
Capital Western Region LLC dated June 16, 2008 2
|
14.1
|
Code
of Ethics 3
|
21
|
Subsidiaries
of Reed’s, Inc. 5
|
23.1
|
Consent
of Weinberg & Co., P.A.*
|
23.2
|
Consent
of Jenkens & Gilchrist, LLP (contained in Exhibit 5.1) 2
|
*
|
Filed
herewith
|
1.
|
Previously
Filed as part of the Registrant’s Registration Statement on Form SB-2
(File No. 333-120451).
|
2.
|
Previously
filed as part of this Registration Statement on Form S-1(File No.
333-146012).
|
3.
|
Previously
filed as part of the Registrant’s Registration Statement on Form SB-2
(File No. 333-135186).
|
4.
|
Incorporated
by reference to Exhibit 10.9(a) to the Company’s Form 10KSB for the period
ended December 31, 2007
|
5.
|
Incorporated
by reference to Exhibit 21.1 to the Company’s Form 10KSB for the period
ended December 31, 2007
|
6.
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K
dated July 16, 2008
|
7
|
Incorporated
by reference to Exhibit 10.1 to the Company’s Current Report on Form 8K
dated July 23, 2008
|