reeds_10k-123108.htm
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2008
Commission
File Number 000-32501
(Exact
name of registrant as specified in its charter)
Delaware
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35-2177773
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State
or other jurisdiction of incorporation or organization
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I.R.S.
Employer Identification Number
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13000
South Spring Street
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Los
Angeles, California
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90061
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Address
of principal executive offices
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Zip
Code
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(310)
217-9400
Registrant’s
telephone number, including area code
Securities
registered pursuant to Section 12(b) of the Act:
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Name
of each exchange where registered
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Common
Stock, $.0001 par value per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes o No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. 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
definition of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
Accelerated filer o Accelerated
filer o Non-accelerated
filer o Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates (excluding voting shares held by officers and directors) as of
June 30, 2008 was $12,120,000
9,107,177
common shares, $.001 par value, were outstanding on March 25,
2009.
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Page
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PART
I
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4
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Item 1.
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Business
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4
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Item 2.
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Properties
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14
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Item 3.
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Legal
Proceedings
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14
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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15
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PART
II
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16
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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16
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Item 6.
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Selected
Financial Data
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18
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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18
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Item 8.
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Financial
Statements
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26
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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27
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Item 9A.
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Controls
and Procedures
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27
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Item 9B.
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Other
Information
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28
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PART
III
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29
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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29
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Item 11.
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Executive
Compensation
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32
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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34
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Item 13.
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Certain
Relationships and Related Transactions and Director
Independence
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35
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Item 14.
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Principal
Accountant Fees and Services
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36
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PART
IV
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37
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Item 15.
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Exhibits,
Financial Statement Schedules
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37
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CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This
Annual Report on Form 10-K (“Annual Report”), the other reports, statements, and
information that we have previously filed or that we may subsequently file with
the Securities and Exchange Commission (“SEC”) and public announcements that we
have previously made or may subsequently make include, may include, incorporate
by reference or may incorporate by reference certain statements that may be
deemed to be forward-looking statements. The forward-looking statements included
or incorporated by reference in this Annual Report and those reports,
statements, information and announcements address activities, events or
developments that Reed’s, Inc. (together with its subsidiaries hereinafter
referred to as “we,” “us,” “our” or “Reed’s”) expects or anticipates will or may
occur in the future. Any statements in this document about expectations,
beliefs, plans, objectives, assumptions or future events or performance are not
historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as “may,”
“should,” “could,” “predict,” “potential,” “believe,” “will likely result,”
“expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,”
“projection,” “would” and “outlook,” and similar expressions. Accordingly, these
statements involve estimates, assumptions and uncertainties, which could cause
actual results to differ materially from those expressed in them. Any
forward-looking statements are qualified in their entirety by reference to the
factors discussed throughout this document. All forward-looking statements
concerning economic conditions, rates of growth, rates of income or values as
may be included in this document are based on information available to us on the
dates noted, and we assume no obligation to update any such forward-looking
statements.
The risk
factors referred to in this Annual Report could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made
by us, and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which it
is made and we do not undertake any obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, involve a number of risks,
uncertainties and other factors that could cause actual results and events to
differ materially from the statements made, including, but not limited to, the
following, and other factors discussed elsewhere in this Annual Report,
including under the section entitled “Risk Factors:”
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Our
ability to generate sufficient cash flow to support capital expansion
plans and general operating
activities,
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Decreased
demand for our products resulting from changes in consumer
preferences,
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Competitive
products and pricing pressures and our ability to gain or maintain its
share of sales in the marketplace,
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The
introduction of new products,
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Our
being subject to a broad range of evolving federal, state and local laws
and regulations including those regarding the labeling and safety of food
products, establishing ingredient designations and standards of identity
for certain foods, environmental protections, as well as worker health and
safety. Changes in these laws and regulations could have a material effect
on the way in which we produce and market our products and could result in
increased costs,
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Changes
in the cost and availability of raw materials and the ability to maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of our
products,
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Our
ability to penetrate new markets and maintain or expand existing
markets,
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Maintaining
existing relationships and expanding the distributor network of our
products,
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The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
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Decisions
by distributors, grocery chains, specialty chain stores, club stores and
other customers to discontinue carrying all or any of our products that
they are carrying at any time,
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The
availability and cost of capital to finance our working capital needs and
growth plans,
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The
effectiveness of our advertising, marketing and promotional
programs,
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Changes
in product category consumption,
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Economic
and political changes,
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Consumer
acceptance of new products, including taste test
comparisons,
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Possible
recalls of our products, and
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Our
ability to make suitable arrangements for the co-packing of any of our
products.
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Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
PART
I
Item
1. Business
Background
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell five unique
product lines:
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Virgil’s Root Beer, Cream Sodas
and Real Cola, including diet
sodas,
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Reed’s Ginger Chews,
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
approximately 4,000 smaller or specialty stores and approximately 3,000
supermarket format stores ), supermarket chains (estimated at approximately
7,000 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 previously maintained 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.
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. The co-pack, facility in Pennsylvania
supplies 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 ice creams are co-packed for us at Ronnybrooke
Dairy in upstate New York on a purchase order basis. We pack our
candy products at the Brewery.
Key
elements of our business strategy include:
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Increase our relationship with
and sales to the approximately 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 alternative
and natural beverage brands and other products, including 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 our approximately 10,500 natural and mainstream supermarket accounts
in the U.S. 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 Annual Report.
Historical
Development
In June
1987, Christopher J. Reed, our founder and Chief Executive Officer, began
development of Reed’s Original Ginger Brew, his first beverage
creation. After two years of development, the product was introduced
to the market in Southern California stores in 1989. By 1990, we
began marketing our products through natural food distributors and moved our
production to a larger facility in Boulder, Colorado.
In 1991,
we incorporated our business operations in the state of Florida under the name
of Original Beverage Corporation and moved all of our production to a co-pack
facility in Pennsylvania. We began exhibiting at national natural and
specialty food trade shows, which brought national distribution in natural,
gourmet and specialty foods and the signing of our first mainstream supermarket
distributor. Our products began to receive trade industry recognition
as an outstanding new product. The United States National Association
of the Specialty Food Trade, or NASFT, named Original Ginger Brew as an
“Outstanding Beverage Finalist” in the United States in 1997, and the Canadian
Fancy Food Association, or CFFA, awarded us “Best Imported Food Product” in
1991.
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, pursuant to a
reincorporation merger, 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 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, 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 (known as 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 10
at end of 2008. We also launched our Peanut Butter Ginger Chews in
2008, the second candy in the Reed’s Ginger Chew line.
Industry
Overview
Our
beverages fall within the New Age Beverage category, which we believe is growing
rapidly. Consumer awareness of the health risks of too much sugar, in
addition to studies evidencing the athletic performance benefits of proper
hydration plus a variety of new beverages/serving sizes are, we believe, fueling
robust sales in the New Age Beverage category. Additionally, industry
analysts forecast the New Age Beverage market to grow to $800 million in 2009,
up from $168 million in 2004.
We also believe the non-chocolate candy
segment, such as Reed’s Ginger Chews, will continue to be a growth segment as
well. Non-chocolate candy sales increased 4.2% from 2006 to 2007,
according to the National Confectioners Association
(NCA). Additionally, the annual confectionary
retail sales (including chocolate, non-chocolate and gum sales) in the United
States were approximately $28.2 billion in 2006, of which approximately $8.9
billion was non-chocolate candy.
Furthermore, we believe that the
packaged ice cream industry, which includes economy, regular, premium and
super-premium products has the potential for continued robust
growth. According to Mintel International Group, the entire frozen
market will grow 15% by 2012 through all retail
channels. Furthermore, 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 creams. This higher quality ice cream generally
sells at a premium to the other ice cream segments due to its emphasis on
quality, brand image, flavor selection and texture.
Our
Products
We
currently manufacture and sell 16 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”), a market research and consulting firm for the Natural Products
Industry, which is the only sales information service catering to the natural
food trade, for the52 weeks ending December 1, 2007, Reed’s products were the
top five items based on dollar 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, eight
varieties of Virgil’s Root Beer and Cream Sodas and Real Cola (including diet
varieties), China Cola and Cherry China Cola.
Our candy
products include Reed’s Crystallized Ginger Candy, Reed’s Peanut Butter Ginger
Chews and Reed’s Ginger 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 25 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 brewed
from 22 grams of fresh ginger
root.
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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 Original Ginger Brew,
Extra Ginger Brew and Spiced Apple Brew are now available in 750 ml.
champagne bottles. The Reed’s Extra Ginger Brew is also 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.
Virgil’s
Real Cola
We
launched Virgil’s Real Cola in February 2008. Virgil’s Real Cola is a classic
cola recipe made naturally using the finest ingredients and unbleached cane
sugar. Virgil’s Real Cola is made naturally without caffeine or
preservatives.
Virgil’s
Real Cola is sold in 12-ounce bottles.
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. In
April 2008, we introduced diet Real Cola.
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 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 Chews
For many years, residents of Southeast
Asia from Indonesia to Thailand have enjoyed soft, gummy ginger candy chews. We
sell Reed’s Ginger 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), making the candies
potentially more appealing to the vegan market, and making them slightly easier
to unwrap than their Asian counterparts. Reed’s Ginger 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 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. We are also planning to launch
Reed’s Natural Energy Elixir, an energy drink infused with all natural
ingredients designed to provide consumers with a healthy and natural boost to
energy levels, in mid
2009. 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 which
supplies us with product we do not produce at The Brewery. The term of our
agreement with the co-packer terminates November 1, 2011 and grants Reed’s
the option to extend the contract for an additional one year
period. The co-packer 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.
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 distributors who specialize in mainstream retailers, 55
distributors that specialize in Natural Foods and specialty stores and 40
distribution centers of customers who handle their own logistics.
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. Our analysis will explore
options that may include outsourcing the international sales effort to third or
related parties.
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 previously maintained 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 ten 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 approximately 7,000 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.
In addition, we distribute our products
internationally through Reed’s Brokerage, Inc., a company controlled by Mark
Reed, and Robert T. Reed, both brothers of Christopher J. Reed.
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 for 2009 will be supermarket sales. We have a small highly
trained sales force that is directly contacting supermarket chains and setting
up promotional calendars for 2009. 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.
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. Three of our material
trademarks are registered trademarks in the U.S. Patent and Trademark Office:
Virgil’s ®, Reed’s Original Ginger Brew All-Natural Jamaican Style Ginger Ale ®
and Tianfu China Natural Soda ®. 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.
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 Company’s
products are subject to the Federal Food, Drug, and Cosmetic Act, the Federal
Trade Commission Act, the Lanham Act, state consumer protection laws, federal,
state and local workplace health and safety laws, various federal, state and
local environmental protection laws and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. Outside the
United States, the distribution and sale of our many products and related
operations are also subject to numerous similar and other statutes and
regulations.
A
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. This is 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 or
that are contributed to such products solely by a municipal water supply are
generally exempt from the warning requirement. No Company beverages produced for
sale in California are currently required to display warnings under this law. We
are unable to predict whether a component found in a Company product might be
added to the California list in the future, although the state has initiated a
regulatory process in which caffeine will be evaluated for listing. Furthermore,
we are also unable to predict when or whether the increasing sensitivity of
detection methodology that may become applicable under this law and related
regulations as they currently exist, or as they may be amended, might result in
the detection of an infinitesimal quantity of a listed substance in a beverage
of ours produced for sale in California.
Bottlers
of our beverage products presently offer and use nonrefillable, recyclable
containers in the United States and various other markets around the world. Some
of these bottlers also offer and use refillable containers, which are also
recyclable. Legal requirements apply in various jurisdictions in the United
States and overseas requiring that deposits or certain ecotaxes or fees be
charged for the sale, marketing and use of certain nonrefillable beverage
containers. The precise requirements imposed by these measures vary. Other types
of beverage container-related deposit, recycling, ecotax and/or product
stewardship statutes and regulations also apply in various jurisdictions in the
United States and overseas. We anticipate that additional, similar legal
requirements may be proposed or enacted in the future at local, state and
federal levels, both in the United States and elsewhere.
All of
our facilities and other operations in the United States are subject to various
environmental protection statutes and regulations, including those relating to
the use of water resources and the discharge of wastewater. Our policy is to
comply with all such legal requirements. Compliance with these provisions has
not had, and we do not expect such compliance to have, any material adverse
effect on our capital expenditures, net income or competitive
position.
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which
approximated $131,000 and $174,000 in 2008 and 2007, 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 have
32 full-time employees, as follows: three in general management, ten in sales
and marketing support, five 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.
Item
2. Property
We own an
18,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street
in an unincorporated area of Los Angeles County, near downtown Los
Angeles. The property is located in the Los Angeles County
Mid-Alameda Corridor Enterprise Zone. Businesses located in the enterprise zone
are eligible for certain economic incentives designed to stimulate business
investment, encourage growth and development and promote job
creation.
We
purchased the facility in December 2000 for a purchase price of $850,000,
including a down payment of $102,000. We financed approximately $750,000 of the
purchase price with a loan from U.S. Bank National Association, guaranteed by
the United States Small Business Administration. We also obtained a
building improvement loan for $168,000 from U.S. Bank National Association,
guaranteed by the United States Small Business
Administration. Christopher J. Reed, our founder and Chief Executive
Officer, personally guaranteed both loans. Both loans were 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.
This loan is personally guaranteed by Christopher J. Reed, our Chief Executive
Officer. We have used the proceeds of this loan to pay off the outstanding loans
on the Brewery and for working capital. The new loan is payable over a 30
year term, bears interest at 8.41% per annum and carries a prepayment penalty of
3% if the loan is repaid within five years.
Item 3. Legal Proceedings
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 $119,000,
including statutory interest. The shares that were tendered for rescission were
agreed to be purchased by others and not from our funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. With respect to
the offerees who rejected the rescission offer, we may continue to be liable
under federal and state securities laws for up to an amount equal to the value
of all shares of common stock issued in connection with the initial public
offering plus any statutory interest we may be required to pay. If it is
determined that we offered securities without properly registering them under
federal or state law, or securing an exemption from registration, regulators
could impose monetary fines or other sanctions as provided under these laws.
However, we believe the rescission offer provides us with additional meritorious
defenses against any future claims relating to these shares.
Except as
set forth above, we believe that there are no material litigation matters at the
current time. Although the results of such litigation matters and claims cannot
be predicted with certainty, we believe that the final outcome of such claims
and proceedings will not have a material adverse impact on our financial
position, liquidity, or results of operations.
Item 4. Submission of Matters to a Vote of
Security Holders
The 2008
Annual Meeting of Stockholders of the Company was held on December 31,
2008. At the meeting, the following individuals were elected as
directors of the Company and received the number of votes set opposite their
respective names:
Director
|
Votes
For
|
Against
|
Broker
Non-Votes
|
|
5,487,608
|
-
|
575,976
|
Judy
Holloway Reed
|
5,481,013
|
-
|
582,571
|
Mark
Harris
|
5,535,096
|
-
|
528,488
|
Dr.
D.S.J. Muffoletto, N.D.
|
5,533,154
|
-
|
530,430
|
Michael
Fischman
|
5,535,096
|
-
|
528,488
|
In
addition, at the meeting, our stockholders ratified the appointment by the board
of directors of Weinberg & Company, P.A. as the Company’s independent
registered public accounting firm for the 2008 fiscal year; with 5,705,489 votes
for, 350,481 votes against, and 7,613 Abstention/non-broker votes.
PART
II
Item 5. Market for Common Equity and Related
Stockholder Matters
Since
November 27, 2007, our common stock has been listed for trading on the NASDAQ
Capital Market trading under the symbol “REED”. Prior to November 27,
2007 our common stock was quoted on the OTC Bulletin Board under the symbol
“REED.OB”. 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)
|
|
|
|
High
|
|
|
Low
|
|
Year Ending December 31,
2008
|
|
|
|
|
|
|
First
Quarter
|
|
$ |
6.24
|
|
|
$ |
1.50
|
|
Second
Quarter
|
|
|
3.94
|
|
|
|
1.89
|
|
Third
Quarter
|
|
|
3.30
|
|
|
|
1.45
|
|
Fourth
Quarter
|
|
|
2.31
|
|
|
|
1.00
|
|
As of
December 31, 2008, 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
8,979,341 outstanding shares of common stock.
Unregistered
Sales of Equity Securities
During the fiscal year ended December
31, 2008, we sold the following equity securities that were unregistered 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 exemption from registration under Section 4(2) of the
Securities Act.
During
May and June 2008, we issued 5,981 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 exemption from registration under Section 4(2) of the
Securities Act.
During
May and June of 2008, we granted 175,000 options to purchase common stock at an
exercise pricesof $1.99 pursuant to exemption from registration under
Section 4(2) of the Securities Act.
In
December, 2008, we granted options to purchase 150,000 shares of common stock
under our employee stock option plan at exercise prices of $1.10 to $1.34
pursuant to exemption from registration under Section 4(2) of the Securities
Act.
On
December 22, 2008, we granted 50,750 shares of common stock to our employees as
bonuses. The closing price of our common stock on that date was $1.11
per share. The shares were issued pursuant to exemption from
registration under Section 4(2) of the Securities Act.
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 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 are authorized to issue options to
purchase up to 500,000 shares of common stock under our 2001 Stock Option Plan,
and we are authorized to issue options to purchase up to 1,500,000 shares of
common stock under our 2007 Stock Option Plan. 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 to 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.
2009
Consultant Stock Plan
We are authorized to issue up to
100,000 shares of common stock to employees, officers,
directors, consultants, independent contractors, advisors, or other service
providers to Reed’s under our 2009 Consultant Stock Plan. The 2009
Consultant Stock Plan was adopted by our board of directors on February 13, 2009
and is administered by a committee of the board of directors. The
plan committee may from time to time, and subject to the provisions of the plan
and such other terms and conditions as the plan committee may prescribe, grant
to any eligible person one or more shares of common stock of Reed’s
("Award Shares"). The grant of Award Shares or grant of the right to receive
Award Shares shall be evidenced by either a written consulting agreement or a
separate written agreement confirming such grant, executed by Reed’s and the
recipient, stating the number of Award Shares granted and stating all terms and
conditions of such grant.
The plan committee, in its sole
discretion, may grant Award Shares in any of the following
instances:
(i) as
a "bonus" or "reward" for services previously rendered and compensated, in which
case the recipient of the Award Shares shall not be required to pay any
consideration for such Award Shares, and the value of such Award Shares shall be
the fair market value of such Award Shares on the date of grant; or
(ii) as
"compensation" for the previous performance or future performance of services or
attainment of goals, in which case the recipient of the Award Shares shall not
be required to pay any consideration for such Award Shares (other than the
performance of his services).
Equity
Compensation Plan Information
The following table provides
information, as of December 31, 2008, with respect to options outstanding and
available under the 2001 Plan and 2007 Plan and certain other outstanding
options:
Plan
Category
|
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
(a)
|
|
Weighted-Average Exercise Price
of Outstanding Options, Warrants and
Rights
(b)
|
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (excluding securities reflected in Column
(a))
(c)
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
702,500
|
|
$
|
3.55
|
|
1,297,500
|
Equity
compensation plans not approved by security holders
|
|
1,868,236
|
|
$
|
5.41
|
|
Not
applicable
|
|
|
|
|
|
|
|
|
TOTAL
|
|
2,570,736
|
|
$
|
4.90
|
|
1,297,500
|
Item
6. Selected Financial Data
As a smaller reporting company, Reed’s
is not required to provide disclosure pursuant to this Item 6.
Item 7. Management’s Discussion and Analysis
or Plan of Operation
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes appearing elsewhere in this Annual Report. This discussion and
analysis may contain forward-looking statements based on assumptions about our
future business. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under “Risk Factors” and elsewhere
in this Annual Report.
Overview
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks, and water. We currently manufacture, market and sell five unique
product lines:
|
●
|
Virgil’s
Root Beer, Cream Sodas and Real Cola, including diet
sodas
|
|
●
|
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.
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 - Last year’s
fuel price increases caused increases in our packaging, production and
ingredient costs. Fuel prices have abated; however we continue to pursue
alternative production, packaging and ingredient suppliers and options to help
offset the effect of last year’s fuel price increases on these
expenses.
Low Carbohydrate Diets and
Obesity - Most of 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 developed low-carbohydrate
versions of some of our beverages namely the Virgil’s line.
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 initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. However, we are in the process of
discontinuing our direct distribution and redirecting our customers to local
distributors. 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. We own trademarks that we consider material to our
business. Three of our material trademarks are registered trademarks in the U.S.
Patent and Trademark Office: Virgil’s ®, Reed’s Original Ginger Brew All-Natural
Jamaican Style Ginger Ale ® and Tianfu China Natural Soda ®. 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.
We
account for these items in accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets.” Under the provisions of SFAS No. 142,
we do not amortize indefinite-lived trademark licenses and
trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified during
the years ended December 31, 2008 or December 31, 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 years ended December 31, 2008 or December
31, 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.
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.
Stock-Based Compensation. We
periodically issue stock options and warrants to employees and non-employees in
non-capital raising transactions for services and for financing costs. We
adopted SFAS No. 123R, “Accounting for Stock-Based Compensation” effective
January 1, 2006, and are 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 remain
unvested on the effective date. We account 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” whereby the fair value of the stock
compensation is based on 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 instrument is
complete.
We
estimate the fair value of stock options pursuant to SFAS No. 123R using the
Black-Scholes option-pricing model, which was developed for use in estimating
the fair value of options that have no vesting restrictions and are fully
transferable. This model requires the input of subjective assumptions, including
the expected price volatility of the underlying stock and the expected life of
stock options. Projected data related to the expected volatility of stock
options is based on the historical volatility of the trading prices of the
Company’s common stock and the expected life of stock options is based upon the
average term and vesting schedules of the options. Changes in these subjective
assumptions can materially affect the fair value of the estimate, and therefore
the existing valuation models do not provide a precise measure of the fair value
of our employee stock options.
Results
of Operations
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Gross
sales for the year ended December 31, 2008 increased to $15,277,000 from
$13,059,000 during 2007, a net increase of $2,218,000, or 17%. Sales increased
in both our Virgil’s product line and our Reed’s Ginger Brews line. We
experienced increases in the volumes of sales, especially in our Virgil’s
product line; and increases in our prices, primarily on our Reed’s Ginger Brew
lines. Generally, over 90% of our sales are split evenly between our
two most significant product lines, Reed’s Ginger Brews and Virgil’s sodas,
during both 2008 and 2007. The increase in sales was primarily due to
an increase in sales to newly introduced mainstream distributors and to an
increase in our existing distribution channels of natural food distributors and
retailers.
Cost
of Goods Sold
Cost of
goods sold consists primarily of the costs of our ingredients, packaging and
production. Cost of goods sold increased by 8% to $11,891,000 during
the year ended December 31, 2008 from $11,040,000 in 2007; as compared to the
sales increase of 17% in the same comparable periods. Our costs of
sales have been impacted by fuel and commodity price increases which have caused
an increase in our costs of production from our co-packer. Fuel price
increases in 2008 have increased our costs of delivery. The costs of
glass vary, and the cost of ginger has increased by about 20% in
2008. In addition, we had increased costs of packaging. In
late 2008, we negotiated reductions in our co-packing fees, which are
anticipated to decrease our per-unit cost of goods sold in 2009. In
2009, we are experiencing lower freight costs due to the fall of fuel
costs. We are also producing higher portions of our products at our
own facility in Los Angeles, which is anticipated to lower our per-unit costs
and improve our margins. We are also currently negotiating for
significant reductions in glass costs.
Gross
Profit
Our gross
profit increased to $3,386,000 in the year ended December 31, 2008, from
$2,019,000 in 2007, an increase of $1,367,000 or 68%. The gross
profit as a percentage of sales improved to 22% in 2008, from 15% in
2007. This gross profit margin increase is primarily due to price
increases in 2008, where we have raised prices on the Reed’s Ginger Brew line by
approximately 20% bringing it more in line with our competitors in the natural
soda category. In addition, we have improved our systems to track and manage the
approval and use of promotions and discounting, resulting in higher effective
prices and net gross margins. Finally, we have renegotiated our production costs
from our largest co-packer and we anticipate a further increase in gross margins
of approximately 5% in 2009, with current pricing.
Selling
and marketing expenses
Selling
and marketing expenses consist primarily of direct charges for staff
compensation costs, advertising, sales promotion, marketing and trade shows.
Selling and marketing costs decreased to $3,817,000 in the year ended December
31, 2008 from $4,587,000 in 2007, a net decrease of $770,000 or
17%. The decrease is primarily due to decreases in compensation and
travel costs of $1,011,000 and a decrease in trade show costs of $333,000. Such
decreases were offset by an increase in advertising in promotion of $229,000, an
increase in broker commissions of $229,000, and an increase in office and
equipment costs of $59,000.
Our
strategic direction in sales is to focus on 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. As a result, 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 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.
Our
decrease in trade show costs in 2008 was due to non-recurring promotions that
occurred with one customer in 2007. Promotional expense increased in
2008 due to increased promotionally spending with supermarkets as we implement
increased marketing programs with our supermarket partners. Brokerage
commission expenses increased due to an increased use of brokerage firms to help
penetrate and manage our supermarket business in 2008.
General
and Administrative Expenses
General
and administrative expense consists primarily of the cost of executive,
administrative, and finance personnel, as well as professional fees. General and
administrative expenses increased to $3,140,000 during the year ended December
31, 2008 from $2,621,000 in 2007, a net increase of $519,000 or 20%. The
increase in 2008 is primarily due to an increase in professional fees expense of
$444,000 and an increase in insurance and operating costs of
$74,000. The increase in professional fees, including 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 Sarbanes-Oxley
legislation. In addition, we had a one-time non cash expense of
approximately $300,000 for professional consulting services, for which we issued
stock.
We
believe that our existing executive and administrative staffing levels are
sufficient to allow for moderate growth without the need to add personnel and
related costs for the foreseeable future.
Loss
from Operations
Our loss
from operations decreased to $3,571,000 in the year ended December 31, 2008 from
$5,489,000 in 2007. The improvement of $1,918,000 was due to
increased sales, increased margins and lower costs of marketing. We
have implemented cost-cutting measures throughout our business during 2008 and
believe that this will result in over $2 million lower costs for the 2009
year.
Interest
Expense
Interest
expense increased to $244,000 in the year ended December 31, 2008, compared to
interest expense of $182,000 in 2007. The increase is due to the
increased borrowing under a long-term mortgage, secured by our buildings; and
under a line of credit agreement with First Capital LLC, secured primarily by
our inventory and accounts receivable.
Liquidity
and Capital Resources
As of
December 31, 2008, we had an accumulated deficit of $14,919,000 and we had
working capital of $636,000, compared to an accumulated deficit of $11,081,000
and working capital of $2,943,000 at December 31, 2007. Cash and cash
equivalents were $229,000 as of December 31, 2008, as compared to $743,000 at
December 31, 2007. This decrease in our working capital and cash position was
primarily attributable to our net loss. In addition to our cash position on
December 31, 2008, we had availability under our line of credit of approximately
$33,000.
Our
decrease in cash and cash equivalents to $229,000 at December 31, 2008 compared
to $743,000 at December 31, 2007 was the result of $2,468,000 used in operating
activities and $191,000 used in investing activities; offset by $2,145,000
provided by financing activities.
The
measures that we have taken in late 2008 to lower our cost of goods are yielding
current improvements in gross margins of approximately 5% that we believe will
extend throughout 2009. We also have initiatives underway to improve
our glass costs as well as our ginger costs. Our completed operating
cost reductions will lower operating expenses by over $2 million in 2009, as
compared to 2008. At the current sales run rates and prices, we
believe that our Company will operate at profitable levels in 2009.
We
believe that the Company has a number of options for gaining the necessary
working capital in 2009; needed to fund our seasonality, product launches and
other growth plans. Our primary capital source will be cash flow from
operations. We are also investigating improved working capital loans
that more fully value our assets for collateral. We may raise a
limited amount of funds through a combination of equity and debt; however, we’d
prefer to wait until our stock has a better market value so that we minimize
dilution. We believe that the Company can become leaner if our sales
goals do not materialize, and that our costs can be managed to produce
profitable operations.
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. In 2007, we
completed a private placement to accredited investors, 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 total proceeds received, net of
underwriting commissions and the investment banking fee, of
$8,040,000.
Net cash
used in operations during 2008 was $2,468,000 compared with $5,806,000 used in
operations during 2007. Cash used in operations during 2008 was
primarily due to the net loss in period and to an increase in accounts
receivable collections, as compared to the same prior year period.
Net cash
used in investing activities of $191,000 during 2008 compared with $2,951,000
during 2007 is primarily the result of equipment purchases during 2008 of
$191,000 as compared to $2,651,000 in 2007.
Net cash
provided by financing activities of $2,145,000 during 2008 was primarily due to
net proceeds from the refinancing of our land and buildings of $1,770,000 and
our obtaining of a line of credit of $1,354,000; offset by debt payoffs of
$800,000. As of December 31, 2008, we had outstanding borrowings of
$1,354,000 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 financially secure and have over $1 billion dollars in assets
with 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.
Our
operating losses have negatively impacted our liquidity and we are continuing to
work on decreasing operating losses, while focusing on increasing net sales. We
are currently borrowing near the maximum on our line of credit. At December 31,
2008, we had approximately $500,000 to $1,000,000 in excess inventory over our
normal inventory levels, which is being used to fuel sales in the first quarter
of 2009. We believe the operations of the company are currently
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 2009. 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. 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.
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission of the Public Company
Accounting Oversight Board's amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.”
We do 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.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
financial statements.
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.
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Financial
Statements:
|
|
|
Balance
Sheets as of December 31, 2008 and December 31, 2007
|
F-2
|
|
Statements
of Operations for the years ended December 31, 2008 and 2007
|
F-3
|
|
Statement
of Stockholders’ Equity for the years ended December 31, 2008 and
2007
|
F-4
|
|
Statements
of Cash Flows for the years ended December 31, 2008 and 2007
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
26
Report
of Independent Registered Public Accounting Firm
We have
audited the accompanying balance sheets of Reed’s, Inc. as of December 31, 2008
and 2007 and the related statements of operations, changes in stockholders’
equity and cash flows for the years then ended. 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 audits 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,
2008 and 2007 and the results of its operations and its cash flows for the years
then ended 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
February
26, 2009, except Note 5, as to which the date is March 27, 2009
BALANCE
SHEETS
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
229,000 |
|
|
$ |
743,000 |
|
Inventory
|
|
|
2,837,000 |
|
|
|
3,028,000 |
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $97,000 as of December 31, 2008 and $408,000 as of
December 31, 2007
|
|
|
897,000 |
|
|
|
1,161,000 |
|
Prepaid
and other current assets
|
|
|
68,000 |
|
|
|
93,000 |
|
Total
Current Assets
|
|
|
4,031,000 |
|
|
|
5,025,000 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
4,133,000 |
|
|
|
4,249,000 |
|
Brand
names
|
|
|
800,000 |
|
|
|
800,000 |
|
Deferred
offering costs
|
|
|
77,000 |
|
|
|
- |
|
Deferred
financing fees
|
|
|
62,000 |
|
|
|
13,000 |
|
Total
assets
|
|
$ |
9,103,000 |
|
|
$ |
10,087,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,929,000 |
|
|
$ |
1,997,000 |
|
Lines
of credit
|
|
|
1,354,000 |
|
|
|
- |
|
Current
portion of long term debt
|
|
|
16,000 |
|
|
|
27,000 |
|
Accrued
interest
|
|
|
- |
|
|
|
4,000 |
|
Accrued
expenses
|
|
|
96,000 |
|
|
|
54,000 |
|
Total
current liabilities
|
|
|
3,395,000 |
|
|
|
2,082,000 |
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
1,747,000 |
|
|
|
766,000 |
|
Total
Liabilities
|
|
|
5,142,000 |
|
|
|
2,848,000 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $10 par value, 500,000 shares authorized, 47,121 shares outstanding
at December 31, 2008 and 48,121 shares outstanding at December 31,
2007
|
|
|
471,000 |
|
|
|
481,000 |
|
Common
stock, $.0001 par value, 19,500,000 shares authorized,
8,979,341 shares issued and outstanding at December 31, 2008 and
8,751,721 shares issued and outstanding at December 31,
2007
|
|
|
1,000 |
|
|
|
1,000 |
|
Additional
paid in capital
|
|
|
18,408,000 |
|
|
|
17,838,000 |
|
Accumulated
deficit
|
|
|
(14,919,000 |
) |
|
|
(11,081,000 |
) |
Total
stockholders’ equity
|
|
|
3,961,000 |
|
|
|
7,239,000 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
9,103,000 |
|
|
$ |
10,087,000 |
|
The
accompanying notes are an integral part of these financial
statements
STATEMENTS
OF OPERATIONS
For the
Years Ended December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
15,277,000 |
|
|
$ |
13,059,000 |
|
Cost
of sales
|
|
|
11,891,000 |
|
|
|
11,040,000 |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,386,000 |
|
|
|
2,019,000 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
and marketing expense
|
|
|
3,817,000 |
|
|
|
4,587,000 |
|
General
and administrative expense
|
|
|
3,140,000 |
|
|
|
2,621,000 |
|
Write-off
note receivable
|
|
|
- |
|
|
|
300,000 |
|
Total
operating expenses
|
|
|
6,957,000 |
|
|
|
7,508,000 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations
|
|
|
(3,571,000 |
) |
|
|
(5,489,000 |
) |
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,000 |
|
|
|
120,000 |
|
Interest
expense
|
|
|
(244,000 |
) |
|
|
(182,000 |
) |
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(3,814,000 |
) |
|
|
(5,551,000 |
) |
|
|
|
|
|
|
|
|
|
Preferred
stock dividend
|
|
|
(24,000 |
) |
|
|
(28,000 |
) |
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$ |
(3,838,000 |
) |
|
$ |
(5,579,000 |
) |
|
|
|
|
|
|
|
|
|
Loss
per share available to common stockholders - basic and
diluted
|
|
$ |
(0.43 |
) |
|
$ |
(0.70 |
) |
Weighted
average number of shares outstanding - basic and diluted
|
|
|
8,884,338 |
|
|
|
8,009,009 |
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements
STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For the Years Ended December 31,
2008 and
2007
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Additional
Paid–In
Capital
|
|
|
Accumulated
Deficit
|
|
|
Total
Stockholders’
Equity
|
|
Balance,
January 1, 2007
|
|
|
7,143,185 |
|
|
$ |
1,000 |
|
|
|
58,940 |
|
|
$ |
589,000 |
|
|
$ |
9,535,000 |
|
|
$ |
(5,502,000 |
) |
|
$ |
4,623,000 |
|
Fair
Value of Common Stock issued for services and equipment
|
|
|
1,440 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
11,000 |
|
|
|
– |
|
|
|
11,000 |
|
Common
stock, issued in connection with the June 30, 2007 preferred stock
dividend
|
|
|
3,820 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
28,000 |
|
|
|
(28,000 |
) |
|
|
– |
|
Common
stock issued upon conversion of preferred stock
|
|
|
43,276 |
|
|
|
– |
|
|
|
(10,819 |
) |
|
|
(108,000 |
) |
|
|
108,000 |
|
|
|
– |
|
|
|
– |
|
Common
stock issued upon exercise of warrants
|
|
|
60,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
165,000 |
|
|
|
– |
|
|
|
165,000 |
|
Common
stock issued for cash, net of offering costs
|
|
|
1,500,000 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
7,626,000 |
|
|
|
– |
|
|
|
7,626,000 |
|
Public
Offering expenses
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(55,000 |
) |
|
|
– |
|
|
|
(55,000 |
) |
Fair
value vesting of options issued to employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
420,000 |
|
|
|
|
|
|
|
420,000 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(5,551,000 |
) |
|
|
(5,551,000 |
) |
Balance,
December 31, 2007
|
|
|
8,751,721 |
|
|
|
1,000 |
|
|
|
48,121 |
|
|
|
481,000 |
|
|
|
17,838,000 |
|
|
|
(11,081,000 |
) |
|
|
7,239,000 |
|
Fair
Value of Common Stock issued for bonus and services
|
|
|
212,710 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
392,000 |
|
|
|
– |
|
|
|
392,000 |
|
Common
stock issued in connection with the June 30, 2008 preferred stock
dividend
|
|
|
10,910 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
24,000 |
|
|
|
(24,000 |
) |
|
|
– |
|
Common
stock issued upon conversion of preferred stock
|
|
|
4,000 |
|
|
|
– |
|
|
|
(1,000 |
) |
|
|
(10,000 |
) |
|
|
10,000 |
|
|
|
– |
|
|
|
– |
|
Fair
value vesting of options issued to employees
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
144,000 |
|
|
|
|
|
|
|
144,000 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(3,814,000 |
) |
|
|
(3,814,000 |
) |
Balance,
December 31, 2008
|
|
|
8,979,341 |
|
|
$ |
1,000 |
|
|
|
47,121 |
|
|
$ |
471,000 |
|
|
$ |
18,408,000 |
|
|
$ |
(14,919,000 |
) |
|
$ |
3,961,000 |
|
The
accompanying notes are an integral part of these financial
statements
STATEMENTS
OF CASH FLOWS
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(3,814,000 |
) |
|
$ |
(5,551,000 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
355,000 |
|
|
|
205,000 |
|
Loss
on disposal of equipment
|
|
|
5,000 |
|
|
|
- |
|
Fair
value of stock options issued to employees
|
|
|
144,000 |
|
|
|
420,000 |
|
Fair
value of common stock issued for services or bonuses
|
|
|
392,000 |
|
|
|
4,000 |
|
Write
off of note receivable
|
|
|
- |
|
|
|
300,000 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
264,000 |
|
|
|
23,000 |
|
Inventory
|
|
|
191,000 |
|
|
|
(1,517,000 |
) |
Prepaid
expenses and other current assets
|
|
|
25,000 |
|
|
|
96,000 |
|
Accounts
payable
|
|
|
(68,000 |
) |
|
|
302,000 |
|
Accrued
expenses
|
|
|
42,000 |
|
|
|
(64,000 |
) |
Accrued
interest
|
|
|
(4,000 |
) |
|
|
(24,000 |
) |
Net
cash used in operating activities
|
|
|
(2,468,000 |
) |
|
|
(5,806,000 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(191,000 |
) |
|
|
(2,651,000 |
) |
Increase
in notes receivable
|
|
|
- |
|
|
|
(300,000 |
) |
Net
cash used in investing activities
|
|
|
(191,000 |
) |
|
|
(2,951,000 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
- |
|
|
|
7,626,000 |
|
Payments
for offering costs
|
|
|
(77,000 |
) |
|
|
(55,000 |
) |
Payments
for deferred financing fees
|
|
|
(102,000 |
) |
|
|
- |
|
Decrease
in restricted cash
|
|
|
- |
|
|
|
1,581,000 |
|
Proceeds
from exercise of warrants
|
|
|
- |
|
|
|
165,000 |
|
Net
borrowings (repayments) on existing lines of credit
|
|
|
1,354,000 |
|
|
|
(1,356,000 |
) |
Principal
repayments on notes
|
|
|
(800,000 |
) |
|
|
(263,000 |
) |
Proceed
received from borrowings on debt
|
|
|
1,770,000 |
|
|
|
163,000 |
|
Net
cash provided by financing activities
|
|
|
2,145,000 |
|
|
|
7,861,000 |
|
Net
decrease in cash
|
|
|
(514,000 |
) |
|
|
(896,000 |
) |
Cash
at beginning of year
|
|
|
743,000 |
|
|
|
1,639,000 |
|
Cash
at end of year
|
|
$ |
229,000 |
|
|
$ |
743,000 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
248,000 |
|
|
$ |
207,000 |
|
Taxes
|
|
$ |
- |
|
|
$ |
- |
|
Non
Cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
Preferred
Stock converted to common stock
|
|
$ |
10,000 |
|
|
$ |
108,000 |
|
Common
Stock issued in settlement of preferred stock
dividend
|
|
$ |
24,000 |
|
|
$ |
28,000 |
|
Common
Stock issued in acquisition of property and equipment
|
|
$ |
- |
|
|
$ |
7,000 |
|
The
accompanying notes are an integral part of these financial
statements
NOTES
TO FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
(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, Cream Sodas and Real Cola beverages (Root Beer,
Cream Soda, Black Cherry Cream Soda, Real Cola, the same four in a Diet version,
plus the Special Edition Bavarian Nutmeg Root Beer) , 2 China Cola beverages
(regular and cherry), 3 kinds of ginger candies (crystallized ginger,
ginger chews and peanut butter 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 collectability 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, 2008 and December 31, 2007 was approximately $97,000 and
$408,000 respectively.
|
E)
|
Property
and Equipment and Related
Depreciation
|
Property
and equipment is stated at cost. Depreciation is calculated using accelerated
and straight-line methods over the estimated useful lives of the assets as
follows:
Property and Equipment
Type
|
|
Years of
Depreciation
|
|
Building
|
|
39
years
|
|
Machinery
and equipment
|
|
5-12
years
|
|
Vehicles
|
|
5
years
|
|
Office
equipment
|
|
5-7
years
|
|
Management
regularly reviews property, equipment and other long-lived assets for possible
impairment. This review occurs quarterly, or more frequently if events or
changes in circumstances indicate the carrying amount of the asset may not be
recoverable. If there is indication of impairment, management prepares an
estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition. If
these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Management believes that the accounting estimate related to impairment of its
property and equipment is a “critical accounting estimate” because: (1) it
is highly susceptible to change from period to period because it requires
management to estimate fair value, which is based on assumptions about cash
flows and discount rates; and (2) the impact that recognizing an impairment
would have on the assets reported on our balance sheet, as well as net income,
could be material. Management’s assumptions about cash flows and discount rates
require significant judgment because actual revenues and expenses have
fluctuated in the past and are expected to continue to do so.
The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible
Assets.” Goodwill and other intangible assets deemed to have indefinite lives
are not subject to annual amortization. The Company reviews, at least quarterly,
its investment in brand names and other intangible assets for impairment and if
impairment is deemed to have 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 5.
Management
applies the impairment tests contained in SFAS Number 142 to determine if
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, 2008 and
2007.
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. Based on Management’s assessment,
there are no indicators of impairment at December 31, 2008 or 2007.
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000 at December 31, 2008. 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 guarantee during the years ended
December 31, 2008 and 2007.
During
the year ended December 31, 2008, the Company had two customers who
accounted for approximately 32% and 14% of its sales, respectively; and during
the year ended December 31, 2007 the same customers accounted for 35% and 14% of
its sales, respectively. No other customer accounted for more than 10% of sales
in either year. As of December 31, 2008 the Company had accounts receivable due
from three customers who comprised $135,000 (14%), $183,000 (18%) and $102,000
(10%), respectively, of its total accounts receivable; and at December 31, 2007
the Company had accounts receivable from one customer who comprised $660,000
(42%), of its total accounts receivable.
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
available for their production of 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
|
Fair
Value Measurements are determined by the Company's adoption of SFAS No. 157,
"Fair Value Measurements" ("SFAS 157") as of January 1, 2008, with the exception
of the application of the statement to non-recurring, non-financial assets and
liabilities as permitted. The adoption of SFAS 157 did not have a material
impact on the Company's fair value measurements. SFAS 157 defines fair value as
the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date. SFAS 157 establishes a fair value hierarchy, which prioritizes
the inputs used in measuring fair value into three broad levels as
follows:
Level 1-Quoted prices in active markets for identical assets or
liabilities.
Level 2-Inputs, other than the quoted prices in active markets, that are
observable either directly or indirectly.
Level 3-Unobservable inputs based on the Company's assumptions.
SFAS 157
requires the use of observable market data if such data is available without
undue cost and effort.
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 in selling expenses.
For the years ended December 31, 2008 and 2007, those costs were approximately
$108,000 and $225,000, 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, 2008 and 2007 approximated $815,000 and $955,000,
respectively.
Basic
earnings (loss) per share is computed by dividing the net income (loss)
applicable to Common Stockholders by the weighted average number of shares of
Common Stock outstanding during the year. Diluted earnings (loss) per share is
computed by dividing the net income (loss) applicable to Common Stockholders by
the weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued, using the treasury stock method.
Potential common shares are excluded from the computation when their effect is
antidilutive.
For the
years ended December 31, 2008 and 2007 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,
|
|
|
|
2008
|
|
|
2007
|
|
Warrants
|
|
|
1,868,236 |
|
|
|
1,668,236 |
|
Preferred
Stock
|
|
|
188,484 |
|
|
|
192,484 |
|
Options
|
|
|
702,500 |
|
|
|
749,000 |
|
Total
|
|
|
2,759,220 |
|
|
|
2,609,720 |
|
Advertising
costs are expensed as incurred and are included in selling expense in the amount
of $154,000 and $174,000, for the years ended December 31, 2008 and 2007,
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 that the Company
operates 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)
|
Deferred
Offering Costs
|
The
Company capitalizes costs incurred related to its issuance of common stock until
such time as the stock is issued. These costs included attorney’s fees,
accountant’s fees, SEC filing fees, state filing fees, and other specific
incremental costs directly related to the public offering and related issuance
of common stock. As proceeds are received from the offering, the deferred
offering costs were charged to additional paid in capital. During the years
ended December 31, 2008 and 2007, $0 and $55,000, respectively, of deferred
offering costs were charged to additional paid in capital.
|
Q)
|
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 May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission of the Public Company
Accounting Oversight Board's amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.”
In March
2008, the Company adopted 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.
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.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
financial statements.
Inventory
is valued at the lower of cost (first-in, first-out) or market, and is comprised
of the following as of:
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Raw
Materials
|
|
$ |
755,000 |
|
|
$ |
1,179,000 |
|
Finished
Goods
|
|
|
2,082,000 |
|
|
|
1,849,000 |
|
|
|
$ |
2,837,000 |
|
|
$ |
3,028,000 |
|
Fixed
assets are comprised of the following as of:
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Land
|
|
$ |
1,410,000 |
|
|
$ |
1,410,000 |
|
Building
|
|
|
1,769,000 |
|
|
|
1,743,000 |
|
Vehicles
|
|
|
320,000 |
|
|
|
339,000 |
|
Machinery
and equipment
|
|
|
1,398,000 |
|
|
|
1,250,000 |
|
Office
equipment
|
|
|
386,000 |
|
|
|
374,000 |
|
|
|
|
5,283,000 |
|
|
|
5,116,000 |
|
Accumulated
depreciation
|
|
|
(1,150,000 |
) |
|
|
(867,000 |
) |
|
|
$ |
4,133,000 |
|
|
$ |
4,249,000 |
|
Depreciation
expense for the years ended December 31, 2008 and 2007 was $302,000 and
$204,000, 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,
2008 and 2007, carrying amounts for Brand Names were $800,000.
Deferred
Financing Fees
Deferred
financing fees are comprised of the following as of:
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Loan
fees relating to financing
|
|
$ |
102,000 |
|
|
$ |
18,000 |
|
Accumulated
amortization
|
|
|
(40,000 |
) |
|
|
(5,000 |
) |
|
|
$ |
62,000 |
|
|
$ |
13,000 |
|
Amortization
expense for the years ended December 31, 2008 and 2007 was approximately $53,000
and $1,000 respectively. Amortization of deferred financing fees is as follows
for the years ending December 31:
Year
|
|
Amount
|
|
2009
|
|
$ |
29,000 |
|
2010
|
|
|
1,000 |
|
2011
|
|
|
1,000 |
|
2012
|
|
|
1,000 |
|
2013
|
|
|
1,000 |
|
Thereafter
|
|
|
29,000 |
|
Total
|
|
$ |
62,000 |
|
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 December 31, 2008, the aggregate amount outstanding
under the line of credit was $1,354,000 and the Company had approximately
$33,000 of availability on this line of credit. Interest accrues and is paid
monthly 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 (7.65% at December 31, 2008).
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 Agreement is secured by all of the business assets of the
Company and is personally guaranteed by the principal shareholder and Chief
Executive Officer.
The
Company is required to comply with a number of affirmative, negative and
financial covenants. At December 31, 2008 the Company was in
violation of the Fixed Charge Coverage Ratio and the Net Worth
Covenant. On March 27, 2009, the Company has subsequently
re-negotiated the financial covenants and obtained a waiver of covenant
violations at December 31, 2008.
During
the year ending December 31, 2007, the Company had an unsecured $50,000
line of credit with a bank which expired in December 2009. Interest was payable
monthly at the prime rate, as published in the Wall Street Journal, plus 2% per
annum. The Company paid off the line in the year ending December 31, 2007, and
there was $50,000 available under the line of credit at December 31,
2008.
During
the year ending December 31, 2007, the Company paid off $1,331,000 and closed a
line of credit with a bank. The interest rate on this line of credit
was at the Prime rate.
Long-term
debt consists of the following as of:
|
|
December
31,
2008
|
|
|
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 were $5,976, subject to annual
adjustments. The interest rate in effect at December 31, 2007 was
8.5%. The note was secured by land and building and guaranteed by the
majority stockholder. The note was paid off in fiscal
2008.
|
|
$ |
- |
|
|
$ |
650,000 |
|
|
|
|
|
|
|
|
|
|
Building
improvement loan with a maximum draw of $168,000. The interest rate is at
the Wall Street Journal prime rate plus 1%, adjusted monthly with no cap
or floor. The combined monthly principal and interest payments were
$1,137; subject to annual adjustments. The rate in effect at
December 31, 2007 was 7.08% per annum. The note was secured by land
and building and guaranteed by the majority stockholder. The note was
paid off in fiscal 2008.
|
|
|
- |
|
|
|
137,000 |
|
|
|
|
|
|
|
|
|
|
Note
payable to GMAC, secured by an automobile, payable in monthly installments
of $384 including interest at 0.0%. the note was paid off in
fiscal 2008.
|
|
|
- |
|
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
Notes
payable to Chrysler Financial Corp., secured by automobiles, payable in
monthly installments of $658, including interest at 1.9% per
annum. The notes were paid off in fiscal 2008.
|
|
|
- |
|
|
|
5,000 |
|
|
|
|
|
|
|
|
|
|
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, and is personally
guaranteed by the majority stockholder.
|
|
|
1,763,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,763,000 |
|
|
|
793,000 |
|
|
|
|
|
|
|
|
|
|
Less
current portion
|
|
|
16,000 |
|
|
|
27,000 |
|
|
|
$ |
1,747,000 |
|
|
$ |
766,000 |
|
The
aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31:
Year
|
|
Amount
|
|
2009
|
|
$ |
16,000 |
|
2010
|
|
|
18,000 |
|
2011
|
|
|
19,000 |
|
2012
|
|
|
21,000 |
|
2013
|
|
|
23,000 |
|
Thereafter
|
|
|
1,666,000 |
|
Total
|
|
$ |
1,763,000 |
|
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,
2008 and 2007 there were 47,121 and 48,121 shares outstanding respectively, 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 $28,000
dividend payable to the preferred shareholders, which management elected to pay
through the issuance of 3,820 shares of its common stock; and during the year
ended December 31, 2008 the Company accrued and paid a $24,000 dividend payable
to the preferred shareholders, which management elected to pay through the
issuance of 10,910 shares of its common stock.
In the
event of any liquidation, dissolution or winding up of the Company, or if there
is a change of control event, then, subject to the rights of the holders of our
more senior securities, if any, the holders of our Series A preferred stock are
entitled to receive, prior to the holders of any of our junior securities,
$10.00 per share plus all accrued and unpaid dividends. Thereafter, all
remaining assets shall be distributed pro rata among all of our security
holders. 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 were converted
into 43,276 shares of common stock. During the year ended December
31, 2008, 1,000 shares of preferred stock were converted into 4,000 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,
8,979,341 shares issued and outstanding as of December 31, 2008 and
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
the year ended December 31, 2008 the Company issued 161,960 shares of common
stock at stock prices ranging from $1.99 to $3.85 with a value of $336,000 in
exchange for consulting services and 50,750 shares of common stock at a share
price of $1.11 and a value of $56,000 to employees as a bonus.
(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 years ended December 31, 2008 and 2007, the Company issued 325,000 and
474,000 options, respectively, to purchase the Company's common stock at a
weighted average price of $1.62 and $7.50, respectively, to employees under the
Plans. The aggregate value of the options vesting, net of forfeitures, during
the years ended December 31, 2008 and 2007 was $144,000 and $420,000,
respectively, and has been reflected as compensation cost. As of December 31,
2008, the aggregate value of unvested options was $610,000, which will be
amortized as compensation cost as the options vest, over 3 years.
In
accordance with FAS 123R, the company recalculated its expected compensation for
all options outstanding at December 31, 2008 and compared it to previously
recorded compensation expense for options in that option pool. 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 $382,000.
The
weighted-average grant date fair value of options granted during 2008 and 2007
was $1.23 and $4.68, respectively.
|
Year
ended December 31
|
|
2008
|
|
2007
|
Expected
volatility
|
107%-109%
|
|
70%-90%
|
Weighted
average volatility
|
109%
|
|
72%
|
Expected
dividends
|
—
|
|
—
|
Expected
average term (in years)
|
4.3
|
|
5
|
Risk
free rate - average
|
2.75%
|
|
4.48%
|
Forfeiture
rate
|
0%
|
|
0%
|
A summary
of option activity as of December 31, 2008 and changes during the two years then
ended is presented below:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
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
|
|
|
$ |
733,000 |
|
Exercisable
at December 31, 2007
|
|
|
298,333 |
|
|
$ |
3.81 |
|
|
2.7
|
|
|
$ |
609,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
|
|
749,000 |
|
|
$ |
6.02 |
|
|
|
|
|
|
|
|
Granted
|
|
|
325,000 |
|
|
$ |
1.62 |
|
|
|
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(371,500 |
) |
|
$ |
6.83 |
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
702,500 |
|
|
$ |
3.55 |
|
|
3.4
|
|
|
|
- |
|
Exercisable
at December 31, 2008
|
|
|
286,667 |
|
|
$ |
4.59 |
|
|
2.0
|
|
|
|
- |
|
A summary
of the status of the Company’s nonvested shares granted under the Company’s
stock option plan as of December 31, 2008 and changes during the two years then
ended 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 |
|
Granted
|
|
|
325,000 |
|
|
$ |
1.23 |
|
Vested
|
|
|
(74,167 |
) |
|
$ |
4.34 |
|
Forfeited
|
|
|
(285,667 |
) |
|
$ |
4.84 |
|
Nonvested
at December 31, 2008
|
|
|
415,833 |
|
|
$ |
1.93 |
|
Additional
information regarding options outstanding as of December 31, 2008 is as
follows:
|
|
|
Options
Outstanding at December 31, 2008
|
|
|
Options
Exercisable at
December
31, 2008
|
|
|
|
|
Number
of
Shares
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life
(years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.01
- $1.99
|
|
|
|
325,000 |
|
|
|
4.70 |
|
|
$ |
1.62 |
|
|
|
- |
|
|
|
- |
|
$2.00
- $4.99
|
|
|
|
235,000 |
|
|
|
1.85 |
|
|
$ |
3.61 |
|
|
|
215,000 |
|
|
$ |
3.57 |
|
$5.00
- $6.99
|
|
|
|
17,500 |
|
|
|
0.42 |
|
|
$ |
6.00 |
|
|
|
17,500 |
|
|
$ |
6.00 |
|
$7.00
- $8.50
|
|
|
|
125,000 |
|
|
|
3.55 |
|
|
$ |
8.12 |
|
|
|
54,167 |
|
|
$ |
8.21 |
|
|
|
|
|
702,500 |
|
|
|
|
|
|
|
|
|
|
|
286,667 |
|
|
|
|
|
The
following table summarizes warrant activity as of and for the two years ended
December 31, 2008:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
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 |
|
|
$ |
1,675,000 |
|
Exercisable
at December 31, 2007
|
|
|
1,668,236 |
|
|
$ |
5.75 |
|
|
|
3.4 |
|
|
$ |
1,675,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
|
|
1,668,236 |
|
|
$ |
5.75 |
|
|
|
|
|
|
|
|
|
Granted
|
|
|
200,000 |
|
|
$ |
2.54 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
1,868,236 |
|
|
$ |
5.41 |
|
|
|
2.6 |
|
|
|
- |
|
Exercisable
at December 31, 2008
|
|
|
1,668,236 |
|
|
$ |
5.75 |
|
|
|
2.4 |
|
|
|
- |
|
The
aggregate intrinsic value was calculated, as of December 31, 2008, as the
difference between the market price and the exercise price of the Company’s
stock, which is zero since none of the warrants were in-the-money.
The
200,000 warrants granted during the year ended December 31, 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 of the
Company. The warrants are issuable only upon the attainment of
certain international product sales. No warrants vested during the
year ended December 31, 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.
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 $3,902,000.
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
|
|
Expected
volatility
|
|
|
70 |
%
|
|
Weighted
average volatility
|
|
|
70 |
%
|
|
Expected
dividends
|
|
|
- |
|
|
Expected
term (in years)
|
|
|
5 |
|
|
Risk
free rate
|
|
|
5.10 |
%
|
|
The
weighted-average grant date fair value of warrants granted during 2007 was
$4.27.
The
following table summarizes the outstanding warrants to purchase Common Stock at
December 31, 2008.:
|
|
|
104,876
|
$2.00
|
June
2009
|
648,365
|
$2.54 - $4.00
|
June
2009 – May 2013
|
1,114,995
|
$6.60 - $7.50
|
December
2011 – June 2012
|
At
December 31, 2008 and 2007, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $13,800,000 and $10,500,000 for Federal purposes,
respectively, and $11,300,000 and $9,300,000 for state purposes respectively.
The Federal carryforward expires in 2028 and the state carryforward expires in
2013. 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 are as follows as
of:
|
|
December
31,
2008
|
|
|
December
31,
2007
|
|
Deferred
income tax asset:
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$ |
6,200,000 |
|
|
$ |
4,800,000 |
|
Valuation
allowance
|
|
|
(6,200,000 |
) |
|
|
(4,800,000 |
) |
Net
deferred income tax asset
|
|
|
— |
|
|
|
— |
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
|
|
|
2008
|
|
2007
|
Federal
Statutory tax rate
|
|
(34 |
)
|
% |
|
(34 |
)
|
% |
State
tax, net of federal benefit
|
|
(5 |
) |
% |
|
(5 |
) |
% |
Change
in valuation
|
|
(39 |
) |
% |
|
(39 |
) |
% |
Allowance
|
|
39
|
|
% |
|
39
|
|
% |
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,
2008 and 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 NOL’s 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, 2008 and 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, 2008 and 2007 was $48,000 and $54,000,
respectively.
Future
payments under these leases as of December 31, 2008 are as
follows:
Year ending December
31,
|
|
Amount
|
|
2009
|
|
$ |
16,000 |
|
2010
|
|
|
8,000 |
|
2011
|
|
|
8,000 |
|
2012
|
|
|
1,000 |
|
Thereafter
|
|
|
0 |
|
Total
|
|
$ |
33,000 |
|
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, 2008 and 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.
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 $119,000,
including statutory interest. The shares that were tendered for rescission were
agreed to be purchased by others and not from our funds.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. With respect to
the offerees who rejected the rescission offer, we may continue to be liable
under federal and state securities laws for up to an amount equal to the value
of all shares of common stock issued in connection with the initial public
offering plus any statutory interest we may be required to pay. If it is
determined that we offered securities without properly registering them under
federal or state law, or securing an exemption from registration, regulators
could impose monetary fines or other sanctions as provided under these laws.
However, we believe the rescission offer provides us with additional meritorious
defenses against any future claims relating to these shares.
Except as
set forth above, we believe that there are no material litigation matters at the
current time. Although the results of such litigation matters and claims cannot
be predicted with certainty, we believe that the final outcome of such claims
and proceedings will not have a material adverse impact on our financial
position, liquidity, or results of operations.
As of
December 31, 2007, the Company 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 was
payable on March 25, 2008 and bears interest at 7.50% per annum with quarterly
interest payments. As of December 30, 2007, the Company determined that the note
was deemed uncollectible and the collateral worthless, and has written off the
entire balance and associated accrued interest.
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. During the year ended December 31, 2008, the
Company employed two family members of the majority shareholder and Chief
Executive Officer of the Company in sales roles. They were paid approximately
$37,000 and $113,000.
During
the year ended December 31, 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, Chief
Executive 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
year ended December 31, 2008, the Company paid $60,000 for these services and
200,000 warrants were granted in connection with this distribution agreement.
The warrants are issuable only upon the attainment of certain international
product sales. No warrants vested during the year ended December 31, 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.
On
January 5, 2009 the Company issued 75,000 stock options to an officer under the
Plan, at an exercise price of $1.30, the closing price of the common stock on
that date. On February 11, 2009, the Company issued 52,419 shares of
common stock to two brothers of Christopher Reed, Chief Executive Officer of the
Company, in connection with the distribution of its products internationally, as
payment for amounts due in 2009 under the agreement. The shares were
valued at $1.24 per share, the closing price of the stock on that
date. On February 17, 2009, the Company issued 30,000 shares of
common stock to a consultant for services rendered in 2009. On
February 19, 2009, the Company issued 45,416 shares of common stock for
professional services rendered in 2008. On February 11, 2009, the
Company issued 20,000 stock options to two of its employees under the Plan, at
an exercise price of $1.24, the closing price of the common stock on that
date. On March 6, 2009, the Company re-priced 420,000 of its
outstanding options to employees, to an exercise price of $0.75, the closing
price of the stock on that date. The aggregate value of the
re-pricing is $74,000, with $22,000 being expensed immediately, for fully vested
options, and $52,000 being amortized over the remaining vesting periods of the
options, which range from 6 to 34 months. On March 6, 2009, the
Company issued 25,000 options to an employee under the Plan at an exercise price
of $0.75, the closing price of the stock on that date.
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
None.
Item
9A. Controls and Procedures
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting. Our system of internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
Our
internal control over financial reporting include those policies and procedures
that:
|
●
|
pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect our transactions and dispositions of our
assets;
|
|
●
|
provide
reasonable assurance that our transactions are recorded as necessary to
permit preparation of our financial statements in accordance with
accounting principles generally accepted in the United States of America,
and that our receipts and expenditures are being made only in accordance
with authorizations of our management and our directors;
and
|
|
●
|
provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of our assets that could
have a material effect on the financial
statements.
|
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time. Our system
contains self monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
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 our 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.