Registration
Statement No. 333-120451
As
filed with the Securities and Exchange Commission on March 25,
2005
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Amendment 2
Form SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Reed’s,
Inc.
(Exact
name of registrant as specified in its charter)
Delaware
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2086
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95-4348325
|
(State
or other jurisdiction of incorporation
or organization) |
|
(Primary
Standard Industrial Classification
Code Number) |
|
(IRS
Employer Identification
No.) |
13000
South Spring Street
Los
Angeles, California 90061
Telephone:
(310) 217-9400
(Address
and telephone number of principal executive offices)
Christopher
J. Reed
Reed’s,
Inc.
13000
South Spring Street
Los
Angeles, California 90061
Telephone:
(310) 217-9400
(Name,
address and telephone number of agent for service)
Copies
of all communications to:
Lawrence
W. Horwitz, Esq.
HORWITZ
& CRON
Four
Venture - Suite 390
Irvine,
California 92618
Telephone:
(949) 450-4942
(Name,
address, and telephone number of registrant’s counsel)
Approximate
date of proposed sale to the public: As
soon as practicable after the effective date of this registration statement.
If
this Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act of 1933, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. x
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. o
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
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Proposed |
|
Proposed |
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|
|
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|
|
Maximum |
|
Maximum |
|
|
|
Title
of Each Class of |
|
Amount
to be |
|
Offering
Price |
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Aggregate
|
|
Amount
of |
|
Securities
to be Registered |
|
Registered
|
|
Per
Share |
|
Offering
Price(1) |
|
Registration
Fee |
|
Common
stock, $.0001 par value |
|
|
2,
000,000 |
|
$ |
4.00 |
|
$ |
8,000,000 |
|
$ |
1,014 |
|
Underwriter’s
warrants to purchase shares of common stock, $.001 par
value(2) |
|
|
230,000 |
|
$ |
6.60 |
|
|
--- |
|
|
--- |
|
Shares
of common stock underlying underwriter’s warrants |
|
|
230,000 |
|
$ |
6.60 |
|
$ |
1,518,000 |
|
$ |
179 |
|
Totals |
|
|
|
|
|
|
|
$ |
9,518,000 |
|
$ |
1,193 |
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CALCULATION
OF REGISTRATION FEE
(1)
Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended.
(2)
In connection with the sale of the common stock, we are granting to the
underwriter a warrant to purchase up to [_______] shares of common stock
at a per share purchase price equal to 165% of the public offering price
per share. No registration fee is required pursuant to Rule
457(g).
|
The
Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may
determine. |
The
information in this Prospectus is not complete and may be changed. We may not
sell these securities until the Registration Statement filed with the Securities
and Exchange Commission is effective. This Prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED MARCH 25, 2005
REED’S,
INC.
We
develop, manufacture, market, and sell natural non-alcoholic beverages, as well
as candies and ice creams.
We are
offering up to 2,000,000 shares of our common stock. No public market
currently exists for our shares. The public offering price is
$ per share.
This price has been arbitrarily set. The shares are being offered on a best
efforts basis through Brookstreet Securities Corporation, our underwriter, a
member of the National Association of Securities Dealers, Inc., for a commission
equal to 6% of the gross sales made in this offering. In addition, Brookstreet
will receive a lead underwriter’s concession of 1% of gross sales made in this
offering and a non-accountable expense allowance of 3% of gross sales made in
this offering.
There
is no current public market for our shares and there is no assurance that a
public market for our shares will ever develop. In the event a public market for
our shares does not develop, purchasers in this offering may be unable to sell
the shares for an extended period of time. Our underwriter currently intends to
apply for quotation of our common stock upon the Over the Counter Bulletin Board
(“OTCBB”) quotation system.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 3 to read about factors you should consider before buying shares of
our common stock.
|
|
Per
Share |
|
If
200,000
Shares
are
Sold(1) |
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If
1,000,000
Shares
are
Sold(1) |
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If
2,000,000
Shares
are
Sold(1) |
|
Proceeds
to the Company |
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$ |
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$ |
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$ |
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$ |
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Underwriter
Commission |
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$ |
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|
$ |
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|
$ |
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$ |
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Proceeds
to the Company before estimated expenses of the offering |
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$ |
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$ |
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$ |
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$ |
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Proceeds
to the Company after estimated expenses of the offering |
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$ |
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|
$ |
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|
$ |
|
|
$ |
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(1)
The amounts shown are for illustrative purposes only. The offering is a
best efforts offering with no assurance that all or any shares will be
sold. |
Texas
investors must meet minimum net worth standards having a minimum annual
gross income of $65,000.00 and a minimum net worth of $65,000.00,
exclusive of automobiles, home and home furnishings; or a minimum net
worth of $150,000.00 exclusive of automobiles, home and home furnishings.
We
will
not accept subscriptions for shares from the District of Columbia unless
and until at least 200,000 shares have been sold. |
|
There
is no minimum number of shares we must sell in this offering. Offering
proceeds will not be placed in escrow. Upon receipt, offering proceeds
will be deposited into the Company’s operating account of and used to
conduct the Company’s business affairs. The offering will terminate nine
months after the effective date of this prospectus unless terminated
sooner by us. |
|
Neither
the Securities and Exchange Commission nor any state securities regulators
have approved or disapproved these securities or determined if this
prospectus is accurate or complete. Any representation to the contrary is
a criminal offense. |
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BROOKSTREET
SECURITIES CORPORATION. |
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|
The date
of this Prospectus is March , 2005
TABLE
OF CONTENTS
Section |
Page |
Prospectus
Summary |
1 |
Risk
Factors |
3 |
Use
of Proceeds |
10 |
Dividend
Policy |
11 |
Capitalization
as of June 30, 2004 |
12 |
Dilution
|
13 |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
14 |
Business
|
22 |
Legal
Proceedings |
37 |
Management
|
38 |
Certain
Relationships and Related Transactions |
41 |
Principal
Stockholders |
42 |
Description
of Our Securities |
43 |
Shares
Available for Future Resale |
45 |
Plan
of Distribution |
46 |
Legal
Matters |
48 |
Experts
|
48 |
Where
You Can Find More Information |
48 |
Index
to Financial Statements |
F-1 |
Dealers who solicit prospective investors in the subject offering are
required to deliver a copy of this Prospectus commencing upon the effective date
of the subject Registration Statement and terminating 40 days thereafter. The
effective date of the Registration Statement, of which this Prospectus is a
part, is _______________.
PROSPECTUS
SUMMARY
This summary highlights information found in greater detail elsewhere in this
prospectus. Prior to making an investment decision, you should read the entire
prospectus carefully; including the section entitled “Risk Factors” beginning on
page 3.
About
Our Company
We are a growing developer, manufacturer, marketer, and seller of New Age
beverages, as well as candies and ice creams. “New Age Beverages” is a category
that includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently offer 14 beverages, 2 candies, and 3 ice
creams.
We sell the majority of our products primarily in upscale gourmet and natural
food stores and supermarket chains in the United States and, to a lesser degree,
in Canada. Historically, most of our beverages were sold in the natural food
industry.
Our current business strategy is to maintain a firm marketing focus in the
natural food marketplace while building a national direct sales and distribution
force to take our proven products into mainstream market and distribution
channels. . We believe that the proceeds of this offering may greatly accelerate
the success of this business strategy by providing working capital to finance an
expanded sales and distribution network.
At this time, we produce our carbonated beverages at two facilities. Our Brewery
in Los Angeles handles the western half of the United States and we have a
contract with The Lion Brewery, Inc., a packing, or co-pack, facility in
Pennsylvania for the eastern United States. Our Ginger Juice Brews are co-packed
for us in Northern California. Our ice creams are co-packed for us at a dairy in
upstate New York.
We have a national network of natural and specialty food distributors in the
United States and Canada. We also have mainstream beverage distributors in
select markets. In Southern California, we have our own direct distribution in
addition to other local distributors. We currently rely upon one customer
for between 10-15% of our aggregate gross revenues. If we were to lose this
customer, our operations would be materially effected.
We currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced by the
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits to
maintain store and distributor relationships. In the future, we intend to
integrate both our distributions and sales forces.
In December 2000, we purchased an 18,000 square foot warehouse, the
Brewery, at 13000 South Spring Street, Los Angeles, California 90061, in an
unincorporated area of Los Angeles County near downtown Los Angeles. This
facility serves as our principal executive offices, our West Coast bottling
plant, and our Southern California warehouse facility. Our telephone number is
310.217.9400.
We have not generated a profit during our last two fiscal years and
there is no assurance that we will develop profitable operations in the future.
Our net operating loss for the calendar year 2003 was $774,367 and our net
operating loss for the six months ended June 20, 2004 is $38,037. We are
offering a maximum of 2,000,000 of our shares. In the event the maximum amount
of this offering is sold, then this offering shall involve the sale of 30% of
our outstanding common stock and Christopher Reed and his family members will
own 52.4% of our outstanding common stock.
This
offering is a best efforts offering through our underwriter, Brookstreet
Securities Corporation. While there is no assurance, our underwriter currently
intends to apply for quotation of our common stock upon the Over the Counter
Bulletin Board (“OTCBB”) quotation system. This will require that we complete
certain filings and disclosures of information to the National Association of
Securities Dealers and to the OTCBB itself. Our shares are currently not traded
on the public securities markets and even if our shares of common stock become
quoted on the OTCBB, there is no assurance that an active public market for our
shares of stock will be established.
Our Internet address is www.reedsgingerbrew.com.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
(The
rest of this page left blank intentionally)
The Offering
Common
Stock being offered |
|
|
2,000,000
shares |
|
Offering
Price |
|
$ |
____
per share |
|
Common
stock outstanding: |
|
|
|
|
Prior
to this offering |
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4,726,091
shares |
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After
this offering: |
|
|
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if
200,000 shares are sold |
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4,926,091
shares |
|
if
1,000,000 shares are sold |
|
|
5,726,091
shares |
|
if
all 2,000,000 shares are sold |
|
|
6,726,091
shares |
|
Use
of Proceeds
We plan to use the net proceeds to hire additional sales representatives, launch
new products, pay for retail slotting, expand our brand advertising, update our
West Coast production facility, the Brewery, to purchase fully-branded coolers
and in-store displays and for working capital.
Summary
Financial Information
The following historical financial information should be read in conjunction
with the audited financial statements and the notes to those statements and the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this prospectus. The
consolidated statements of operations and comprehensive income data with respect
to the years ended December 31, 2003 and 2002, and the consolidated balance
sheet data at December 31, 2003 are derived from, and are qualified by
reference to, the audited financial statements included elsewhere in this
prospectus. The historical results are not necessarily indicative of results to
be expected for any future periods.
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Six
Months Ended June 30, |
|
Years
Ended December 31, |
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|
2004 |
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2003
|
|
2003
|
|
2002
|
|
|
|
(Unaudited) |
|
(Unaudited)
|
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Statements
of Income Data: |
|
|
|
|
|
|
|
|
|
|
|
|
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Sales
|
|
|
4,495,344
|
|
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3,262,426
|
|
|
6,781,776
|
|
|
6,428,742
|
|
Gross
profit |
|
|
871,577
|
|
|
731,629
|
|
|
1,319,571
|
|
|
1,592,609
|
|
Selling,
general and administrative expenses |
|
|
795,601
|
|
|
676,339
|
|
|
1,416,518
|
|
|
1,348,827
|
|
Income
(loss) from operations |
|
|
75,976
|
|
|
55,290
|
|
|
(96,947 |
) |
|
243,782
|
|
Loss
before income taxes |
|
|
(38,037 |
) |
|
(499,408 |
) |
|
(774,367 |
) |
|
(65,812 |
) |
Provision
for income taxes |
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net
Loss |
|
|
(38,037 |
) |
|
(499,408 |
) |
|
(774,367 |
) |
|
(65,812 |
) |
Net
Loss per share, basic and diluted |
|
|
(0.01 |
) |
|
(0.11 |
) |
|
(0.16 |
) |
|
(0.01 |
) |
Weighted
average shares used to compute net loss per share |
|
|
4,726,091
|
|
|
4,721,591
|
|
|
4,724,488
|
|
|
4,721,591
|
|
|
|
June 30,
2004 |
|
December 31,
2003 |
|
|
|
(Unaudited) |
|
|
|
Balance
Sheet Data: |
|
|
|
|
|
|
|
Total
assets |
|
|
5,614,486
|
|
|
4,534,970
|
|
Current
liabilities |
|
|
3,384,753
|
|
|
2,541,297
|
|
Long-term
liabilities, less current portion |
|
|
1,197,360
|
|
|
1,508,260
|
|
Stockholders’
equity |
|
|
721,473
|
|
|
759,510
|
|
RISK
FACTORS
An investment in our common stock is very risky. You should carefully consider
the risk factors described below, together with all other information in this
prospectus, before making an investment decision. The trading price of our
common stock could decline due to any of these risks, and you could lose all or
part of your investment. You also should refer to the other information set
forth in this prospectus, including our financial statements and the related
notes.
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses, we
eventually may have insufficient working capital to maintain operations as
presently set forth in our business plan.
As of June 30, 2004, we had an accumulated deficit of $1,708,823. For the
years ended December 31, 2003 and 2002, we incurred losses from operations
of $96,947 and $243,782, respectively. If we are not able to begin to earn an
operating profit at some point in the future, we eventually may have
insufficient working capital to maintain our operations as we presently intend
to conduct them. In addition, we may not be able to contribute profit from
operations toward the expansion and other business plans discussed in this
prospectus.
The
beverage business is highly competitive.
We compete for distributors, shelf space, and customers primarily with other New
Age beverage companies including:
-
SoBe
(owned by Pepsi)
-
Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury Schweppes)
-
Henry
Weinhard (owned by Phillip Morris)
-
Arizona
-
Hansen’s
-
Knudsen &
Sons
-
Jones
Sodas
-
A&W
Root Beer
-
Blue
Sky
-
Natural
Brews
Several of our competitors and potential competitors have financial resources
greater than ours, and Pepsi, Cadbury Schweppes, and Phillip Morris have
substantially greater financial resources than ours. These greater resources
permit our competitors to implement extensive advertising and promotional
programs, which we have not been, and may not be, able to match. As competitors
enter the field, our market share may fail to increase or may decrease despite
our efforts to continue to produce superior products with higher quality
ingredients and a brewing process that we believe remains a trade secret.
See
“Business — Competition.”
Competitors in the soft drink industry include bottlers and distributors of
nationally advertised and marketed products as well as chain store and private
label soft drinks. The principal methods of competition include brand
recognition, price and price promotion, retail space management, service to the
retail trade, new product introductions, packaging changes, distribution
methods, and advertising.
The
loss of our largest customer would substantially reduce revenues.
During 2003, Trader Joe’s accounted for approximately 15% of our sales and we
anticipate that Trader Joe’s will continue to account for more than 10% of our
sales in 2004. The loss of Trader Joe’s as a customer would substantially reduce
our revenues unless and until we replaced that source of revenue.
Any
decrease in the supply of ginger, other key ingredients or finished products, or
increase in the prices of such ingredients, could significantly increase our
costs, and thereby reduce our profits.
We depend upon an uninterrupted supply of ginger and certain other ingredients,
a significant portion of which we obtain overseas, principally from China and
Brazil. We obtain almost all of our crystallized ginger from Fiji and our Ginger
Chews from Indonesia. Any decrease in the supply of these ingredients or
increase in the prices of these ingredients as a result of any adverse weather
conditions, pests, crop disease, interruptions of shipment or political
considerations, among other reasons, could substantially increase our costs and
adversely affect our financial performance.
The
loss of any of our third-party suppliers or service providers could impair our
operations and substantially reduce our financial results.
We rely on third parties, called co-packers in our industry, to produce some of
our beverages, to produce our glass bottles and to bottle some of our beverages.
The loss of our third-party suppliers or service providers could impair our
operations and adversely affect our financial performance.
The
loss of our third-party distributors could impair our operations and
substantially reduce our financial results.
We depend in large part on distributors to distribute our beverages and other
products. Most of our outside distributors are not bound by written agreements
with us and may discontinue their relationship with us on short notice. Most
distributors handle a number of competitive products. In addition, our products
are a small part of our distributors’ businesses. The loss of our third-party
beverage distributors could impair our operations and adversely affect our
financial performance.
Our
manufacturing process is not patented.
None of the manufacturing processes used in producing our products are subject
to a patent or similar intellectual property protection. Our only protection
against a third party using our recipes and processes is confidentiality
agreements with the companies that produce our beverages and with our some of
our employees. If our competitors develop substantially equivalent proprietary
information or otherwise obtain access to our knowledge, we will have greater
difficulty in competing with them for business, and our market share could
decline.
We regard the protection of our trademarks, trade dress, and trade secrets as
critical to our future success. We have registered our trademarks in the United
States. We also rely on a combination of laws and contractual restrictions, such
as confidentiality agreements, to establish and protect our proprietary rights,
trade dress, and trade secrets. However, laws and contractual restrictions may
not be sufficient to protect the exclusivity of our intellectual property
rights, trade dress, or trade secrets. Furthermore, enforcing our rights to our
intellectual property could involve the expenditure of significant management
and financial resources. See “Business — Proprietary Rights.”
We
face risks associated with product liability claims and product recalls.
Other companies in the beverage industry have experienced product liability
litigation and product recalls arising primarily from defectively manufactured
products or packaging. We maintain product liability insurance insuring our
operations from any claims associated with product liability and we believe that
the amount of this insurance is sufficient to protect us. We do not maintain
product recall insurance. While we have to date not experienced any product
liability or product recall claims, there is no assurance that we will not
experience such claims in the future. In the event we were to experience a
product liability or product recall claim, our business operations could be
materially and adversely effected.
If
we are not able to retain the full-time services of Christopher J. Reed, it will
be more difficult for us to manage our operations and our operating performance
could suffer.
Our business is dependent, to a large extent, upon the services of Christopher
J. Reed, our founder, President, Chief Executive Officer and Chairman of the
Board. We depend on Mr. Reed’s creativity and leadership in running or
supervising virtually all aspects of our day-to-day operations. We do not have a
written employment agreement with Mr. Reed. In addition, we do not maintain key
person life insurance on Mr. Reed. Therefore, in the event of the loss or
unavailability of Mr. Reed to us, there can be no assurance that we would be
able to locate in a timely manner or employ qualified personnel to replace him.
The loss of the services of Mr. Reed or our failure to attract and retain other
key personnel over time would jeopardize our ability to execute our business
plan and could have a material adverse effect on our business, results of
operations and financial condition.
We
need to manage our growth and implement and maintain procedures and controls
during a time of rapid expansion in our business.
The cost of manufacturing and packaging our products is approximately 80% of our
aggregate revenues. This gross margin places pressure upon our cash flow and
cash reserves when our sales increase. As we experience significant growth, such
an expansion has placed, and is expected to continue to place, a significant
strain on our management, operational and financial resources. Such growth will
require improvements in our operational, accounting and information systems,
procedures and controls. If we fail to manage this growth properly, it could
divert our limited management, cash, personnel, and other resources from other
responsibilities and could adversely affect our financial performance.
Our
management has broad discretion in the application of the net proceeds from this
offering.
Our Board of Directors
and management presently intend to utilize a substantial portion of the net
proceeds of this offering for the specific purposes set forth in “Use of
Proceeds.” However, we have broad discretion with respect to redirecting the
application and
allocation
of the net-proceeds of this offering in light of changes in circumstances and
the availability of certain business opportunities. As a result, any return on
investment to investors will be substantially dependent upon the discretion and
judgment of our management with respect to the application and allocation of the
net proceeds of the offering. See “Use of Proceeds.”
We
have operated without independent directors in the
past
We
have not had two independent directors through a large portion of our history.
This means that the material agreements between related parties have not been
negotiated with the oversight of independent directors; this means that most
agreements into which we have entered were at the absolute discretion of the
majority shareholder, Chris Reed Please see the “Certain Relationships and
Related Transactions” section for specific details of these
transactions.
Risks
Relating to This Offering
It
may be a conflict of interest for Peter Sharma III to hold a position on the
Board of Directors, while also being a primary selling agent, supervised by a
separate broker/dealer, as well as being indebted to the
issuer.
As
a director, Mr. Sharma has a fiduciary responsibility to our shareholders. The
analyst for the State of Texas believes that Mr. Sharma’s position with
Brookstreet Securities Corporation and his financial indebtedness may compromise
his ability to make decisions in the best interest of our
shareholders.
We
have previously been unsuccessful in a prior public
offering
We
have previously tried to raise money in a public offering. This offering was
declared effective on December 31, 2002 and was subsequently withdrawn on March
27, 2003. We withdrew the offering due to what we perceived as poor market
conditions for an offering in the economic climate surrounding the 2003 Iraq
War.
We
determined the offering price for the shares being offered arbitrarily. The
market price for the common stock after the offering may vary from the offering
price.
Prior to this offering, there was no public market for our common stock. We
arbitrarily determined the offering price for the shares being offered. The
price bears no direct relationship to our assets, earnings, book value, or other
such criteria of value. For this reason, the market price after the offering may
vary from the initial offering price.
There
is not yet a public trading market for our securities and if a market develops
for our securities, it could be limited, sporadic, and highly volatile.
We cannot assure you that an active market for our shares will be established or
maintained in the future. It is the intention of our underwriter to apply for
quotation of our common stock on the Over The Counter Bulletin Board quotation
system (the “OTCBB”). The OTCBB is not a national securities exchange, and many
companies have experienced limited liquidity when traded through this quotation
system. Therefore, if you purchase shares of our common stock and later decide
to sell the shares, you may have difficulty selling the shares. Even if a market
for our common stock is established, stockholders may have to sell our stock at
prices substantially lower than the price they paid for it or might otherwise
receive than if a broad public market existed.
Since
there is no minimum number of shares which must be subscribed for before we can
use the proceeds from sales, our expansion plans will be affected by the number
of shares actually sold.
The speed with which we implement our expansion plans will depend, to a large
degree, on the amount of funds available for expansion. Such funds may be
provided by the sale of common stock in this offering, our existing lines of
credit, and revenues from sales, future loans or otherwise. If we sell less than
all the shares in this offering, our ability to implement the expansion plans
described under “Use of Proceeds” and elsewhere in this prospectus could be
delayed, depending on the amount of other funds available to us for such
purposes.
You
will experience immediate and substantial dilution in this offering.
The initial public offering price is substantially higher than the net tangible
book value of each outstanding share of common stock. Purchasers of common stock
in this offering will suffer immediate and substantial dilution. The dilution
will be $3.02 per share, or approximately 75%, in the net tangible book
value of the common stock from the public offering price if all
2,000,000 shares being offered are sold. The dilution will be
$3.45 per share (86%) if only 1,000,000 shares (50%) are sold, and
$3.93 per share (98%) if only 200,000 shares (10%) are sold. See
“Dilution.”
Our
ability to obtain needed additional financing is uncertain.
We currently believe that our available cash resources, combined with the net
proceeds from this offering and cash flow from operations, will be sufficient to
meet our anticipated working capital and capital expenditure requirements for at
least 12 months after the date of this prospectus. We may need to raise
additional funds to respond to business contingencies, which may include the
need to:
· |
fund
more rapid expansion |
· |
fund
additional marketing expenditures |
· |
enhance
our operating infrastructure |
· |
respond
to competitive pressures |
· |
acquire
other businesses |
We cannot assure you that additional financing will be available on terms
favorable to us, or at all. If adequate funds are not available or if they are
not available on acceptable terms, our ability to fund the growth of our
operations, take advantage of opportunities, develop products or services or
otherwise respond to competitive pressures, could be significantly limited.
Our ability to implement our full business expansion plan is largely dependent
upon the outcome of this offering. Assuming no funds from this offering were
available, over the next 12 months, we would be able to launch the
750 ml. champagne bottle for approximately three to five of our products,
including our Reed’s Ginger Brew and swing-lid bottles for approximately two of
our products. In addition, we would be able to hire approximately two additional
sales representatives. Other elements of our expansion plan might have to be
curtailed or delayed unless we could find alternative external sources of
working capital.
Future
financings could adversely affect your ownership interest and rights in
comparison with those of other securityholders.
Our
board of directors has the power to issue additional shares of common or
preferred stock without stockholder approval. If additional funds are raised
through the issuance of equity or convertible debt securities, the percentage
ownership of our existing stockholders will be reduced, and these newly issued
securities may have rights, preferences, or privileges senior to those of
existing stockholders, including, those persons acquiring shares in this
offering.
If
we issue any additional common stock or securities convertible into common
stock, such issuance will reduce the proportionate ownership and voting power of
each other stockholder. In addition, such stock issuances might result in a
reduction of the book value of our common stock.
Because
Christopher J. Reed controls a majority of our stock, he can control the
outcome, or greatly influence the outcome, of all matters on which stockholders
vote.
Christopher J. Reed, our President, CEO and Chairman of the Board, currently
owns approximately 68% of our outstanding voting stock. If all the shares in
this offering are sold, Mr. Reed will own approximately 41% of our outstanding
voting stock. If 1,000,000 shares in this offering (50%) are sold, Mr. Reed
will own approximately 51% of our outstanding voting stock, and if only
200,000 shares in this offering (10%) are sold, he will own approximately
64% of our outstanding voting stock. Therefore, Mr. Reed will be able to control
the outcome, or greatly influence the outcome, on all matters requiring
stockholder approval, including the election of directors, amendment of our
certificate of incorporation, and any merger, consolidation or sale of all or
substantially all of our assets or other transaction resulting in a change of
control of our company. See “Principal Stockholders.”
A
substantial number of our shares will be available for sale in the public market
after the offering and sales of those shares could adversely affect our stock
price.
Sales of a substantial number of shares of common stock into the public market
after this offering, or the perception that such sales could occur, could
substantially reduce our stock price in any public market, and could impair our
ability to obtain capital through an offering of equity securities. After this
offering, we will have 6,726,091 shares of common stock outstanding if all
2,000,000 shares in this offering are sold, 5,726,091 shares of common
stock outstanding if 1,000,000 shares in this offering (50%) are sold, and
4,926,091 shares of common stock outstanding if 200,000 shares in this
offering (10%) are sold. All the shares of common stock sold in this offering
will be freely tradable without restriction or further registration required
under federal securities laws.
Of the shares of our common stock currently outstanding, 4,277,416 shares
are “restricted securities” under the Securities Act of 1933, as amended. Some
of these “restricted securities” will be subject to restrictions on the timing,
manner, and volume of sales of such shares. See “Shares Available For Future
Resale.”
Our
common stock may become subject to “penny stock” regulations that may affect the
liquidity for our common stock.
Our common stock may become subject to the rules adopted by the Securities and
Exchange Commission, or SEC, that regulate broker-dealer practices in connection
with transactions in “penny stocks.” Penny stocks are generally equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ Stock Market,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or system).
The penny stock rules require that a broker-dealer, prior to a transaction in a
penny stock not otherwise exempt from those rules, deliver a standardized risk
disclosure document prepared by the SEC, which contains the
following:
· |
a
description of the nature and level of risk in the market for penny stocks
in both public offerings and secondary trading |
· |
a
description of the broker’s or dealer’s duties to the customer and of the
rights and remedies available to the customer with respect to violation to
such duties or other requirements of Securities’ laws
|
· |
a
brief, clear, narrative description of a dealer market, including “bid”
and “ask” prices for penny stocks and significance of the spread between
the “bid” and “ask” price |
· |
a
toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or in the
conduct of trading in penny stocks, and |
· |
such
other information and is in such form (including language, type, size and
format), as the Commission shall require by rule or regulation.
|
Prior
to effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:
· |
the
bid and offer quotations for the penny stock |
· |
the
compensation of the broker-dealer and its salesperson in the transaction
|
· |
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the market
for such stock |
· |
the
liquidity of the market for such stock, and |
· |
monthly
account statements showing the market value of each penny stock held in
the customer’s account. |
In addition, the penny stock rules require that prior to a transaction in a
penny stock not otherwise exempt from those rules, the broker-dealer must make a
special written determination that the penny stock is a suitable investment for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock such as our common stock if it is
subject to the penny stock rules.
(remainder
of this page left blank intentionally)
FORWARD
LOOKING STATEMENTS
Some of the statements made in this prospectus, including certain statements
made under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business”
constitute forward-looking statements within the meaning of Section 27A of
the Securities Act 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended.
In some cases, you can identify forward-looking statements by terminology such
as “may,” “will,” “should,” “could,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative
of such terms or other comparable terminology.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of activity,
performance, or achievements to be materially different from any future results,
levels of activity, performance, or achievement expressed or implied by such
forward-looking statements.
Management cautions that these statements are qualified by their terms and/or
important factors, many of which are outside the control of the Company, 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:
· |
The
Company’s ability to generate sufficient cash flows to support capital
expansion plans and general operating activities;
|
· |
Decreased
demand for our products resulting from changes in consumer preferences;
|
· |
Competitive
products and pricing pressures and the Company’s ability to gain or
maintain its share of sales in the marketplace;
|
· |
The
introduction of new products; |
· |
The
Company’s 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 the Company produces and
markets its products and could result in increased costs;
|
· |
Changes
in the cost and availability of raw materials and the ability to maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of the Company’s
products; |
· |
The
Company’s ability to penetrate new markets and maintain or expand existing
markets; |
· |
Maintaining
existing relationship and expanding the distributor network of the
Company’s products; |
· |
The
marketing efforts of distributors of the Company’s products, most of whom
also distribute products that are competitive with the Company’s
products; |
· |
Decisions
by distributors, grocery chains, specialty chain stores, club stores and
other customers to discontinue carrying all or any of the Company’s
products that they are carrying at any
time; |
· |
The
availability and cost of capital to finance the Company’s working capital
needs and growth plans; |
The
effectiveness of the Company’s advertising, marketing and promotional programs;
· |
Changes
in product category consumption; |
· |
Economic
and political changes; |
· |
Consumer
acceptance of new products, including taste test comparisons;
|
· |
Possible
recalls of the Company’s products; and
|
· |
The
Company’s ability to make suitable arrangements for the co-packing of any
of its products. |
Although
we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. Because the
Company’s actual results could be materially different from the results
described or anticipated by the Company’s forward-looking statements, due to the
inherent uncertainty of estimates, forecasts and projections, you should not
rely on the accuracy of forward-looking statements in this
prospectus
USE OF PROCEEDS
Estimated net proceeds from this offering, based on an offering price of $4.00
per share and after deducting a 6% sales commission, a 1% lead underwriter’s
concession, a 3% non-accountable broker expense allowance and other offering
expenses estimated to range from approximately $200,000 to $275,000, will range
from $0 to $6,925,017, depending upon the number of shares we sell in this
offering. The offering is being made on a best efforts basis, and we do not know
how many shares, if any, will be sold in this offering.
The primary purposes of this offering are to obtain additional capital, create a
public market for our common stock, and facilitate future access to public
capital markets. In general, we intend to use the net proceeds from this
offering to increase working capital, hire additional sales representatives, and
launch new products. Depending upon the amount raised in this offering, we also
plan to purchase and place coolers, in-store displays and other marketing tools;
expand brand advertising, fund supermarket slotting fees where applicable,
provide for improvements to our West Coast production facility, the Brewery and
hire a chief operating officer.
We presently expect to use the estimated net proceeds from the offering
substantially as set forth in the table below, if the number of shares indicated
are sold in the offering:
Proposed
Use |
|
Estimated
Amount
if
200,000 Shares
are
Sold
(10%
of Total) |
|
Estimated
Amount
if
1,000,000 Shares are Sold
(50%
of Total) |
|
Estimated
Amount
if
2,000,000 Shares are Sold
(100%
of Total) |
|
Gross
Offering Receipt |
|
$ |
800,000 |
|
|
|
|
$ |
4,000,000 |
|
|
|
|
$ |
8,000,000 |
|
|
|
|
Underwriters’
Compensation |
|
|
80,000 |
|
|
|
|
|
400,000 |
|
|
|
|
|
800,000 |
|
|
|
|
Offering
Expenses |
|
|
199,983 |
|
|
|
|
|
224,983 |
|
|
|
|
|
274,983 |
|
|
|
|
Net
Proceeds |
|
|
520,017 |
|
|
(100 |
)% |
|
3,375,017 |
|
|
(100 |
)% |
|
6,925,017 |
|
|
(100 |
)% |
Additional
Sales Representatives |
|
$ |
250,000 |
|
|
(48 |
)% |
$ |
900,000 |
|
|
(27 |
)% |
$ |
2,100,000 |
|
|
(30 |
)% |
New
product launches |
|
|
100,000 |
|
|
(19 |
)% |
|
250,000 |
|
|
(7 |
)% |
|
375,000 |
|
|
(6 |
)% |
Retail
Slotting |
|
|
0 |
|
|
(0 |
)% |
|
750,000 |
|
|
(22 |
)% |
|
1,500,000 |
|
|
(22 |
)% |
Brand
Advertising |
|
|
0 |
|
|
(0 |
)% |
|
750,000 |
|
|
(22 |
)% |
|
1,500,000 |
|
|
(22 |
)% |
Cooler
and in-store displays |
|
|
103,017 |
|
|
(20 |
)% |
|
320,017 |
|
|
(10 |
)% |
|
640,017 |
|
|
(9 |
)% |
Chief
Operating Officer |
|
|
0 |
|
|
(0 |
)% |
|
100,000 |
|
|
(3 |
)% |
|
100,000 |
|
|
(1 |
)% |
West
Coast Brewery |
|
|
0 |
|
|
(0 |
)% |
|
150,000 |
|
|
(4 |
)% |
|
150,000 |
|
|
(2 |
)% |
Working
Capital |
|
|
67,000 |
|
|
(13 |
)% |
|
155,000 |
|
|
(5 |
)% |
|
560,000 |
|
|
(8 |
)% |
Total
Estimated Net Proceeds |
|
$ |
520,017 |
|
|
(100 |
)% |
$ |
3,375,017 |
|
|
(100 |
)% |
$ |
6,925,017 |
|
|
(100 |
)% |
Additional
Sales Representatives. We
will be able to hire from two to approximately 30 new sales representatives,
depending upon the net proceeds of this offering.
New
Product Launches. We
will be able to launch from between five and approximately 20 new products, by
which we mean SKUs, depending upon the net proceeds of this offering.
Retail
Slotting. We
plan to place some of our products in up to 30,000 new stores. Some stores,
particularly chains, require slotting fees to place product on store shelves.
Currently, we do not pay slotting fees to place a majority of our products in
stores. However, in the future, we may have to pay slotting fees, depending upon
the type of stores and chains where we place our products. See “Business —
Our Primary Markets — Mainstream Supermarkets.”
Brand
Advertising. We
plan to use strategic consumer and trade targeted advertising to build brand
awareness, and support existing and new product placements. Our advertising
plans include print ads in magazine and newspapers, public relations events and
consumer event sponsorships at which we offer samples of our products.
Cooler
and In-store Display Programs. Our
marketing plans include placing up to 2,000 Reed’s branded refrigerated coolers
and Reed’s branded in-store displays, which we call Kegerators, throughout the
United States and, to a lesser degree, in Canada. We consider coolers and
in-store displays to be efficient and proven marketing tools.
West
Coast Brewery. Depending
upon the net proceeds of this offering, we intend to purchase packaging
automation equipment for the Brewery. This will allow us to increase production
capacity and overall time that our products can be in production, while
decreasing labor costs.
In
June 2004, we entered into a revolving loan and security agreement pursuant to
which we are able to borrow up to $1,100,000. See “Management’s Discussion and
Analysis and Results of Operations — Liquidity and Capital Resources.” We
intend to use all or a portion of any funds borrowed pursuant to this loan
agreement, in addition to the proceeds from the sale of the shares in this
offering, for the uses described above.
If
fewer than all 2,000,000 shares are sold in this offering, we will reduce
or eliminate some proposed uses as described in the table above. The speed with
which we expand our marketing and advertising for our products, and the number
of products we offer to the public, depends in large part on the number of
shares of common stock sold in this offering. If only a limited number of shares
are sold, our expansion plans will take substantially longer to implement.
If
fewer than 200,000 shares are sold, we will use most of the money to hire
additional sales representatives.
Assuming
no funds from this offering were available, over the next twelve months, we
would be able to launch the 750 ml. champagne bottle for approximately
three to five of our products, including our Reed’s Ginger Brew and swing-lid
bottles for approximately two of our products. In addition, we would be able to
hire approximately two additional sales representatives. Other elements of our
expansion plan might have to be curtailed or delayed unless we could find
alternative external sources of working capital.
We
cannot assure you that the above dollar amounts will be specifically allocated
as set forth in the foregoing table. Our management has discretion in the
application of the actual net proceeds of the offering. Allocation of net
proceeds is further subject to future events including changes in general
economic conditions, changes in our strategy and our response to competitive
pressures and consumer preferences associated with the products we sell. Pending
ultimate application, the net proceeds will be invested in an interest-bearing
bank account.
The
“Use of Proceeds” budget as laid out in the foregoing table represents our best
estimate as to the amounts that will be spent on each category of expenditure
listed. As we evaluate the effectiveness of each of the different expense
categories to grow the business profitably, we expect to modify these amounts to
most effectively use these funds. We may find that our sales representatives are
selling mostly our core brands and do not need or want more new product launches
but that funds are better used in purchasing more displays to fuel their sales
activities. We may find that in-store displays create more cost effective
advertising than straight brand advertising. The evaluation of the use of funds
is an ongoing, interactive function of management.
DIVIDEND
POLICY
We
have never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends. We currently intend to retain future earnings,
if any, to finance operations and expansion of our business.
We
are obligated to pay a non-cumulative 5% dividend from lawfully available assets
to the holders of our Series A preferred stock beginning on June 30, 2005 in
either cash or additional shares of Series A preferred stock in our discretion.
See “Description of Our Securities — Preferred Stock.”
CAPITALIZATION AS OF JUNE 30, 2004
The
following table sets forth our capitalization as of June 30, 2004 and as
adjusted to reflect the sale by us of 2,000,000 shares of common stock in
this offering and the application of the estimated net proceeds, assuming an
offering price of $4.00 per share, after deducting underwriter commissions and
estimated offering expenses. The table also shows the effect if only 50% and 10%
of the offering is completed. The information in the table below is qualified
by, and should be read in conjunction with, our audited financial statements and
related notes appearing elsewhere in this prospectus. The following table
assumes that the underwriter does not exercise its over-allotment option and
excludes the following shares:
· |
17,500 shares
of common stock issuable upon exercise of outstanding options issued by us
under our 2001 Stock Option Plan at a weighted average exercise price of
$3.21; |
· |
482,500
additional shares of common stock reserved for future issuance under our
2001 Stock Option Plan; |
· |
55,000
shares of common stock issuable upon exercise of outstanding options,
other than outstanding options issued under our 2001 Stock Option Plan, at
a weighted average exercise price of $2.43; |
· |
848,876 shares
of common stock issuable upon exercise of outstanding warrants at a
weighted average exercise price of $1.94; and |
· |
200,000
shares reserved for future issuance under the underwriter’s warrant.
|
|
|
June
30, 2004 (Unaudited) |
|
As
adjusted
(Based
on percentage of offering completed) |
|
Current
Liabilities: |
|
|
|
|
|
10 |
% |
|
50 |
% |
|
100 |
% |
Current
portion of long-term debt |
|
$ |
383,000 |
|
|
383,000 |
|
|
383,000 |
|
|
383,000 |
|
Lines
of credit |
|
|
1,015,327 |
|
|
1,015,327 |
|
|
1,015,327 |
|
|
1,015,327 |
|
Total
current liabilities |
|
|
1,398,327 |
|
|
1,398,327 |
|
|
1,398,327 |
|
|
1,398,327 |
|
Long-term
liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt |
|
|
937,466 |
|
|
937,466 |
|
|
937,466 |
|
|
937,466 |
|
Notes
payable to related parties |
|
|
259,894 |
|
|
259,894 |
|
|
259,894 |
|
|
259,894 |
|
Total
Long-term liabilities |
|
|
1,197,360 |
|
|
1,197,360 |
|
|
1,197,360 |
|
|
1,197,360 |
|
Proceeds
received prior to the issuance of preferred stock |
|
|
310,900 |
|
|
310,900 |
|
|
310,900 |
|
|
310,900 |
|
Stockholders’
equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock — par value $.0001 per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorized —
50,000,000 shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
and outstanding — 4,726,091 shares |
|
|
472 |
|
|
492 |
|
|
572 |
|
|
672 |
|
Additional
paid-in capital |
|
|
2,429,824 |
|
|
2,949,841 |
|
|
5,804,841 |
|
|
9,354,841 |
|
Accumulated
deficit |
|
|
(
1,708,823 |
) |
|
(
1,708,823 |
) |
|
(
1,708,823 |
) |
|
(
1,708,823 |
) |
Total
stockholders’ equity |
|
|
721,473 |
|
|
1,241,510 |
|
|
4,096,590 |
|
|
7,646,690 |
|
Total
Capitalization |
|
$ |
3,628,060 |
|
|
4,148,097 |
|
|
7,003,177 |
|
|
10,553,277 |
|
DILUTION
Our net tangible book value at June 30, 2004 was $(149,829), or $(0.03) per
share. Our net tangible book value per share is determined by subtracting the
total amount of our liabilities from the total amount of our tangible assets and
dividing the remainder by the weighted average number of shares of our common
stock outstanding.
The as adjusted net tangible book value after this offering will be $6,755,188,
after deducting estimated expenses of this offering, or $1.01 per share, if all
the shares in this offering are sold at an assumed offering price of
$4.00 per share. Therefore, purchasers of shares of common stock in this
offering will realize a minimum dilution of $2.99 per share, or about 75%
of their investment. If fewer than all shares offered hereby are sold, the
dilution will be greater. The following table illustrates this dilution,
assuming 200,000 shares are sold, 1,000,000 shares are sold, and
2,000,000 shares in this offering are sold:
|
|
If
200,000 Shares are Sold |
|
If
1,000,000 Shares are Sold |
|
If
2,000,000 Shares are Sold |
|
Offering
Price per Share |
|
$ |
4.00 |
|
$ |
4.00 |
|
$ |
4.00 |
|
Net
tangible book value per common share at June 30, 2004 |
|
|
(0.03 |
) |
|
(0.03 |
) |
|
(0.03 |
) |
Increase
per common share attributable to new investors |
|
|
0.11 |
|
|
0.59 |
|
|
1.04 |
|
Net
tangible book value per share of common stock after the
offering |
|
|
0.08 |
|
|
0.56 |
|
|
1.01 |
|
Dilution
per share of common stock to new investors |
|
$ |
3.92 |
|
$ |
3.44 |
|
$ |
2.99 |
|
During the five years prior to the date of the prospectus, we sold shares of
common stock for prices ranging from $1.00 to $4.00 per share.
Additional dilution, not reflected in the foregoing table, will result to the
extent that outstanding options and warrants to purchase our common stock are
exercised or convertible debt or our Series A convertible preferred stock
is converted into shares of our common stock. As of June 30, 2004, we had
outstanding options and warrants to purchase an aggregate of 921,376 shares
of common stock at a weighted average exercise price of $2.04 per share.
We have not issued and will not issue options or warrants with an exercise price
less than 85% of the fair market value of the underlying common stock on the day
of the grant.
As of June 30, 2004, we had outstanding an aggregate $238,022 of
convertible debt, including accrued and unpaid interest, to purchase an
aggregate of 118,261 shares of common stock at a weighted average exercise
price of $2.13 per share. In October 2004, $255,000 of debt was converted
into 25,500 shares of Series A convertible preferred stock. In October
2004, we also issued 33,790 shares of Series A convertible preferred
stock to investors who purchased such shares for $10.00 per share. Each
share of our Series A convertible preferred stock can be converted into
four shares of common stock, meaning that the aggregate of 59,290 shares of
Series A convertible preferred stock currently outstanding can be converted
into an aggregate of 237,160 shares of common stock, at a weighted average
price of $2.50 per share. Those issuances are not shown above, because
their effect is to increase the tangible book value per share and, therefore,
are not dilutive to purchasers of shares of common stock in this offering.
However, if the holders of Series A convertible preferred stock convert
such stock to common stock, such conversion would have a dilutive effect at such
time.
Comparative
Data
The
following charts illustrate the pro forma proportionate ownership of our common
stock upon completion of the Offering if 10%, 50%, and 100% of the Offering is
sold. These charts compare the relative amounts paid, net of Offering costs, by
the present shareholders and by investors in this Offering assuming no changes
in net tangible book value other than those resulting from the
Offering.
If
10% of
Offering
sold
(200,000
shares) |
|
|
(i)
(ii) Shares Purchased |
|
|
(i)(ii)
Percentage |
|
|
Total
Consideration |
|
|
(iii)(iv) Percentage |
|
|
Average
Price per Share Paid, net of Offering Costs |
|
Existing
Shareholders |
|
|
4,726,091 |
|
|
96 |
% |
|
2,430,296(1) |
|
|
82 |
% |
|
0.51 |
|
New
Investors |
|
|
200,000 |
|
|
4 |
% |
$ |
520,017 |
|
|
18 |
% |
$ |
2.60 |
|
Total |
|
|
4,926,091 |
|
|
100 |
% |
$ |
2,950,313 |
|
|
100 |
% |
|
|
|
If
50% of
Offering
sold
(1,000,000
shares) |
|
(v)
(vi) Shares Purchased |
|
(i)(ii)
Percentage |
|
Total
Consideration |
|
(vii)(viii) Percentage |
|
Average
Price per Share Paid, net of Offering Costs |
|
Existing
Shareholders |
|
|
4,726,091 |
|
|
83 |
% |
$ |
2,430,296(1) |
|
|
41 |
% |
$ |
0.51 |
|
New
Investors |
|
|
1,000,000 |
|
|
17 |
% |
$ |
3,375,017 |
|
|
59 |
% |
$ |
3.38 |
|
Total |
|
|
5,726,091 |
|
|
100 |
% |
$ |
5,805,313 |
|
|
100 |
% |
|
|
|
If
100% of
Offering
sold
(2,000,000
shares) |
|
(ix)
(x) Shares Purchased |
|
(i)(ii)
Percentage |
|
Total
Consideration |
|
(xi)(xii) Percentage |
|
Average
Price per Share Paid, net of Offering Costs |
|
Existing
Shareholders |
|
|
4,726,091 |
|
|
70 |
% |
$ |
2,430,296(1) |
|
|
26 |
% |
$ |
0.51 |
|
New
Investors |
|
|
2,000,000 |
|
|
30 |
% |
$ |
6,925,017 |
|
|
74 |
% |
$ |
3.46 |
|
Total |
|
|
4,926,091 |
|
|
100 |
% |
$ |
9,355,313 |
|
|
100 |
% |
|
|
|
____________
(1) Based on
the capital contribution from inception to June 30, 2004
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our
consolidated financial statement and related notes included elsewhere in this
prospectus. Except for historical information, the following discussion and
analysis contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. See “Forward Looking Statements,”
beginning at page 8 of this prospectus.
Overview
We develop, manufacture, market, and sell “alternative” or “New Age” beverages
and assorted foods. We currently manufacture, market and sell six unique product
lines:
We currently distribute and sell our products through a network of natural,
gourmet, and independent distributors, as well as through our growing in-house
direct sales and distribution team, throughout the United States and, to a
lesser extent, in Canada. In 2003, we implemented direct sales to several large
national retail accounts. These accounted for approximately 19% of our sales in
2003 and approximately 22% of our sales in 2004. In addition, in 2003 we created
our own distribution system in southern California. This accounted for
approximately 1% of our sales in 2003 and approximately 4% of our sales in 2004.
The following table shows a breakdown of the sales with respect to distribution
channel.
Distribution
Channel |
|
2003
sales |
|
Percentage
sales |
|
2004
sales |
|
Percentage
sales |
|
Direct
sales to large retailers |
|
$ |
1,286,365 |
|
|
19 |
% |
$ |
1,983,598 |
|
|
22 |
% |
Our
local direct distribution |
|
$ |
90,121 |
|
|
1 |
% |
$ |
395,601 |
|
|
4 |
% |
Natural,
Gourmet and Mainstream distributors |
|
$ |
5,405,290 |
|
|
80 |
% |
$ |
6,720,801 |
|
|
74 |
% |
Total |
|
$ |
6,781,776 |
|
|
100 |
% |
$ |
9,100,000(1 |
) |
|
100 |
% |
Notes:
(1)
estimated 2004 sales
New products, or SKUs, that we launched in 2003 include a 5-liter “party keg”
version of our Virgil’s Root Beer and Virgil’s Cream Soda in 12-ounce long neck
bottles. Both of these high-margin items continue to contribute to growth of our
sales for 2003 and 2004.
In 2003, we expanded our marketing from our historical focus on natural and
gourmet foods to include more mainstream markets. These efforts include selling
our products directly to accounts, primarily Costco, BJ Wholesale, and Cost
Plus World Markets. In addition, through our current North American natural and
gourmet distributors, we have focused sales to the natural food section of
mainstream supermarket chains. This has resulted in our products now being sold
in Safeway, Kroger’s and numerous other national supermarket chains. Our local
distribution in southern California is placing our products directly into
accounts locally, including Ralph’s, Bristol Farms, and many independent
accounts.
We gauge the financial success of our company by a number of different
parameters. Because our industry typically values companies on a top-line basis,
one of our main company goals is to increase net sales. We continue to increase
net sales each year. Net sales have increased from $6.2 million in 2001 to
$6.4 million in 2002 to $6.8 million in 2003 and are on track for
further year-over-year growth in 2004. We believe that the increase in net sales
comes from three sources: successes in our new local distribution, increases in
our core business and our new direct sales to large retailers.
Almost as important as increasing our net sales are increasing our gross
margins. We continue to work to reduce costs related to production of our
products. In 2002, we purchased and outfitted a West Coast production facility,
the Brewery, in part to help reduce both production costs and freight costs
associated with our West Coast sales. Gross profits declined after the
construction of the Brewery. Gross margins decreased from 24.8% in 2002 to 19.5%
in 2003, and remained at 19.4% for the first six months of 2004. We believe that
the inefficiencies commensurate with a start-up period for the Brewery have been
a principal cause of the decline of our gross margins since the Brewery’s
acquisition. We expect gross margins to begin increasing in the second half of
2004, as the Brewery attains greater functionality and efficiencies. As the
Brewery continues to become more fully operational, we believe that we will see
greater margin improvements due to freight and production savings. The following
table shows the progress of productions at the Brewery and the savings being
generated:
Year |
|
Cases
of candy produced at new brewery |
|
Production
savings candy ($) |
|
Cases
of beverages produced at new brewery |
|
Freight
savings
beverages
($) |
|
Total
savings ($) |
|
2002 |
|
|
0
|
|
$ |
0 |
|
|
0
|
|
$ |
0 |
|
$ |
0 |
|
2003 |
|
|
33,514 |
|
$ |
33,514 |
|
|
16,835 |
|
$ |
22,390 |
|
$ |
55,904 |
|
2004
|
|
|
31,278 |
|
$ |
31,278 |
|
|
113,816 |
|
$ |
151,372 |
|
$ |
182,650 |
|
In addition, through the Brewery, we have increased our capability to offer
specialty beverage packaging options not typically available in the marketplace,
such as our new 5-liter party keg line and our new 750 ml. champagne bottle
line. We also intend to continue to work at keeping the growth of general and
administrative and selling expenses lower, in order to improve our
profitability.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main challenges, trends, risks, and opportunities that could impact or are
impacting our financial results include but are not limited to:
Fuel
Prices -
As oil prices continue to rise, our freight rates, which run at approximately 8%
of net sales, have been increasing. We currently see freight rates increasing by
an additional 5% to 10% in the near term. On the other hand, we expect that the
Brewery will counter this trend, at least in part, by reducing our need for
cross-country freight services.
Low
Carbohydrate Diets and Obesity -
Consumers have been demanding lower carbohydrate products. This trend does not
seem to have affected our sales growth in 2004. We are watching this trend
closely and have started developing low-carbohydrate versions of some of our
beverages.
Distribution
Consolidation -
The trend towards continued consolidation of the beverage distribution industry
through mergers and acquisitions has inspired us to start our own direct
distribution locally in southern California and to go to large national
retailers. Consolidation among natural foods industry distributors has not had
an affect on our sales. However, this consolidation may limit the distributor
options outside natural foods to service mass-market food accounts.
Consumer
Demanding More Natural Foods -
The rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has shifted to products not only to
using more natural ingredients but to add ingredients with a perceived positive
function such as vitamins, herbs and other nutrients. Our products are designed
with this consumer demand in mind, also.
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 supermarkets through out the United
States. Supermarkets can require more advertising monies to be spent and
sometimes require slotting fees. We continue to work to keep these fees
reasonable. The natural food section of the supermarket is generally not as
expensive as other areas from a slotting fee perspective. See the “Business”
section regarding supermarket marketing.
Beverage
Packaging Changes -
Beverage packaging have continued to innovate. 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. See the business section for new product
developments.
Cash
Flow Requirements -
Growth of our company will depend on the availability of additional capital
infusions to finance. 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. Our margins are tight and our operations are currently
breaking even on a cash flow basis. Any change in costs of goods will further
increase losses and will further tighten cash reserves. We feel that we could
raise prices to offset this problem if it occurs. We haven’t increased our
prices since inception and we feel that the market has been increasing in terms
of beverage prices in the last ten years.
Packaging
or Raw Material Price Increases -
An increase in packaging or raw materials could be adverse to our cash flow and
income. We have not had a significant increase in any of these costs for many
years but the effect of the US dollars value dropping with respect to other
major world currencies and rising fuel prices could possibly increase costs of
the raw materials and packaging making up the cost of goods manufactured. We
continue to search for packaging and production alternatives to reduce our cost
of goods.
Critical
Accounting Policies
Our consolidated 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 consolidated financial statements including various allowances and
reserves for accounts receivable and inventories, the estimated lives of
long-lived assets and trademarks and trademark licenses, as well as claims and
contingencies arising out of litigation or other transactions that occur in the
normal course of business. The following summarize our most significant
accounting and reporting policies and practices:
Trademark
License and Trademarks. Trademark
license and trademarks primarily represent the costs we pay for exclusive
ownership of the Reed’s® trademark in connection with the manufacture, sale and
distribution of beverages and water and non-beverage products. We also own the
Virgil’s® trademark and the China Cola® trademark. In addition, we own a number
of other trademarks in the United States as well as in a number of countries
around the world. During 2002, we adopted SFAS No. 142, Goodwill, and Other
Intangible Assets. Under the provisions of SFAS No. 142, we discontinued
amortization on indefinite-lived trademark licenses and trademarks while
continuing to amortize remaining trademark licenses and trademarks over one to
25 years.
In accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks annually 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 annual
impairment analysis performed in the fourth quarter of 2003 and our analysis of
the trademark license and trademarks for the quarter ended June 30, 2004,
the estimated fair values of trademark license and trademarks exceeded the
carrying value.
Long-Lived
Assets. Our
management regularly reviews property, equipment and other long-lived assets,
including identifiable amortizing intangibles, for possible impairment. This
review occurs annually 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. Annually, 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 as of June 30, 2004.
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 consolidated 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.
In estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising
and Promotional Allowances. We
account for advertising production costs by expensing such production costs the
first time the related advertising is run.
Accounts
Receivable. We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding.
Inventories.
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory or
the current estimated market value of the inventory. We regularly reviews our
inventory quantities on hand and records a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or our
ability to sell the product(s) concerned and production requirements. Demand for
our products can fluctuate significantly. Factors that could affect demand for
our products include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in cancellations of advance
orders or a reduction in the rate of reorders placed by customers. Additionally,
our management’s estimates of future product demand may be inaccurate, which
could result in an understated or overstated provision required for excess and
obsolete inventory.
Income
Taxes. Current
income tax expense is the amount of income taxes expected to be payable for the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income and
ongoing, prudent, and feasible tax planning strategies, in assessing the value
of our deferred tax assets. If our management determines that it is more likely
than not that these assets will not be realized, we will reduce the value of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income in
the period when that determination was made.
Recent
Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 46, “Consolidation of Variable Interest Entities”, an
interpretation of Accounting Research Bulletin (“ARB”) No. 51 “Consolidated
Financial Statement.” In December 2003, the FASB issued a revised version
of FIN 46 (FIN 46R) that replaced the original FIN 46.
Interpretation No. 46R addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through other interest that will
absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest, the direct or indirect ability to make decisions
about the entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected loss.
Interpretation No. 46R also requires expanded disclosures by the primary
beneficiary (as defined) of a variable interest entity and by an enterprise that
holds a significant variable interest in a variable interest entity but is not
the primary beneficiary. Interpretation No. 46 as revised, applies to small
business issues no later than the end of the first reporting period that ends
after December 15, 2004.
This effective date includes those entities to which Interpretation No. 46R had
previously been applied. However, prior to the required application of
Interpretation No. 46R, a public entity that is a small business issuer shall
apply Interpretation No. 46R or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003.
Interpretation No. 46R may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In June 2003, the FASB issued an Exposure Draft for a proposed statement of
financial accounting standards (“SFAS”) entitled “Qualifying Special Purpose
Entities (“QSPE”) and Isolation of Transferred Assets”, an amendment of
SFAS No. 140 (“The Exposure Draft”). The Exposure Draft is a proposal that
is subject to change and as such is not yet authoritative. If the proposal is
enacted in its current form, it will amend and clarify SFAS 140. The
Exposure Draft would prohibit an entity from being a QSPE if it enters into an
agreement that obligated a transferor of financial assets, its affiliates, or
its agents to deliver additional cash or other assets to fulfill the
special-purposes entity’s obligation to beneficial interest holders.
In April 2003, the FASB issued SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.”
SFAS No. 149 amends and clarifies financial accounting reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The changes in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. This statement is effective for contracts entered into
or modified after June 30, 2003 and all of its provisions should be applied
prospectively.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.”
SFAS No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer’s accounting for three types of
freestanding financial instruments. One type is mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange for cash and
other assets. A second type includes put options and forward purchase contracts,
which involves instruments that do or may require the issuer to buy back some of
its shares in exchange for cash or other assets. The third type of instruments
that are liabilities under this Statement is obligations that can be settled
with shares, the monetary value of which is fixed, tied solely or predominantly
to a variable such as a market index, or varies inversely with the value of the
issuer’s shares.
SFAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirely. Most of the provisions of
SFAS No. 150 are consistent with the existing definition of liabilities in
FASB Concepts Statement No. 6, “Elements of Financial Statements.” The remaining
provisions of this SFAS are consistent with the FASB’s proposal to revise that
definition to encompass certain obligations that a reporting entity can or must
settle by issuing its own shares. This SFAS shall be effective for financial
instruments entered into or modified after May 31, 2003 and otherwise shall
be effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial instruments of a
non-public entity, as to which the effective date is for fiscal periods
beginning after December 15, 2003.
We do not believe that the adoption
of the above recent pronouncements will have a material effect on our
consolidated financial position or results of operations.
Results
of Operations
Six
Months Ended June 30, 2004 Compared to Six Months Ended June 30,
2003 |
|
Net
sales increased by $1,232,918, or 37.8%, from $3,262,426 in the first six months
of 2003 to $4,495,344 in the first six months of 2004. This increase was
primarily a result of sales growth of existing products (16.6%) and the
introduction of new products (21.2%). Existing product growth came from the
Virgil’s Root Beer 12 ounce bottle sales (6.3%) and from the core Reed’s Ginger
Brew products (10.3%) consisting of Reed’s Original, Reed’s Extra and Reed’s
Premium Ginger Brew. While we keep limited data on the following, we believe
these existing product sales increases were due to increased sales in existing
outlets and the expansion of the number of outlets carrying these product. New
product growth came from the 5 liter Virgil’s Root Beer party keg (16.2%) and
from the new Virgil’s Cream Soda launch (5.0%). These new product launches did
not employ any special promotional discounts above and beyond our normal
promotional activity for any of our products. Sales on these new items have
continued to be steady and growing. We expect
net sales to continue to increase due to the addition of several large new
customers and the sales increases from both new and existing products. Sales
have been increasing due to the increased sales efforts from the expansion of
our sales force.
As
a percentage of net sales, gross profit decreased from 22.4% in the first six
months of 2003 to 19.4% in the first six months of 2004. This decrease was
primarily the result of inefficiencies with the start-up of the Brewery (0.9%),
increased freight costs related to fuel costs increases and the colder winter
caused by the need to have more freight shipped by more expensive, and
temperature controlled trucks to avoid freezing product (2.1%). We expect to see
improvements in the gross margin even though fuel prices will be driving down
the gross margin. We expect this to be offset by the continued increase of west
coast productions reducing our use of cross-country freight..
Selling expenses increased by $44,995, or 15.4%, from $291,283, in the first six
months of 2003, to $336,278 in the first six months of 2004, and decreased as a
percentage of net sales from 8.9% in the first six months of 2003, to 7.5% in
the first six months of 2004. The increase in selling expenses was primarily
attributable to the increase in the sales force (7.1%) and increased advertising
and promotional expenses (8.8%). We expect to continue to increase the selling
expenses due to the expected increases in the size of our sales force. We do not
expect to see an increase in the current level of advertising and promotional
expenses in the near term. We expect the trend of selling expenses as a
percentage of net sales to continue to decrease or stay steady by design.
General and administrative expenses increased by $74,267, or 19.3%, from
$385,056 in the first six months of 2003 to $459,323 in the first six months of
2004, and decreased as a percentage of net sales from 11.8% in the first six
months of 2003 to 10.2% in the first six months of 2004. The increase is
primarily attributable to increased payroll expenses due to increases in staff
to handle the growth in our operations. We do not expect to see additional
increases in general and administrative expenses in the near term and expect the
percentage of net sales to continue to decrease.
Interest expense decreased from $128,152 in the first six months of 2003, to
$114,013 in the first six months of 2004. This decrease is primarily
attributable to the fact that we had lower interest expenses in the first six
months of 2004 due to refinancing its receivable line of credit at lower
interest rates with a new lender, Bay Business Credit. We expect our interest
expenses to stay approximately steady. Our borrowings have increased but this is
offset by some of our debt holders converting their debt to preferred stock. In
addition, in 2003, we expensed $426,546 for a public offering of our common
stock, which offering was withdrawn. The public offering was filed on October
25, 2001 and was withdrawn on March 26, 2003 and we did not complete the
offering. The offering became effective on December 31, 2002. We had a
nine-month window to sell shares and because the initial stock sales were slow
and the stock market was depressed due to the Iraq war we withdrew the offering.
Twelve
Months Ended December 31, 2003 Compared to Twelve Months Ended
December 31, 2002 |
|
Net sales increased by $353,034, or 5.5%, from $6,428,742 in 2002 to $6,781,776
in 2003. The net sales increase was primarily the result of sales growth of
existing products in existing accounts (3.7%), and the new products (1.8%).
Existing product growth came from the Virgil’s Root Beer 12 ounce bottle sales
(1.8%) and from the core Reed’s Ginger Brew products (1.9%) consisting of Reed’s
Original, Reed’s Extra and Reed’s Premium Ginger Brew. While we keep limited
data on the following, we believe these existing product sales increases were
due to increased sales in existing outlets and the expansion of the number of
outlets carrying these product. New product growth came from the 5 liter
Virgil’s Root Beer party keg (1.8%). This new product launch did not employ any
special promotional discounts above and beyond our normal promotional activity
for any of our products. Sales of this new item has continued to be steady and
growing
Selling expenses increased by $79,296 or 13.7% from $578,964 in 2002 to $658,260
in 2003 and increased as a percentage of net sales from 9.0% in 2002 to 9.7% in
2003. The increase in selling expenses was primarily due to an increased use of
outside food brokers (6.4%) and the increased size of the direct hired sales
force (7.3%)
General and administrative expenses increased by $395, from $757,863 in 2002 to
$758,258 in 2003 and decreased as a percentage of net sales from 11.8% in 2002
to 11.2% in 2003. Accounting expenses decreased from 2002 to 2003 (-12.1%). This
is primarily due to the fact that we incurred significant accounting expenses in
2002 in connection with the preparation of a registration statement for a public
offering of common stock, which was filed in 2002; that registration statement
was later withdrawn. In 2003, utilities increased (4.9%) and insurance increased
($4.0%) due to the opening of our West Coast facility. In addition, recycling
fees increased in 2003 over 2002 (3.3%).
Interest expense was $250,738 in 2003, compared to interest expense of $309,594
in 2002. We had lower interest expenses in 2003 due to refinancing our
receivable line of credit at lower interest rates with a new lender, Bay
Business Credit. In addition, in 2003, we expensed $426,546 for a public
offering of our common stock, which offering was withdrawn. The public offering
was filed on October 25, 2001 and was withdrawn on March 26, 2003 and we did not
complete the offering. The offering became effective on
December
31, 2002. We had a nine-month window to sell shares and because the initial
stock sales were slow and the stock market was depressed due to the Iraq war we
withdrew the offering.
Liquidity
and Capital Resources
Historically, we have financed our operations primarily through private sales of
common stock and convertible debt, a line of credit from a financial institution
and cash generated from operations.
As
of June 30, 2004, we had a working capital deficit of $355,246, compared to
a working capital deficit of $589,659 as of December 31, 2003. This
decrease in our working capital deficit was primarily attributable to increased
cash, accounts receivable, and inventory and an increase in accounts payable.
Our cash increased primarily from proceeds received prior to the issuance of
preferred stock. Our accounts receivable increased as a result of sales
increasing in May and June and slightly slower collections of accounts
receivable. The increase in receivables was due to an approximately $350,000 new
customer order and a promotion run with a new marketing program. The average
monthly sales for the first four months of 2004 were approximately $600,000.
Sales in May were $1,200,000 and $930,000 in June. We anticipate sales to
increase as result of increased sales efforts. We do not expect collections of
receivables to slow significantly. Approximately $400,000 of the increase in
accounts payable resulted from the increase in sales during May and June. The
other approximately $190,000 of increase in accounts payable resulted from an
increase in operating expenses.
As of June 30, 2004, cash was $173,075, compared to $12,930 as of
December 31, 2003. Net cash used in operating activities was approximately
$247,427 for the six months ended June 30, 2004, primarily due to an
increase in the receivables and inventory, offset by an increase in accounts
payable. We used $57,214 in investing activities for the six months ended
June 30, 2004, primarily for the purchase of equipment for our West Coast
Brewery. Cash flow from financing activities was $464,786 for the six months
ended June 30, 2004 as a result of increased borrowing from our line of
credit and the collection of $310,900 of net proceeds in connection with our
offering of preferred stock in 2004.
Our trade accounts receivable, net, was $1,329,729 at June 30, 2004, an
increase of $763,672 (134.9%) over our accounts receivable, net, of $566,057 at
December 31, 2003. The increase in accounts receivable was due primarily to
an increase in sales and not to any change in our credit policy. While overall
sales grew at by 37.8%, June 2004 was a particularly robust month and created
the very high receivables. We do not expect this high level to be sustained in
the near term.
Of the aggregate principal amount of $420,000 that we borrowed from various
investors in 2001 with an interest rate of 8% and which loans have an extended
maturity date in October 2004, we repaid $116,000 on or before June 30,
2004, $224,000 ($255,000 including interest) was converted into shares of
Series A preferred stock in October 2004 and $80,000 remains outstanding.
The remaining debt holders have signed extensions of their notes with a new
maturity of June 21, 2006. In consideration for this extension, these note
holders have been granted an interest rate increase to 10% from 8% effective
retroactively to June 30, 2004.
We do not have any current material commitments for capital expenditures.
On June 25, 2004, we renewed our credit facility with Bay Business Credit.
The credit facility consists of a one-year revolving line of credit of up to
$1,100,000, which expires on June 25, 2005. The amount available for
borrowing from time to time under the revolving line of credit is dependent upon
the levels of certain eligible accounts receivable and inventory. As of
June 30, 2004, we had an outstanding balance of $931,989 under the line of
credit, based on eligible accounts receivable and inventory at that time.
Borrowings under the credit facility bear interest at the prime rate plus
9% per annum (13.0% as of June 30, 2004).
This revolving line of credit is secured by all of our assets, including
accounts receivable, inventory, trademarks and other intellectual property, and
equipment. The credit facility does not impose any financial covenants on us.
On December 11, 2000, we borrowed $748,000 from the U.S. Bank National
Association, guaranteed by the U.S. Small Business Administration, which we used
to finance the purchase of the Brewery. At the same time, we borrowed $168,000
from U.S. Bank National Association, guaranteed by the U.S. Small Business
Administration, which we used to make improvements at the Brewery. The interest
for these loans is prime plus 1% (5.0% as of June 30, 2004), and the loans
mature in 25 years. Our founder and CEO, Christopher J. Reed, has
personally guaranteed these loans. Payments under the loans are current.
In the second quarter of 2004, we began a private placement of Series A
convertible preferred stock. We raised $337,900 ($310,900, net of offering
expenses), from the sale of 33,790 shares of Series A convertible
preferred stock and a number of our debt holders converted an aggregate of
approximately $255,000 of debt to 25,500 shares of Series A preferred
stock. As of June 30, 2004, the necessary filings to create the
Series A preferred stock under Delaware law had not yet been completed.
Therefore, these amounts are shown as debt on our balance sheet at such date but
will be reclassified when the Series A preferred stock is actually issued.
On September 24, 2004, we obtained a line of credit in the amount of
approximately $280,000 with Merrill Lynch. The loan was co-signed by
Robert T. Reed, Jr., our Vice President and National Sales
Manager — Mainstream and a brother of our founder and CEO,
Christopher J. Reed. Robert Reed also pledged his stock account at Merrill
Lynch as collateral. The line of credit bears interest at a rate of rate of
3.785% plus LIBOR (5.815% as of October 28, 2004). In consideration for Mr.
Reed’s pledging his stock account at Merrill Lynch as collateral, we pay Mr.
Reed 5% per annum of the amount we borrow from Merrill Lynch. See “Certain
Relationships and Related Transactions.”
On September 28, 2004, we obtained a loan for $150,000 from Bay Business
Credit secured by certain plant equipment. This loan bears interest at prime
plus 10% (14.75% as of October 28, 2004) and matures in October 2007.
On January 14, 2004, we obtained a loan for $41,000 from Bay Business Credit
secured by certain plant equipment. This loan bears interest at prime plus 10%
(14.75% as of October 28, 2004) and matures in October 2007.
During the next six months, we expect to reduce our raw materials inventory by
approximately $150,000. . We built up this inventory by purchasing beverage
bottles in a foreclosure proceeding of an unrelated party. We expect the Brewery
to start utilizing this glass inventory in the fourth quarter of 2004.
As a result of our cash reserves and the combination of the recent private stock
offering and new borrowings, we believe that we have adequate resources to fund
our operations, without implementing most of our business expansion plan, for at
least the next 12 months.
Inflation
Although management expects that our operations will be influenced by general
economic conditions, we do not believe that inflation has a material effect on
our results of operations.
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of this page left blank intentionally)
BUSINESS
Background
We are a growing developer, manufacturer, marketer, and seller of New Age
beverages, as well as candies and ice creams. New Age beverages is a category
that includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks, and water.
We currently offer 14 beverages, including six varieties of Reed’s Ginger Brews,
Virgil’s Root Beer and Cream Soda, China Cola and Cherry China Cola, and four
varieties of a new line of non-carbonated ginger brews called Reed’s Ginger
Juice Brews. Our recent products include Reed’s Crystallized Ginger Candy,
Reed’s Crystallized Ginger Baking Bits, Reed’s Ginger Candy Chews, Reed’s
Original Ginger Ice Cream, Reed’s Chocolate Ginger Ice Cream, and Reed’s Green
Tea Ginger Ice Cream.
We sell the majority of our products primarily in upscale gourmet and natural
food stores and supermarket chains in the United States and, to a lesser degree,
in Canada. Historically, most of our beverages were sold in the natural food
industry.
Our current business strategy is to maintain a firm marketing focus in the
natural food marketplace while building a national direct sales and distribution
force to take our proven products into mainstream market and distribution
channels. Key elements of our business strategy include:
· |
increased
direct sales and distribution; |
· |
increased
store placement in mass market; |
· |
strong
national distributor relationships; |
· |
stimulating
strong consumer demand for our existing brands and products;
|
· |
developing
additional unique alternative beverage brands and other products; and
|
· |
specialty
packaging like our 5-liter party kegs, our ceramic swing-lid bottle and
our 750 ml. champagne bottle. |
Our current sales efforts are focused in three areas. Our first area of focus is
sales to natural and specialty food stores in the United States and, to a lesser
degree, Canada, through our regional sales people in conjunction with regional
food brokerage organizations. The second area of focus is our local direct store
distribution program, using Company-owned trucks and drivers to service a
majority of our retail accounts in southern California. The third area of focus
is our sales effort selling directly to large retailers and to mainstream
beverage distributors. We believe that all three sales efforts are contributing
to our growth. We intend to continue to expand our sales personnel in each of
these three sales efforts.
We are developing new packaging options of our most successful products. These
new packaging options are 750 ml. champagne bottle versions, European swing
lid-style bottles, and 5-liter party kegs. These new packaging options are being
utilized in all three sales efforts.
We create consumer demand for our products in the following ways: we support
sampling programs of our products that sample approximately 30,000 people a
week, we generate free press through our in house public relations, we advertise
in national magazines targeting our customers, we maintain a company website and
we participate in large public events as sponsors.
In addition, our Brewery recently started contracting, or co-packing, production
for other companies’ products, although this is a small part of our business. We
do not maintain product recall insurance at the Brewery. Generally, we believe
that we maintain adequate insurance coverage for our business as it is currently
conducted.
Our business expansion plans are contingent to a great extent by the success of
this offering. If all or most of the shares being offered hereby are sold, we
will be able to increase substantially our marketing, advertising and
distribution, as well as the number of products we offer. If only a smaller
number of shares are sold, we will need to expand at a much slower rate.
Our principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our
Internet address is www.reedsgingerbrew.com.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
We were incorporated in 1991 in Florida as Original Beverage Corporation. In
October 2001, we changed our state of incorporation to Delaware and also changed
our name to Reed’s, Inc.
Historical
Development
In
June 1987, Christopher J. Reed, our founder and CEO, began development of Reed’s
Original Ginger Brew, his first beverage creation. After two years of
development, it was ready for market in June 1989. Initial sales were in 11
southern California stores.
By 1990, we brought on the next three natural food distributors. Production
moved to a larger facility in Boulder, Colorado. In 1991, we moved all of our
production to our co-pack facility in Pennsylvania. We began exhibiting at the
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.
Sales topped $500,000.
Also in 1991, the United States National Association of the Specialty Food
Trade, or NASFT, and the Canadian Fancy Food Association, or CFFA, both gave us
top honors as a new product that year. CFFA awarded us “Best Imported Food
Product at their annual show and Original Ginger Brew was a NASFT “Outstanding
Beverage Finalist” in the United States.
Throughout the 1990’s, we continued to develop and launch new ginger brew
varieties. Reed’s Ginger Brews reached broad placement in natural foods stores
nationwide. The major natural food distributors and many specialty food and
mainstream beverage distributors started carrying our beverages. In 1997, we
began licensing the products of China Cola. In addition, we launched Reed’s
Crystallized Ginger Candy. We have the candy manufactured in Fiji under a
proprietary, natural, non-sulfured process.
In 1999, we purchased the Virgil’s Root Beer brand from Crowley Beverage
Company. The brand has won numerous gourmet awards. Because the Virgil’s brand
is partially produced under our auspices in Europe, this purchase also secured
our entry into the European Union for our entire line of products.
In connection with our acquisition of China Cola in 2000, we agreed to pay the
seller royalties equal to $0.75 per case sold. The minimum payments per
agreement year were $18,750 and the royalties expired on July 1, 2002.
Also in 2000, we launched Reed’s Original Ginger Ice Cream and two more
products: Reed’s Cherry Ginger Brew and a beautiful designer 10-ounce gift tin
of our Reed’s Crystallized Ginger Candy. In December 2000, we acquired China
Cola. Our sales broke through the $5 million level, reaching
$5.7 million that year.
In December 2000, we also purchased an 18,000 square foot warehouse
property, the Brewery, to house our West Coast production facility. The Brewery
now also houses our executive offices and serves as our southern California
warehouse facility.
In 2001, we saw the national launch of Reed’s Chocolate Ginger Ice Cream and
Reed’s Green Tea Ginger Ice Cream. We also expanded our confectionary line with
two new candy products: Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger
Candy Chews.
In 2002, we launched our Reed’s Ginger Juice Brew line, with four flavors of
organic juice blends. In November, we completed our first test runs of Reed’s
and Virgil’s products at the new Brewery and in January 2003, our first
commercially available products came off the Los Angeles line.
In
2001, we filed a registration statement on Form SB-2 offering 3,000,000 shares
at $6.00 through Blue Bay Capital Corp., which was declared effective by the SEC
on December 31, 2002. We withdrew that Registration Statement in March,
2003 in response to our analysis of capital market conditions in the economic
climate surrounding the 2003 Iraq War. All moneys collected were
returned.
We launched our own direct distribution in Los Angeles in April 2003. In its
first year, it has successfully opened hundreds of new accounts in stores that
represent a completely new phase of expansion for our sales and distribution of
our products. These include successes in industrial foodservice, hospitals,
motion picture studios, local “mom and pop” groceries and mainstream supermarket
chains, both large and small. In November, we launched the 5-liter Virgil’s
party keg and sales for that single SKU reached $120,000 in the first month due
to large, initial orders for from Costco Club stores in San Diego, Arizona,
New England, and Texas. Market expansion in this area continues to accelerate.
In 2004, we launched Virgil’s Cream Soda, draft Virgil’s Root Beer, and draft
Cream Soda from the Brewery, with installations at the Getty Center in Los
Angeles, Fox Studios and other locations around Los Angeles. In May, our local
southern California direct sales effort landed direct distribution of our
products into Ralph’s supermarkets. In October 2004, we launched our two newest
products: Virgil’s Cream Soda in a 5-liter keg and Reed’s Spice Apple Brew in a
750 ml. champagne bottle.
Industry
Overview
Our beverages are classified as New Age beverages, a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks
and water. In just four years, manufacturers’ sales of New Age beverages
ballooned from $8 billion in 1998 to more than $13 billion in 2002.
This represents an average growth of more than 11% per year. In 2004,
dollar sales are expected to reach $15 billion, reflecting average growth
of 7.4% from 2002. Estimates are that sales will reach more than
$18 billion by 2008. (Source: Business Trends Analysts) The Alternative
Beverage category is a small portion of the non-alcoholic beverage market, which
has annual sales in excess of $80 billion.
The candy industry in the United States exceeds $23 billion in sales
annually in 2003, of which approximately 40% is non-chocolate candy. The average
American consumes over 25 pounds of candy per year. (Source: National
Confectioners Association)
The ice cream industry in the United States generates more than $20 billion
in annual sales in 2003. (Source: International Dairy Foods Association and the
United States Dairy Association) The packaged ice cream industry includes
economy, regular, premium, and super-premium products.
Super-premium ice cream such as Reed’s Ginger Ice Creams is generally
characterized by a greater richness and density than other kinds of ice cream.
This higher quality ice cream generally costs more than other kinds and is
usually marketed by emphasizing quality, flavor selection, texture and brand
image. Based on supermarket sales, super-premium sales in the United States were
$700 million in 2003, or approximately 3.5% of all ice cream sales.
(Source: AC Nielsen Scan Trak) The highest supermarket sales increases in
2003 were seen by the premium and super-premium higher fat varieties. Sales of
super-premium ice cream grew by more than 12% in 2003 over 2002. (Source:
International Dairy Foods Association)
Our
Products
We currently manufacture and sell 14 beverages, two candies, and three ice
creams. All of our products are made using premium all-natural ingredients.
According to Spence Information Services (SPINS), which is the only sales
information service catering to the natural food trade; Reed’s Brews and
Virgil’s Root Beer currently hold three of the top ten positions based on dollar
sales among all beverages in the natural foods industry with Reed’s Extra Ginger
Brew holding the number 1 position in the chart.
Our products include:
Beverages
Reed’s
Ginger Brews
Why ginger? We have found friends and advocates among alternative, holistic,
naturopathic, and homeopathic medical practitioners, dieticians and medical
doctors. This is because our beverages contain a high volume of ginger. A number
of practitioners have contacted us of their own accord, telling us of their
habit of recommending Reed’s Extra Ginger Brew for their patients as a simple
way to ingest a known level of ginger. Reed’s Ginger Brews contain between eight
and 26 grams of fresh ginger in every 12-ounce bottle.
While we make no claim as to any medical or therapeutic benefits of our
products, among the applications frequently cited in third-party medical studies
on ginger are:
· |
Recommended
use for prevention and relief of motion sickness,
|
· |
A
preferred alternative to aspirin in heart attack prevention,
|
· |
A
safe and effective alternative to pharmaceutical anti-ulcer drugs,
|
· |
Anti-inflammatory
treatment for arthritis, |
· |
Treatment
for a variety of digestive disorders, including both constipation and
diarrhea, |
· |
Natural
therapy for menstrual discomfort, nausea, colds and influenza, and
|
|
o |
University
of Minnesota Press and ePress (October, 2003), |
|
o |
Vegetarian
Times (Jan. 2004), |
|
o |
Hormel
Institute of Phoenix, AZ (Jan. 2004), |
|
o |
Common
Spice Or Wonder Drug (Herbal Free Press, 1993) |
The
United States Food and Drugs Administration (FDA) include Ginger on their GRAS
(generally recognized as safe) list, however, Neither the FDA nor any other
government agency officially endorses or recommends the use of ginger as a
dietary supplement.
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 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. We use no refined sugars as sweeteners. Our
products differ from commercial soft drinks in three particular characteristics:
sweetening, carbonation, and coloring. Reed’s Ginger Brews present 20% less
sweetness, 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 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.
We currently manufacture and sell six varieties of Reed’s Ginger Brews:
-
Reed’s
Original Ginger Brew was
our first creation, and is a Jamaican recipe for homemade ginger ale using
17 grams of fresh ginger root, lemon, lime, honey, fructose, pineapple,
herbs, and spices. Reed’s Original Ginger Brew is 20% fruit
juice.
-
Reed’s
Extra Ginger Brew is
the same approximate recipe, with 26 grams of fresh ginger root for a
stronger bite. Reed’s Extra Ginger Brew is 20% fruit juice.
-
Reed’s
Premium Ginger Brew is
the no-fructose version of Reed’s Original Ginger Brew, and is sweetened only
with honey and pineapple juice. Reed’s Premium Ginger Brew is 20% fruit
juice.
-
Reed’s
Raspberry Ginger Brew is
brewed from 17 grams of fresh ginger root, raspberry juice, and lime. It
is 20% raspberry juice and is sweetened with fruit juice and
fructose.
-
Reed’s
Spiced Apple Brew uses
8 grams of fresh ginger root, the finest tart German apple juice, and
such apple pie spices as cinnamon, cloves, and allspice. Spiced Apple Brew is
50% apple juice and sweetened with fruit juice and fructose.
-
Reed’s
Cherry Ginger Brew is
the newest addition to our Ginger Brew family, and is naturally brewed from:
filtered water, fructose, fresh ginger root, cherry juice from concentrate,
and spices. Reed’s Cherry Ginger Brew is 22% cherry
juice.
All six Reed’s Ginger Brews are offered in 12-ounce bottles are sold in stores
as singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold in select Costco stores in a special 12-pack. Reed’s Spiced Apple Brew is
now available in a 750 ml. champagne bottle.
Over the years, Virgil’s 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 NASFT’s International Fancy Food and Confection
Show three times, in 1994, 1996 and 1997. Bon
Apetít magazine
has also named Virgil’s Root Beer “Best Beverage.” Originally brewed in the
north of England, Virgil’s is now produced in the United States and
Germany.
Virgil’s is a premium root beer. We use these all-natural ingredients:
· |
Bourbon
vanilla from Madagascar |
· |
Cinnamon
from Sri Lanka |
· |
Sweet
birch and molasses from the southern United States
|
· |
Pimento
berry oil from Jamaica |
· |
Balsam
oil from Peru, and |
We collect these ingredients worldwide and gather them together at the brewing
and bottling facilities we use in the United States and Germany. At the
breweries, 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 three packaging styles: 12-ounce bottles in a
four-pack, a special ceramic-swing-lid Grolsch Beer-style pint bottle, and a
5-liter self-tapping party keg. We now make Virgil’s available in draft “pony
kegs” as well.
We launched Virgil’s Cream Soda in January 2004 and initial sales have been
strong. 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 use these all-natural
ingredients:
We brew Virgil’s Cream Soda the same way we brew Virgil’s Root Beer.
Virgil’s Cream Soda is currently being sold in 12-ounce long neck bottles in
colorful 4-packs and a 5-liter party keg version. We offer Virgil’s Cream Soda
in our draft format as well.
We
consider China Cola to be the best tasting and most natural cola in the world.
Now sweetened with raw cane, we restored China Cola to its original delicious
blend of 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
peony root,
-
cassia
bark,
-
Malaysian
vanilla,
-
oils
of lemon,
-
oil
of lime,
-
oil
of orange,
-
nutmeg,
-
clove,
-
licorice,
-
cardamom,
-
caramel
color,
-
citric
acid and
-
phosphoric
acid.
Cherry China Cola is made from the same ingredients as Original China Cola, with
the addition of natural cherry flavor.
China Cola and Cherry China Cola sell as singles, in four-packs and in 24-bottle
cases.
In May 2002, we launched a new line of ginger brews called Reed’s Ginger Juice
Brews. They are 100% juice products that are non-carbonated and brewed from
organic fresh ginger root and sweetened with organic juices. We did this in part
in response to a strong trend we have seen toward organic ingredients and
non-carbonated beverages in the marketplace. We wanted to extend our ginger brew
line and believe that these new flavors will cater to the growing market for
organic non-carbonated beverages.
All four of our Reed’s Ginger Juice Brews start with:
· |
organic
fresh ginger root, and |
· |
organic
white grape juice from concentrate. |
· |
Reed’s
Lemon Guava Ginger Juice Brew adds:
|
· |
guava
juice from concentrate, and |
· |
lemon
juice from concentrate. |
· |
Reed’s
Strawberry Kiwi Ginger Juice Brew adds:
|
· |
organic
strawberry juice from concentrate, and |
· |
organic
kiwi juice from concentrate. |
· |
Pineapple
Orange Ginger Juice Brew adds:
|
· |
organic
pineapple juice from concentrate, |
· |
organic
orange juice from concentrate, and |
· |
organic
limejuice from concentrate. |
· |
Reed’s
Cranberry Raspberry Ginger Juice Brew adds:
|
· |
cranberry
juice from concentrate, and |
· |
organic
raspberry juice from concentrate. |
Reed’s Ginger Juice Brews drinks come in a 16-ounce juice bottle as singles or
in cases of 12 and 24 bottles.
Under a license agreement, we previously sold six different types of Malibu
Teaz, a line of organic ready-to-drink teas and sweeteners. Under the license
agreement, profits were split equally between Malibu Teaz and us. In
2002, we
entered into discussions to purchase Malibu Teaz but no agreement was reached.
At the end of 2002, we decided not to renew the license and we stopped selling
Malibu Teaz products.
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 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 in large vats filled with simmering raw cane syrup. Steeping for several
days, 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, and 16-ounce re-sealable Mylar bags and in bulk. We also sell Reed’s
Crystallized Ginger Baking Bits in bulk.
Reed’s
Ginger Candy Chews |
For more than 100 years, residents of Southeast Asia from Indonesia to
Thailand have enjoyed soft, gummy ginger candy chews. Individually wrapped, ten
to a ‘Lucky Strike’ style soft-pack, Reed’s has taken them a step further,
adding more ginger, using no gelatin (vegan-friendly) and making them slightly
easier to unwrap than their Asian counterparts.
Reed’s Ginger Candy Chews are made for us in Indonesia from sugar, maltose (malt
sugar), ginger, and tapioca starch.
We sell Reed’s Ginger Candy Chews individually wrapped in soft-packs of ten
candies and as individually wrapped loose pieces in bulk.
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. The three Reed’s
Ginger Ice Creams are:
Reed’s
Original Ginger Ice Cream is
made from milk; cream, raw cane sugar, Reed’s Crystallized Ginger Candy
(finest ginger root, raw cane sugar), ginger puree, and guar gum (a
natural vegetable gum)
|
Chocolate
Ginger Ice Cream is
made from milk; cream, raw cane sugar, finest Belgian Cocoa (used to make
Belgian Chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger
root, raw cane sugar), chocolate shavings (sugar, unsweetened chocolate,
Belgian Cocoa, soy lecithin and real vanilla), ginger puree, and guar gum
(a natural vegetable gum) combine creating the ultimate chocolate ginger
ice cream.
|
Reed’s
Green Tea Ginger Ice Cream is
made from milk, cream, the finest Green Tea, raw cane sugar, ginger puree,
Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar),
and guar gum (a natural vegetable gum) combine to make the ultimate green
tea ginger ice cream. |
We
sell Reed’s Ginger Ice Creams in pint containers and cases of eight pints. We
plan to supply Reed’s Ginger Ice Creams in foodservice volume-packaging as
well.
We plan to continue expanding the Reed’s Ginger Brew, Reed’s Ginger Juice Brew,
Reed’s Ginger Ice Cream, and Reed’s Ginger Candy product lines. Other Reed’s
Ginger Product concepts and lines are under consideration. We also plan to
expand the Virgil’s product line into additional new flavors and packaging
styles.
Among the advantages of our owned and self-operated Brewery are the flexibility
to try innovative packaging and the capability to experiment inexpensively with
new product flavors with little risk to our operations or capital. For example,
to the best of our knowledge, our Brewery is the first plant mass-producing
swing-lid bottled soft drinks in North America; we will soon produce several of
our beverages in one-liter swing-lid bottles. Our Spiced Apple Brew is now
available in a 750 ml. champagne bottle and other products are planned to
be available with this packaging in the near future.
Currently, we sell a half-liter Virgil’s Root Beer swing-lid bottle that is made
for us in Europe. The new one-liter bottles will be filled at the Brewery,
allowing us to provide a greater amount of product at a substantially lower
price. We have received preliminary interest from several large national
supermarket chains for this product.
Although we are always working on new products and designs, research and
development expenses in the last two years have been nominal. We do not expect
any significant increases in this research and development expenses.
Manufacture
of Our Products
At this time, we produce our carbonated beverages at two facilities. Our Brewery
in Los Angeles handles the western half of the United States and we have a
contract with The Lion Brewery, Inc., a packing, or co-pack, facility in
Pennsylvania for the eastern United States. The current two-year term of the
agreement expires on May 31, 2005 and renews automatically for successive
two-years terms unless terminated by either party. The co-pack facility
assembles our products and charges us a fee, generally by the case, for the
products they produce.
Our
Ginger Juice Brews are co-packed at H.A. Ryder for us in Northern California. We
supply all the ingredients and packaging. The co-pack facility assembles our
products and charges us a fee, by the case. Our ice creams are co-packed for us
at Ronnybrooke dairy in upstate New York. We supply all the flavor additions and
packaging and the dairy supplies the ice cream base. The co-pack facility
assembles our products and charges us a fee, by the unit produced for us. We
have half-liter swing-lid bottles of our Virgil’s Root Beer line co-packed for
us at the Hofmark brewery in southern Germany. The co-pack facility assembles
our products and charges us a fee by the unit they produce for us. We do not
have written contracts with H.A Ryder, Ronnybrooke Dairy or the German co-pack
facility.
We follow a ‘fill as needed’ manufacturing model to the best of our ability and
we have no significant backlog of orders.
Substantially all of the raw materials used in the preparation, bottling and
packaging of our products are purchased by us or by our contract packers in
accordance with our specifications. Reed’s Crystallized Ginger is made to our
specifications in Fiji. Reed’s Ginger Candy Chews are made to our specifications
in Indonesia, and we repackage them at the Brewery in Los Angeles.
Generally, we obtain the ingredients used in our products from domestic
suppliers and each ingredient has several reliable suppliers. We have no major
supply contracts with any of our suppliers. As a general policy, we pick
ingredients in the development of our products that have multiple suppliers and
are common ingredients. This provides a level of insurance 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 our products. In addition, we do not believe that growth will result in
any significant difficulty or delay in obtaining raw materials, ingredients or
finished product that is repackaged at the Brewery.
Our
Primary Markets
We target a niche in the soft drink industry known as New Age beverages. The
soft drink industry generally characterizes New Age Beverages as being made more
naturally, with upscale packaging, and often creating and utilizing new and
unique flavors and flavor combinations. The New Age Beverage segment of our
industry has grown from $620 million in annual sales in 1989 to over
$15 billion in estimated annual revenues in 2004 (Source: Business Trend
Analysts).
The New Age beverage segment is highly fragmented and includes such players as
SoBe (acquired by PepsiCo), Snapple (acquired by Cadbury Schweppes in 2000),
Arizona (2003 revenues over $200 million), Hansen’s (2003 revenues over
$110 million) and Jones Sodas (2003 revenues over $23 million), among
others. (Sources: BevNet, Beverage World, Yahoo Finance, and company filings
made with the SEC.) 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 higher
price, 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 holding up
well among these significantly larger brands. See “Business —
Competition.”
We sell the majority of our products in natural food stores, gourmet shops, and
supermarket chains, primarily in the United States and, to a lesser degree, in
Canada. In addition, we increasingly sell our products in restaurants,
delicatessens, neighborhood grocery markets, movie studios, hospitals and
industrial foodservice locations.
We believe that our products have achieved a leading position in their niche in
the fast-growing natural food industry. According to May 2001 data from the
Spence Information Service, a Nielson Company, or SPINS, our top-selling items
are in over 90% of natural food stores in the United States. The last time we
purchased natural foods sales ratings surveys by SPINS, in 2001, we
also found three of our SKUs leading the top five and five of our SKUs in the
top ten based on sales.
With the advent of large chains like Whole Foods and Wild Oats and specialty
merchants like Trader Joe’s, the natural foods segment continues to grow each
year in direct competition with the mainstream grocery trade.
Our products are currently placed in approximately 110 Safeway stores in Oregon
and all 130 Raley’s stores in Northern California. Safeway and Raley’s data
show Reed’s Ginger Brews, with minimal advertising and promotions, performs in
the “middle of the pack” of highly advertised national brands in the New Age
Beverage segment of the market.
We intend to build on this success by placing Reed’s, Virgil’s and the rest of
our lines in the New Age section of as many of the nation’s
35,000 supermarkets as possible.
Our products are currently in supermarkets throughout the United States and
Western Canada, including the following:
Supermarket
Chain |
Location
|
Acme
|
Philadelphia
|
AJ’s
|
Arizona
|
Albertson’s
|
Texas
|
Bashas
|
Arizona
|
Big
Save |
Hawaii
|
Bristol
Farms |
Southern
California |
Byerly’s
|
Minnesota
|
Foodarama
|
New
England |
Fred
Meyers |
Northwestern
U.S. |
Gelson’s
|
Southern
California |
Giant
Food |
Maryland
|
HEB
|
Texas
|
Henry’s
|
San Diego
|
Kroger
|
Nationwide
|
Larry’s
Markets |
Seattle
|
Overwaitea/Save-On
Foods |
Western
Canada |
Patrini’s
|
San Francisco
|
Pavilion’s
|
Southern
California |
Publics
|
Florida
|
QFC
|
Northwestern
U.S. |
Raley’s/Nob
Hill |
Northern
California |
Ralph’s
|
Southern
California |
Randall’s
|
Houston
|
Rice’s
|
Houston
|
Safeway
|
National
and Western Canada |
Sentry
Foods |
Milwaukee
|
Smith’s
|
Utah
|
Super
Fresh |
Philadelphia
|
Thriftway
|
Northwest
|
Trader
Joe’s |
East
and West Coasts |
Treasure
Island |
Chicago
|
Vons
|
Southern
California |
Wegman’s
|
New
York |
Winn-Dixie
|
New
Orleans |
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, when we have to pay slotting fees for new placement, the slotting fee
normally costs between $10 and $100 per store per new item placed. We
intend to use a portion of the net proceeds of this offering to pay slotting
fees. See “Use of Proceeds.”
On-premise (restaurant) activity in commercial and non-commercial locations
is an increasing component of total beverage sales. In recognition of this
trend, we market aggressively to industrial cafeterias, bars, and restaurants.
Placement of our products in stadiums, sports arenas, concert halls, theatres,
and other cultural centers is another long-term marketing priority. In addition,
we plan to seek placement of our ice creams in restaurants nationwide.
A limited market has developed for our products in Europe and Asia, with
increasing activity from our distributor in the Netherlands and increasing
purchases by a Japanese marketer. Sales outside of North America currently
represent less than 1% of our total sales. Sales in Canada represent about 1.3%
of our total sales.
The European Union is an open market for Reed’s with access to that market due
in part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in
Germany. Reaction to the Reed’s brands at Natural Products Exposition Europe in
June 2000 was very positive. In October 2003, in Cologne, Germany at ANUGA, one
of the world’s largest food shows, our products experienced a broad, positive
reception. We have already had some success in selling our products in Europe
through a master distributor in Amsterdam and sub-distributors in the
Netherlands, Denmark, the United Kingdom, and Spain. We are currently
negotiating with a Dutch company in Amsterdam for wider European distribution.
American Trading Corp. in Japan orders our products on a regular basis for
distribution in Japan. We are holding preliminary discussions with other trading
companies and import/ export companies for the distribution of our products
throughout Japan, China and the rest of Asia. We believe that these areas are a
natural fit for Reed’s ginger products, because of the importance of ginger in
Asian diet and nutrition.
Distribution,
Sales and Marketing
We currently have a national network of natural and specialty food distributors
in the United States and Canada. We also have mainstream beverage distributors
in select markets. In southern California, we have our own direct distribution
in addition to other local distributors.
We plan to expand our direct distribution into other markets. In addition, where
a market does not support or lend itself to direct distribution, we intend to
enlist local mainstream beverage distributors to carry our products.
We plan to use a significant portion of the proceeds of this offering toward
hiring the additional sales people needed to support both the expansion of our
existing direct distribution and to grow sales through mainstream distributors.
See “Use of Proceeds.”
Other New Age beverages employed this model for growth in their early years
before being acquired by large beverage concerns. Snapple, SoBe, Arizona Teas,
and Energy Brands had or have large dedicated sales forces supporting extensive
networks of beverage distributors. A few New Age beverage companies have put in
place their own direct distribution, such Odwala and Fresh Samantha. Which model
we ultimately favor will depend on results in the marketplace. We anticipate
using a hybrid of both distribution strategies.
We currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced by
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits to
maintain store and distributor relationships. In the future, we intend to
integrate both our distribution and sales forces.
The job of the in-house representative is to merchandize existing products, run
promotions and introduce new items. The sales manager is responsible for the
distributor relationships and larger chain accounts that require headquarter
sales visits in addition to managing the sales representatives. We sell directly
to our distributors, who in turn sell to retail stores. Our representatives
maintain the pipeline flow of our products from our distributors (our direct
customers), to the retailer (our distributors’ customers) to the end customer,
the individual consumer.
We currently have two sales representatives working alongside our mainstream
distributors. Based upon their results, we anticipate expanding the number of
direct hired sales representatives to work along side our mainstream
distributors. In addition, we have three sales representatives working with our
southern California direct distribution services. Based on their results, we
plan rapidly to hire more of these representatives.
We are placing vending machines, in-store draft displays, which we call
Kegerators, and fully branded coolers in our retail establishments.
We also offer our products and promotional merchandise directly to consumers via
the Internet through our website, www.reedsgingerbrew.com.
One of the main goals of our sales and marketing efforts is to increase the
number of sales people and distributors focused on growing our brands. Our
increased efforts in marketing also will require us to hire additional sales
representatives, and lease additional equipment for Kegerators and coolers. See
“Use of Proceeds.” We anticipate that as our sales force grows that additional
office support in accounting, production and purchasing will be required.
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, who may also have relationships with our
competitors, include natural food, gourmet food, and mainstream distributors.
Direct contact with the distributors is by in-house sales representatives. In
limited markets, where direct representation is too costly, we utilize food
brokers and outside representatives.
Marketing
to Retail Stores |
We market to stores by utilizing trade shows, trade advertising, telemarketing,
direct mail pieces, and direct contact with the store. For our direct contact,
we have sales representatives and brokers who visit stores to sell directly in
many regions. Sales to retail stores are coordinated through our distribution
network and our regional warehouses. We intend to use a portion of the net
proceeds of this offering to expand our direct sales force. See “Use of
Proceeds.”
Direct
Sales and Distribution |
In June 2003, we started Direct Sales and Distribution (DSD) to stores in
southern California, using a direct hired sales team and Company owned delivery
trucks. Our sales representatives work closely with our new route drivers and
with distributors in areas farther away from our West Coast Brewery in Los
Angeles. This effort has increased our product distribution. Early efforts are
producing very encouraging results including placement in most of the
supermarkets in southern California and other mainstream accounts.
While
we do not break out sales figures on a regional basis, we can reasonably
estimate that Southern California sales traditionally represent about $1 million
per annum. The initial indication from our Southern California DSD team suggests
that this amount will increase. The local effort is currently selling at about
$50,000 per month end of year 2004 and end of year 2003 the sales were averaging
around $15,000 per month. This is mostly new business and outside our existing
markets.
These new direct-distribution accounts also include retail locations up and down
the street, including many new independent supermarkets, mom, and pop markets,
Japanese, Korean, Chinese and Thai markets, foodservice and delis, among others.
In addition, direct distribution facilitates our new placements at hospitals,
the Getty Center in Los Angeles, Fox Studios and other cultural and
institutional accounts.
As part of our new direct distribution, we have started to offer in-store draft
displays, or Kegerators. While we believe that packaging is an important part of
making successful products, we also believe that our products themselves need to
be exceptional to survive in today’s marketplace. Our Kegerator is an
unattended, in-store draft display that allows a consumer to sample our products
at an extremely low cost per demonstration. Stores offer premium locations for
these new, and we believe unique, draft displays. Our product sales in most of
these stores have increased significantly from the exposure of the premium
locations and product taste trials. We intend to use a portion of the net
proceeds of this offering to increase the number of Kegerators we place in
stores. See “Use of Proceeds.”
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.
Our West Coast Brewery has initiated a draft program. The first draft location
we have installed is at Fox Studios commissaries and restaurants. Sales are
strong and Fox has asked for more installations. Currently, we are serving
Virgil’s Root Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger Brew on draft.
In addition, all of our other carbonated drinks are available in draft format.
We have informal commitments from 50 or more locations in southern California,
without having made a large marketing effort in this direction.
To our knowledge, no other independent soft drink manufacturers, other than
Coca-Cola and PepsiCo, have placed fully-branded, back-lit vending machines
nationwide. We believe we are the first natural soft drink manufacturer to
create its own fully branded, backlit vending machine. We lease the vending
machines and then modify them to our specifications. Over the next few years, we
intend to expand direct consumer distribution through placement of these branded
vending machines in additional locations in the United States and, to a lesser
degree, in Canada. The cost to lease the vending machines is relatively low. We
will use a portion of the proceeds of this offering to lease, brand and install
more vending machines. See “Use of Proceeds.”
Vending machines present several advantages. As an outdoor source of product, a
vending machine acts as a 24 hours a day, 7 days a week point of
purchase. Using modern cellular technology, we will be able to track performance
of each machine and the individual products within the machine. For example,
this means that if Reed’s Extra Ginger Brew were outselling other products, we
would see this in real time and be able to respond by restocking the vending
machine promptly. Such data will also be invaluable as a tracking demographic,
allowing us to place more of what sells best in a particular neighborhood in a
responsive fashion or, in the case of a low performance location, to relocate
the machine.
Our
vending machine program is currently in development; to date we have placed one
vending machine in Malibu as a test...
In-store placements of branded refrigerated coolers by Snapple, SoBe, and Jones
Soda, among others, have proven to have a significant positive effect on their
sales. For example, SoBe created its pervasive presence in the mass-marketplace
almost entirely on a backbone of cooler placements and Jones saw a doubling of
its business in just 18 months based upon this concept. We are currently
testing our own Reed’s branded coolers in a number of locations.
Competition
Our premium beverage products compete generally with all liquid refreshments and
in particular with numerous other New Age beverages, including:
· |
Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury Schweppes)
|
· |
Henry
Weinhard (owned by Phillip Morris) |
The 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.
Many 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
resources than we do and have greater access to additional financing.
We believe that our success to date is due in great part to our innovative
beverage recipes and packaging and use of premium ingredients and a trade secret
brewing process. We believe that our commitments to the highest quality
standards and brand innovation are key to our success.
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.
Most of these companies have greater brand recognition, market share, and access
to financing than we do.
We compete with other companies not only for consumer acceptance but also for
shelf space in retail outlets and for marketing focus by distributors, most of
whom also distribute other brands with which our products compete. The principal
methods of competition include product quality and taste, brand advertising,
trade and consumer promotions, pricing, packaging and the development of new
products.
Our
sales are less than 1% of the over-all marketplace in the New Age Beverage Set
Proprietary
Rights
We own several trademarks that we consider material to our business, including
Reed’s, Virgil’s and China Cola. 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.
Three of our material trademarks are registered trademarks in the U.S. Patent
and Trademark Office: Reed’s®, Virgil’s®, and China Cola®. Registrations for
trademarks in the United States will last indefinitely as long as we continue to
use and police the trademarks and renew filings with the applicable governmental
offices. We have not been challenged in our right to use any of our material
trademarks in the United States. We intend to obtain international registration
of certain trademarks under the Berne Convention.
We sometimes use non-disclosure agreements with employees and distributors to
protect our proprietary rights.
Government
Regulation
The production and marketing of our products are governed by the rules and
regulations of various federal, state, and local agencies, including the United
States Food and Drug Administration. The Food and Drug Administration also
regulates the labeling of our products. We have not encountered any regulatory
action as a result of our operations.
Environmental
Matters
Our primary cost of environmental compliance is in recycling fees, which are
estimated to be $30,000 in 2004. 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.
Employees
We currently have 30 full-time employees, as follows: one in general
management, nine in sales and marketing support, five in operations and 15 in
production. We employ additional people on a part-time basis as needed.
We have never participated in a collective bargaining agreement. We believe that
the relationship with our employees is good.
Properties
In December 2000, we purchased an 18,000 square foot warehouse, the
Brewery, at 13000 South Spring Street in an unincorporated area of Los
Angeles County, near downtown Los Angeles. The purchase price of the facility
was $850,000, including a down payment of $102,000. We financed the balance 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 in the amount of $168,000 from U.S. Bank National Association,
guaranteed by the United States Small Business Administration. Christopher J.
Reed, our founder and CEO, personally guaranteed both loans. Both loans have
25-year terms, with interest at the New York prime rate plus 1%, adjusted
monthly, with no cap or floor. As of June 2004, the principal and interest
payments on the two loans combined were $5,420 per month. This facility serves
as our principal executive offices, our West Coast Brewery, and bottling plant
and our southern California warehouse facility.
The property is located in the Los Angeles County Mid-Alameda Corridor
Enterprise Zone. Businesses located in the enterprise zone are eligible for
economic incentives designed to stimulate business investment, encourage growth
and development, and promote job creation. The incentives include a tax credit
for wages paid to a qualified employee, up to $26,895 over a five-year period; a
credit for the sales or use tax paid or incurred on the purchase of certain
qualified machinery or equipment; a business expense deduction for
the
cost of qualified property up to $20,000 purchased for exclusive use in the
enterprise zone; the ability to carry up to 100% of net operating losses over a
maximum of 15 years to reduce the amount of taxable enterprise zone income
for those years; and certain other financial incentives.
LEGAL
PROCEEDINGS
We currently and from time to time are involved in litigation incidental to the
conduct of our business. We are not currently a party to any lawsuit or
proceeding which, in the opinion of our management, is likely to have a material
adverse effect on us.
MANAGEMENT
General
The following table sets forth certain information with respect to our directors
and executive officers:
Name
|
Age |
Position
|
|
|
|
Christopher
J. Reed |
46 |
President,
Chief Executive Officer, Chief Financial Officer and Chairman of the Board
|
Eric
Scheffer |
37 |
Vice
President and National Sales Manager - Natural Foods
|
Robert
T. Reed, Jr. |
49 |
Vice
President and National Sales Manager - Mainstream
|
Robert
Lyon |
55 |
Vice
President Sales - Special Projects
|
Judy
Holloway Reed |
45 |
Secretary
and Director
|
Peter
Sharma III |
45 |
Director
|
Christopher
J. Reed founded
our company in 1987. Mr. Reed has served as our Chairman, President, Chief
Executive Officer, and Chief Financial Officer since our incorporation in 1991.
Mr. Reed has been responsible for our design and products including the original
product recipes, the proprietary brewing process, and the packaging and
marketing strategies. Mr. Reed received a B.S. in Chemical Engineering in 1980
from Rennselaer Polytechnic Institute in Troy, New York.
Eric
Scheffer has
been our Vice President and National Sales Manager - Natural Foods since
May 2001. From September 2000 to May 2001, Mr. Scheffer worked as Vice President
of Sales for Rachel Perry Natural Cosmetics. Mr. Scheffer was national sales
manager at Earth Science, Inc. from January 1999 to September 2000, where he
managed the United States and Canadian outside sales force. Mr. Scheffer was
national sales manager at USA Nutritionals from June 1997 to January 1999, where
he led a successful effort bridging their marketing from natural foods to
mainstream stores. He worked for Vita Source as Western sales manager from May
1994 to June 1997 and was their first sales representative.
Robert
T. Reed Jr. has
been our Vice President and National Sales Manager - Mainstream since
January 2004. From 1988 through December 2003, Mr. Reed was Vice President of
Strategic Sales at SunGard Availability Services, during a period that company’s
revenues increased from $30 million to over $1.2 billion, earning the
company a place in the Fortune 500. Mr. Reed became President of the SunGard
eSourcing, the managed Internet services provider subsidiary of SunGard
Availability Services, an entity with revenues in excess of $70 million and
over 300 employees. He earned a Bachelors of Science at Mount Saint Mary’s
University in 1977. Mr. Reed is the brother of Christopher J. Reed, our
Chairman, President, Chief Executive Officer, and Chief Financial
Officer.
Robert
Lyon has
been our Vice President Sales - Special Projects since June 2002. . In that
capacity, Mr. Lyon directs our southern California direct sales and distribution
program, our launch in mainstream markets. Over the past five years, Mr. Lyon
also ran an organic rosemary farm in Malibu, California, selling bulk to
re-packagers. In the 1980s and 1990s, Mr. Lyon started a successful water taxi
service with 20 employees and eight vessels of his own design. He also built the
national sales team for a jewelry company, Iberia. Mr. Lyon holds several U.S.
patents. He earned a Business Degree from Northwestern Michigan University in
1969.
Judy
Holloway Reed has
been with us since 1992 and, as we have grown, has run the accounting,
purchasing, and shipping and receiving departments at various times in the
1990s. Ms. Reed has been one of our directors since June 2004, our Secretary
since October 1996 and our Director of Office Operations and Staff Management
since June 2004. In the 1980s, Ms. Reed managed media tracking for a Los Angeles
Infomercial Media Buying Group and was an account manager with a Beverly Hills,
California stock portfolio management company. She earned a Business Degree from
MIU in 1981. Ms. Reed is the wife of Christopher J. Reed, our Chairman,
President, Chief Executive Officer and Financial Officer.
Peter
Sharma III has been a
member of our Board of Directors since June 2004, and is a member of Brookstreet
Securities Corporation, the underwriter of this offering. Mr. Sharma was a
member of Blue Bay Capital, the selling agent for the public offering from which
we withdrew in March 2003. From time to time since January 2000, Mr. Sharma has
acted as our management, information technology, sales, product development, and
marketing consultant. He has worked as an independent management
consultant
since 1997 and continues to do so. From 1990 to 1997, Mr. Sharma worked as a
sales trainer and regional manager for Time-Life and Encyclopædia
Britannica North America. In the 1980s, Mr. Sharma worked in the micro-cap
investment banking industry, raising capital for satellite navigation, air
ambulance service, gaming, travel & leisure, and personal services companies
and as an independent management consultant. Mr. Sharma’s consulting company,
Sirius/Pureprophet, Ltd., is a sole proprietorship that requires only minimal
clerical attention.
Other than the relationship of Christopher J. Reed, Judy Holloway Reed, and
Robert T. Reed, Jr., none of our directors or executive officers is related
to each other.
Key
Employees. Our
key employees include the following people:
Steven
Hernandez,
age 48, became our controller in March 2004. From 1997 to March 2004, Mr.
Hernandez was an independent consultant in the manufacturing field in systems,
including cost accounting consultant for Gillead Sciences, Inc. (February 2002
to March 2004), cost accounting consultant for Flow Serve, Inc. (April 2001 to
December 2002), cost accounting manager for Crown Bolt, Inc. (1999 to April
2001) and cost analyst at Health Valley Company (1997 to 1999). Mr. Hernandez
also has experience is cost accounting in the snack food and confectionery
industries. Mr. Hernandez earned his B.S. in Economics/Accounting from
California State University, Bakersfield in 1978.
During the next 12 months, we intend to hire a Chief Operating Officer to
handle day-to-day operations. This will provide operations support to
Christopher J. Reed. In addition, we intend to hire a Distribution Manager with
extensive experience in the beverage arena with specific experience in setting
up a regional distributor network.
We
will have two independent directors before this offering is declared effective
and will maintain two independent directors going forward.
Executive
Compensation
The following table sets forth for the last three fiscal years each component of
compensation paid or awarded to, or earned by, our executive
officers.
|
|
Annual
Compensation |
|
|
|
Salary |
|
Salary |
|
Salary |
|
Bonus |
|
Name
and Principal Position |
|
2004 |
|
2003 |
|
2002 |
|
2002-2003 |
|
Christopher
J. Reed, President, CEO and CFO |
|
$ |
150,000 |
|
$ |
150,000 |
|
$ |
150,000 |
|
$ |
--- |
|
Judy
Holloway Reed, Secretary, Dir of Office Operations
(part-time) |
|
|
12,000 |
|
|
12,000 |
|
|
N/A |
|
|
---- |
|
Robert
T. Reed, Jr., Vice President and National Sales
Manager-Mainstream |
|
|
50,000 |
|
|
50,000 |
|
|
N/A |
|
|
---- |
|
Eric
Scheffer, Vice president and national Sales Manager-Natural
Foods |
|
|
60,000 |
|
|
60,000 |
|
|
60,000 |
|
|
---- |
|
Mr. Reed’s salary has not changed since 2001, and there are no discussions
underway as of the date of this prospectus to increase his salary. We have not
adopted any retirement, pension, profit sharing, or other similar
programs.
Director
Compensation
We do not pay any compensation to our non-employee directors for their
attendance at board meetings.
We have not adopted any retirement, pension, profit sharing, or other similar
programs.
Option/SAR
Grants and Exercises
During 2003, no stock options or stock appreciation rights, or SARs, were
granted to Christopher J. Reed. At December 31, 2003, Mr. Reed held no
unexercised options or SARs.
No options were granted to or exercised by employees during 2003 or 2004.
Employment
Agreements
There are no written employment agreements with any of our officers or key
employees, including Christopher J. Reed.
2001
Stock Option Plan
Pursuant to our 2001 Stock Option Plan, we are authorized to issue options to
purchase up to 500,000 shares of common stock. As of the date of this
prospectus, 17,500 options have been issued under the plan.
The plan permits the grant of options to our employees, directors and
consultants. The options may constitute either “incentive stock options” within
the meaning of Section 422 of the Internal Revenue Code or “non-qualified
stock options.”
The plan is 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 shall 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, the options, all vested
options may be exercised within three months following such event. However, if
an optionee’s employment or consulting relationship with us terminates for
cause, or if a director of ours is removed for cause, all unexercised options
shall 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, the
options, all vested options may be exercised within one year following such
event.
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.
Indemnification
of Directors and Officers
Our amended certificate of incorporation provides that, to the fullest extent
permitted by Delaware law, as it may be amended from time to time, none of our
directors will be personally liable to we or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Our amended certificate of incorporation also provides discretionary
indemnification for the benefit of our directors, officers, and employees, to
the fullest extent permitted by Delaware law, as it may be amended from time to
time. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors or officers, or persons controlling we,
pursuant to the foregoing provisions, we have been informed that in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Pursuant to our amended bylaws, we are required to indemnify our directors,
officers, employees and agents, and we have the discretion to advance his or her
related expenses, to the fullest extent permitted by law.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We have three loans payable to Robert T. Reed, Sr., the father of our
founder, President and CEO, Christopher J. Reed. The first loan was made to us
in May 1991 to provide $94,000 in working capital. This loan bears interest at
10% per annum and matures in May 2006. As of June 30, 2004, the
outstanding principal balance of the loan was $32,354 and accrued and unpaid
interest was $8,935.
The second loan from Robert T. Reed, Sr. was made to us in June 1999 to
provide $250,000 for the acquisition of Virgil’s Root Beer. This loan bears
interest at 8% per annum and matures in June 2006. As of June 30,
2004, the outstanding principal balance of the loan was $177,540 and accrued and
unpaid interest was $52,276. Until July 2005, Mr. Reed has the right to convert
the principal and accrued and unpaid interest of this loan into shares of our
common stock at a rate of one share of common stock for every $2.00 owed to Mr.
Reed. As of June 30, 2004, the loan was convertible into
114,908 shares of common stock.
The third loan from Robert T. Reed, Sr., was made to us in October 2003 to
provide $50,000 for working capital. This loan bears interest at 8% per
annum and matures in October 2006. As of June 30, 2004, the outstanding
principal balance of the loan was $50,000 and accrued and unpaid interest was
$329.
Mr Reed has suspended payments due him from time to time.
In September 2004, Robert T. Reed Jr., our Vice President and National Sales
Manager — Mainstream and a brother of Christopher J. Reed, co-signed a note
for a line of credit we opened with Merrill Lynch and pledged his stock account
at Merrill Lynch as collateral. In consideration for Mr. Reed’s pledging his
stock account at Merrill Lynch as collateral, we pay Mr. Reed 5% per annum
of the amount we borrow from Merrill Lynch.
In
July 2001, Mark Reed, a brother of Christopher J. Reed, converted a loan he made
to us into 8,889 shares of common stock. The original loan was for $5,000
and was made in June of 1991. The loan was part of a private offering of
convertible debt.
We believe that the terms of each of the foregoing transactions were as
favorable to us as the terms that would have been available to us from
unaffiliated parties.
Since
January 2000 we have extended a line of credit to
one of our
consultants, Peter
Sharma III who since June,
2004 also
sits on our Board of
Directors.
The line of
credit is
interest free. In June 2005 a repayment schedule begins at $1000 per month that
ends with a balloon payment for the remaining balance, due on December 31, 2007.
As of
September
30, 2004 the debit balance of the credit line was $99,197. From time to time we
utilize Mr. Sharma’s consulting services, for which he has not levied a fee
since October 2001. In addition, Mr. Sharma is a representative of the
underwriter Brookstreet Securities Corporation and any compensation Mr. Sharma
receives pursuant from this offering will be paid to him by the underwriter
only.
At the time of each of the transactions listed above, except for the loan in
October 2003 from Robert T. Reed, Sr., we did not have any independent
directors to ratify such transactions. We currently do not have any independent
directors.
We will add two independent directors to the board prior to this offering going
effective. In addition, all future material affiliated transactions and loans
will be made or entered into on terms that are no less favorable to us than
those that can be obtained from unaffiliated third parties; and all future
material affiliated transactions and loans, and any forgiveness of loans, must
be approved by a majority of our independent directors who do not have an
interest in the transactions and who have access, at our expense, to independent
legal counsel.
PRINCIPAL
STOCKHOLDERS
The following table sets forth certain information as to shares of our common
stock owned as of October 31, 2004, or which can be acquired within
60 days of October 31, 2004, by (i) each person known by
management to beneficially own more than five percent (5%) of our outstanding
common stock, (ii) each of our directors and executive officers, and
(iii) all directors and executive officers as a group.
Name
and Address
of
Beneficial Owner |
|
Number
of Shares Owned Before Offering |
|
%
Owned Before Offering(1) |
|
%
Owned If 200,000 Shares Are Sold |
|
%
Owned If 1,000,000 Shares Are Sold |
|
%
Owned If 2,000,000 Shares Are Sold |
|
5%
Stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joseph
Grace
1900
West Nickerson Street
Suite
116, PMB 158
Seattle,
WA 98119 |
|
|
500,000 |
|
|
10.6 |
% |
|
10.1 |
% |
|
8.7 |
% |
|
7.4 |
% |
Directors
and Executive Officers
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Reed(3) |
|
|
3,200,000 |
|
|
67.8 |
% |
|
63.7 |
% |
|
51.4 |
% |
|
41.4 |
% |
Robert
T. Reed, Jr.(4) |
|
|
327,500 |
|
|
6.9 |
% |
|
6.6 |
% |
|
5.7 |
% |
|
4.9 |
% |
Eric
Scheffer |
|
|
500 |
|
|
* |
|
|
* |
|
|
* |
|
|
* |
|
Robert
Lyons |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
|
0 |
|
Judy
Holloway Reed(3) |
|
|
3,200,000 |
|
|
67.8 |
% |
|
63.7 |
% |
|
51.4 |
% |
|
41.4 |
% |
Peter
Sharma III(5) |
|
|
137,539 |
|
|
2.9 |
% |
|
2.8 |
% |
|
2.4 |
% |
|
2.0 |
% |
All
directors and executive officers as a group (6 persons) |
|
|
3,665,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
_________________________
*
Less than 1% |
(1)
Percentage of ownership for each holder is calculated on
4,726,091 shares of common stock outstanding on October 31,
2004. Beneficial ownership is determined in accordance with the rules of
the SEC and generally includes shares over which the holder has voting or
investment power, subject to community property laws. Shares of common
stock subject to options or warrants that are currently exercisable or
exercisable within 60 days are considered to be beneficially owned by
the person holding the options or warrants for computing that person’s
percentage, but are not treated as outstanding for computing the
percentage of any other person. |
|
(2)
The address for all of our directors and officers is: 13000 South
Spring Street, Los Angeles, California 90061. |
|
(3)
Christopher J. Reed and Judy Holloway Reed are husband and wife. The same
number of shares is shown for each of them as they may each be deemed to
be the beneficial owner of all of such shares. |
|
(4)
Consists of (i) 267,500 shares of common stock and
(ii) 15,000 shares of Series A preferred stock, which can
be converted at any time into 60,000 shares of common
stock. |
|
(5)
Consists of warrants to purchase 137,539 shares of common stock
at any time. |
DESCRIPTION
OF OUR SECURITIES
We have the authority to issue 12,000,000 shares of capital stock,
consisting of 11,500,000 shares of common stock, $.0001 par value per
share, and 500,000 of preferred stock, which can be issued from time to time by
our board of directors on such terms and conditions as they may determine. As of
October 31, 2004, there were 4,726,091 shares of common stock
outstanding. In addition, as of September 29, 2004, issued and outstanding are
59,290 shares of Series A preferred stock.
We
will not offer preferred stock to Promoters except on the same terms as it is
offered to all other existing shareholders or to new shareholders;
and
We
will not authorize the issuance of preferred stock unless such issuance is
approved by a majority of the our Independent Directors who do not have an
interest in the transaction and who have access, at the our expense, to our
legal counsel or their independent legal counsel.
All
issuance of Reed’s, Inc. securities require a majority vote of our shareholders
of record at the time of issuance
Common
Stock
Holders of our common stock are entitled to one vote per share on all matters
requiring a vote of stockholders, including the election of directors. Since our
common stock does not have cumulative voting rights, the holders of more than a
majority of the outstanding shares of common stock can elect all of the
directors whose terms expire that year, if they choose to do so. Christopher J.
Reed, our President and CEO, holds a majority of our outstanding common stock
and may continue to hold a majority of our outstanding common shares if less
than all the shares being offered in this offering are sold. Consequently, Mr.
Reed may continue to be able to elect all of our directors.
Holders of our common stock are entitled to receive dividends only if we have
funds legally available and the Board of Directors declares a dividend.
Holders of our common stock do not have any rights to purchase additional
shares. This right is sometimes referred to as a pre-emptive right.
Upon a liquidation or dissolution, whether in bankruptcy or otherwise, holders
of common stock rank behind our secured and unsecured debt holders, and behind
any holder of any series of our preferred stock.
Prior to this offering, there has been no public market for our common stock.
Series A
Preferred Stock
Holders of our Series A preferred stock are entitled to receive out of
assets legally available, a 5% pro-rata annual non-cumulative dividend. 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 as “as converted” basis with the holder of our
common stock.
In the event of any liquidation, dissolution or winding up of our operations, or
if there is a change of control event, then, subject to the rights of the
holders of our more senior securities, if any, the holders of our Series A
preferred stock are entitled to receive, prior to the holders of any of our
junior securities, $10.00 per share plus all accrued and unpaid dividends.
Thereafter, all remaining assets shall be distributed pro rata among all of our
security holders.
At any time after June 30, 2007, we have the right, but not the obligation,
to redeem all or any portion of the Series A preferred stock by paying the
holders thereof the sum of the original purchase price per share, which was
$10.00, plus all accrued and unpaid dividends.
The Series A preferred stock may be converted, at the option of the holder,
at any time after issuance and prior to the date such stock is redeemed, into
four shares of common stock, subject to adjustment in the event of stock splits,
reverse stock splits, stock dividends, recapitalization, reclassification, and
similar transactions. We are obligated to reserve out of our authorized but
unissued shares of common stock a sufficient number of such shares to effect the
conversion of all outstanding shares of Series A preferred stock.
Except as provided by law, the holders of our Series A preferred stock do
not have the right to vote on any matters, including, without limitation, the
election of directors. However, so long as any shares of Series A preferred
stock are outstanding, we shall not, without first obtaining the approval of at
least a majority of the holders of the Series A preferred stock:
-
amend
our Certificate of Incorporation or bylaws in any manner which adversely
affects the rights of the Series A preferred
stock; or
-
authorize
or issue 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.
There is no public market for our Series A preferred stock and we do not
intend to register such stock with the SEC or seek to establish a public market
for such stock.
Options
and Warrants
As of October 31, 2004, we had outstanding options and warrants to purchase
an aggregate of 921,376 shares of our common stock, with a range of
exercise prices from $0.02 to $6.00 and an average exercise price of
$2.04 per share. The options and warrants expire at various dates between
2005 and 2007.
Voting
Requirements
Delaware corporate law and our bylaws require the approval of the holders of a
majority of our voting securities for most actions requiring stockholder
approval. These actions include:
There are no provisions in our Certificate of Incorporation or bylaws that would
delay, defer, or prevent a change in control of our company. However,
Christopher J. Reed, as our principal stockholder, has the power, and may
continue to have the power, to determine the outcome of any such vote, or any
other matter, on which the stockholders may vote.
Delaware
Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law regulating corporate takeovers. This section prevents certain
Delaware corporations, under certain circumstances, from engaging in a “business
combination” with:
- A
stockholder who owns 15% or more of our outstanding voting stock (such a
person is referred to as an “interested stockholder”)
- An
affiliate of an interested stockholder, or
- An
associate of an interested stockholder, for three years following the date
that the stockholder became an interested
stockholder.
A
“business combination” includes a merger or sale of more than 10% of our
assets.
However, the above provisions of Section 203 do not apply if:
-
Our
board of directors approves the transaction that made the stockholder an
interested stockholder, prior to the date of that
transaction
-
After
the completion of the transaction that resulted in the stockholder becoming an
interested stockholder, the stockholder owned at least 85% of our voting stock
outstanding at the time the transaction began, excluding shares owned by
persons who are our officers and directors, or
-
On
or subsequent to the date of the transaction, the business combination is
approved by our board and authorized at a meeting of our stockholders by an
affirmative vote of at least 2/3 of the outstanding voting stock not owned by
the interested stockholder.
The provisions of this statute could prohibit or delay mergers or other change
and control attempts, and thus may discourage attempts to acquire our company.
SHARES
AVAILABLE FOR FUTURE RESALE
Sales of substantial amounts of our common stock in the public market, or the
perception that these sales could occur, could adversely affect prevailing
market prices of our common stock. Those circumstances could also adversely
affect our ability to raise capital on favorable terms.
All of the shares issued in this offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, except for
shares, which may be purchased by our affiliates. The term affiliates is defined
in Rule 144 under the Securities Act of 1933 and includes our directors,
executive officers and 10%-or-greater stockholders, as well as others who exert
control over a company.
Of the 4,726,091 shares of our common stock outstanding as of
October 31, 2004, 4,277,416 shares are restricted securities as that
term is defined in Rule 144. Restricted securities may be resold publicly
only if they are registered or if the sale qualifies for an exemption under the
securities laws, including Rule 144. Of these 4,277,416 shares,
3,968,000 shares are held by our affiliates.
Under
Rule 144, a person who has beneficially owned restricted shares of our
common stock for at least one year can sell within any three-month period a
number of shares that does not exceed the greater of:
-
1%
of the shares of common stock then outstanding (in our case, between
47,261 shares if no shares are sold pursuant to this offering and
67,261 shares immediately after this offering if all shares offered
hereby are sold), or
-
The
average weekly trading volume of our common stock during the four weeks
preceding the sale.
Under Rule 144(k), a person who has not been our affiliate for 90 days
preceding a sale can sell shares owned for at least two years without the volume
limitations referred to above.
Of the 4,277,416 restricted shares of our common stock outstanding,
4,277,416 shares have been owned for at least one year and 4,272,916 of
these shares have been owned for at least two years.
(The
remainder of this page left blank intentionally)
PLAN
OF DISTRIBUTION
General
There is no
current market for our shares and there can be no assurance that a public market
for our shares will ever develop. Further, there can be no assurance that in the
event a public market for our shares were to develop that this market would be
sustained over an extended period of time or that it would be of sufficient
trading volume to allow ready liquidity to all investors in our
shares.
We are offering to sell, on a best efforts basis, up to 2,000,000 newly issued
shares of our common stock at a price of $4.00 per share. No minimum number
of shares is required to be sold and as a result, we may only sell a nominal
amount of shares under this offering. We will not escrow any of the proceeds
received from the sale of shares before the offering terminates. Upon acceptance
of a share purchase order, the proceeds from that order will be immediately
available for our use and there is no assurance that we will sell all or any
part of the remaining shares offered in this transaction.
Texas
investors must meet minimum net worth standards having a minimum annual gross
income of $65,000.00 and a minimum net worth of $65,000.00, exclusive of
automobiles, home and home furnishings; or a minimum net worth of $150,000.00
exclusive of automobiles, home and home furnishings.
Sales
will be made only in states in which we have registered the offering and only in
states in which Brookstreet is registered to sell securities.
Brookstreet is a member of the National Association of Securities Dealers, or
NASD. For serving as underwriter of this offering, we will pay Brookstreet a
selling commission equal to 6% of the aggregate purchase price of the common
stock sold in this offering. We will also pay Brookstreet a 1% lead
underwriter’s concession and a non-accountable expense allowance equal to 3% of
the aggregate purchase price of the common stock sold in this offering. In
addition, we paid Brookstreet a non-refundable fee of $25,000, for legal and due
diligence expenses.
In addition,
we will issue to Brookstreet a five-year warrant, to purchase a number of shares
of common stock equal to 10% of the shares sold in this offering, at an assumed
purchase price of $6.60 per share.
Under our
agreement with Brookstreet, we may terminate this offering at anytime, for any
reason, after the declared effective date of this Registration Statement.
Under an
agreement between Brookstreet and Peter Sharma III, their registered
representative who is also a member of Reed’s, Inc.’s Board of Directors, Mr.
Sharma will act as Brookstreet’s lead agent in this offering.
In
compliance with NASD rules, neither the warrants granted to Brookstreet nor the
shares issuable upon their exercise may be sold, transferred, assigned, pledged,
or hypothecated by any person, for a period of 180 days following the effective
date of this offering. The warrants and shares issuable upon their exercise may
be transferred to any NASD member participating in this offering and the bona
fide officers or partners thereof, and securities which are convertible into
other types of securities or which may be exercised for the purchase of other
securities may be so transferred, converted or exercised if all securities so
transferred or received remain subject to the restrictions specified above for
the remainder of the initially applicable time period. All certificates or
similar instruments representing securities restricted pursuant to the foregoing
shall bear an appropriate legend describing the restriction and stating the time
period for which the restriction is operative. Securities received by a member
of the NASD as underwriting compensation shall only be issued to a member
participating in the offering and the bona fide officers or partners thereof.
Brookstreet
is a general securities broker/ dealer registered with the SEC and an NASD
member. We may deem compensation we pay Brookstreet as underwriting commission.
We
are obligated to pay the expenses of this offering.
We
previously registered and withdrew a public offering in 2003.
We
filed a registration statement on Form SB-2 offering 3,000,000 shares at $6.00
through Blue Bay Capital Corp., which was declared effective by the SEC on
December 31, 2002. We withdrew that Registration Statement in March, 2003
in response to our analysis of capital market conditions in the lead-up to the
Iraq War. We returned all moneys collected. There is no guarantee that similar
or other circumstances will not arise that would cause us to reconsider this
effort.
Market
for Common Equity
Our
underwriter, Brookstreet Securities Corporation, plans to apply for quotation of
our common stock on the OTCBB. The OTCBB is not a national securities exchange,
and many companies have experienced limited liquidity when traded through this
quotation system. Following successful development of a trading market on the
OTCBB, it is our further intent to seek listing on a national stock exchange;
Arca|Ex - PSE is our preferred exchange. Each exchange has requirements for
listing that will determine, in part, which exchange we choose; the table below
demonstrates the listing requirements for these two exchanges.
Listing
Requirement |
Arca|Ex
- PSE |
OTCBB |
Pre-Tax
Income Last Year |
$100,000† |
N/A |
Two
Year Avg. Pre-Tax Income |
N/A |
N/A |
Net
Tangible Assets |
$2,000,000 |
N/A |
Market
Value of Publicly Held Stock |
$1,500,000 |
N/A |
#
of Shares Publicly Held |
500,000 |
25,000 |
#
Public Shareholders |
500 |
40 |
Bid
Price of Listed Securities |
$3.00 |
No
Minimum |
Shareholders
Equity |
No
Minimum |
No
Minimum |
Audit
Committee |
Yes |
No |
†
The issuer must meet the $100,000 net income requirement, which excludes
non-recurring and extraordinary items in the past fiscal year, two of the
past three fiscal years, or have total net tangible assets of
$2,500,000. |
Our underwriter, Brookstreet Securities Corporation,
will be the sponsoring broker dealer of our application to commence quotation of
our stock price. While there is no assurance, if we do obtain approval of this
application, we anticipate trading on the OTCBB. The OTCBB is not a national
securities exchange, and many companies have experienced limited liquidity when
traded through this quotation system. We expect to apply to list on the OTCBB
shortly after the completion of this offering.
We
based the stock offering price of this offering on the price investors paid in
the Company’s private placement of 2004, with a premium associated with the
improved liquidity resulting from the public offering and the improved business
prospects of the Company.
We have advised all current
shareholders of our company, our officers, and directors regarding the
requirements of Regulation M of the Securities Exchange Act of 1934.
Regulation M regulates the following activities during a securities offering:
(i) activities
by distribution participants (e.g.,
underwriters, prospective underwriters, brokers, and dealers) and their
affiliated purchasers; (ii) activities
by issuers or selling security holders and their affiliated purchasers;
(iii) NASDAQ
passive market making; (iv) stabilization
activities; and (v) short
selling in advance of a public offering. Regulation M also provides that the
safe harbor of Rule 10b-18 under the Exchange Act is not available during the
restricted period of a distribution.
Other
Principle Terms of the Underwriting Agreement
The underwriting agreement also includes the following terms:
· |
We
agree to use our best efforts to have the shares sold in this offering
listed on a national stock exchange as soon as practicable following the
offering; |
· |
We
agree to indemnify the underwriter against certain liabilities, including
liabilities under the Securities Act of 1933; and
|
· |
For
a period of five years following this offering, the underwriter will have
the right to designate an observer to our board of directors and each of
its committees. |
Offering
Procedures
We will publish announcements of the offering on certain of our products and on
our website, and we will mail and e-mail copies of the announcement to our
stockholders, customers and inquirers. The announcements will provide the
limited information permitted under applicable securities laws including the
appropriate telephone number, mailing address and e-mail address for requesting
this
prospectus.
We will likely publish similar announcements in selected print media.
Shares may be purchased by placing a buy order in a cash account with
Brookstreet. According to regular way settlement, a written confirmation will be
sent by electronic mail or first class mail to notify the subscriber of the
extent, if any, to which Brookstreet has accepted their order on our behalf.
The offering will begin on the effective date of this prospectus and continue
until either all of the shares have been sold or we terminate the offering, but
in no event later than nine months after the date of this prospectus. Subject to
the foregoing, the timing of the termination is at the discretion of our board
of directors.
Lock-Up
Agreements
Each
of our directors, executive officers and 5%-or-greater stockholders, has signed
a written agreement restricting each such person from selling any of their
shares of our common stock for a period of 12 months from the date of this
prospectus, other than intra-family transfers or transfers to trusts for estate
planning purposes, without the prior written consent of Brookstreet.
Lock-In
of Promotional Shares
In connection with our previously prior filed registration statement, which was
declared effective by the SEC on December 31, 2002, and to satisfy the
requirements of certain state securities laws and regulations, certain persons
who were deemed our promoters executed promotional share lock-in agreements with
respect to all or some of their common stock and/or options. Pursuant to these
agreements, they agreed that (i) they generally were unable to transfer the
subject shares and/or options and (ii) in the event of a dissolution,
merger, consolidation, reorganization, sale of exchange of our assets or
securities with a person who is not a promoter, they would not share in any
distribution until the public stockholders have received an amount equal to
$4.00 times the number of shares of common stock that they purchased in the
prior public offering and which they still held at the time of such distribution
(adjusted for stock splits, stock dividends, recapitalizations and the like).
The latter restriction could be waived by the vote of holders of a majority of
the outstanding common stock which was not subject to the promotional shares
lock-in agreements. However, the voting rights of the common stock subject to
the escrow were not affected.
In the event of a non-cash transaction, the fair value of the non-cash
consideration would be used. In the event of a transaction with a promoter, the
persons named below also would not share in any distribution until the public
stockholders received an amount equal to $4.00 times the number of shares
of common stock that they purchased in the prior public offering and which they
still held at the time of such distribution (adjusted for stock splits, stock
dividends, recapitalizations and similar transactions).
Beginning
one year from the completion or termination of the prior public offering,
2 1/2% of the shares placed in escrow would be released each quarter. All
remaining promotional shares would be released from escrow on the second
anniversary of the completion or termination of the prior public offering.
Shares released from the promotional shares lock-in agreements would no longer
be considered “promotional shares” and the holders of such released shares
consequently could participate in any distributions with respect to such
released shares. In addition, the agreements provide that the escrow would
terminate if the registration in the various states was terminated prior to the
sale of any shares or if the purchase price for any shares sold were returned to
the investors. We formally withdrew our registration statement with the SEC on
March 27, 2003, prior to the time that any shares were sold. Even though we
did not withdraw our registration in the various states, there is an argument
that these agreements terminated and are not currently effective.
The promotional shares lock-in agreements related to the following individuals:
Security
Holder |
|
Quantity |
|
Type
of Security |
|
Christopher
J. Reed |
|
|
3,200,000 |
|
|
shares
|
|
Robert
T. Reed, Jr. |
|
|
279,510 |
|
|
shares
and options |
|
Robert
T. Reed, Sr. |
|
|
262,500 |
|
|
options
|
|
Peter
Sharma III |
|
|
137,539 |
|
|
options |
|
Joseph
Grace |
|
|
250,000 |
|
|
shares |
|
Total |
|
|
4,129,549 |
|
|
shares
and options |
|
(The
remainder of this page left blank intentionally)
LEGAL
MATTERS
The validity of the securities offered hereby is being passed upon for us by
Horwitz and Cron of Irvine, California.
EXPERTS
Our financial statements which appear in this prospectus and in the registration
statement have been audited by _________________. With respect to the balance
sheet at December 31, 2003 and the statement of operations and cash flows
for the years ended December 31, 2002 and 2003, and are included in
reliance upon the report of said firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form SB-2 with the SEC. This
prospectus, which forms a part of that registration statement, does not contain
all of the information included in the registration statement. Certain
information is omitted and you should refer to the registration statement and
its exhibits. Statements contained in this prospectus regarding the contents of
any contract or any other document to which reference is made are not
necessarily complete, and you should refer to the exhibits attached to the
registration statement for copies of the actual contract or document.
You may review and copy our complete registration statement at the SEC’s Public
Reference Room at 450 Fifth Street, Washington, D.C. 20549, and at the
SEC’s regional offices in Chicago, Illinois and New York, New York. You may
call the SEC at 800.732.0330 for further information on the operation of the
Public Reference Room. The registration statement, and other reports and filings
we will make with the SEC in the future, can also be reviewed by accessing the
SEC’s website at http://www.sec.gov.
As a result of this offering, we will become subject to the information and
reporting requirements of the Securities Exchange Act for at least twelve months
and, in accordance therewith, will file periodic reports and other information
with the SEC, including an annual report containing audited financial
statements.
You should rely only on the information in this prospectus or any supplement to
it. We have not authorized anyone to provide you with information that is
different. You should not assume that the information in this prospectus or any
supplement is accurate as of any date other than the date on its cover.
(The
remainder of this page left blank intentionally)
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS
(1)
|
Operations
and Summary of Significant Accounting Policies |
|
This summary of significant accounting policies is presented to assist in
understanding the Company’s financial statements. These accounting policies
conform to generally accepted accounting principles and have been consistently
applied in the preparation of the financial statements.
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 14 beverages, two
candies, and three ice creams.
The Company sells its products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree, in
Canada.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The Company evaluates the collectibility of its trade accounts receivable based
on a number of factors. In circumstances where the Company becomes aware of a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded which reduces the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The allowance for doubtful accounts, slotting fees, 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, 2003 and June 30, 2004 (unaudited) was $35,580
and $68,130, respectively.
D) 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
and improvement |
|
|
|
|
|
39
years |
|
Machinery
and equipment |
|
|
|
|
|
7
years |
|
Computer
|
|
|
|
|
|
3-5
years |
|
Automobile
|
|
|
|
|
|
5
years |
|
Office
equipment |
|
|
|
|
|
7
years |
|
Management regularly reviews property, equipment and other long-lived assets,
including identifiable amortizing intangibles, for possible impairment. This
review occurs annually 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 by reviewing the net sales of
the associated beverage and applying industry multiples for which similar
beverages are sold. Annually, or earlier, if there is indication of impairment
of identified.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
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 as of
December 31, 2003 or June 30, 2004.
Management believes that the accounting estimate related to impairment of its
long lived assets, including its 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 consolidated 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.
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.
Trademark license and trademarks primarily represent the costs paid by the
Company for exclusive ownership of the Reed’s® trademark in connection with the
manufacture, sale and distribution of beverages and water and non-beverage
products. The Company also owns the Virgil’s® trademark and the China Cola®
trademark. In addition, the Company owns a number of other trademarks in the
United States as well as in a number of countries around the world. During 2002,
the Company adopted SFAS No. 142, Goodwill, and Other Intangible Assets.
Under the provisions on SFAS No. 142, the Company discontinued amortization
on indefinite-lived trademark licenses and trademarks while continuing to
amortize remaining trademark licenses and trademarks over one to 25 years.
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 annually, its
investment in brand names and other intangible assets for impairment and if
impairment is deemed to have occurred the impairment is charged to expense.
Intangible assets which have finite lives are amortized on a straight-line basis
over their remaining useful life; they are also subject to annual impairment
reviews. See Note 4.
The Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed to risk
for the amounts of funds held in one bank in excess of the insurance limit. In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess of the
$100,000 guarantee during the year ended December 31, 2003 and the six
months ended June 30, 2004.
During
the years ended December 31, 2003 and 2002 the Company’s had one customer
which accounted for approximately 15% and 13% of sales in each of the respective
years and 12.9% and 16.7% for each of the six months ended June 30, 2004
and June 30, 2003, respectively . No other customer accounted for more than
10% of sales in either year. As of December 31, 2003 and at June 30,
2004, the Company had $70,909 and $131,282-of accounts receivable from that
customer.
The
Company currently relies on a single contract packer for a majority of its
production and bottling of beverage products. The Company has different packers
for their non-beverage products. Although there are other packers and the
Company is in the process of outfitting their own brewery and bottling plant, a
change in packers may cause a delay in the production process, which could
ultimately affect operating results.
G) Fair
Value of Financial Instruments |
|
The Company’s financial instruments include cash, accounts and other
receivables, accounts payable, lines of credit and loans payable. The carrying
value of the Company’s financial instruments approximate their fair value as of
December 31, 2003.
H) Shipping
and Handling Costs |
|
The Company classifies all shipping and handling costs of the sale of its
products as a component of cost of sales.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
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.
J) Deferred
Stock Offering Costs |
|
The Company capitalizes costs incurred related to an initial public offering and
future issuance of common stock until such time as the stock is issued, or the
stock offering is abandoned by the Company (usually within six months when the
cost was incurred). These costs include attorney’s fees, accountant’s fees, SEC
filing fees, state filing fees, and other consulting fees all related to the
initial public offering and future issuance of common stock. In 2003, an
offering was abandoned and $426,682 of such costs were expensed. Deferred
offering costs of $7,672 are included in the balance sheet as of June 30,
2004 (unaudited) in connection with the Company’s public offering
anticipated to commence in 2004.
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (SFAS No. 123), establishes a fair value method of accounting for
stock-based compensation plans and for transactions in which an entity acquires
goods or services from non-employees in exchange for equity instruments. SFAS
No. 123 also encourages, but does not require companies to record compensation
cost for stock-based employee compensation. SFAS No. 123 was amended by SFAS No.
148, which now requires companies to disclose in interim financial statements
the pro forma effect on net income (loss) and net income (loss) per common share
of the estimated fair market value of stock options or warrants issued to
employees. The Company has chosen to continue to account for stock-based
compensation utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”,
with pro forma disclosures of net income (loss) as if the fair value method had
been applied. Accordingly, compensation cost for stock options is measured as
the excess, if any, of the fair market price of the Company’s stock at the date
of grant over the amount an employee must pay to acquire the stock.
Revenue is recognized on the sale of 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. Product is not shipped without an order from
the customer and credit acceptance procedures being 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 advertising production costs by expensing such
production costs the first time the related advertising is run. In addition, the
Company supports its customers, including distributors, with promotional
allowances, a portion of which is utilized for marketing and indirect
advertising by them. In certain instances, a portion of the promotional
allowances payable to customers based on the levels of sales to such customers,
the Company estimates promotion requirements or expected use of the allowances.
If the level of sales, promotion requirements, or use of the allowances are
different from such estimates, the promotional allowances could, to the extent
based on estimates, require adjustments.
Advertising costs are expensed as incurred and are included in selling expense,
in the amount of $29,234 and $37,915 for the years ended December 31, 2003
and 2002, respectively and $33,403 and $41,846 for the six months ended
June 30, 2004 and 2003, respectively (unaudited).
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.”
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
N) Recent
Accounting Pronouncements |
|
In January 2003, the Financial Accounting Standards Board (“FASB”) issued
Interpretation No. 46, “Consolidation of Variable Interest Entities,” an
interpretation of Accounting Research Bulletin (“ARB”) No. 51 “Consolidated
Financial Statement.” In December 2003, the FASB issued a revised version of
FIN 46 (FIN 46R) that replaced the original FIN 46.
Interpretation No. 46R addresses consolidation by business enterprises of
variable interest entities, which have one or both of the following
characteristics: (i) the equity investment at risk is not sufficient to
permit the entity to finance its activities without additional subordinated
support from other parties, which is provided through other interest that will
absorb some or all of the expected losses of the entity; (ii) the equity
investors lack one or more of the following essential characteristics of a
controlling financial interest, the direct or indirect ability to make decisions
about the entities activities through voting rights or similar rights; or the
obligation to absorb the expected losses of the entity if they occur, which
makes it possible for the entity to finance its activities; the right to receive
the expected residual returns of the entity if they occur, which is the
compensation for the risk of absorbing the expected loss.
Interpretation No. 46R also requires expanded disclosures by the primary
beneficiary (as defined) of a variable interest entity and by an enterprise that
holds a significant variable interest in a variable interest entity but is not
the primary beneficiary. Interpretation No. 46 as revised, applies to small
business issues no later than the end of the first reporting period that ends
after December 15, 2004.
This effective date includes those entities to which Interpretation No. 46R had
previously been applied. However, prior to the required application of
Interpretation No. 46R, a public entity that is a small business issuer shall
apply Interpretation No. 46R or this Interpretation to those entities that are
considered to be special-purpose entities no later than as of the end of the
first reporting period that ends after December 15, 2003.
Interpretation No. 46R may be applied prospectively with a cumulative-effect
adjustment as of the date on which it is first applied or by restating
previously issued financial statements for one or more years with a
cumulative-effect adjustment as of the beginning of the first year restated.
In June 2003, the FASB issued an Exposure Draft for a proposed statement of
financial accounting standards (“SFAS”) entitled “Qualifying Special Purpose
Entities (’QSPE’) and Isolation of Transferred Assets,” an amendment of
SFAS No. 140 (“The Exposure Draft”). The Exposure Draft is a proposal that
is subject to change and as such is not yet authoritative. If the proposal is
enacted in its current form, it will amend and clarify SFAS 140. The
Exposure Draft would prohibit an entity from being a QSPE if it enters into an
agreement that obligated a transferor of financial assets, its affiliates, or
its agents to deliver additional cash or other assets to fulfill the
special-purposes entity’s obligation to beneficial interest holders.
In April 2003, the FASB issued SFAS No. 149, “Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.”
SFAS No. 149 amends and clarifies financial accounting reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities.” The changes in SFAS No. 149 improve financial
reporting by requiring that contracts with comparable characteristics be
accounted for similarly. This statement is effective for contracts entered into
or modified after June 30, 2003 and all of its provisions should be applied
prospectively.
In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.”
SFAS No. 150 changes the accounting for certain financial instruments with
characteristics of both liabilities and equity that, under previous
pronouncements, issuers could account for as equity. The new accounting guidance
contained in SFAS No. 150 requires that those instruments be classified as
liabilities in the balance sheet.
SFAS No. 150 affects the issuer’s accounting for three types of
freestanding financial instruments. One type is mandatory redeemable
shares, which the issuing company is obligated to buy back in exchange for cash
and other assets. A second type includes put options and forward purchase
contracts, which involves instruments that do or may require the issuer to buy,
back some of its shares in exchange for cash or other assets. The third type of
instruments that are liabilities under this Statement is obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuer’s shares.
SFAS No. 150 does not apply to features embedded in a financial instrument
that is not a derivative in its entirely. Most of the provisions of
SFAS No. 150 are consistent with the existing definition of liabilities in
FASB Concepts Statement No. 6, “Elements of Financial Statements.” The remaining
provisions of this SFAS are consistent with the FASB’s proposal to revise that
definition to encompass certain obligations that a reporting entity can or must
settle by issuing its own shares. This SFAS shall be effective for
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
financial
instruments entered into or modified after May 31, 2003 and otherwise shall
be effective at the beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial instruments of a
non-public entity, as to which the effective date is for fiscal periods
beginning after December 15, 2003.
The Company does not believe that the adoption of the above recent
pronouncements will have a material effect on the Company’s consolidated
financial position or results of operations.
Inventory is valued at the lower of cost (first-in, first-out) or market, and is
comprised of the following,
|
|
December 31,
|
|
June 30,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
(Unaudited)
|
|
Raw
Materials |
|
$ |
668,025 |
|
$ |
588,171 |
|
Finished
Goods |
|
|
629,335
|
|
|
819,614
|
|
|
|
$ |
1,297,360 |
|
$ |
1,407,785 |
|
Fixed assets are comprised of the following as of December 31, 2003 and
June 30, 2004:
|
|
December 31,
|
|
June 30,
|
|
|
|
2003
|
|
2004
|
|
|
|
|
|
(Unaudited)
|
|
Land
|
|
$ |
409,546 |
|
$ |
409,546 |
|
Building
|
|
|
896,112
|
|
|
903,008
|
|
Vehicles
|
|
|
137,664
|
|
|
137,664
|
|
Machinery
and equipment |
|
|
465,430
|
|
|
509,888
|
|
Office
equipment |
|
|
98,937
|
|
|
98,937
|
|
Accumulated
depreciation |
|
|
(293,778
|
) |
|
(345,366
|
) |
|
|
$ |
1,713,911 |
|
$ |
1,713,677 |
|
Depreciation expense for the years ended December 31, 2003 and 2002 was
$92,051 and $39,126, respectively, and $51,589 and $36,635 for the six months
ended June 30, 2004 and 2003, respectively (unaudited).
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. One of the Brand Names was
deemed to have been impaired in 2002 and the impairment of approximately $12,000
was charged to loss on impairment. The impairment resulted from the initial
valuation of the asset in accordance with FAS No. 142. 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, 2003 and 2002 and at June 30, 2004
(unaudited) the carrying amounts for Brand Names were $800,201.
Other Intangible Assets consists of:
December 31,
2003 |
|
|
|
Carrying
|
|
Accumulated
|
|
Current
Year |
|
|
|
Asset
|
|
Amount
|
|
Amortization
|
|
Amortization
|
|
Useful
Life |
|
Packaging
Design |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
$ |
77,128 |
|
$ |
24,287 |
|
$ |
6,628 |
|
|
120
months |
|
Building
Loan Fees |
|
|
18,614
|
|
|
2,234
|
|
|
745
|
|
|
300
months |
|
Total
|
|
$ |
95,742 |
|
$ |
26,521 |
|
$ |
7,373 |
|
|
|
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
June 30,
2004 |
|
|
|
Carrying
|
|
Accumulated
|
|
Current
Period |
|
|
|
Asset
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amortization
|
|
|
Useful
Life |
|
|
|
(Unaudited) |
|
|
|
Packaging
Design |
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
$ |
82,986 |
|
$ |
27,893 |
|
$ |
3,606 |
|
|
120
months |
|
Building
Loan Fees |
|
|
18,614
|
|
|
2,606
|
|
|
372
|
|
|
300
months |
|
Total
|
|
$ |
101,600 |
|
$ |
30,499 |
|
$ |
3,978 |
|
|
|
|
The
estimated aggregate amortization as of December 31, 2003 for each of the
next five years is:
Year
|
|
Amount
|
|
2004
|
|
$ |
7,956 |
|
2005
|
|
$ |
7,956 |
|
2006
|
|
$ |
7,956 |
|
2007
|
|
$ |
7,956 |
|
2008
|
|
$ |
7,956 |
|
The Company had outstanding borrowings of $788,514 and $1,015,327 as of
December 31, 2003 and June 30, 2004 (unaudited), respectively, under
the following line of credit agreements:
The Company has an unsecured $50,000 line of credit with a bank. Interest is
payable monthly at the Wall Street Journal prime rate plus 1.5%. The Company’s
outstanding balance was $36,814 at December 31, 2003 and $33,338 at
June 30, 2004 (unaudited). The interest rate in effect at December 31,
2003 was 5.5%.
The Company has an unsecured $50,000 line of credit with a bank, guaranteed by
the Small Business Administration (SBA) and the Company’s President.
Interest is payable monthly at a rate of 7.5% per annum. The line of credit
expires December 2005. Upon expiration the loan converts to a term loan
providing for principal and interest payments sufficient to amortize the loan by
December 2009. The Company’s outstanding balance was $50,000 at
December 31, 2003 and at June 30, 2004 (unaudited).
The Company has a line of credit with a finance company. This line of credit
allowed for a maximum borrowing base of $800,000 as of December 31, 2003.
On June 25, 2004, the Company renewed and amended its credit facility with
the lender. The amended credit facility consists of a one-year revolving line of
credit of up to $1,100,000, and expires on June 25, 2005.
The amount available for borrowing from time to time under the revolving line of
credit is dependent upon the levels of certain eligible accounts receivable and
inventory. As of December 31, 2003 and June 30, 2004 (unaudited), the
Company had an outstanding balance of $701,700 and $931,989, respectively, under
the line of credit, based on eligible accounts receivable and inventory at that
time. Borrowings under the credit facility bear interest at the prime rate plus
8% per annum (12.25% as of June 30, 2004).
This revolving line of credit is secured by all of our assets, including
accounts receivable, inventory, trademarks and other intellectual property, and
equipment. The credit facility does not impose any financial covenants on us.
(6)
Notes
Payable to Related Parties |
|
The Company has three loans payable to Robert T. Reed, Sr., the father of
the Company’s founder Christopher J. Reed, in an amount of $259,894 as of
December 31, 2003 and at June 30, 2004 (unaudited):
The first loan bears interest at 10% per annum and matures in May 2006. The
outstanding principal balance of the loan as of December 31, 2003 and at
June 30, 2004 (unaudited) was $32,354.
The second loan bears interest at 8% per annum and matures in June 2006.
The outstanding principal balance of this loan as of December 31, 2003 and
at June 30, 2004 (unaudited) was $177,540. Until July 2005, Mr. Reed
has the right to convert this loan into shares of our common stock at a rate of
one share of common stock for every $2.00 owed to Mr. Reed. As of June 30,
2004, the loan was convertible into 114,908 shares of common stock.
The
third loan bears interest at 8% per annum and matures in October 2006. The
outstanding principal balance of this loan as of December 31, 2003 and at
June 30, 2004 (unaudited) was $50,000.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Long-term
debt consists of the following as of December 31, 2003 and June 30,
2004:
Note
payable to SBA in the original amount of $748,000 with interest at the
Wall Street Journal prime rate plus 1%, adjusted monthly with no cap or
floor. The combined principal and interest payments are $4,725, subject to
annual adjustments. The interest rate in effect at December 31, 2003
was 6%. The note is secured by land and building and guaranteed by the
majority stockholder The note matures November 2025. |
|
$ |
706,195 |
|
$ |
697,336 |
|
Note
payable for a business acquisition in the original amount of $500,000,
payable at $100,000 per annum, including 5.37% imputed interest. The
note is collateralized by a pledge of 3,200,000 shares of common
stock owned by the majority stockholder, who has also personally
guaranteed the obligation. The note matures June 2004 and was paid in full
in July 2004. |
|
|
97,668
|
|
|
100,000
|
|
Notes
payable to various non-related parties, unsecured, with interest at
8% per annum. Principal and accrued interest are payable in full at
the end of the note term. Upon repayment of the loan and any accrued
interest the debt holders will be entitled to one warrant for each dollar
of debt, for a maximum of 370,000 warrants. The warrants will have an
exercise price of $3 and a term of 10 years. Principal and any unpaid
interest are due in October 2004(A). |
|
|
354,000
|
|
|
304,000
|
|
The
Company obtained a building improvement loan with a maximum draw of
$168,000. The interest rate is at the Wall Street Journal prime rate plus
1%, adjusted monthly with no cap or floor. The combined monthly principal
and interest payments are $1,597; the rate in effect at December 31,
2003 was 6%. The note is secured by land and building and guaranteed by
the majority stockholder and matures November 2005. |
|
|
148,923
|
|
|
147,057
|
|
Note
payable to a non-related individual, due on demand, unsecured, with
interest at 10% per annum. The note is convertible to common stock at
60% of the initial public offering price or 100% of a private offering
price. |
|
|
9,000 |
|
|
9,000 |
|
Notes
payable to GMAC, secured by automobiles, payable in monthly installments
of $758 including interest at 0.0%, with maturity in 2008.
|
|
|
34,082 |
|
|
31,842 |
|
Notes
payable to Chrysler Financial Corp., secured by automobiles, payable in
monthly installments of $658, including interest at 1.9%, with maturity in
2008. |
|
|
35,853 |
|
|
31,231 |
|
Total |
|
|
1,385,721 |
|
|
1,320,466 |
|
Less
current portion |
|
|
411,452
|
|
|
383,000 |
|
|
|
$ |
974,269 |
|
$ |
937,466 |
|
(A) Subsequent to June 30, 2004, a number of holders of our debt
indicated their willingness to convert a total of $255,000 of debt into
25,500 shares of Series A convertible preferred stock at a price of
$10.00 per share. As of June 30, 2004, the necessary filings to create
the Series A convertible preferred stock under Delaware law had not yet
been completed (see Notes 8 and 15).
The aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31, 2003:
December 31,
|
|
Amount
|
|
2004
|
|
$ |
411,452 |
|
2005
|
|
|
128,784
|
|
2006
|
|
|
39,784
|
|
2007
|
|
|
37,530
|
|
2008
|
|
|
28,053
|
|
Thereafter
|
|
|
740,118
|
|
Total
|
|
$ |
1,385,721 |
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Common stock consists of $.0001 par value, 50,000,000 shares
authorized, 4,726,091 issued and outstanding December 31, 2003.
Subsequent to June 30, 2004, the Company changed its authorized shares from
50,000,000 to 12,000,000, with 11,500,000 shares allocated to common stock
and 500,000 shares allocated to Series A preferred stock (see
Note 15).
Loss
per share calculations are in accordance with SFAS No. 128, “Earnings Per
Share.” Basic loss per share is calculated by dividing net loss by weighted
average number of common shares outstanding for the year. Diluted loss per share
is computed by dividing net loss by the weighted average number of common shares
outstanding plus the dilutive effect of outstanding common stock warrants and
convertible debentures.
For
the year ended December 31, 2003 and the six months ended June 30,
2004 (Unaudited), the calculations of basic and diluted earnings 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, 2003 and at June 30, 2004 (unaudited):
Warrants
|
|
|
848,876
|
|
Convertible
notes |
|
|
139,572
|
|
Options
|
|
|
72,500
|
|
(10)
Stock
Options and Warrants |
|
The Company has granted certain employees and other individuals’ stock options
to purchase the Company’s common stock under employment agreements. The options
generally vest immediately or when services are performed and have a maximum
term of five (5) years.
In 2001, the Company adopted the Original Beverage Corporation 2001 Stock Option
Plan. The options shall be granted from time to time by the Compensation
Committee. Individuals eligible to receive options include employees of the
Company, consultants to the Company and directors of the Company. The options
shall have a fixed price, which will not be less than 100% of the fair market
value per share on the grant date.
Options granted to employees are accounted for according to APB 25. The
following table summarizes the stock option activity for the year ended
December 31, 2003 and the six months ended June 30, 2004 (Unaudited):
|
|
|
|
Weighted
Average |
|
|
|
|
Options
|
|
|
Exercise
Price |
|
Balance
January 1, 2002 |
|
|
72,500
|
|
$ |
3.21 |
|
Options
granted in 2002 |
|
|
—
|
|
|
NA
|
|
Options
exercised in 2002 |
|
|
—
|
|
|
NA
|
|
Balance
January 1, 2003 |
|
|
72,500
|
|
$ |
3.21 |
|
Options
granted in 2003 |
|
|
—
|
|
|
NA
|
|
Options
exercised in 2003 |
|
|
—
|
|
|
NA
|
|
Balance
December 31, 2003 |
|
|
72,500
|
|
$ |
3.21 |
|
Options
granted first six months in 2004 |
|
|
—
|
|
|
NA
|
|
Options
exercised first six months of 2004-11-09 |
|
|
—
|
|
|
|
|
Exercisable
|
|
|
72,500
|
|
$ |
3.21 |
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
|
|
Weighted
Average |
|
Weighted
Average |
|
|
|
|
|
Remaining |
|
Remaining
|
|
Weighted
Average |
|
Weighted
Exercise Price Range |
|
|
Number |
|
|
Contractual
Life |
|
|
Exercise
Price |
|
$2.00
|
|
|
37,500
|
|
|
53
months |
|
$ |
2.00 |
|
$3.00
|
|
|
17,500
|
|
|
53
months |
|
$ |
3.00 |
|
$6.00
|
|
|
17,500
|
|
|
53
months |
|
$ |
6.00 |
|
Total
options |
|
|
72,500
|
|
|
53
months |
|
$ |
3.21 |
|
All options are vested and exercisable as of June 30, 2004.
The weighted average grant date fair value of the options granted during 2002
was $0.78. Had compensation cost for the plan been determined based on the fair
value of the options at the grant date, consistent with the methodology
prescribed by SFAS 123, the Company’s net loss would have been the pro
forma amounts indicated below:
|
|
Years
Ended |
|
Six
Months Ended |
|
|
|
2003
|
|
2002
|
|
2004
|
|
2003
|
|
Net
loss as reported |
|
$ |
(774,367
|
) |
$ |
(65,812
|
) |
$ |
(38,037
|
) |
$ |
(499,408
|
) |
Stock
based compensation cost |
|
|
—
|
|
|
(13,650
|
) |
|
—
|
|
|
(13,650
|
) |
Pro
forma net loss |
|
$ |
(774,367
|
) |
$ |
(79,462
|
) |
$ |
(38,037
|
) |
$ |
(513,058
|
) |
Loss
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
As
reported |
|
$ |
(0.16
|
) |
$ |
(.01
|
) |
$ |
(.01
|
) |
$ |
(.11
|
) |
Pro
forma |
|
$ |
(0.16
|
) |
$ |
(.02
|
) |
$ |
(.01
|
) |
$ |
(.11
|
) |
No warrants were issued in 2003 or 2004.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options pricing model with the following assumptions used for
grants in 2002: no expected dividends, 49% volatility, average risk free
interest rate 3.01%, and expected lives of five years.
For the years ended December 31, 2003 and 2002 and the six months ended
June 30, 2004 and 2003 (unaudited), there were no intrinsic compensation
costs recognized in the net loss because there were no options issued for less
than the market value.
The Company grants warrants to non-employees. During 2000 and 2001, the company
issued 848,876 warrants in connection with the issuance of $420,000 of debt. The
Company used the Black-Scholes valuation technique and determined that 59% of
the debt should be allocated to the value of the warrants as of the date of
issuance. This resulted in an allocation of $172,200 to debt, and an allocation
of $247,800 to discount relating to the warrants. The Company has amortized the
discount over the initial expected life of the debt resulting in amortization of
$24,780 and $148,680 for the years ending December 31, 2003 and 2002, and
$24,780 for the six month period ended June 30, 2003 (unaudited). The
amount of the discount allocated to the warrants has been fully amortized as of
December 31, 2003.
A summary of the warrants outstanding and exercisable at December 31, 2003
is as follows:
|
|
Weighted
Average |
|
|
|
|
|
|
|
Remaining
|
|
Average
Contractual |
|
Exercise
|
|
Weighted
Exercise Price Range |
|
|
Number
|
|
|
Life
|
|
|
Price
|
|
$0.02
|
|
|
262,500
|
|
|
17
months |
|
$ |
0.02 |
|
$2.00
|
|
|
119,876
|
|
|
84
months |
|
$ |
2.00 |
|
$3.00
|
|
|
466,500
|
|
|
110
months |
|
$ |
3.00 |
|
Total
warrants |
|
|
848,876
|
|
|
|
|
|
|
|
The warrants expire at various dates between 2005 and 2007.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
At
December 31, 2003, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income.
The amounts available were $1,680,705 for Federal purposes and $890,291 for
state purposes. The Federal carryforward expires in 2023 and the state
carryforward expires in 2008. Given the Company’s history of net operating
losses, management has determined that it is more likely than not the Company
will not be able to realize the tax benefit of the carryforwards.
Accordingly,
the Company has not recognized a deferred tax asset for this benefit. Upon the
attainment of taxable income by the Company, management will assess the
likelihood of realizing the tax benefit associated with the use of the
carryforwards will recognize a deferred tax asset at that time.
Significant
components of the Company’s deferred income tax assets are as follows:
|
|
December 31,
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2003
|
|
2002
|
|
2004
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Deferred
income tax asset: |
|
|
|
|
|
|
|
|
|
|
Net
operating loss carry forward |
|
$ |
623,400 |
|
$ |
317,729 |
|
$ |
623,400 |
|
Valuation
allowance |
|
|
(623,400
|
) |
|
(317,729
|
) |
|
(623,400
|
) |
Net
deferred income tax asset |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as follows:
|
|
December 31,
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2003
|
|
2002
|
|
2004
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Tax
expense at the U.S. statutory income tax |
|
|
(34.0
|
)% |
|
(34.0
|
)% |
|
(34.0
|
)% |
Increase
in the valuation allowance |
|
|
34.0
|
% |
|
34.0
|
% |
|
34.0
|
% |
Effective
tax rate |
|
|
—
|
|
|
—
|
|
|
—
|
|
(12)
Commitments
and Contingencies |
|
The Company leases two pieces of machinery under non-cancelable operating
leases. The first lease calls for monthly payments of $1,795 and expires in
October 2006. The Company has the option to renew the lease for another eight
months or purchase the equipment at fair market value. The second lease calls
for monthly payments of $185 and expires in May 2004.
Future payments under these leases as of December 31, 2003 are as follows:
Years
Ending |
|
|
|
December 31
|
|
|
|
2004 |
|
$22,465 |
2005 |
|
21,540
|
2006 |
|
17,950
|
|
|
$61,955 |
The Company currently and from time to time is involved in litigation incidental
to the conduct of its business. The Company is not currently a party to any
lawsuit or proceeding which, in the opinion of its management, is likely to have
a material adverse effect on it.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(13)
Proceeds
Received Prior to Issuance of Preferred Stock |
|
In the second quarter of 2004, the Company began a private placement of
Series A convertible preferred stock. The Company raised $337,900 from the
sale of 33,790 shares of Series A convertible preferred stock,
resulting in $310,900 of proceeds to the Company net of offering costs. As of
June 30, 2004, the necessary filings to create the Series A
convertible preferred stock under
Delaware
law had not yet been completed. Therefore, these amounts are shown as debt on
the Company’s balance sheet at such date but will be reclassified when the
Series A preferred stock is actually issued.
(14)
Related
Party Activity |
|
The Company has notes payable to a related party. See Note 6.
Since
January 2000 we have extended a line of credit to one of our consultants, Peter
Sharma III who since June, 2004 also sits on our Board of Directors and is
a registered representative of our underwriter, Brookstreet Securities Corp. The
line of credit is interest free. In June 2005 a repayment schedule begins at
$1000 per month that ends with a balloon payment for the remaining balance, due
on December 31, 2007. As of September 30, 2004 the debit balance of the credit
line was $99,197.
On September 24, 2004, the Company obtained a line of credit in the amount
of approximately $280,000 with Merrill Lynch. The loan was co-signed by Robert
T. Reed, Jr., the Company’s Vice President and National Sales
Manager — Mainstream and a brother of the Company’s founder and CEO,
Christopher J. Reed. Robert Reed also pledged his stock account at Merrill Lynch
as collateral. The line of credit bears interest at a rate of rate of 3.785%
plus LIBOR (5.815% as of October 28, 2004). In consideration for Mr. Reed’s
pledging his stock account at Merrill Lynch as collateral, the Company pays Mr.
Reed 5% per annum of the amount the Company borrows from Merrill Lynch. See
“Certain Relationships and Related Transactions.”
On September 28, 2004, the Company obtained a loan for $150,000 from Bay
Business Credit secured by certain plant equipment. This loan bears interest at
prime plus 10% (14.75% as of October 28, 2004) and matures in October 2007.
Subsequent to June 30, 2004, the Company reached agreement with certain
convertible debt holders. The debt ceases accruing interest as of June 30,
2004 and the debt holders have agreed to convert their debt to preferred stock.
The conversion is expected to occur in the fourth quarter of 2004 and will be
converted to Series A preferred stock. Approximately 25,500 shares of
Series A preferred stock will be issued in connection with this conversion.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 24.
Indemnification
of Directors and Officers |
|
Section 145 of the Delaware General Corporation Law (the “DGCL”), as the
same exists or may hereafter be amended, provides that a Delaware corporation
may indemnify any persons who were, or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the corporation’s best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the corporation’s best interests, provided that no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee, or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him or
her against the expenses which such officer or director has actually and
reasonably incurred.
Section 145 of the DGCL further authorizes a corporation to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity, arising out of his or her status as such,
whether or not the corporation would otherwise have the power to indemnify him
or her under Section 145 of the DGCL.
The Company’s amended certificate of incorporation provides that, to the fullest
extent permitted by Delaware law, as it may be amended from time to time, none
of the Company’s directors will be personally liable to the Company or the
Company’s stockholders for monetary damages resulting from a breach of fiduciary
duty as a director.
The Company’s amended certificate of incorporation also provides discretionary
indemnification for the benefit of the Company’s directors, officers, and
employees, to the fullest extent permitted by Delaware law, as it may be amended
from time to time. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to the Company’s directors or officers, or
persons controlling us, pursuant to the foregoing provisions, the Company has
been informed that in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is therefore unenforceable.
Pursuant to the Company’s bylaws, the Company is required to indemnify its
directors, officers, employees and agents, and the Company has the discretion to
advance his or her related expenses, to the fullest extent permitted by law.
The Company does not currently provide liability insurance coverage for its
directors and officers.
(Remainder
of page left blank intentionally)
Item 25.
Other
Expenses of Issuance and Distribution |
|
The following is a schedule of the estimated expenses (all of which will be
borne by the Company) incurred in connection with the offering of the securities
registered hereby, other than underwriter commissions. Advertising expenses we
incur in connection with our own selling efforts will vary depending on the
success of the offering.
|
|
Amount
if |
|
Amount
if |
|
Amount
if |
|
|
|
200,000
|
|
1,000,000
|
|
2,000,000
|
|
|
|
Shares
are |
|
Shares
are |
|
Shares
are |
|
Description
|
|
Sold
|
|
Sold
|
|
Sold
|
|
SEC
registration fee |
|
$
|
1,083
|
|
|
$
|
1,083
|
|
|
$
|
1,083
|
|
|
Printing
and Engraving Fees |
|
|
10,000
|
*
|
|
|
10,000
|
*
|
|
|
10,000
|
*
|
|
Postage
(mailing share certificates) |
|
|
500
|
*
|
|
|
500
|
*
|
|
|
500
|
*
|
|
Legal
Fees |
|
|
60,000
|
*
|
|
|
60,000
|
*
|
|
|
60,000
|
*
|
|
Accounting
Fees |
|
|
60,000
|
*
|
|
|
60,000
|
*
|
|
|
60,000
|
*
|
|
Blue
Sky Fees and Expenses |
|
|
15,000
|
*
|
|
|
15,000
|
*
|
|
|
15,000
|
*
|
|
Underwriter
Expenses |
|
|
25,000
|
*
|
|
|
25,000
|
*
|
|
|
25,000
|
*
|
|
Advertising
Expenses |
|
|
25,000
|
*
|
|
|
50,000
|
*
|
|
|
100,000
|
*
|
|
Miscellaneous
Expenses |
|
|
3,400
|
*
|
|
|
3,400
|
*
|
|
|
3,400
|
*
|
|
TOTAL
|
|
$
|
199,983
|
|
|
$
|
224,983
|
|
|
$
|
274,983
|
|
|
Item 26.
Recent
Sales of Unregistered Securities |
|
There have been no sales of unregistered securities within the last three years,
except as set forth below.
In January 2001, the Company issued 14,500 shares of common stock as a
year-end bonus to its employees. The Company recognized $29,000 of compensation
expense. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
In January 2001, the Company issued 3,200 shares of common stock in
exchange for services provided by two vendors. The Company estimates that the
value of the services provided in exchange for the shares was approximately
$2.00 per share, so it has recognized $6,400 of expense. The Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a non-public sale of securities.
In February 2001 Robert T. Reed Jr. exercised warrants for 20,000 shares of
the common stock at $1.00 per share. The warrants had been issued in 1992.
The Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a non-public sale of
securities.
In May 2001, the Company sold 500 shares of common stock at $3.00 per
share to an existing stockholder who is not an affiliate of the Company. The
Company believes that the offering was exempt from registration under the
Securities Act by reason of Section 4(2) thereof as a non-public sale of
securities.
In June 2001, the Company issued options to purchase 17,500 shares of
common stock to a manager of the Company. The exercise price of the options is
$3.00 per share, and the options expire in June 2009. No compensation cost
was recognized because the strike price equaled the fair value of the stock at
the date of issuance. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Section 4(2) thereof as
a non-public sale of securities.
In June 2001, the Company issued warrants to purchase 30,000 shares of
common stock to a consultant of the Company in partial consideration for
services rendered to the Company. The exercise price of the options is
$3.00 per share, and the options expire in June 2009. The fair value of
this warrant grant is estimated on the date of grant using the Black-Scholes
options pricing model with the following assumptions used: no expected
dividends, 49% volatility, and risk-free interest of 4.81% and expected life of
five years. The value was calculated to be $1.46 per warrant for a total
value of $43,806.68. The total value has been included in deferred stock
offering costs to be offset against the future sale of common stock. The Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a non-public sale of securities.
In
May, June, and July 2001, the Company raised $420,000 from the issuance of notes
to fifteen persons who were existing stockholders or otherwise familiar with the
Company. These notes bear interest at 8% per annum. The original maturity
date of the notes was in February 2003 and the note holders extended the
maturity date until October 2004. The investors also received warrants to
purchase an aggregate of 420,000 shares of common stock at an exercise
price of $3.00 per share. The options expire ten years from the date of
issuance. The investors were:
William
Robertson |
|
$ |
159,000 |
|
Lucinda
Robertson |
|
$ |
30,000 |
|
David
Robinov |
|
$ |
50,000 |
|
Martin
Shepard |
|
$ |
20,000 |
|
Kapur
Payson |
|
$ |
30,000 |
|
Mark
Johnson |
|
$ |
30,000 |
|
Dan
Keays |
|
$ |
30,000 |
|
Bill
Milligan |
|
$ |
25,000 |
|
Shane
Milligan |
|
$ |
20,000 |
|
Brant
Milligan |
|
$ |
5,000 |
|
Billy
Milligan |
|
$ |
5,000 |
|
Shalee
Milligan |
|
$ |
5,000 |
|
Shannon
Milligan |
|
$ |
5,000 |
|
William
Holiman |
|
$ |
1,000 |
|
Jason
Robertson |
|
$ |
5,000 |
|
A
portion of the loan proceeds has been allocated to the value of the underlying
warrants based on the requirements of APB 14, which was calculated to be
$247,800. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
In July 2001, Mark Reed converted $10,000 worth of convertible debt issued in
1991 and accrued interest into 8,889 shares of common stock, or a
conversion rate of $1.125 per share. The Company believes that the
conversion was exempt from registration under the Securities Act by reason of
Section 3(a)(9), since the issuance was an exchange with existing security
holders exclusively and no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange. In addition, the Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a non- public sale of securities.
In July 2001, the Company issued warrants to purchase 1,500 shares of
common stock to a consultant of the Company in partial consideration for
services rendered to the Company. The exercise price of the options is
$3.00 per share, and the options expire in July 2009. The fair value of
this warrant grant is estimated on the date of grant using the Black-Scholes
options pricing model with the following assumptions used: no expected
dividends, 49% volatility, and risk-free interest of 4.76% and expected life of
five years. The value was calculated to be $1.46 per warrant for a total
value of $2,187. The total value has been included in deferred stock offering
costs to be offset against the future sale of common stock. The Company believes
that the offering was exempt from registration under the Securities Act by
reason of Section 4(2) thereof as a non-public sale of securities.
In August 2001, $15,000 was raised in a private sale of a total of
3,750 shares of common stock at $4.00 per share to two existing
stockholders of the Company who are not affiliates of the Company. The Company
believes that the offering was exempt from registration under the Securities Act
by reason of Section 4(2) thereof as a non-public sale of securities.
In October 2001, B.J. Green converted $17,815 worth of convertible debt and
interest into 11,877 shares of common stock, or a conversion rate of
$1.50 per share. The convertible debt had been issued in 1991. The Company
believes that the conversion was exempt from registration under the Securities
Act by reason of Section 3(a)(9), since the issuance was an exchange with
existing security holders exclusively and no commission or other remuneration
was paid or given directly or indirectly for soliciting such exchange. In
addition, the Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
In July 2002, the Company issued options to purchase 17,500 shares of
common stock to a manager of the Company, in accordance with the terms of the
manager’s employment agreement. The exercise price of the options is
$6.00 per share and the options expire in July 2007. No compensation cost
was recognized because the strike price equaled the fair value of the stock at
the date of issuance. The Company believes that the offering was exempt from
registration under the Securities Act by reason of Rule 701 thereunder as a
sale of securities pursuant to a written compensation contract with an employee
of the issuer, and/or Section 4(2) of the Securities Act as a non-public
sale of securities.
In January 2003, the Company issued 1,500 shares of common stock as a
year-end bonus to its employees. The Company recognized $4,500 of compensation
expense. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
In July 2003, the Company sold 3,000 shares of common stock at
$3.50 per share to an existing stockholder who is not an affiliate of the
Company. The Company believes that the offering was exempt from registration
under the Securities Act by reason of Section 4(2) thereof as a non-public
sale of securities.
Beginning in the second quarter of 2004, the
Company conducted a private offering and raised $337,900 ($310,900, net of
offering expenses) from the sale of 33,790 shares of Series A
convertible preferred stock at a price of $10.00 per share. This offering
was completed in October 2004, after the Company filed the Certificate of
Designations creating the Series A convertible preferred stock with the
Secretary of State of Delaware. The sales were made to existing stockholders and
other persons who were familiar with the Company. The Company believes that the
offering was exempt from registration under the Securities Act by reason of
Section 4(2) thereof or Regulation D promulgated thereunder, as a
non-public sale of securities.
Also at this time, a number of holders of our debt indicated their willingness
to convert a total of $255,000 of debt into 25,500 shares of Series A
convertible preferred stock at a price of $10.00 per share. This offering
was completed in October 2004, after the Company filed the Certificate of
Designations creating the Series A convertible preferred stock with the
Secretary of State of Delaware. The Company believes that the offering was
exempt from registration under the Securities Act by reason of Section 4(2)
thereof or Regulation D promulgated thereunder, as a non-public sale of
securities.
Copies of the following documents are filed with this registration statement as
exhibits:
|
1.2*
|
|
|
Underwriting
Agreement |
|
|
3.1
|
|
|
Certificate
of Incorporation |
|
|
3.2
|
|
|
Amendment
to Certificate of Incorporation |
|
|
3.3
|
|
|
Certificate
of Designations |
|
|
3.4
|
|
|
Certificate
of Correction to Certificate of Designations |
|
|
3.5
|
|
|
Bylaws,
as amended |
|
|
4.1*
|
|
|
Form
of common stock certificate |
|
|
4.2*
|
|
|
Form
of Series A preferred stock certificate |
|
|
4.3
|
|
|
2001
Employee Stock Option Plan |
|
|
4.4*
|
|
|
Convertible
promissory notes issued to investors |
|
|
4.5 |
|
|
Amendment
to Promissory Note |
|
|
5.1*
|
|
|
Legal
opinion of Horwitz and Cron |
|
|
10.1*
|
|
|
Purchase
Agreement for Virgil’s Root Beer |
|
|
10.2
|
|
|
Brewing
Agreement dated as of May 15, 2001 between the Company and The Lion
Brewery, Inc. |
|
|
10.3
|
|
|
Loan
Agreement with U.S. Bank National Association for purchase of the Brewery
|
|
|
10.4 |
|
|
Loan
Agreement with U.S. Bank National Association for improvements at the
Brewery |
|
|
10.5 |
|
|
Loan
Agreement with Bay Business Credit |
|
|
10.6*
|
|
|
Credit
Agreement with Merrill Lynch |
|
|
10.7
|
|
|
Form
of Promotional Share Lock-In Agreement |
|
|
10.8*
|
|
|
Loan
Agreement dated September 28, 2004 with Bay Business Credit
|
|
|
10.9 |
|
|
Sirius/Pureprophet, Ltd. Vendor's Credit Line Agreement with Original Beverage Corp. |
|
|
10.10 |
|
|
Terms of Amortization Peter Sharma III For
Sirius/Pureprophet, Ltd. Vendor's Credit Line Agreement with Original
Beverage Corp. (Addendum) |
|
|
10.11 |
|
|
Co-Sign Agreement |
|
|
10.12 |
|
|
Loan Agreement with Robert T. Reed
Sr. |
|
|
10.13 |
|
|
Loan Agreement with William
Holiman |
|
|
10.14 |
|
|
Loan Agreement with Bay Business
Credit |
|
|
10.15 |
|
|
Loan Agreement with Robert T.
Reed |
|
|
10.16 |
|
|
Loan Agreement with Robert T. Reed
Sr. |
|
|
10.17 |
|
|
Amendment to Loan Agreement with Bay
Business Credit |
|
|
23.1
|
|
|
Consent
__________ |
|
|
23.2*
|
|
|
Consent
of Horwitz and Cron (contained in Exhibit 5.1)
|
|
|
24
|
|
|
Power
of Attorney (included in the signature page to the Registration Statement)
|
|
__________________
*
|
to
be filed by amendment |
|
A. Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, or 1933 Act, may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
1933 Act and will be governed by the final adjudication of such issue.
B.
The undersigned registrant hereby undertakes:
|
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: |
|
|
|
|
|
(i) To
include any prospectus required by Section 10(a)(3) of the
1933 Act, |
|
|
|
|
|
(ii) To
reflect in the prospectus any facts or events arising after the effective
date of the Registration Statement (or most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration
Statement.
Notwithstanding
the foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
(Section 230.424(b) of Regulation S-B) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective Registration
Statement, and |
|
|
|
|
|
(iii) To
include any additional or changed material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the Registration
Statement. |
|
|
|
|
|
(2) That,
for the purpose of determining any liability under the 1933 Act, each
such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof. |
|
|
|
|
|
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering. |
|
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Los Angeles, California, on this 25th day of
March, 2005.
|
REED’S,
INC |
|
|
By:
/s/ CHRISTOPHER J.
REED |
|
|
Christopher
J. Reed |
|
|
Chairman,
President and Chief Executive Officer |
|
POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS:
That the undersigned officers and directors of Reed’s, Inc., Corporation, a
Delaware corporation, do hereby constitute and appoint Christopher J. Reed and
Peter Sharma III, and either of them, the lawful attorneys-in-fact and
agents with full power and authority to do any and all acts and things and to
execute any and all instruments which said attorneys and agents, and either one
of them, determine may be necessary or advisable or required to enable said
corporation to comply with the Securities Act of 1933, as amended, and any rules
or regulations or requirements of the Securities and Exchange Commission in
connection with this Registration Statement. Without limiting the generality of
the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or either one of them, shall do or cause to
be done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney
as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
registration statement has been signed below by the following persons in the
capacities and on the dates indicated.
Name |
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
CHRISTOPHER J. REED
Christopher
J. Reed |
|
Chief
Executive Officer, President, Chief Financial Officer and Chairman of the
Board (Principal Executive Officer, Principal Financial Officer and
Principal Accounting Officer) |
|
March
25, 2005 |
|
|
|
|
|
|
|
/s/
JUDY HOLLOWAY REED
Judy
Holloway Reed |
|
Director |
|
|
|
|
|
|
|
|
|
/s/
PETER SHARMA III
Peter
Sharma III |
|
Director |
|
|
|
EXHIBIT
INDEX
|
1.2*
|
|
|
Underwriting
Agreement |
|
|
3.1
|
|
|
Certificate
of Incorporation |
|
|
3.2
|
|
|
Amendment
to Certificate of Incorporation |
|
|
3.3
|
|
|
Certificate
of Designations |
|
|
3.4
|
|
|
Certificate
of Correction to Certificate of Designations |
|
|
3.5
|
|
|
Bylaws,
as amended |
|
|
4.1*
|
|
|
Form
of common stock certificate |
|
|
4.2*
|
|
|
Form
of Series A preferred stock certificate |
|
|
4.3
|
|
|
2001
Employee Stock Option Plan |
|
|
4.4*
|
|
|
Convertible
promissory notes issued to investors |
|
|
4.5 |
|
|
Amendment
to Promissory Note |
|
|
5.1*
|
|
|
Legal
opinion of Horwitz and Cron |
|
|
10.1*
|
|
|
Purchase
Agreement for Virgil’s Root Beer |
|
|
10.2
|
|
|
Brewing
Agreement dated as of May 15, 2001 between the Company and The Lion
Brewery, Inc. |
|
|
10.3
|
|
|
Loan
Agreement with U.S. Bank National Association for purchase of the Brewery
|
|
|
10.4 |
|
|
Loan
Agreement with U.S. Bank National Association for improvements at the
Brewery |
|
|
10.5 |
|
|
Loan
Agreement with Bay Business Credit |
|
|
10.6*
|
|
|
Credit
Agreement with Merrill Lynch |
|
|
10.7
|
|
|
Form
of Promotional Share Lock-In Agreement |
|
|
10.8*
|
|
|
Loan
Agreement dated September 28, 2004 with Bay Business Credit
|
|
|
10.9 |
|
|
Sirius/Pureprophet, Ltd. Vendor's Credit Line Agreement with Original Beverage Corp. |
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10.10 |
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Terms of Amortization Peter Sharma III For
Sirius/Pureprophet, Ltd. Vendor's Credit Line Agreement with Original
Beverage Corp. (Addendum) |
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10.11 |
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Co-Sign Agreement |
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10.12 |
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Loan Agreement with Robert T. Reed
Sr. |
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10.13 |
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Loan Agreement with William
Holiman |
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10.14 |
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Loan Agreement with Bay Business
Credit |
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10.15 |
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Loan Agreement with Robert T.
Reed |
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10.16 |
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Loan Agreement with Robert T. Reed
Sr. |
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10.17 |
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Amendment to Loan Agreement with Bay
Business Credit |
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23.1
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23.2*
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Consent
of Horwitz and Cron (contained in Exhibit 5.1)
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24
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Power
of Attorney (included in the signature page to the Registration Statement)
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__________________
*
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to
be filed by amendment |
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