As
filed with the Securities and Exchange Commission on June 21,
2006
Registration
No. 333-______
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
REED’S,
INC.
(Name
of
small business issuer in its charter)
Delaware
|
2086
|
95-4348325
|
(State
or jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(I.R.S.
Employer
Identification
Number)
|
13000
South Spring Street
Los
Angeles, California 90061
(310) 217-9400
|
|
(Address
and telephone number of principal executive offices
and
principal place of business)
|
|
|
|
|
|
|
|
|
Christopher
J. Reed
Chief
Executive Officer
13000
South Spring Street
Los
Angeles, California 90061
(310) 217-9400
|
|
|
(Name,
address and telephone number of agent for service)
|
|
|
With
copies to:
Jeffrey
P. Berg, Esq.
Jenkens
& Gilchrist, LLP
12100
Wilshire Boulevard
Suite
1500
Los
Angeles, California 90025-7120
(310)
820-8800
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|
|
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Approximate
date of commencement of proposed sale to the public:
As soon
as practicable after the effective date of this Registration
Statement.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act, check the
following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective Registration Statement for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. o
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. o
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of
Securities
to be Registered
|
Amount
to be
Registered
|
Proposed
Maximum
Aggregate
Offering Price
Per
Share (1)
|
Proposed
Maximum
Aggregate
Offering Price(1)
|
Amount
of
Registration
Fee
|
Common
stock, $0.0001
par value
|
333,156
|
$4.00
|
$1,332,624
|
$142.59
|
(1) |
Estimated
solely for the purpose of calculating the registration fee. Based
on the
per share purchase price of the shares being
registered.
|
THE
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(a), MAY DETERMINE.
The
information in this prospectus is not complete and may be changed. These
securities may not be sold until the registration statement filed with the
Securities and Exchange Commission is effective. This preliminary prospectus
is
not an offer to sell these securities nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
Subject
to Completion, dated June 21, 2006
333,156
Shares of Common Stock
Reed’s,
Inc.
RESCISSION
OFFER
We
develop, manufacture, market and sell natural non-alcoholic beverages, candies
and ice creams.
On
May
13, 2005, a registration statement relating to our initial public offering
of
common stock was declared effective by the Securities and Exchange Commission.
As a result, through the date of this prospectus, 333,156 shares of common
stock
were sold to the public for $4.00 per share
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, our stockholders may be unable to sell the shares
for
an extended period of time. We intend to apply for listing of our common stock
on the Nasdaq Capital Market or the American Stock Exchange following the
completion of this rescission offer and our public offering, if we are able
to
qualify for such markets, and if not, we anticipate that US EURO Securities,
Inc. will apply for quotation of our common stock on the Over the Counter
Bulletin Board (“OTCBB”). However, we cannot assure you when or if a market for
our common stock will be established.
The
Rescission Offer
· |
We
are offering to repurchase 333,156 shares of our common stock from
persons
who are or were residents of California, Colorado, Connecticut, Hawaii,
Illinois, Indiana, Louisiana, Massachusetts, Missouri, Montana, New
York,
Oregon, South Carolina, Utah, Vermont, Virginia and Washington and
the
country of Israel. These persons purchased shares of our common stock
in
our initial public offering. If our rescission offer is accepted
by all
offerees, we will be required to make an aggregate payment to the
holders
of these shares of up to approximately $1,332,624, plus statutory
interest.
|
· |
The
repurchase price for the shares of our common stock subject to the
rescission offer will be $4.00 per share, which is equal to the price
paid
by those persons who purchased these shares. If you accept our rescission
offer and surrender your shares, you will receive interest, based
on the
repurchase price noted above and calculated from the date you purchased
the shares through the date that the rescission offer expires at
the
interest rate based on your state of residence as set forth
below.
|
Federal
law does not provide a specific interest rate to be used in the calculation
of
the consideration to be received in connection with the repurchases of
securities by an issuer in a rescission offer. We intend to use the legal rates
of interest for the repurchase of shares based on the state of residence of
the
stockholder.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 7 to read about factors you should consider before buying shares of
our
common stock.
The
rescission offer will expire on ______, 2006.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is _________,
2006
SUPPLEMENTAL
NOTES REGARDING THE RESCISSION OFFER
· |
The
rescission offer is not an unanticipated development. Rather, our
intent
to make this rescission offer and the details of the rescission offer
were
disclosed in our Annual Report on Form 10-KSB for the year ended
December
31, 2005.
|
· |
The
rescission offer process is proceeding as disclosed in our public
filings
and as we expect. We intend to commence the rescission offer on
_____________, 2006. The filing of the registration statement relating
to
the rescission offer is a normal part of the rescission offer
process.
|
· |
We
have entered into an agreement with Mark Reed and Robert T. Reed,
Jr.
(the
“designated purchasers”) that they would irrevocably commit to purchase up
to all of the shares in the rescission offer that are tendered to
us for
rescission. We would assign to the designated purchasers the right
to
purchase any rescission shares at 100% of the amount required to
pay the
rescission price under applicable state law. As currently contemplated,
the initial $250,000 of rescission shares would be purchased by Mark
Reed.
If the number of rescission shares tendered for rescission exceeds
$250,000 of shares, Robert
T. Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission
to
us. Each of the designated purchasers is a brother of Christopher
J. Reed,
our President, Chief Financial Officer and the Chairman of the Board
of
Directors. Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial
owner
of approximately 7.29% of our common stock.
Each of the designated purchasers may also participate in the purchase
of
shares of common stock to be distributed in the public offering.
Since up
to all of the rescission shares would be purchased by the designated
purchasers, none of the rescission shares would be purchased directly
by
us and would not deplete proceeds from our public offering or other
of our
then current cash balances. The rescission shares, which may be purchased
by the designated purchasers in the rescission offer, would be deemed
to
be registered shares for the benefit of the designated purchasers
pursuant
to a registration statement to be filed by us relating to the rescission
offer under the Securities Act, effective as of the commencement
date of
the rescission offer without any further action on the part of the
designated purchasers. If
we are required to pay the obligation which may be created under
the
rescission offer, such a refund would materially and adversely effect
our
financial position.
|
· |
We
cannot give any assurances as to the number of stockholders who will
accept the rescission offer. It is our intention that if any of the
shares
are tendered for rescission, the shares will be purchased by others
and
not from our funds. If we are required to pay the obligation which
may be
created under the rescission offer, such a refund would materially
and
adversely effect our financial
position.
|
· |
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 rescission
offer and our public offering may be unable to sell the shares for
an
extended period of time. We intend to apply for listing of our common
stock on the Nasdaq Capital Market or the American Stock Exchange
following the completion of this rescission offer and our public
offering,
if we are able to qualify for such markets, and if not, we anticipate
that
US EURO Securities, Inc. will apply for quotation of our common stock
on
the Over the Counter Bulletin Board (“OTCBB”). However, we cannot assure
you when or if a market for our common stock will be
established.
|
· |
We
have filed a registration statement for our initial public offering
and
intend to continue the process of selling our shares in our public
offering at a purchase price of $4.00 per share. As of the date of
this
prospectus, we have sold 333,156 shares resulting in gross proceeds
to us
of $1,332,624, which are the subject of this rescission offer. The
offering is a best efforts offering through our underwriters, US
EURO
Securities, Inc. and Brookstreet Securities Corporation and certain
selected broker-dealers. We intend to complete this rescission offer
before we recommence our public offering. We cannot give you assurances
as
to the number of shares which will be sold in the public offering
or the
price at which the common stock will trade in the future, if at
all.
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· |
When
the rescission offer expires, any person who did not accept the rescission
offer will have freely tradable stock, subject to restrictions that
may be
placed on shares held by our
affiliates.
|
· |
The
rescission offer is merely an offer to repurchase shares. No stockholder
is required to accept our rescission
offer.
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32 |
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44 |
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58 |
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F-1 |
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You
should rely only on the information contained in this prospectus. We have not
authorized anyone to provide you with information that is different from that
contained in this prospectus. We are offering to repurchase shares of our common
stock only in jurisdictions where offers and sales are permitted. The
information in this prospectus is complete and accurate only as of the date
of
the front cover regardless of the time of delivery of this prospectus or of
any
sale of shares. Except where the context requires otherwise, in this prospectus,
the “Company,” “Reed’s,” “we,” “us” and “our” refer to Reed’s, Inc., a Delaware
corporation.
General
Q:
Why are we making the rescission offer?
A:
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2 (333-120451). The shares we issued in connection with
the
initial public offering were not issued pursuant to an effective registration
statement and may not have been exempt from the registration or qualification
requirements under the Securities Act of 1933 and under those state securities
laws that provide an exemption from such requirements. We became aware that
the
shares may not have been issued pursuant to an effective registration statement.
Because the shares were not issued pursuant to an effective registration
statement and there was no available exemption from the registration
requirements of the Securities Act or the registration or qualification
requirements of the various states for such issuances, the shares issued in
connection with the initial public offering may have been issued in violation
of
either federal or state securities laws, or both, and may be subject to
rescission. In order to address this issue, we intend to make and complete
this
rescission offer prior to the effective date of this prospectus to all holders
of any outstanding shares who we believe may be entitled to argue for rescission
and, pursuant to this rescission offer, we will offer to repurchase these shares
then outstanding from the holders. We will be making this rescission offer
to
167 persons who are or were residents of California, Colorado, Connecticut,
Hawaii, Illinois, Indiana, Louisiana, Massachusetts, Missouri, Montana, New
York, Oregon, South Carolina, Utah, Vermont, Virginia and Washington, and in
the
country of Israel. If our rescission offer is accepted by all offerees, we
could
be required to make an aggregate payment to the holders of these shares of
up to
approximately $1,332,624, plus statutory interest.
Q:
Which shares of common stock are included in the rescission
offer?
A:
We are
offering, upon the terms and conditions described in this prospectus, to rescind
the sale of 333,156 shares of common stock issued in connection with our initial
public offering.
Q:
When does the rescission offer expire?
A:
Our
rescission offer will expire on ______________, 2006.
Q:
What will I receive if I accept the rescission offer?
A:
If you
accept our rescission offer with respect to the common stock you purchased
in
the initial public offering, we will repurchase the shares you hold that are
subject to the rescission offer at the price per share you paid, plus interest
at the current statutory rate per year, from the date of purchase through the
date the rescission offer expires.
The
legal
rates of interest for the repurchase of shares will be based on the state of
residence of the stockholder. These interest rates are as follows:
State
|
|
Interest
Rate
|
|
State
|
|
Interest
Rate
|
California
|
|
7%
|
|
Montana
|
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10%
|
Colorado
|
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8%
|
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New
York *
|
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7%
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Connecticut
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6%
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Oregon
|
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9%
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Hawaii
|
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10%
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South
Carolina
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11.25%
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Illinois
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10%
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Utah
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12%
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Indiana
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8%
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Vermont
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12%
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Louisiana
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8%
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Virginia
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6%
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Massachusetts
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6%
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Washington
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8%
|
Missouri
|
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8%
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|
Israel
*
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7%
|
|
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* |
New
York and Israeli law do not provide a specific interest rate. For
purposes
of the rescission offer, we are applying the rate of interest of
California (our principal place of business) to calculate the
consideration to be received by New York and Israeli residents who
may be
entitled to rescission rights.
|
Q:
Can you give me an example of what I will receive if I accept the rescission
offer?
A:
We will
repurchase outstanding shares of common stock subject to the rescission offer
at
the price per share you paid, plus interest at the current statutory rate per
year, from the date of purchase of your shares through the date that the
rescission offer expires. If you are a resident of California and hold 1,000
shares of our common stock that you purchased in connection with the public
offering at a per share price of $4.00 and you accept our rescission offer,
you
would receive:
· |
The
original purchase price = 1,000 X $4.00 =
$4,000.
|
· |
Plus
simple interest at 7% per year for 10 months =
$233.33.
|
· |
For
a total of $4,233.33.
|
You
will
not have any right, title or interest to the shares of common stock you will
be
surrendering upon the closing of the rescission offer, and you will only be
entitled to receive the proceeds from our repurchase of the common
stock.
Q:
How will the rescission offer be funded?
A:
We
have entered into an agreement with Mark Reed and Robert T. Reed, Jr.
(the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock.
Q:
Have any officers, directors or 5% stockholders advised us whether they will
participate in the rescission offer?
A:
None of
our officers, directors or 5% stockholders purchased shares in our initial
public offering and are not eligible to participate in this rescission offer
for
purposes of tendering their shares for rescission. However, we have entered
into
an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. Robert T. Reed, Jr. is a
beneficial owner of approximately 7.29% of our common stock.
If
Robert
T. Reed, Jr. purchases shares in this rescission offer, he would increase his
ownership interest in us.
Q:
If I do not accept the offer now, can I sell my shares?
A:
If you
do not accept the rescission offer, you can sell the shares of common stock
that
were subject to the rescission offer without limitation as to the number or
manner of sale. However, our common stock is not publicly traded, and there
can
be no assurances if or when such a market will develop.
Q:
What do I need to do now to accept or reject the rescission
offer?
A:
To
accept or reject the rescission offer, you must complete and sign the
accompanying election form and return it in the enclosed return envelope to
us,
to the attention of Christopher J. Reed, 13000 South Spring Street, Los Angeles,
California 90061, as soon as practical but in no event later than ______, 2006.
If you are accepting the rescission offer, please also include in your return
envelope, with respect to any shares of common stock that you want us to
repurchase,
· |
a
completed and signed election form (see Appendix A),
and
|
· |
a
stock power representing the shares you are surrendering for repurchase
(see Appendix B).
|
Q:
Can I accept the rescission offer in part?
A:
If you
accept the rescission offer, then you must accept the rescission offer with
respect to all of the shares of common stock issued to you in connection with
our initial public offering.
Q:
What happens if I do not return my rescission offer election
form?
A:
If you
do not return a properly completed election form before the expiration date
of
our rescission offer, you will be deemed to have rejected our
offer.
Q:
What remedies or rights do I have now that I will not have after the rescission
offer?
A:
It is
unclear whether or not you will have a right of rescission under federal
securities laws after the rescission offer. The staff of the Securities and
Exchange Commission, or SEC, is of the opinion that a person’s right of
rescission created under the Securities Act of 1933 may survive the rescission
offer. Generally, the federal statute of limitations for noncompliance with
the
requirement to register securities under the Securities Act of 1933 is one
year
from the date of the violation upon which the action to enforce liability is
based.
The
state
remedies and statutes of limitations vary and depend upon the state in which
you
purchased the shares. For a more detailed description of the various state
laws
governing rescission rights in the respective states, see “Rescission Offer -
Effect of Rescission Offer.”
We
believe that your acceptance of the rescission offer will preclude you from
later seeking similar relief. Regardless of whether you accept the rescission
offer, we believe that any remedies you may have after the rescission offer
expires would not be greater than an amount you would receive in the rescission
offer.
Q:
Can I change my mind after I have mailed my signed election
form?
A:
Yes. You
can change your decision about accepting or rejecting our rescission offer
at
any time before the expiration date. You can do this by completing and
submitting a new election form. Any new election forms must be received by
us
prior to the expiration date in order to be valid. We will not accept any
election forms after the expiration date.
Q:
Who can help answer my questions?
A:
You can
call Christopher J. Reed at Reed’s, at (310) 217-9400, with questions about the
rescission offer.
Q:
Where can I get more information about Reed’s?
A:
You
can obtain more information about Reed’s from the filings we make from time to
time with the SEC. These filings are available on the SEC’s website at
www.sec.gov.
This
summary highlights selected information from this prospectus. It does not
contain all of the information that is important to you. We encourage you to
carefully read this entire prospectus and the documents to which we refer you.
The following summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this registration
statement.
Our
Company
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently offer 15 beverages, three candies and
three ice creams. We sell most of our products in specialty gourmet and natural
food stores, supermarket chains, retail stores and restaurants in the United
States and, to a lesser degree, in Canada.
We
primarily sell our products through a network of natural, gourmet and
independent distributors. We also maintain an organization of in-house sales
managers who work mainly in the stores serviced by our natural, gourmet and
mainstream distributors and with our distributors. We also work with regional,
independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
Our
current business strategy is to maintain our marketing focus in the natural
food
marketplace while expanding sales of our products in mainstream markets and
distribution channels. We believe that the proceeds of our public offering
may
accelerate the success of this business strategy by providing working capital
to
finance an expanded in-house sales and distribution network.
We
produce certain of our soda products for the western half of the United States
at an 18,000 square foot warehouse facility owned by us in an unincorporated
area of Los Angeles County near downtown Los Angeles, known as The
Brewery.
We
also
contract with The Lion Brewery, Inc., a packing, or co-pack, facility in
Pennsylvania, to supply us with soda products for the eastern half of the United
States and nationally for soda products that we do not produce at The Brewery.
Our Ginger Juice Brews are co-packed for us at a facility in Northern
California. Our ice creams are co-packed for us at a dairy in upstate New York.
We pack our candy products at the Brewery.
We
have
not been profitable during our last two fiscal years and there is no assurance
that we will develop profitable operations in the future. Our net operating
loss
for the years ended December 31, 2005 and 2004 was $825,955 and $479,371,
respectively. Our net operating loss for the quarters ended March 31, 2006
and
2005 was $369,597 and $241,386, respectively. We cannot assure you that we
will
have profitable operations in the future.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our Internet
address is www.reedsgingerbrew.com.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
Rescission
Offer
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. The shares issued in connection with the initial public
offering may have been issued in violation of either federal or state securities
laws, or both, and may be subject to rescission. In order to address this issue,
we made a rescission offer to the holders of these shares prior to the effective
date of this registration statement.
We
have
entered into an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock. Each
of
the designated purchasers may also participate in the purchase of shares of
common stock to be distributed in the public offering. Since up to all of the
rescission shares would be purchased by the designated purchasers, none of
the
rescission shares would be purchased directly by us and would not deplete
proceeds from our public offering or other of our then current cash balances.
The rescission shares, which may be purchased by the designated purchasers
in
the rescission offer, would be deemed to be registered shares for the benefit
of
the designated purchasers pursuant to a registration statement to be filed
by us
relating to the rescission offer under the Securities Act, effective as of
the
commencement date of the rescission offer without any further action on the
part
of the designated purchasers. If
we are
required to pay the obligation which may be created under the rescission offer,
such a refund would materially and adversely effect our financial
position.
Federal
securities laws do not provide that a rescission offer terminates a purchaser’s
right to rescind a sale of stock that was not registered as required or was
not
otherwise exempt from such registration requirements. In connection with those
offerees who rejected the rescission offer, we may continue to be liable under
federal and state securities laws for up to an amount equal to the value of
all
shares of common stock issued in connection with the initial public offering
plus any statutory interest. We also understand that the SEC and certain state
regulators, including California, have requested additional information
regarding the rescission offer. If it is determined that we offered securities
without properly registering them under federal or state law, or securing an
exemption from registration, regulators could impose monetary fines or other
sanctions as provided under these laws. We believe our anticipated rescission
offer could provide us with additional meritorious defenses against any future
claims relating to these shares.
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.
Our
Public Offering
We
have
filed a registration statement for our initial public offering and intend to
continue the process of selling our shares in our public offering. 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. As of the date of this
prospectus, we have sold 333,156 shares resulting in gross proceeds to us of
$1,332,624, which are the subject of this rescission offer. However, whether
or
not these shares are repurchased under the rescission offer, the maximum number
of shares which may be sold from the date of this prospectus will be reduced
by
the number of shares sold to the date of this prospectus.
The
offering is a best efforts offering through our underwriters, US EURO
Securities, Inc. and Brookstreet Securities Corporation and certain selected
broker-dealers. We intend to complete this rescission offer before we recommence
our public offering. We cannot give you assurances as to the number of shares
which will be sold in the public offering or the price at which the common
stock
will trade in the future, if at all.
No
minimum number of shares is required to be sold and as a result, we may only
sell a nominal amount of additional shares under the 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.
Summary
Financial Data
The
following historical financial information should be read in conjunction with
the section entitled “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our financial statements and the
related notes included elsewhere in this prospectus. The historical results
are
not necessarily indicative of results to be expected for any future
periods:
Balance
Sheet Data:
|
March
31, 2006 (Unaudited)
|
December
31, 2005
|
Total
assets
|
$5,138,925
|
$4,912,195
|
Current
liabilities
|
3,769,282
|
3,450,269
|
Long-term
liabilities, less current portion
|
1,284,732
|
1,312,931
|
Stockholders’
equity
|
84,911
|
148,995
|
Statements
of Operations Data: |
Three
Months Ended March 31,
|
Years
Ended December 31,
|
|
2006
(Unaudited)
|
2005
(Unaudited)
|
2005
|
2004
|
Sales
|
$1,979,272
|
$1,817,336
|
$9,470,285
|
$8,978,365
|
Gross
profit
|
290,396
|
331,049
|
1,724,786
|
1,875,328
|
Operating
expenses
|
559,386
|
501,225
|
2,241,237
|
1,946,667
|
Loss
from operations
|
(268,990)
|
(170,176)
|
(516,451)
|
(71,339)
|
Net
Loss attributable to common stockholders
|
(369,597)
|
(241,386)
|
(855,425)
|
(479,371)
|
Net
Loss per share, basic and diluted (1)
|
(0.07)
|
(0.05)
|
(0.18)
|
(0.10)
|
Weighted
average shares used to compute net loss per share
|
5,157,077
|
4,726,091
|
4,885,151
|
4,726,091
|
(1)
|
Does
not include 39,500 shares issued following March 31, 2006 at $4.00
per
share in connection the public
offering.
|
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. If a market is ever
established for our common stock, the trading price of our common stock could
decline due to any of these risks, and you could lose all or part of your
investment. You also should refer to the other information set forth in this
prospectus, including our financial statements and the related notes.
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain or expand
operations according to our business plan.
As
of
March 31, 2006, we had an accumulated deficit of $3,628,660. For the three
months ended March 31, 2006 and March 31, 2005, we had incurred losses from
operations of $268,990 and $170,176, respectively. As of December 31, 2005,
we
had an accumulated deficit of $3,259,063. For the years ended December 31,
2005 and 2004, we incurred losses from operations of $516,451 and $71,339,
respectively. We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If
we are
not able achieve profitable operations at some point in the future, we
eventually may have insufficient working capital to maintain our operations
as
we presently intend to conduct them or to fund our expansion and
marketing and product development plans.
In
addition, our losses may increase in the future as we expand our manufacturing
capabilities and fund our marketing plans and product development. These losses,
among other things, have had and will continue to have an adverse effect on
our
working capital, total assets and stockholders’ equity. If we are unable to
achieve profitability, the market value of our common stock will decline and
there would be a material adverse effect on our financial
condition.
Our
public offering is being made on a “best efforts” basis and there is no minimum
number of shares we must sell beyond the number of shares that have been sold
by
us as of the date of this prospectus. We cannot assure you of the number of
shares that we will sell in the offering. We currently believe that our
available cash resources and cash flow from operations, without any additional
net proceeds from the offering, will be sufficient to sustain our business
operations for at least 13 months after the date of this prospectus. However,
we
would be required to reduce our level of operations, including reducing
infrastructure, promotions, personnel and other operating expenses.
In
addition, our ability to implement our full business expansion plan is largely
dependent upon the outcome of the offering. If we do not receive the maximum
proceeds from the offering, some or all of the elements of our expansion plan
may have to be curtailed or delayed unless we are able to find alternative
external sources of working capital. We would need to raise additional funds
to
respond to business contingencies, which may include the need to:
· |
fund
more rapid expansion,
|
· |
fund
additional marketing expenditures,
|
· |
enhance
our operating infrastructure,
|
· |
respond
to competitive pressures, and
|
· |
acquire
other businesses.
|
We
cannot
assure you that additional financing will be available on terms favorable to
us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
We
may not be able to develop successful new beverage products which are important
to our growth.
An
important part of our strategy is to increase our sales through the development
of new beverage products. We cannot assure you that we will be able to continue
to develop, market and distribute future beverage products that will enjoy
market acceptance. The failure to continue to develop new beverage products
that
gain market acceptance could have an adverse impact on our growth and materially
adversely affect our financial condition. We may have higher obsolescent product
expense if new products fail to perform as expected due to the need to write
off
excess inventory of the new products.
Our
results of operations may be impacted in various ways by the introduction of
new
products, even if they are successful, including the following:
· |
sales
of new products could adversely impact sales of existing
products,
|
· |
we
may incur higher cost of goods sold and selling, general and
administrative expenses in the periods when we introduce new products
due
to increased costs associated with the introduction and marketing
of new
products, most of which are expensed as incurred,
and
|
· |
when
we introduce new platforms and bottle sizes, we may experience increased
freight and logistics costs as our co-packers adjust their facilities
for
the new products.
|
The
beverage business is highly competitive.
The
premium beverage and carbonated soft drink industries are highly competitive.
Many of our competitors have substantially greater financial, marketing,
personnel and other resources than we do. Competitors in the soft drink industry
include bottlers and distributors of nationally advertised and marketed
products, as well as chain store and private label soft drinks. The principal
methods of competition include brand recognition, price and price promotion,
retail space management, service to the retail trade, new product introductions,
packaging changes, distribution methods, and advertising. We also compete for
distributors, shelf space and customers primarily with other premium beverage
companies. As additional competitors enter the field, our market share may
fail
to increase or may decrease.
The
loss of our largest customers would substantially reduce
revenues.
Our
customers are material to our success. If we are unable to maintain good
relationships with our existing customers, our business could suffer. Unilateral
decisions could be taken by our distributors, and/or convenience chains, grocery
chains, specialty chain stores, club stores and other customers to discontinue
carrying all or any of our products that they are carrying at any time, which
could cause our business to suffer.
Trader
Joe’s accounted for approximately 15% of our sales in 2005 and for approximately
14% of our sales in 2004. The loss of Trader Joe’s as a retailer would
substantially reduce our revenues unless and until we replaced that source
of
revenue.
The
loss of our third-party distributors could impair our operations and
substantially reduce our financial results.
We
depend
in large part on distributors to distribute our beverages and other products.
Most of our outside distributors are not bound by written agreements with us
and
may discontinue their relationship with us on short notice. Most distributors
handle a number of competitive products. In addition, our products are a small
part of our distributors’ businesses.
We
continually seek to expand distribution of our products by entering into
distribution arrangements with regional bottlers or other direct store delivery
distributors having established sales, marketing and distribution organizations.
Many of our distributors are affiliated with and manufacture and/or distribute
other soda and non-carbonated brands and other beverage products. In many cases,
such products compete directly with our products.
The
marketing efforts of our distributors are important for our success. If our
brands prove to be less attractive to our existing distributors and/or if we
fail to attract additional distributors, and/or our distributors do not market
and promote our products above the products of our competitors, our business,
financial condition and results of operations could be adversely
affected.
United
Natural Foods, Inc. accounted for approximately 39% of our sales in 2005 and
2004. Management believes it could find alternative distribution channels in
the
event of the loss of this distributor. Such a loss may adversely affect sales
in
the short term.
The
loss
of our third-party beverage distributors could impair our operations and
adversely affect our financial performance.
Price
fluctuations in, and unavailability of, raw materials that we use could
adversely affect us.
We
do not
enter into hedging arrangements for raw materials. Although the prices of raw
materials that we use have not increased significantly in recent years, our
results of operations would be adversely affected if the price of these raw
materials were to rise and we were unable to pass these costs on to our
customers.
We
depend
upon an uninterrupted supply of the ingredients for our products, a significant
portion of which we obtain overseas, principally from China and Brazil. We
obtain almost all of our crystallized ginger from Fiji and our Ginger Chews
from
Indonesia. Any decrease in the supply of these ingredients or increase in the
prices of these ingredients as a result of any adverse weather conditions,
pests, crop disease, interruptions of shipment or political considerations,
among other reasons, could substantially increase our costs and adversely affect
our financial performance.
The
loss of any of our co-packers could impair our operations and substantially
reduce our financial results.
We
rely
on third parties, called co-packers in our industry, to produce some of our
beverages, to produce our glass bottles and to bottle some of our beverages.
Our
co-packing arrangements with our main co-packer are under a contract that
expires in 2007. Our co-packing arrangements with other companies are on a
short
term basis and such co-packers may discontinue their relationship with us on
short notice. While this arrangement permits us to avoid significant capital
expenditures, it exposes us to various risks, including:
· |
our
largest co-packer, Lion Brewery, accounted for approximately 63.5%
of our
total case production in 2005,
|
· |
if
any of those co-packers were to terminate our co-packing arrangement
or
have difficulties in producing beverages for us, our ability to produce
our beverages would be adversely affected until we were able to make
alternative arrangements, and
|
· |
our
business reputation would be adversely affected if any of the co-packers
were to produce inferior quality
products.
|
We
compete in an industry that is brand-conscious, so brand name recognition and
acceptance of our products are critical to our success.
Our
business is substantially dependent upon awareness and market acceptance of
our
products and brands by our targeted consumers. In addition, our business depends
on acceptance by our independent distributors of our brands as beverage brands
that have the potential to provide incremental sales growth rather than reduce
distributors’ existing beverage sales. Although we believe that we have been
relatively successful towards establishing our brands as recognizable brands
in
the New Age beverage industry, it may be too early in the product life cycle
of
these brands to determine whether our products and brands will achieve and
maintain satisfactory levels of acceptance by independent distributors and
retail consumers. We believe that the success of our product name brands will
also be substantially dependent upon acceptance of our product name brands.
Accordingly, any failure of our brands to maintain or increase acceptance or
market penetration would likely have a material adverse affect on our revenues
and financial results.
We
compete in an industry characterized by rapid changes in consumer preferences
and public perception, so our ability to continue to market our existing
products and develop new products to satisfy our consumers’ changing preferences
will determine our long-term success.
Consumers
are seeking greater variety in their beverages. Our future success will depend,
in part, upon our continued ability to develop and introduce different and
innovative beverages. In order to retain and expand our market share, we must
continue to develop and introduce different and innovative beverages and be
competitive in the areas of quality and health, although there can be no
assurance of our ability to do so. There is no assurance that consumers will
continue to purchase our products in the future. Additionally, many of our
products are considered premium products and to maintain market share during
recessionary periods, we may have to reduce profit margins, which would
adversely affect our results of operations. Product lifecycles for some beverage
brands and/or products and/or packages may be limited to a few years before
consumers' preferences change. The beverages we currently market are in varying
stages of their lifecycles and there can be no assurance that such beverages
will become or remain profitable for us. The beverage industry is subject to
changing consumer preferences and shifts in consumer preferences may adversely
affect us if we misjudge such preferences. We may be unable to achieve volume
growth through product and packaging initiatives. We also may be unable to
penetrate new markets. If our revenues decline, our business, financial
condition and results of operations will be materially and adversely
affected.
Our
quarterly operating results may fluctuate significantly because of the
seasonality of our business.
Our
highest revenues occur during the spring and summer, the second and third
quarters of each fiscal year. These seasonality issues may cause our financial
performance to fluctuate. In addition, beverage sales can be adversely affected
by sustained periods of bad weather.
Our
business is subject to many regulations and noncompliance is
costly.
The
production, marketing and sale of our unique beverages, including contents,
labels, caps and containers, are subject to the rules and regulations of various
federal, provincial, state and local health agencies. If a regulatory authority
finds that a current or future product or production run is not in compliance
with any of these regulations, we may be fined, or production may be stopped,
thus adversely affecting our financial conditions and operations. Similarly,
any
adverse publicity associated with any noncompliance may damage our reputation
and our ability to successfully market our products. Furthermore, the rules
and
regulations are subject to change from time to time and while we closely monitor
developments in this area, we have no way of anticipating whether changes in
these rules and regulations will impact our business adversely. Additional
or
revised regulatory requirements, whether labeling, environmental, tax or
otherwise, could have a material adverse effect on our financial condition
and
results of operations.
Rising
fuel and freight costs may have an adverse impact on our sales and
earnings.
The
recent volatility in the global oil markets has resulted in rising fuel and
freight prices, which many shipping companies are passing on to their customers.
Our shipping costs, and particularly our fuel expenses, have been increasing
and
we expect these costs may continue to increase. Due to the price sensitivity
of
our products, we do not anticipate that we will be able to pass all of these
increased costs on to our customers. The increase in fuel and freight costs
could have a material adverse impact on our financial condition.
Our
manufacturing process is not patented.
None
of
the manufacturing processes used in producing our products are subject to a
patent or similar intellectual property protection. Our only protection against
a third party using our recipes and processes is confidentiality agreements
with
the companies that produce our beverages and with our employees who have
knowledge of such processes. If our competitors develop substantially equivalent
proprietary information or otherwise obtain access to our knowledge, we will
have greater difficulty in competing with them for business, and our market
share could decline.
We
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.
We
face risks associated with product liability claims and product
recalls.
Other
companies in the beverage industry have experienced product liability litigation
and product recalls arising primarily from defectively manufactured products
or
packaging. We maintain product liability insurance insuring our operations
from
any claims associated with product liability and we believe that the amount
of
this insurance is sufficient to protect us. We do not maintain product recall
insurance. In the event we were to experience additional product liability
or
product recall claim, our business operations and financial condition could
be
materially and adversely affected.
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserts claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contends that we negligently manufactured the soda resulting in at least
one personal injury. Consac seeks $2.6 million in damages, plus interest and
attorneys fees. Although we believe that we have meritorious defenses to this
proceeding, there can be no assurances as to its outcome. In the event we were
to experience additional product liability or product recall claims, our
business operations could be materially and adversely effected. An adverse
outcome in this proceeding would have a material adverse effect on our business
operations and financial condition.
Our
intellectual property rights are critical to our success, the loss of such
rights could materially adversely affect our business.
We
own
numerous trademarks that are very important to our business. We also own the
copyright in and to portions of the content on the packaging of our products.
We
regard our trademarks, copyrights and similar intellectual property as critical
to our success and attempt to protect such property with registered and common
law trademarks and copyrights, restrictions on disclosure and other actions
to
prevent infringement. Product packages, mechanical designs and artwork are
important to our success and we would take action to protect against imitation
of our packaging and trade dress and to protect our trademarks and copyrights,
as necessary. However, there can be no assurance that other third parties will
not infringe or misappropriate our trademarks and similar proprietary rights.
If
we lose some or all of our intellectual property rights, our business may be
materially and adversely affected.
If
we are not able to retain the full-time services of 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, Chairman of the Board,
and Chief Financial Officer. 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.
Our
Chief Executive Officer may lack the experience and formal training to serve
as
our Chief Financial Officer.
Our
Chief
Executive Officer, Christopher J. Reed, currently also serves as our Chief
Financial Officer. However, Mr. Reed does not have any formal financial training
as a Chief Financial Officer. Due to the increasing complexity of accountancy
and cash management for reporting companies and the emphasis on internal
controls over financial reporting, Mr. Reed’s lack of experience in this area
may adversely affect the future results of our operations and our ability to
maintain an adequate system of internal controls over financial
reporting.
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. It is our intention to use the proceeds
of our public offering to expand our business operations. If we are to expand
our operations, such expansion would place a significant strain on our
management, operational and financial resources. Such expansion would also
require improvements in our operational, accounting and information systems,
procedures and controls. If we fail to manage this anticipated expansion
properly, it could divert our limited management, cash, personnel, and other
resources from other responsibilities and could adversely affect our financial
performance.
We
have operated without independent directors in the past.
We
have
not had two independent directors through a large portion of our history. As
a
result, certain material agreements between related parties have not been
negotiated with the oversight of independent directors and were entered into
at
the absolute discretion of the majority shareholder, Christopher J. Reed. Please
see the “Certain Relationships and Related Transactions” section for specific
details of these transactions.
Risks
Related to This Rescission Offering and Our Securities
We
may continue to have potential liability even after this rescission offer is
made.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. The shares issued in connection with the initial public
offering may have been issued in violation of either federal or state securities
laws, or both, and may be subject to rescission. In order to address this issue,
we are making this rescission offer to the holders of these shares sold in
connection with our public offering.
If
this
rescission offer is accepted, we could be required to make aggregate payments
to
the holders of these shares up to $1,332,624, plus statutory interest. This
exposure is calculated by reference to the acquisition price of $4.00 per share
for the common stock in connection with the initial public offering, plus
accrued interest at the applicable statutory rate. It is our intention that
if
any of the shares are tendered for rescission, the shares will be purchased
by
others and not from our funds. If we are required to pay the obligation which
may be created under the rescission offer, such a refund would materially and
adversely effect our financial position.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. If any or
all
of the offerees reject the rescission offer, we may continue to be liable under
federal and state securities laws for up to an amount equal to the value of
all
shares of common stock issued in connection with the initial public offering
plus any statutory interest we may be required to pay. We also understand that
the SEC and certain state regulators, including California, have requested
additional information regarding the rescission offer. If it is determined
that
we offered securities without properly registering them under federal or state
law, or securing an exemption from registration, regulators could impose
monetary fines or other sanctions as provided under these laws.
Your
federal right of rescission may not survive if you affirmatively reject or
fail
to accept the rescission offer.
If
you
affirmatively reject or fail to accept the rescission offer, it is unclear
whether or not you will have a right of rescission under federal securities
laws
after the expiration of the rescission offer. The staff of the SEC is of the
opinion that a person’s right of rescission created under the Securities Act of
1933 may survive the rescission offer.
We
cannot predict whether the amounts you would receive in the rescission offer
would be greater than the fair market value of our
securities.
The
amount you would receive in the rescission offer is fixed and is not tied to
the
fair market value of our common stock at the time the rescission offer closes.
As a result, if you accept the rescission offer, you may receive less than
the
fair market value of the securities you would be tendering to us.
If
you do not accept the rescission offer, your shares and the shares you receive
from the exercise of your options, although freely tradeable, may still remain
subject to limitation on resales.
If
you
affirmatively reject the rescission offer or fail to accept the rescission
offer
before the expiration of the rescission offer, your shares will be registered
under the Securities Act of 1933 and will be fully tradeable, subject to any
applicable limitations set forth in Rule 144 under the Securities Act of 1933.
However, you will also remain subject to any applicable terms and conditions
of
any agreement under which your shares were issued or otherwise relating to
your
shares. In addition, you will remain subject to any market standoff agreements,
lockup arrangements and any other transfer restrictions entered into with
respect to your shares.
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
due to what we perceived as poor market conditions for a public offering in
the
economic climate at the time.
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.
There
is
currently no public market for our common stock and we cannot assure you when
or
if there will be a market for our common stock. We cannot assure you that an
active market for our shares will be established or maintained in the future.
We
intend to apply for listing of our common stock on the Nasdaq Capital Market
or
the American Stock Exchange following the completion of this rescission offer
and the public offering, if we are able to qualify for such markets, and if
not,
we anticipate that US EURO Securities, Inc. will apply for quotation of our
common stock on the Over the Counter Bulletin Board (“OTCBB”). However, 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.
In
addition, if a market develops for our common stock, the market price of our
common stock may be volatile, which could cause the value of your investment
to
decline. Securities
markets experience significant price and volume fluctuations. This market
volatility, as well as general economic conditions, could cause the market
price
of our common stock to fluctuate substantially. Many factors that are beyond
our
control may significantly affect the market price of our shares. These factors
include:
· |
price
and volume fluctuations in the stock markets
generally,
|
· |
changes
in our earnings or variations in operating
results,
|
· |
any
shortfall in revenue or increase in losses from levels expected by
securities analysts,
|
· |
changes
in regulatory policies or law,
|
· |
operating
performance of companies comparable to us,
and
|
· |
general
economic trends and other external
factors.
|
Such
factors may cause the market price of our common stock to decrease
significantly. You may be unable to sell your shares of common stock at or
above
the initial public offering price.
Since
there is no minimum number of shares in our public offering 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 our public offering, our existing lines of credit,
and
revenues from sales, future loans or otherwise. If we sell less than all the
shares in the public offering, our ability to implement our expansion plans
described in this prospectus could be delayed, depending on the amount of other
funds available to us for such purposes.
Future
financings could adversely affect your ownership interest and rights in
comparison with those of other security holders.
Our
board
of directors has the power to issue additional shares of common or preferred
stock without stockholder approval. If additional funds are raised through
the
issuance of equity or convertible debt securities, the percentage ownership
of
our existing stockholders will be reduced, and these newly issued securities
may
have rights, preferences or privileges senior to those of existing stockholders,
including, those persons acquiring shares in our public 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, Chief Executive Officer, Chairman of the Board and
Chief
Financial Officer owns, before the commencement of our public offering,
approximately 60% of our outstanding voting stock. If all the shares in our
public offering are sold, Mr. Reed will own approximately 46% of our outstanding
voting stock. If 1,000,000 shares in our public offering (50%) are sold, Mr.
Reed will own approximately 54% 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 transactions resulting
in a change of control of our company. In addition, as our Chairman and Chief
Executive Officer, Mr. Reed has and will continue to have significant influence
over our strategy, technology and other matters. Mr. Reed’s interests may not
always coincide with the interests of other holders of our common
stock.
A
substantial number of our shares 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
tour
public 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 a subsequent financing of our securities.
After our public offering, we will have 6,994,953 shares of common stock
outstanding if all 2,000,000 shares in the offering are sold and 5,994,953
shares of common stock outstanding if 1,000,000 shares in the offering (50%)
are
sold. All the shares of common stock sold in the offering will be freely
tradable without restriction or further registration required under federal
securities laws.
In
addition, we have issued and outstanding options and warrants that may be
exercised into 904,241 shares of common stock, 136,158 shares of common stock
issuable upon conversion of principal and accrued interest on certain debt
at
March 31, 2006 and 58,940 shares of Series A preferred stock that may be
converted into 235,760 shares of common stock. In addition, our outstanding
shares of Series A preferred stock bear a dividend of 5% per year, or
approximately $29,470 per year. We have the option to pay the dividend in shares
of our common stock. In 2005, we paid the dividend in an aggregate of 7,362
shares of common stock, and anticipate that we will be obligated to issue at
least this many shares annually to the holders of the Series A preferred stock
so long as such shares are issued and outstanding. We also have 200,000 shares
reserved for future issuance under the underwriters’ warrant (including 33,316
shares underlying underwriters’ warrants which we have agreed to issue to the
underwriters relating to the sale of 333,156 shares sold as of the date of
this
prospectus).
Of
the
shares of our common stock currently outstanding, 4,240,500 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.
Our
common stock may become subject to “penny stock” regulations that may affect the
liquidity of our common stock.
Our
common stock may become subject to the rules adopted by the SEC, that regulates
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
of
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 SEC 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.
Background
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2 (333-120451). The shares we issued in connection with
the
initial public offering were not issued pursuant to an effective registration
statement and may not have been exempt from the registration or qualification
requirements under the Securities Act of 1933 and under those state securities
laws that provide an exemption from such requirements. We became aware that
the
shares may not have been issued pursuant to an effective registration statement.
Because the shares were not issued pursuant to an effective registration
statement and there was no available exemption from the registration
requirements of the Securities Act or the registration or qualification
requirements of the various states for such issuances, the shares issued in
connection with the initial public offering may have been issued in violation
of
either federal or state securities laws, or both, and may be subject to
rescission. In order to address this issue, we are making this rescission offer
to all holders of any outstanding shares who we believe may be entitled to
argue
for rescission and, pursuant to this rescission offer, we will offer to
repurchase these shares then outstanding from the holders. We will be making
this rescission offer to 167 persons who are or were residents of California,
Colorado, Connecticut, Hawaii, Illinois, Indiana, Louisiana, Massachusetts,
Missouri, Montana, New York, Oregon, South Carolina, Utah, Vermont, Virginia
and
Washington, and the country of Israel. If our rescission offer is accepted
by
all offerees, we could be required to make an aggregate payment to the holders
of these shares of up to approximately $1,332,624, plus statutory interest.
Our
anticipated rescission offer will cover an aggregate of 333,156 shares of common
stock issued in connection with our initial public offering. These securities
represent all of the shares issued in connection with the initial public
offering options. We intend to make and complete the rescission offer to the
holders of these shares prior to the effective date of this prospectus of common
stock. The rescission offer will be kept open for at least 30 days and will
be
registered under the Securities Act and qualified in each state where such
qualification is required under applicable state securities laws.
We
will
offer to rescind prior purchases of our common stock that are subject to the
rescission offer for an amount equal to the price paid for the shares plus
interest, calculated from the date of the purchase through the date on which
the
rescission offer expires, at the applicable statutory interest rate per
year.
The
rescission offer will be kept open for 30 days until _____, 2006 and will be
registered under the Securities Act of 1933 and qualified in each state where
such qualification is required under applicable state securities
laws.
If
all
holders of shares of our common stock subject to the rescission offer elected to
accept our rescission offer, we would be required to make an aggregate payment
of approximately $1,332,624, plus statutory interest, to these holders. We
believe this amount represents our aggregate exposure under federal and state
securities laws for not seeking to register or qualify these shares or options
under these laws. Our anticipated rescission offers to be made in the various
states in which we may not have complied with applicable securities laws will
cover an aggregate of 333,156 shares of common stock.
Our
making this rescission offer may not terminate a purchaser’s right to rescind a
sale of securities that was not registered or qualified under the Securities
Act
or applicable state securities laws and was not otherwise exempt from
registration or qualification. Accordingly, should the rescission offer be
rejected by any or all offerees, we may continue to be contingently liable
under
the Securities Act and applicable state securities laws for the purchase price
of these shares up to an aggregate amount of approximately $1,332,624, plus
statutory interest. If a court were to impose a greater remedy, our exposure
as
a result of the rescission offer could be higher. In addition, if it is
determined that we offered securities without properly registering them under
federal or state law, or securing an exemption from registration, regulators
could impose monetary fines or other sanctions as provided under these laws.
We
understand that the SEC and certain state regulators, including California,
have
requested additional information relating to the rescission offer.
We
have
filed a registration statement for our initial public offering and intend to
continue the process of selling our shares in our public offering at a purchase
price of $4.00 per share. The offering is a best efforts offering through our
underwriters, US EURO Securities, Inc. and Brookstreet Securities Corporation
and certain selected broker-dealers. We intend to complete this rescission
offer
before we recommence our public offering. We cannot give you assurances as
to
the number of shares which will be sold in the public offering or the price
at
which the common stock will trade in the future, if at all.
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, holders of our common stock may be
unable to sell the shares for an extended period of time. We intend to apply
for
listing of our common stock on the Nasdaq Capital Market or the American Stock
Exchange following the completion of this rescission offer and our public
offering, if we are able to qualify for such markets, and if not, we anticipate
that US EURO Securities, Inc. will apply for quotation of our common stock
on
the Over the Counter Bulletin Board (“OTCBB”). However, we cannot assure you
when or if a market for our common stock will be established.
Rescission
Offer and Price
We
are
offering to rescind the issuance of 333,156 shares of common stock which we
issued in our initial public offering. By making this rescission offer, we
are
not waiving any applicable statutes of limitations.
We
will
be making this rescission offer to 167 persons who are or were residents of
California, Colorado, Connecticut, Hawaii, Illinois, Indiana, Louisiana,
Massachusetts, Missouri, Montana, New York, Oregon, South Carolina, Utah,
Vermont, Virginia and Washington, and the country of Israel.
If
you
accept our rescission offer and you hold shares of our common stock, we will
repurchase the shares you hold that are subject to the rescission offer at
the
price per share paid ($4.00), plus interest at the current statutory rate per
year mandated by your state of residence, from the date of purchase through
the
date that the rescission offer expires.
If
you
accept our rescission offer, you will be entitled to receive interest at the
applicable statutory interest rate per year in accordance with your state of
residence. You will not, however, be entitled to any payments for interest
or
otherwise unless you affirmatively elect to participate in the offer. We intend
to use the legal rates of interest for the repurchase of the shares and options
based on the state of residence of the stockholder. These interest rates are
as
follows:
State
|
|
Interest
Rate
|
|
State
|
|
Interest
Rate
|
California
|
|
7%
|
|
Montana
|
|
10%
|
Colorado
|
|
8%
|
|
New
York *
|
|
7%
|
Connecticut
|
|
6%
|
|
Oregon
|
|
9%
|
Hawaii
|
|
10%
|
|
South
Carolina
|
|
11.25%
|
Illinois
|
|
10%
|
|
Utah
|
|
12%
|
Indiana
|
|
8%
|
|
Vermont
|
|
12%
|
Louisiana
|
|
8%
|
|
Virginia
|
|
6%
|
Massachusetts
|
|
6%
|
|
Washington
|
|
8%
|
Missouri
|
|
8%
|
|
Israel
*
|
|
7%
|
|
|
|
|
|
|
|
* |
New
York and Israeli law do not provide a specific interest rate. For
purposes
of the rescission offer, we are applying the rate of interest of
California (our principal place of business) to calculate the
consideration to be received by New York and Israeli residents who
may be
entitled to rescission rights.
|
Acceptance
You
may
accept the rescission offer by completing and signing the enclosed election
form
indicating the shares and options to be repurchased and delivering a stock
power
representing the shares you are surrendering for repurchase, on or before the
close of business on _________, 2006, which date and time we refer to in this
document as the expiration date. All acceptances of the rescission offer will
be
deemed to be effective on the expiration date and the right to accept the
rescission offer will terminate on the expiration date. Acceptances or
rejections may be revoked in a written notice to us, to the attention of
Christopher J. Reed, 13000 South Spring Street, Los Angeles, California 90061,
which is received prior to the expiration date. Within 15 business days after
the expiration date, we will pay for any securities as to which the rescission
offer has been validly accepted.
The
rescission offer will expire at 5:00 p.m., Pacific Time, on ________________,
2006.
If
you
submit an election form after the expiration time, regardless of whether your
form is otherwise complete, your election will not be accepted, and you will
be
deemed to have rejected our rescission offer.
Neither
we nor our officers and directors make any recommendations to you with respect
to the rescission offer contained herein. You are urged to read the rescission
offer carefully and to make an independent evaluation with respect to its
terms.
IF
PERSONS DESIRING TO ACCEPT THE RESCISSION OFFER INTEND TO MAKE USE OF THE MAIL
TO RETURN THEIR STOCK POWERS, INSURED REGISTERED MAIL, RETURN RECEIPT REQUESTED,
IS RECOMMENDED.
Rejection
or Failure to Affirmatively Accept
If
you
fail to accept, or if you affirmatively reject the rescission offer by so
indicating on the enclosed election form, you will retain ownership of the
shares which you purchased in connection with our initial public offering and
you will not receive any cash for those securities in connection with the
rescission offer. Your shares will be registered and fully tradeable under
the
Securities Act of 1933, unless you are one of our affiliates within the meaning
of Rule 144. Your shares will remain subject to any applicable terms and
conditions of the original agreement under which they were issued and any
subsequent agreement relating to such shares and any other transfer restrictions
entered into with respect to your shares.
Solicitation
We
have
not retained, nor do we intend to retain, any person to make solicitations
or
recommendations to you in connection with the rescission offer.
Effect
of Rescission Offer
It
is
unclear whether the rescission offer will terminate our liability, if any,
for
failure to register or qualify the issuance of the securities under either
federal or state securities laws. Accordingly, should the rescission offer
be
rejected by any or all offerees, we may continue to be contingently liable
under
the Securities Act of 1933 and applicable state securities laws for the purchase
price of these shares and the value of the options up to an aggregate amount
of
approximately $1,332,624, plus statutory interest. If you are a stockholder
who
acquired shares of our common stock in connection with our initial public
offering that are subject to the rescission offer, it is possible that you
may
continue to have rights under common law or fraud in the state in which the
potential securities violation with respect to your shares occurred. If a court
were to impose a greater remedy, our liability as a result of the potential
securities violations would be higher.
Regardless
of whether you accept the rescission offer, we believe that any remedies you
may
have after the rescission offer expires would not be greater than an amount
you
would receive in the rescission offer.
Below
is
a discussion of our contingent liability in those states where we may have
potential securities laws violations resulting from our issuance of the shares,
which are covered by the rescission offer. Each state has different laws with
respect to rights under common law and fraud and the following discussion of
state law does not relate to the antifraud provisions of applicable securities
laws or rights under common law or equity:
California
Under
California law, an issuer is civilly liable to a purchaser of its securities
sold in violation of the registration or qualification requirements of the
California Corporate Securities Law of 1968. The purchaser may sue to recover
the consideration paid for such securities with interest at 7% per year, less
the amount of any income received from ownership of the securities, upon the
tender of such securities at any time prior to the earlier of the two year
anniversary of the noncompliance with the registration or qualification
requirements or the one year anniversary of the discovery by the purchaser
of
the facts constituting such noncompliance.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the California Corporate Securities Law of 1968 by making a written rescission
offer before suit is commenced by the purchaser, approved as to form by the
California Commissioner of Corporations where the offer:
· |
states
the respect in which liability under the registration or qualification
requirements may have arisen,
|
· |
offers
to repurchase the securities for a cash price payable upon delivery
of the
securities or offering to pay the purchaser an amount in cash equal
in
either case to the amount recoverable by the purchaser, or offering
to
rescind the transaction by putting the parties back in the same position
as before the transaction,
|
· |
provides
that such offer may be accepted by the purchaser at any time within
a
specified period of not less than 30 days after the date of receipt
of the
offer unless rejected earlier during such periods by the
purchaser,
|
· |
sets
forth the provisions of the rescission offer requirements under the
California Corporate Securities Law of 1968,
and
|
· |
contains
such other information as the California Commissioner of Corporations
may
require by rule or order.
|
If
the
purchaser fails to accept such offer in writing within the specified time period
of not less than 30 days after the date of receipt of the offer, that purchaser
will no longer have any right of rescission under California law.
We
must
also file with the California Commissioner of Corporations, in such form as
the
California Commissioner of Corporations prescribes by rule, an irrevocable
consent appointing the Commissioner of Corporations or its successor in office
to be our attorney to receive services for any lawful process in any noncriminal
suit, action or proceeding against us or our successor, which arises under
California law after the consent has been filed with all the same force and
validity as if served personally on us.
We
believe this rescission offer complies in all material respects with the
rescission offer requirements of the California Corporate Securities Law of
1968.
Colorado
None
of
the shares sold in the state of Colorado may have been issued pursuant to an
effective registration statement or an applicable exemption from the
registration requirements set forth in the Colorado Securities Act.
Under
Colorado law, an issuer is civilly liable to a purchaser who buys securities
sold by the issuer in violation of the registration requirements of the Colorado
Securities Act. The issuer is liable to the purchaser for the consideration
paid
for the security, plus interest at 8% per year, costs and reasonable attorney
fees, less the amount of any income received on the security, upon tender of
the
security. If the purchaser no longer owns the security, the issuer is liable
to
such purchaser for damages. The purchaser must bring the action within two
years
after the contract of sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Colorado Securities Act by making a written rescission offer, before suit,
to repurchase the security for cash, payable on delivery of the security, in
an
amount equal to the consideration paid plus interest at 8% per year, less the
amount of any income received on the security, or for damages, if the purchaser
no longer owns the security. The offer must be accepted by the purchaser within
30 days after the offer is mailed by the issuer. The purchaser will no longer
have a right of rescission under Colorado law if the purchaser fails to accept
such offer within the period of time specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Colorado Securities Act.
Connecticut
None
of
the shares sold in the state of Connecticut may have been issued pursuant to
an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Securities and Business Investments
Law of Connecticut.
Under
the
Securities and Business Investments Law of Connecticut, a person that offers
or
sells securities in violation of the registration requirements of the Securities
and Business Investments Law of Connecticut is civilly liable to the purchaser
of the security. The purchaser may sue to recover the consideration paid for
the
security, together with interest at 8% per year, costs and reasonable attorneys’
fees, less the amount of any income received on the security, upon the tender
of
the security. If the purchaser no longer owns the security, the purchaser may
sue for damages. The purchaser must bring the action for violation of the
registration requirements within two years after the date of the contract of
sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Securities and Business Investments Law of Connecticut by making a written
rescission offer, before suit and at a time when the purchaser still owned
the
security, to refund the consideration, paid together with interest at 6% per
year, less the amount of any income received on the security, and he failed
to
accept the offer within thirty days of its receipt. The purchaser also may
not
bring such an action if the purchaser received such an offer before bringing
a
cause of action and at a time when the purchaser did not own the security,
unless the purchaser rejected the offer in writing within thirty days of its
receipt.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Securities and Business Investments Law
of
Connecticut.
Hawaii
None
of
the shares sold in the state of Hawaii may have been issued pursuant to an
effective registration statement or an applicable exemption from the
registration requirements set forth in the Hawaii Uniform Securities
Act.
Under
Hawaii law, an issuer is civilly liable to purchasers of securities sold by
the
issuer in violation of the Hawaii Uniform Securities Act upon tender of the
securities sold or of the contract made. The issuer is liable for the full
amount paid by the purchaser, with interest at 10% per year, plus all taxable
court costs and reasonable attorney’s fees. The purchaser must bring an action
to recover the purchase price within 5 years from the date of the sale or within
2 years from the discovery of facts constituting the violation, but in any
event
no later than 7 years from the date of sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Hawaii Uniform Securities Act by making a written rescission offer, before
suit, to take back the security in question and refund the full amount paid
by
the purchaser, plus interest at 10% per year, less the amount of any income
received by the purchaser from the securities, and the purchaser refuses or
fails to accept such offer within 30 days. The purchaser will no longer have
a
right of rescission under Hawaii law if the purchaser fails to accept such
offer
within the period of time specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Hawaii Uniform Securities Act.
Illinois
None
of
the shares sold in the state of Illinois may have been issued pursuant to an
effective registration statement or an applicable exemption from the
registration requirements set forth in the Illinois Securities Law of
1953.
Under
the
Illinois Securities Law, an issuer who sells securities in violation of the
Illinois Securities Law of 1953 is civilly liable to purchasers of such
securities for the full amount paid, plus interest at 10% per year, less any
income or other amounts received by the purchaser on the securities, upon offer
to tender the securities sold. If the purchaser no longer owns the securities,
the issuer is liable for the above amount less any amounts received by the
purchaser for or on account of the disposition of the securities. The purchaser
must bring an action for relief within 3 years from the date of
sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Illinois Securities Law of 1953 by making a written rescission offer, before
suit, to repurchase the securities, and the purchaser fails to accept the offer
within 15 days from the date the offer is received. The offer must be an offer
to repurchase the securities for a price equal to the full amount paid, plus
interest at 10% per year, less any income thereon. The offer must advise the
purchaser of his or her rights, state the period of time in which the offer
may
be accepted, and contain such further information, if any, as the Secretary
of
State may prescribe. The purchaser will no longer have a right of rescission
under Illinois law if the purchaser fails to accept such offer within the period
of time specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Illinois Securities Law of
1953.
Indiana
None
of
the shares sold in the state of Indiana may have been issued pursuant to an
effective registration statement or an applicable exemption from the
registration requirements of the Indiana Securities Act.
A
person
who offers or sells a security in violation of the registration requirements
of
the Indiana Securities Act is civilly liable to the purchaser of the security.
The purchaser may sue to recover the consideration paid, together with interest
at 8% per year, plus costs, and reasonable attorneys’ fees. If the purchaser no
longer owns the security, the amount of cash or other property received on
the
security upon the sale of the security should be deducted, or the purchaser
may
bring an action for damages. The purchaser must bring the action for violation
of the registration requirements within three years after discovery of the
violation by the person bringing the action.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Indiana Securities Act by making a written rescission offer, before suit,
and at a time when the purchaser owned the security, to refund the consideration
paid together with interest at 8% per year; less the amount of any income
received on the security, and the purchaser failed to accept the offer within
30
days of its receipt. If the purchaser did not own the security, the purchaser
may not commence such an action unless the purchaser rejected the offer within
30 days of receipt.
In
order
to conduct a rescission offer, unless otherwise ordered by the securities
commissioner of Indiana in a particular case the issuer of the security must
adhere to the following:
· |
The
offer must be in writing and the exact text must be submitted to
and
approved by the Commissioner in
advance.
|
· |
The
offer must be worded so that the subscriber must answer affirmatively
that
the subscriber either accepts or rejects the rescission
offer.
|
· |
The
offer must be mailed to the address of the subscriber which appears
on the
books of the transfer agent.
|
· |
The
subscriber shall have 30 days from the date of receipt to accept
the offer
(acceptance period). Acceptance or rejection shall be effective upon
mailing by the subscriber.
|
· |
If
a subscriber fails to respond, the investment will be deemed
rescinded.
|
· |
During
the acceptance period no other communications other than reminders
that
the rescission letter be returned may be initiated by the issuer
or its
agents with any subscribers to whom the rescission offer is being
made.
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At
the close of the acceptance period, the issuer shall file with the
Commissioner a report indicating the date the acceptance period ended,
the
number of subscribers to whom the offer was made, and the number
of
subscribers who accepted the rescission offer and number of shares
rescinded.
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Resumption
of offers and/or sales shall not take place until the securities
commissioner so orders.
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We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Indiana Securities Act.
Louisiana
None
of
the shares sold in the state of Louisiana may have been issued pursuant to
an
effective registration statement or an applicable exemption from the
registration requirements set forth in the Louisiana Securities
Law.
Under
Louisiana law, an issuer is civilly liable to a purchaser of securities sold
in
violation of the registration requirements of the Louisiana Securities Law.
The
purchaser may sue to recover the consideration paid in cash, plus interest
at 8%
per year, less the amount of any income received thereon, together with all
taxable court costs and reasonable attorney’s fees, upon the tender of the
security at any time before the entry of judgment, or for damages, if the
purchaser no longer owns the security. The purchaser must bring suit within
2
years from the date of the sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Louisiana Securities Law by making a written rescission offer, before suit
and at a time when the purchaser owned the security, to repay in cash or by
certified or official bank check, within 30 days from the date of acceptance
of
such offer in exchange for the securities, the fair value of the consideration
paid, plus interest at 8% per year, less the amount of any income received
on
the security, and the purchaser fails to accept the offer within 30 days of
receiving it. If the written offer is provided to the purchaser at a time when
the purchaser no longer owns the security, then the repayment amount is equal
to
the difference between the fair value of the consideration the purchaser gave
for the security and the fair value of the security at the time the purchaser
disposed of it, plus interest at 8% per year, less the amount of any income
received on the security. No such written offer will be effective unless, if
it
were an offer to sell securities, it would be exempt under Section 51:709 of
the
Louisiana Securities Law, or, if registration would have been required, such
rescission offer has been registered and effected under the Louisiana Securities
Law. The purchaser will no longer have a right of rescission under the Louisiana
law if the purchaser fails to accept such offer within the period of time
specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Louisiana Securities Law.
Massachusetts
None
of
the shares sold in the state of Massachusetts may have been issued pursuant
to
an effective registration statement or an applicable exemption from the
registration requirements set forth in the Massachusetts Uniform Securities
Act.
Under
Massachusetts law, an issuer is civilly liable to a purchaser of its securities
sold in violation of the registration requirements. The purchaser may sue to
recover the consideration paid, plus interest at 6% per year, costs and
reasonable attorneys’ fees, less the amount of any income received on the
security, upon the tender of the security, or for damages if the purchaser
no
longer owns the security. The purchaser must bring suit within 4 years after
the
purchaser discovers the violation in question.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Massachusetts Uniform Securities Act by making a written rescission offer,
before suit and at a time when the purchaser owned the security, to refund
the
consideration paid with interest at 6% per year, less the amount of any income
received on the security, and the purchaser fails to accept the offer within
30
days of receiving it, or if the purchaser receives such an offer before suit
and
at a time when the purchaser did not own the security, unless the purchaser
rejects the offer in writing within 30 days of receiving it. The purchaser
will
no longer have a right of rescission under Massachusetts law if the purchaser
fails to accept such offer within the period of time specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Massachusetts Uniform Securities
Act.
Missouri
None
of
the shares sold in the state of Missouri may have been issued pursuant to an
effective registration statement or an applicable exemption from the
registration requirements set forth in the Missouri Securities Act of
2003.
Under
Missouri law, an issuer is civilly liable to persons who purchase securities
sold by the issuer in violation of the registration requirements. The purchaser
may sue to recover the consideration paid for the security, less the amount
of
any income received on the security, and interest at 8% per year, costs and
reasonable attorneys’ fees, upon the tender of the security, or for actual
damages. The purchaser must bring the action within one year after the violation
occurs.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Missouri Securities Act of 2003 by making a written rescission offer, before
suit, which states the respect in which liability may have arisen, fairly
advises the purchaser of the purchaser’s rights in connection with the offer and
provides any financial or other information necessary to correct all material
misrepresentations or omissions in the information that was required to be
furnished to the purchaser at the time of the purchase. The offer must present
an offer to repurchase the security for cash, payable on delivery of the
security, equal to the consideration paid, plus interest at 8% per year, less
the amount of any income received on the security, or for damages if the
purchaser no longer owns the security. The offer must be accepted by the
purchaser within 30 days after the date it is received. The purchaser will
no
longer have a right of rescission under Missouri law if the purchaser fails
to
accept such offer within the period of time specified.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Missouri Securities Act of
2003.
Montana
None
of
the shares sold in the state of Montana may have been issued pursuant to an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Securities Act of
Montana.
Under
Montana law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
The purchaser may sue to recover the consideration paid for the security,
together with interest at 10% per year, costs, and reasonable attorneys’ fees
less the amount of any income received on the security, upon the tender of
the
security. The purchaser may also sue for damages if he no longer owns the
security. The purchaser must bring the action for violation of the registration
requirements within two years after the violation occurs.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Securities Act of Montana by making a written rescission offer, before
suit
and at a time when he owned the security, to refund the consideration paid,
together with interest at 10% per a year, less the amount of any income received
on the security and the purchaser failed to accept the offer within 30 days
of
its receipt. If the purchaser no longer owns the security, the purchaser may
not
commence such an action if he received a written offer in the amount that would
be recoverable if the purchaser did own the security upon a tender, less the
value of the security when the purchaser disposed of it, plus interest at 10%
per year.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Securities Act of Montana.
New
York
Under
New
York law, there is no requirement to register or qualify securities, and there
is no provision for rescission offers. We applied for an exemption under New
York law from the broker-dealer registration and securities issuance
requirements with the State of New York to issue the shares to you in the public
offering without registration or qualification. Because we applied for such
an
exemption, we believe that the shares of common stock issued by us in the state
of New York were issued pursuant to an exemption from registration or
qualification under New York law.
If
shares
were issued to you in New York, you do not have a right of rescission under
New
York law. Accordingly, the rescission offer is being made with respect to
individuals who purchased shares of our common stock in New York, pursuant
only
to federal rights of rescission. The acceptance or non-acceptance of the
rescission offer by these individuals will have no effect under New York
law.
Oregon
None
of
the shares sold in the state of Oregon may have been issued pursuant to an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Oregon Securities Law.
Under
Oregon law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
If the purchaser still owns the security, the purchaser may sue to recover,
upon
tender of the security, the consideration paid for the security, plus interest
at 9% per year, less any amount received on the security. If the purchaser
no
longer owns the security, the purchaser may sue to recover damages in the amount
that would be recoverable upon a tender, less the value of the security when
the
purchaser disposed of it, and less interest on such value from the date of
disposition. The purchaser must bring the action for violation of the
registration requirements within three years after the sale of the
security.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Oregon Securities Law by making a written rescission offer, before suit,
containing both (i) an offer to pay the purchaser the consideration paid for
the
security, interest at 9% per year, less any amount received on the security,
and
(ii) a statement of the effect on the purchaser’s rights of failure to respond.
An action for violation of the registration requirements may be commenced after
receipt of a notice, if the purchaser owned the security when the notice was
received, accepted the payment offer within 30 days after its receipt, and
has
not been paid the full amount offered; or if the purchaser did not own the
security when the notice was received, and within 30 days after receipt, gave
written notice of inability to tender back the security.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Oregon Securities Law.
South
Carolina
None
of
the shares sold in the state of South Carolina may have been issued pursuant
to
an effective registration statement or an applicable exemption from the
qualification requirements of the South Carolina Uniform Securities Act of
2005.
Under
South Carolina law, a person who offers or sells securities in violation of
the
registration requirements is civilly liable to the person buying the security.
The purchaser may sue to recover the consideration paid for the security, less
the amount of any income received on the security, and interest at 11.25%
per year, costs and reasonable attorneys’ fees determined by the court, upon the
tender of the security. If the purchaser no longer owns the security, the
purchaser may sue for actual damages that would be recoverable upon a tender
less the value of the security when the purchaser disposed of it, plus interest
at 11.25%
per year, costs and reasonable attorneys’ fees determined by the court. Tender
may be made at any time before entry of judgment. Tender requires only notice
in
a record of ownership of the security and willingness to exchange the security
for the amount specified. The legal rate of interest payable under South
Carolina law is based on the prime rate as listed in the first edition of the
Wall Street Journal published for each calendar year for which the damages
are
awarded, plus four percentage points, compounded annually. For purposes of
the
rescission offer, the rate of interest applicable to the rescission offer will
be based on the prime interest rate (7.25%) listed in the first edition of
the
Wall Street Journal published in calendar year 2006. A person must bring an
action for violation of the registration requirements within three years after
the violation occurred.
However,
we may terminate the rights of the purchasers to seek additional remedies under
South Carolina Uniform Securities Act of 2005 by making a written rescission
offer, before suit stating the respect in which liability may have arisen,
and
fairly advising the purchaser their rights in connection with the offer, and
any
financial or other information that was required to be furnished to that person
at the time of the purchase of the securities. The rescission must include
an
offer to repurchase the security for cash, payable upon delivery of the
security, equal to the consideration paid, including all commissions and fees,
plus interest at 11.25% per year, less the amount of any income received on
the
security. If the purchaser no longer owns the security, the offer may be to
pay
the purchaser upon acceptance of the offer, damages in an amount that would
be
recoverable upon a tender, less the value of the security when the purchaser
disposed of it, plus interest at 11.25%
per year. The offer must be accepted by the purchaser within 30 days after
the
date of its receipt by the purchaser. The offeror must have the present ability
to pay the amount offered or to tender the security. Finally, the offer must
be
delivered to the purchaser, or sent in a manner that ensures receipt by the
purchaser, and the purchaser must accept the offer and be paid in accordance
with the terms of the offer.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the South Carolina Uniform Securities Act
of
2005.
Utah
None
of
the shares sold in the state of Utah may have been issued pursuant to an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Utah Uniform Securities
Act.
Under
Utah law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
The purchaser may sue to recover the consideration paid for the security,
together with interest at 12% per year, costs and reasonable attorney’s fees,
less the amount of any income received on the security, upon the tender of
the
security, or for damages if he no longer owns the security. Damages are the
amount that would be recoverable upon a tender less the value of the security
when the buyer disposed of it, and interest at 12% per year. If the purchaser
can show that the violation was reckless or intentional, the purchaser may
bring
suit for three times the consideration paid for the security, together with
interest, costs and attorney’s fees. The purchaser must bring the action for
violation of the registration requirements within four years after the act
or
transaction constituting the violation, or within two years after the discovery
by the purchaser of the facts constituting the violation, whichever expires
first.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Utah Uniform Securities Act by making a written rescission offer, before
suit and at a time when he owned the security, to refund the consideration
paid
together with interest at 12% per year, less the amount of any income received
on the security, and he failed to accept the offer within 30 days of receipt.
If
the purchaser no longer owns the security, he may not commence such an action
if
he received a written offer before suit, unless he rejected the offer in writing
within 30 days of its receipt.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Utah Uniform Securities Act.
Vermont
None
of
the shares sold in the state of Vermont may have been issued pursuant to an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Vermont Uniform Securities
Act.
Under
Vermont law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
The purchaser of the security may sue to recover the consideration paid for
the
security, together with interest at 12% per year, costs and reasonable
attorneys’ fees, less the amount of any income received on the security, upon
the tender of the security, or for damages plus costs and reasonable attorneys’
fees if the purchaser no longer owns the securities. Damages are the amount
that
would be recoverable upon a tender, less the value of the security when the
purchaser disposed of it, and interest at 12% per year. Tender shall require
only notice of willingness to exchange the security for the amount specified.
The purchaser must bring the action for violation of the registration
requirements within three years after the act, omission or transaction
constituting the violation, or within two years after the violation is or
reasonably should have been discovered, whichever occurs later, but not later
than six years after the act, omission or transaction constituting the
violation.
Under
Vermont law, effective as of July 1, 2006, an action may not be maintained
if before the action is instituted, the purchaser receives an offer stating
the
respect in which the civil liability may have arisen and fairly advising the
purchaser of that person's rights in connection with the offer, and any
financial or other information necessary to correct all material
misrepresentations or omissions in the information that was required by this
chapter to be furnished to that person at the time of the purchase. The offer
must be to repurchase the security for cash, payable on delivery of the
security, equal to the consideration paid, together with interest at the rate
of
12% per year, less the amount of any income received on the security, or, if
the
purchaser no longer owns the security, an offer to pay the purchaser upon
acceptance of the offer damages in an amount that would be recoverable upon
a
tender, less the value of the security when the purchaser disposed of it,
together with interest at the rate of 12% per year. The offer must be accepted
by the purchaser within 30 days of its receipt, the offeror must have the
present ability to pay the amount offered or to tender the security, the offer
must be delivered to the purchaser in a manner that ensures receipt by the
purchaser and the purchaser must be paid in accordance with the terms of the
offer.
Virginia
None
of
the shares sold in the state of Virginia may have been issued pursuant to an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Virginia Securities
Act.
Under
Virginia law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
The purchaser may sue to recover the consideration paid for the security,
together with interest at 6% per year, costs, and reasonable attorneys’ fees,
less the amount of any income received on the security, upon the tender of
such
security, or for the substantial equivalent in damages if he no longer owns
the
security. Any tender may be made at any time before entry of judgment. The
purchaser must bring the action for violation of the registration requirements
within two years after the transaction upon which the action is
based.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Virginia Securities Act by making a written rescission offer, before suit,
to refund the consideration paid, together with interest at 6% per year, less
the amount of any income received on the security, or to pay damages if the
purchaser no longer owns the security, and the purchaser refuses or fails to
accept such offer within 30 days of its receipt.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Virginia Securities Act.
Washington
None
of
the shares sold in the state of Washington may have been issued pursuant to
an
effective registration statement or an applicable exemption from the
qualification requirements set forth in the Securities Act of
Washington.
Under
Washington law, a person who offers or sells securities in violation of the
registration requirements is civilly liable to the person buying the security.
The purchaser may sue to recover the consideration paid for the security,
together with interest at 8% per year, costs and reasonable attorneys’ fees,
less the amount of any income received on the security, upon the tender of
the
security, or for damages if the purchaser no longer owns the security. Damages
are the amount that would be recoverable upon a tender less (i) the value of
the
security when the purchaser disposed of it, and (ii) interest at 8% per year
from the date. The purchaser must bring the action for violation of the
registration requirements within three years after the contract of
sale.
However,
we may terminate the rights of the purchasers to seek additional remedies under
the Securities Act of Washington by making a written rescission offer, before
suit, which has been passed upon by the director before suit, and at a time
when
the purchaser owned the security, to refund the consideration paid together
with
interest at 8% per year, less the amount of any income received on the
security.
We
believe that this rescission offer complies in all material respects with the
rescission offer requirements of the Securities Act of Washington.
Israel
Israel’s
securities law, known as The Securities Law, 5728-1968, prohibits the offering
of securities to the public, other than under a prospectus, the publication
of
which has been permitted by the Israel Securities Authority. The regulations
promulgated under The Securities Law provide for an exemption to this general
prohibition when the number of investors in Israel to whom the offeror sells
the
offered securities in an offering, combined with the number of investors in
Israel to whom the offeror sold securities during the twelve month preceding
the
offer, is less than 35 investors. Because we have sold our securities to fewer
than 35 investors in Israel at any time, we believe that the shares of common
stock issued by us in Israel in the public offering were issued pursuant to
an
exemption from the prospectus publication requirements under Israeli
law.
If
shares
were issued to you in Israel, you do not have a right of rescission under
Israeli law. Accordingly, the rescission offer is being made with respect to
individuals who purchased shares of our common stock in Israel, pursuant only
to
United States federal rights of rescission. The acceptance or non-acceptance
of
the rescission offer by these individuals will have no effect under Israeli
law.
Funding
the Rescission Offer
We
have
entered into an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock.
Each of
the designated purchasers may also participate in the purchase of shares of
common stock to be distributed in the public offering. Since up to all of the
rescission shares would be purchased by the designated purchasers, none of
the
rescission shares would be purchased directly by us and would not deplete
proceeds from our public offering or other of our then current cash balances.
The rescission shares, which may be purchased by the designated purchasers
in
the rescission offer, would be deemed to be registered shares for the benefit
of
the designated purchasers pursuant to a registration statement to be filed
by us
relating to the rescission offer under the Securities Act, effective as of
the
commencement date of the rescission offer without any further action on the
part
of the designated purchasers. If
we are
required to pay the obligation which may be created under the rescission offer,
such a refund would materially and adversely effect our financial
position.
Directors,
Officers and Major Stockholders
None
of
our officers, directors or 5% stockholders purchased shares in our initial
public offering and are not eligible to participate in this rescission offer
for
purposes of tendering their shares for rescission. However, we have entered
into
an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. Robert T. Reed, Jr. is a
beneficial owner of approximately 7.29% of our common stock.
If
Robert
T. Reed, Jr. purchases shares in this rescission offer, he would increase his
ownership interest in us.
Tax
Consequences of the Rescission Offer
The
following discussion summarizes the material federal income tax considerations
relevant to our stockholders who hold shares that are subject to the rescission
offer. We do not discuss all income tax considerations that may be relevant
to
particular stockholders in light of their individual circumstances, such as
stockholders who are non-U.S. persons, stockholders who are not individuals,
or
stockholders subject to the alternative minimum tax provisions of the Internal
Revenue Code of 1986, as amended, or the Code. In addition, we do not address
the tax consequences of the rescission offer to persons who hold shares that
are
subject to hedging, conversion, or constructive sale transactions, or whose
tax
year is other than a calendar year. Finally, we do not address any foreign,
state or local tax considerations. ACCORDINGLY, STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
RESCISSION OFFER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX
CONSEQUENCES TO THEM OF THE RESCISSION OFFER.
General
The
repurchase of shares from our stockholders may be treated by the Internal
Revenue Service, or the Service, as, among other things, (i) a redemption of
equity securities by us, or (ii) a purchase of securities by a third party.
Because we cannot determine in advance how the Service may characterize these
transactions, we have described below the treatment under the two most likely
characterizations.
We
have
entered into an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. Each
designated person will buy the rescission shares for his own account and with
his own funds. There is no plan or intention by us to redeem the shares to
be
acquired by the designated purchaser.
Treatment
as Repurchase of Shares
We
intend
to treat the rescission transaction as one strictly between the stockholder
and
the designated purchaser. A sale to the designated purchaser for an amount
of
cash equal to the original purchase price, plus applicable accrued interest,
would be treated as a sale or exchange, and assuming that such stockholder
holds
the rescission shares as a capital asset, the sale would be treated as a capital
gain or loss (within the meaning of Section 1221 of the Code and administrative
and case law thereunder). The amount of the gain would be the amount received
by
the stockholder (including the accrued interest amount) less the amount
originally paid for the rescission shares. In this analysis, we have assumed
that the Service will not assert that the designated purchasers are in any
way
acting as our agent in making the purchase of the rescission shares. If the
Service were to assert that the designated purchasers are acting as our agent
in
making the purchase of the rescission shares, then the tax treatment would
more
likely be similar to that described in the subparagraph below entitled
“Treatment as Redemption of Shares.”
Treatment
as Redemption of Shares
The
Service may take the position that the rescission will constitute a taxable
redemption of the rescission shares for cash, with the redemption price equal
to
the amount paid for such shares (and include in the redemption price the
interest on the original purchase price of such rescission shares). A redemption
for an amount of cash equal to the original purchase price (plus accrued
interest) could be treated as a redemption governed by the rules of Section
302
and related sections of the Code. However, the federal tax law governing this
proposed transaction is unclear, at best, and we have not received a ruling
from
the Service regarding such tax consequences. For example, the Service could
characterize the rescission offer as the return of the original purchase price,
which would ordinarily be nontaxable, plus the payment of interest, which would
be taxable as ordinary income.
If
this
tax position as a redemption is sustained, any rescission transaction would
be
treated as a sale or exchange, and, assuming that such stockholder holds his
shares as a capital asset (within the meaning of Section 1221 of the Code and
administrative and case law thereunder), the character of any gain or loss
to
the stockholder would be treated as a capital gain or loss, if:
· |
It
results in a “complete redemption” of the stockholder's interest in us
under Section 302(b)(3) of the Code, which would be the case if either
(i)
all of the shares actually and constructively owned by the stockholder
are
sold pursuant to the rescission offer, or (ii) all of the shares
actually
owned by the stockholder are sold pursuant to the rescission offer
and the
stockholder is eligible to waive, and effectively waives, constructive
ownership of the shares under procedures described in Section 302(c)
of
the Code;
|
· |
It
is “substantially disproportionate” with respect to the stockholder under
Section 302(b)(2) of the Code, which would occur if (i) the percentage
of
our voting stock owned by the stockholder immediately after the
repurchase, taking into account all shares purchased from the stockholder
pursuant to the rescission offer, equals less than 80% of the percentage
of our voting stock owned by the stockholder immediately before the
repurchase, and (ii) the stockholder, after the repurchase, owns
less than
50% of the total combined voting power of all classes of our stock
entitled to vote; or
|
· |
It
is not “essentially equivalent to a dividend” with respect to the
stockholder, under Section 302(b)(1) of the Code, which would occur
if, in
light of the stockholder's individual circumstances, including his
relative interest in us, his sale of shares pursuant to the rescission
offer results in a “meaningful reduction” of his interest in
us.
|
In
determining whether any of the above redemption tests are satisfied, a
stockholder must take into account not only shares that are actually owned
by
him, but also shares that are constructively owned by him within the meaning
of
Section 318 of the Code. Section 318 of the Code provides that a stockholder
may
constructively own shares actually owned, and in some cases, constructively
owned by certain related individuals and shares that he has the right to acquire
by the exercise of an option, warrant, or a conversion right. Contemporaneous
or
related transactions in our capital stock or capital stock rights also may
affect the redemption tests.
If
the
rules of Section 302 were to apply and the rescission fails to qualify as a
redemption, then the gross proceeds of such transaction would be characterized
as a dividend distribution, taxable at ordinary income tax rates to the extent
of our accumulated and current earnings and profits (if any), and any excess
would be treated as a return of capital, to the extent of the stockholder’s
basis in the rescission shares, and any amount in excess of the basis would
be
treated as a gain from a sale or exchange of a capital asset.
THE
LAW
APPLICABLE TO THE RESCISSION OFFER IS UNCLEAR AND WE HAVE NOT RECEIVED AN
OPINION OF COUNSEL OR A RULING FROM THE SERVICE TO THAT EFFECT. THUS, THE
SERVICE COULD SUCCESSFULLY ASSERT A CONTRARY POSITION, OR OTHERWISE,
RECHARACTERIZE THE TRANSACTION IN WHOLE OR IN PART.
THE
PRECEDING DISCUSSION IS INTENDED ONLY AS A SUMMARY OF CERTAIN UNITED STATES
INCOME TAX CONSEQUENCES OF THE RESCISSION OFFER AND DOES NOT PURPORT TO BE
A
COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX EFFECTS RELEVANT THERETO.
STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX
CONSEQUENCES TO THEM OF THE RESCISSION OFFER, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FOREIGN, FEDERAL, STATE, LOCAL,
AND OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE
TAX
LAWS.
This
prospectus contains forward-looking statements. The forward-looking statements
are contained principally in, but not limited to, the sections entitled “Risk
Factors,” “Management’s Discussion and Analysis or Plan of Operation” and
“Business.” Forward-looking statements provide our current expectations or
forecasts of future events. Forward-looking statements include statements about
our expectations, beliefs, plans, objectives, intentions, assumptions and other
statements that are not historical facts. Words or phrases such as “anticipate,”
“believe,” “continue,” “ongoing,” “estimate,” “expect,” “intend,” “may,” “plan,”
“potential,” “predict,” “project” or similar words or phrases, or the negatives
of those words or phrases, may identify forward-looking statements, but the
absence of these words does not necessarily mean that a statement is not
forward-looking.
Forward-looking
statements are subject to known and unknown risks and uncertainties and are
based on potentially inaccurate assumptions that could cause actual results
to
differ materially from those expected or implied by the forward-looking
statements. Our actual results could differ materially from those anticipated
in
forward-looking statements for many reasons, including the factors described
in
the section entitled “Risk Factors” in this prospectus. Accordingly, you should
not unduly rely on these forward-looking statements, which speak only as of
the
date of this prospectus.
Unless
required by law, we undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date
of
this prospectus or to reflect the occurrence of unanticipated events. You
should, however, review the factors and risks we describe in the reports we
will
file from time to time with the SEC, after the date of this
prospectus.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside of our control, 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
effectiveness of our rescission offer to preclude certain holders
of our
stock from seeking relief for alleged violations of securities laws
in
connection with securities issuances in connection with our initial
public
offering,
|
· |
Our
ability to generate sufficient cash flow to support capital expansion
plans and general operating
activities,
|
· |
Decreased
demand for our products resulting from changes in consumer
preferences,
|
· |
Competitive
products and pricing pressures and our ability to gain or maintain
its
share of sales in the marketplace,
|
· |
The
introduction of new products,
|
· |
Our
being subject to a broad range of evolving federal, state and local
laws
and regulations including those regarding the labeling and safety
of food
products, establishing ingredient designations and standards of identity
for certain foods, environmental protections, as well as worker health
and
safety. Changes in these laws and regulations could have a material
effect
on the way in which we produce and market our products and could
result in
increased costs,
|
· |
Changes
in the cost and availability of raw materials and the ability to
maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of our
products,
|
· |
Our
ability to penetrate new markets and maintain or expand existing
markets,
|
· |
Maintaining
existing relationships and expanding the distributor network of our
products,
|
· |
The
marketing efforts of distributors of our products, most of whom also
distribute products that are competitive with our
products,
|
· |
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of our products
that
they are carrying at any time,
|
· |
The
availability and cost of capital to finance our working capital needs
and
growth plans,
|
· |
The
effectiveness of our advertising, marketing and promotional
programs,
|
· |
Changes
in product category consumption,
|
· |
Economic
and political changes,
|
· |
Consumer
acceptance of new products, including taste test
comparisons,
|
· |
Possible
recalls of our products, and
|
· |
Our
ability to make suitable arrangements for the co-packing of any of
our
products.
|
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
We
have
never declared or paid dividends on our common stock. We currently intend to
retain future earnings, if any, for use in our business, and, therefore, we
do
not anticipate declaring or paying any dividends in the foreseeable future.
Payments of future dividends, if any, will be at the discretion of our board
of
directors after taking into account various factors, including the terms of
our
credit facility and our financial condition, operating results, current and
anticipated cash needs and plans for expansion.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock in either cash or additional shares
of common stock at our discretion. In 2005, we paid the dividend in an
aggregate of 7,362 shares of common stock, and anticipate that we will be
obligated to issue at least this many shares annually to the holders of the
Series A preferred stock so long as such shares are issued and outstanding.
See
“Description of Our Securities - Preferred Stock.”
AND
RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and
the
related notes appearing elsewhere in this prospectus. This discussion and
analysis may contain forward-looking statements based on assumptions about
our
future business. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including but not limited to those set forth under “Risk Factors” and elsewhere
in this prospectus.
Overview
We
develop, manufacture, market and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell six unique
product lines:
· |
Virgil’s
Root Beer and Cream Sodas,
|
· |
Reed’s
Ginger Juice Brews,
|
· |
Reed’s
Ginger Candies, and
|
· |
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
The
following table shows a breakdown of net sales with respect to our distribution
channels for the periods set forth in the table:
|
Direct
sales to large retailer accounts
|
%
of total sales
|
Local
direct distribution
|
%
of total sales
|
Natural,
gourmet and mainstream distributors
|
%
of total
|
Total
sales
|
2005
|
$1,536,896
|
16
|
$751,999
|
8
|
$7,181,390
|
76
|
$9,470,285
|
2004
|
1,983,598
|
22
|
395,601
|
4
|
6,599,166
|
74
|
8,978,365
|
2003
|
1,286,365
|
19
|
90,121
|
1
|
5,405,290
|
80
|
6,781,776
|
Historically,
we have focused our marketing efforts on natural and gourmet food stores. In
2003, we expanded our marketing efforts to include more mainstream markets.
These efforts included selling our products directly to:
· |
large
retail accounts, such as Costco, BJ Wholesale, and Cost Plus World
Markets, and
|
· |
the
natural food section of mainstream national supermarket chains, such
as
Safeway, Kroger’s, Ralph’s and Bristol
Farms.
|
In
addition, since 2003, we have introduced new products and offer
specialty beverage packaging options not typically available in the
marketplace
into the
marketplace that have contributed to our growth in sales. These products include
a 5-liter “party keg” version of our Virgil’s Root Beer and Cream Soda, 12-ounce
long neck bottles of our Virgil’s Cream Soda and 750 ml size bottles of our
Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple
Brew.
We
gauge
the financial success of our company by a number of different parameters.
Because our industry typically values companies on a top-line basis, one of
our
main company goals is to increase net sales. Our net sales have increased each
year during the period from 2001 to 2005, as follows:
|
2001
|
2002
|
2003
|
2004
|
2005
|
Net
sales
|
$6,200,000
|
$6,400,000
|
$6,800,000
|
$9,000,000
|
$9,500,000
|
We
believe that the increase in net sales over this period comes from three
factors:
· |
successes
in our Southern California direct distribution
strategy,
|
· |
increases
in our core of national distribution to natural and gourmet food
stores
and mainstream supermarket chains,
and
|
· |
increases
in our direct sales to large
retailers.
|
Almost
as
important as increasing our net sales are increasing our gross margins. We
continue to work to reduce costs related to production of our products. However,
we have encountered difficulties in increasing our gross margins due to certain
factors, including:
· |
inefficiencies
commensurate with a start-up period for the Brewery that we purchased
in
2002 as our West Coast production facility,
and
|
· |
higher
freight, glass and production expenses due to the increase in the
cost of
fuel and increases in the price of ingredients in our
products.
|
In
2002,
we purchased and outfitted the Brewery, in part to help reduce both production
costs and freight costs associated with our west coast sales. Gross margins
decreased from 24.8% in 2002 to 19.5% in 2003 as a principal result of the
start-up of the Brewery. Gross margins increased to 20.9% in 2004 as a principal
result of attaining greater functionality and efficiencies in our operation
of
the Brewery by our own personnel and being able to produce and ship products
in
the western half of the Untied States from a west coast facility. However,
in
2005, gross margins decreased to 18.2% as a principal result of increases in
fuel prices, which put downward pressure on our margins due to increased freight
expenses and increased glass and production costs, both of which are sensitive
to fuel costs.
In
addition, our west coast Brewery facility is running at 40% of capacity. We
had
difficulties with the underutilization of the Brewery at 40% of capacity as
a
result of working out problems associated with the flavor of our ginger brew
products produced at the Brewery, causing us to increase freight and other
associated expenses with producing and shipping such products nationally from
our east coast co-packing facility. Management is committed to selling a high
quality, great tasting product. Since the east coast co-packer is producing
such
a product, management has elected to continue to sell that product on the west
coast, even though it negatively impacts our gross margins. As we are able
to
make the Brewery become more fully utilized, we believe that we will experience
improvements in gross margins due to freight and production
savings.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices -
Our
freight rates were approximately 9.7% of net sales during 2005. We expect
freight rates to increase by an additional 5% to 10% in 2006 as result of the
continuing increase in fuel prices. However, as we increase production at the
Brewery, for delivery of products in the western half of the United States,
we
expect to offset this trend, at least in part, by reducing our need for
cross-country freight services from our eastern co-packing
facility.
Low
Carbohydrate Diets and Obesity
- Our
products are not geared for the low carbohydrate market. Consumer trends have
reflected higher demand for lower carbohydrate products. Despite this trend,
we
achieved an increase in our sales growth in 2005. We monitor these trends
closely and have started developing low-carbohydrate versions of some of our
beverages, although we do not have any currently marketable low-carbohydrate
products.
Distribution
Consolidation -
There
has been a recent trend towards continued consolidation of the beverage
distribution industry through mergers and acquisitions. This consolidation
results in a smaller number of distributors to market our products and
potentially leaves us subject to the potential of our products either being
dropped by these distributors or being marketed less aggressively by these
distributors. As a result, we have initiated our own direct distribution to
mainstream supermarkets and natural and gourmet foods stores in Southern
California and to large national retailers. Consolidation among natural foods
industry distributors has not had an adverse affect on our sales.
Consumer
Demanding More Natural Foods
- The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends behind
our growth. Recently, this trend in drinks has not only shifted to products
using natural ingredients, but also to products with added ingredients
possessing a perceived positive function like vitamins, herbs and other
nutrients. Our ginger-based products are designed with this consumer demand
in
mind.
Supermarket
and Natural Food Stores -
More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in mainstream supermarkets throughout
the
United States in natural food sections. Supermarkets can require that we spend
more advertising money and they sometimes require slotting fees. We continue
to
work to keep these fees reasonable. Slotting fees in the natural food section
of
the supermarket are generally not as expensive as in other areas of the
store.
Beverage
Packaging Changes
-
Beverage packaging has continued to innovate, particularly for premium products.
There is an increase in the sophistication with respect to beverage packaging
design. While we feel that our current core brands still compete on the level
of
packaging, we continue to experiment with new and novel packaging designs such
as the 5-liter party keg and 750 ml champagne style bottles. We have further
plans for other innovative packaging designs.
Packaging
or Raw Material Price Increases
- An
increase in packaging or raw materials has caused our margins to suffer and
has
negatively impacted our cash flow and profitability. We continue to search
for
packaging and production alternatives to reduce our cost of goods.
Cash
Flow Requirements
- Our
growth will depend on the availability of additional capital infusions. We
have
a financial history of losses and are dependent on non-banking sources of
capital, which tend to be more expensive and charge higher interest rates.
Any
increase in costs of goods will further increase losses and will further tighten
cash reserves. We intend to use the proceeds from our public offering to
increase our liquidity to be able to make cash expenditures, as
needed.
Interest
Rates - We
use
lines of credit as a source of capital and are negatively impacted as interest
rates rise. Management believes our public offering will provide capital
sufficient for us to reduce our debt level and allow us to lower our incremental
borrowing costs.
Critical
Accounting Policies
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires
us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable
and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
Revenue
Recognition. Revenue
is recognized on the sale of a product when the product is shipped, which is
when the risk of loss transfers to our customers, and collection of the
receivable is reasonably assured. A product is not shipped without an order
from
the customer and credit acceptance procedures performed. The allowance for
returns is regularly reviewed and adjusted by management based on historical
trends of returned items. Amounts paid by customers for shipping and handling
costs are included in sales.
Trademark
License and Trademarks.
Trademark license and trademarks primarily represent the costs we pay for
exclusive ownership of the Reed’s® trademark in connection with the manufacture,
sale and distribution of beverages and water and non-beverage products. We
also
own the China Cola® trademark and have applied for a trademark on the Virgil’s
name. In addition, we own a number of other trademarks in the United States
as
well as in a number of countries around the world. We account for these items
in
accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Under
the provisions of SFAS No. 142, we do not amortize indefinite-lived
trademark licenses and trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified during
the years ended December 31, 2005 or 2004 or during the three months ended
March
31, 2006.
Long-Lived
Assets.
Our
management regularly reviews property, equipment and other long-lived assets,
including identifiable amortizing intangibles, for possible impairment. This
review occurs quarterly or more frequently if events or changes in circumstances
indicate the carrying amount of the asset may not be recoverable. If there
is
indication of impairment of property and equipment or amortizable intangible
assets, then management prepares an estimate of future cash flows (undiscounted
and without interest charges) expected to result from the use of the asset
and
its eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized to write down the asset to its
estimated fair value. The fair value is estimated at the present value of the
future cash flows discounted at a rate commensurate with management’s estimates
of the business risks. Quarterly, or earlier if there is indication of
impairment of identified intangible assets not subject to amortization,
management compares the estimated fair value with the carrying amount of the
asset. An impairment loss is recognized to write down the intangible asset
to
its fair value if it is less than the carrying amount. Preparation of estimated
expected future cash flows is inherently subjective and is based on management’s
best estimate of assumptions concerning expected future conditions. No
impairments were identified during the years ended December 31, 2005 or 2004
or
during the three months ended March 31, 2006.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Advertising.
We
account for advertising production costs by expensing such production costs
the
first time the related advertising is run.
Accounts
Receivable.
We
evaluate the collectibility of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to
the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment
of
past due trade accounts receivable outstanding.
Inventories.
Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory
or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or
our
ability to sell the product(s) concerned and production requirements. Demand
for
our products can fluctuate significantly. Factors that could affect demand
for
our products include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in cancellations of advance
orders or a reduction in the rate of reorders placed by customers. Additionally,
our management’s estimates of future product demand may be inaccurate, which
could result in an understated or overstated provision required for excess
and
obsolete inventory.
Income
Taxes.
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the value
of our deferred tax assets. If our management determines that it is more likely
than not that these assets will not be realized, we will reduce the value of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Results
of Operations
Three
Months Ended March 31, 2006 Compared to Three Months Ended March 31,
2005
Net
sales
increased by $161,936, or 8.9%, from $1,817,336 in the first three months ended
March 31, 2005 to $ 1,979,272 in the first three months ended March 31, 2006.
Sales of our core Reed’s Ginger Brew items increased
from $916,000 in the first three months ended March 31, 2005 to $1,073,000
in
the first three months ended March 31, 2006. Sales of our Virgil’s Root Beer 12
ounce bottles and our new Virgil’s Cream soda increased by $76,000 from $390,000
and $101,000, respectively, in the first three months ended March 31, 2005
to
$467,000 and $100,000, respectively, in the first three months ended March
31,
2006. Candy sales increased by $76,000 from $129,000 in the first three months
ended March 31, 2005 to $205,000 in the first three months ended March 31,
2006.
These increases were offset by decreases in sales in certain of our other
products. Sales of our new Virgil’s 5 liter party keg labels decreased from
$148,000 in the first three months ended March 31, 2005 to $50,000 in the first
three months ended March 31, 2006 due to non-recurring sales to certain large
retailers. Ice cream sales increased from $34,000 in the first three months
ended March 31, 2005 to $36,000 in the first three months ended March 31,
2006.
Cost
of
sales increased by $202,589, or 13.6%, from $1,486,287 in the first three months
ended March 31, 2005 to $1,688,876 in the first three months ended March 31,
2006. As a percentage of net sales, cost of sales increased from 81.8% in the
first three months ended March 31, 2005 to 85.3% in the first three months
ended
March 31, 2006. Costs of sales increased primarily as a result of increased
depreciation (0.6%), increased production expenses due to fuel costs (2.5%)
and
increased packaging costs (0.4%).
Gross
profit decreased from $331,049 in the first three months ended March 31, 2005
to
$290,396 in the first three months ended March 31, 2006. As a percentage of
net
sales, gross profit decreased from 18.2% in the first three months ended March
31, 2005 to 14.7% in the first three months ended March 31, 2006. Effective
February 1, 2006, we approved a price increase in a number of our product lines
at an average of approximately 7% in order to attempt to increase our gross
profit. The full implementation of the price increase is expected to be
completed by the middle of the third quarter of 2006. We expect margins to
increase by the end of 2006 due to this price increase, provided that these
price increases do not adversely affect our volume of sales.
General
and administrative and selling expenses increased by $50,719 or 10.2% from
$499,099, in the first three months ended March 31, 2005 to $549,818 in the
first three months ended March 31, 2006 and increased as a percentage of net
sales from 27.5% in the first three months ended March 31, 2005 to 27.8% in
the
first three months ended March 31, 2006. The increase in expenses was due to
increased salaries due to a larger sales force (0.8%), increased sales expenses
from increased fuel costs and increased telephone charges (3.8%), increased
utility expenses (1.1%) and increased legal and accounting costs due to the
costs associated with being a public reporting company (0.8%). Health insurance
costs increased due to more people being covered by our health plan (2.3%).
Payroll increased due to temporary employee services incurred as a result of
an
employee departure during the quarter ended March 31, 2006 (2.0%). We reduced
our promotional expenses due to fewer club store demos (-1.9%).
Legal
defense costs for the three months ended March 31, 2006 and 2005 were $9,568
and
$2,216, respectively. These expenses were incurred for a lawsuit brought against
us by a consultant alleging funds due him. We mounted a successful defense
in
this action and were successful on an appeal of this matter.
Interest
expense increased by $29,397, or 41.3%, from $71,210 in the first three months
ended March 31, 2005 to $100,607, in the first three months ended March 31,
2006. The increase in interest expense was due to increasing short term interest
rates, increased borrowings on our available lines of credit and increasing
our
long term debt, which was used to purchase brewing equipment, vehicles and
office equipment.
As
a
result of the foregoing, we experienced a net loss of $241,386 in the first
three months ended March 31, 2005 and $369,597 in the first three months ended
March 31, 2006. Accordingly, we experienced a net loss of $0 .05 per share
in
the first three months ended March 31, 2005 and $0.07 per share in the first
three months ended March 31, 2006.
Twelve
Months Ended December 31, 2005 Compared to Twelve Months Ended
December 31, 2004
Net
sales
increased by $491,920, or 5.5%, from $8,978,365 in 2004 to $9,470,285 in 2005.
Sales of our core Reed’s Ginger Brew items increased
from $3,681,000 in 2004 to $4,103,000 in 2005. Sales of our Virgil’s Root Beer
12 ounce bottles and our new Virgil’s Cream soda increased from $1,591,000 and
$139,000, respectively, in 2004 to $2,091,000 and $667,000, respectively, in
2005. Candy sales increased from $699,000 in 2004 to $822,000 in 2005. These
increases were offset by decreases in sales in certain of our other products.
Sales of our new Virgil’s 5 liter party keg labels decreased from $1,002,000 in
2004 to $575,000 in 2005 due to non-recurring sales in 2004 to certain large
retailers. Ice cream sales dropped from $196,000 in 2004 to $145,000 in 2005.
Our co-packing sales of private labels from the Brewery dropped from $450,048
in
2004 to $239,835 in 2005.
Cost
of
sales increased by $642,462, or 9.0%, from $7,103,037 in 2004 to $7,745,499
in
2005. Costs of sales as a percentage of sales increased from 79.1% in 2004
to
81.8% in 2005. Costs of sales as a percentage of sales increased primarily
as a
result of increases in higher freight costs (0.5%), packaging costs (0.8%)
and
production expenses (4.4%) due to increased fuel costs and increased
depreciation (0.3%), offset by decreases in ingredient costs
(-3.3%).
We
calculate gross profit as total revenues less cost of sales. Gross profit
decreased from $1,875,328 in 2004 to $1,724,786 in 2005. As a percentage of
net
sales, gross profit decreased from 20.9% in 2004 to 18.2% in 2005. Effective
February 1, 2006 we increased prices in a number of our product lines at an
average of approximately 7% in order to attempt to increase our gross profit.
We
expect margins to increase by the end of 2006 due to this price increase,
provided that these price increases do not adversely affect our volume of sales.
General
and administrative and selling expenses increased by $213,958 or 11.5% from
$1,866,511, in 2004 to $2,080,469 in 2005 and increased as a percentage of
net
sales from 20.8% in 2004 to 22.0% in 2005. The increase in expenses was
primarily due to increased salaries due to a larger sales force, more
commissions due to increased number of outside sales brokers, increased sales
fuel costs, increased fuel expenses for plant heating requirements and increased
legal and accounting costs due to the costs associated with the public offering
and becoming a reporting company under the Exchange Act. In addition, if we
are
able to receive a significant portion of the proceeds from the public offering,
we intend to increase our in-house sales force, which we anticipate will permit
us to increase sales of our product lines in the future. We anticipate a lead
time until these new sales people generate enough additional revenue to support
their additional cost.
Beginning
in January 2000, we extended an interest-free line of credit to one of our
consultants, Peter Sharma, III who was a member of our board until January
27,
2006. In July 2005, a repayment schedule began at $1,000 per month and ending
with a balloon payment for the remaining balance, due on December 31, 2007.
As
of December 31, 2005, management has chosen to reserve the entire amount of
the
outstanding balance of $124,210. Management is pursuing collection efforts.
Mr.
Sharma was a registered representative of Brookstreet Securities Corporation
until May 4, 2006. Brookstreet is one of our underwriters in the public
offering. Mr. Sharma received compensation of approximately $28,000 through
his
former relationship with Brookstreet. We are advised by Brookstreet that Mr.
Sharma will not participate in any future sales through Brookstreet in
connection with the public offering.
Legal
defense costs for the years ended December 31, 2005 and 2004 were $36,558 and
$80,156, respectively. These expenses were incurred for a lawsuit brought
against us by a consultant alleging funds due him. We mounted a successful
defense in this action and were successful on an appeal of this
matter.
Interest
expense increased by $54,472, or 21.4%, from $255,032 in 2004 to $309,504 in
2005. The increase in interest expense was primarily due to increased borrowing
on our receivable line of credit with our principal lender. We anticipate using
a portion of the proceeds from the public offering to pay down existing lines
of
credit, and expect that such proceeds will reduce our need for debt financing
and allow us to obtain more favorable borrowing rates, thus offsetting the
rise
in the prime rate, and therefore interest expense should decrease.
Loss
on
extinguishment of debt decreased from $153,000 in 2004 to none in 2005. This
loss related to the discount on the conversion of approximately $255,000 of
our
debt into 25,500 shares of our Series A preferred stock. Upon conversion, the
excess of the fair market price of the underlying common stock over the
conversion price of $1.50 per share resulted in the loss on extinguishment
of
debt.
As
a
result of the foregoing, we experienced a net loss of $479,371 and $855,425
in
2004 and 2005, respectively. In addition, we accrued a $29,470 dividend payable
to the holders of our Series A preferred stock in 2005, which we elected to
pay
in the form of 7,362 shares of common stock. Accordingly, we experienced a
net
loss of $0.10 and $0.18 per share in 2004 and 2005, respectively.
Management
recognizes the operating losses and costs incurred have negatively impacted
liquidity. We anticipate using a portion of the proceeds from the public
offering to pay down existing lines of credit, and expect that such proceeds
will reduce our need for debt financing and allow us to obtain more favorable
borrowing rates, thus offsetting the rise in the prime rate, and therefore
interest expense should decrease. In addition, we anticipate that the price
increases management instituted will lead to increased gross margins and
decreases in loss from operations, thus improving our
profitability.
Liquidity
and Capital Resources
Historically,
we have financed our operations primarily through private sales of common stock,
preferred stock, convertible debt, a line of credit from a financial
institution, and cash generated from operations.
As
of
March 31, 2006, we had a working capital deficit of $ 1,315,156, compared to
a
working capital deficit of $1,594,758 as of December 31, 2005. This
decrease in our working capital deficit should not be viewed as a change in
trend. The primary factor contributing to a reduction in our working capital
deficit was the cash received from our initial public offering. As of December
31, 2005, we had a working capital deficit of $1,594,758, compared to a working
capital deficit of $684,647 as of December 31, 2004. This increase in our
working capital deficit was primarily attributable to increases in accounts
payable and our line of credit. These increases were required due to the loss
we
incurred in 2005 and costs incurred for the public offering. Cash and cash
equivalents were $195,457 as of March 31, 2006, as compared to $27,744 as
December 31, 2005 and $42,488 as of December 31, 2004.
As
of
March 31, 2006, we had outstanding borrowings of $1,539,946 under the following
line of credit agreements:
· |
We
have an unsecured $50,000 line of credit with US Bank which expires
in
December 2009. Interest is payable monthly at the prime rate, as
published
in the Wall Street Journal, plus 12% per annum. Our outstanding balance
was $26,646 at March 31, 2006 and there was $23,354 available under
the
line of credit. The interest rate in effect at March 31, 2006 was
19.75%.
|
· |
We
have a line of credit with Merrill Lynch. Robert T. Reed, Jr., our
Vice
President and National Sales Manager - Mainstream and a brother of
our
Chief Executive Officer, Christopher J. Reed has pledged certain
securities (which do not include any of our securities which are
owned by
Mr. Reed) in his personal securities account on deposit with Merrill
Lynch
as collateral for repayment of the line of credit. The amount of
the line
of credit is based on a percentage value of such securities. At March
31,
2006, the outstanding balance on the line of credit was $642,209,
and
there was $47,140 available under the line of credit The line of
credit
bears interest at a rate of rate of 3.785% per annum plus LIBOR (8.695%
as
of March 31, 2006). In consideration for Mr. Reed’s pledging his stock
account at Merrill Lynch as collateral, we have agreed to pay Mr.
Reed
5% per annum of the amount we borrow from Merrill Lynch, as a loan
fee. During the years ended December 31, 2005 and 2004, we paid Mr.
Reed
$15,250 and $3,125, respectively, under this agreement. In addition,
Christopher J. Reed has pledged all of his shares of common stock
to
Robert T. Reed, Jr. as collateral for the shares pledged by Robert
T.
Reed, Jr.
|
· |
We
have a line of credit with Business Alliance Capital Corporation.
This
line of credit allows us to borrow a maximum amount of $1,910,000,
based
on a borrowing base of accounts receivables and inventory. The borrowing
base on the accounts receivable is 80% of all eligible receivables,
which
are primarily accounts receivables under 90 days. The inventory borrowing
base is 50% of eligible inventory. As of March 31, 2006, the outstanding
balance on the line of credit was $871,091. The interest rate on
this line
of credit is prime plus 2.75%, and the interest rate at March 31,
2006 was
10.5%. The line of credit expires on June 30, 2006 and is guaranteed
by
Christopher J. Reed and his wife, Judy Reed, who are directors and
our
principal stockholders. This revolving line of credit is secured
by all of
our assets, including accounts receivable, inventory, trademarks
and other
intellectual property, building and equipment. As of March 31, 2006,
we
had approximately $257,000 of availability on this line of
credit.
|
Our
senior line of credit with Business Alliance Capital Corporation expires on
June
30, 2006. We believe that we will either be able to negotiate to extend this
line of credit or find a replacement line of credit. We cannot assure you on
what terms we will be able to extend or replace this line of credit. If we
are
unable to extend or replace this line of credit and are placed in a position
of
default under the line of credit, there would be a material adverse effect
our
financial condition.
At
March
31, 2006, we did not have any material commitments for capital
expenditures.
Net
cash
used in operating activities was $491,428 in the quarter ended March 31, 2006,
as compared to net cash provided by operating activities was $135,465 in the
quarter ended March 31, 2005. This increase in net cash used in operating
activities was primarily due to the increase in net loss to $369,587 in the
quarter ended March 31, 2006, as compared to $241,368 in the quarter ended
March
31, 2005, increases in inventory and accounts receivable in the quarter ended
March 31, 2006 from the prior corresponding period, offset by decreases in
prepaid expenses in the quarter ended March 31, 2006 from the prior
corresponding period.
Net
cash
used in operating activities decreased to $42,610 in the year ended December
31,
2005 from $176,020 in the year ended December 31, 2004. This decrease primarily
was due to the increase in net loss to $825,955 in 2005, as compared to $479,371
in 2004, decreases in accrued interest and increases in prepaid expenses in
2005
from 2004 and a non-recurring write off in deferred offering costs of $153,000
in 2004, offset by a provision for amounts due from a former director in 2005
and the decrease of accounts receivable and inventory in 2005 from
2004.
We
used
$19,271 in investing activities in the quarter ended March 31, 2006, as compared
to $37,001 in the quarter ended March 31, 2005. Net cash used in investing
activities in each of these quarters primarily consisted of the purchase of
equipment for the Brewery. In the quarter ended March 31, 2005, we made a loan
to a director in the amount of $12,813 before we commenced our public
offering.
We
used
$214,667 in investing activities in the year ended December 31, 2005, as
compared to $248,187 in the year ended December 31, 2004. Net cash used in
investing activities in each of these years primarily consisted of the purchase
of equipment for the Brewery and loans made to a director before we commenced
our public offering. In the years ended December 31, 2005 and 2004, we purchased
equipment for the Brewery in the amounts of $181,654 and $204,147, respectively,
and made loans to a former director in the amounts of $33,013 and $44,040,
respectively.
Cash
flow
provided from financing activities in the quarter ended March 31, 2006 was
$678,412, as compared to cash flow used in financing activities of $107,792
in
the quarter ended March 31, 2005. We received cash from the sale of common
stock
of $811,955 in the public offering in the quarter ended March 31, 2006. We
increased borrowings on our line of credit in the amount of $93,993 in quarter
ended March 31, 2006, as compared to our making payments on our line of credit
in the of $194 in the in the quarter ended March 31, 2005. Deferred offering
costs increased to $198,833 in the quarter ended March 31, 2006 as compared
to
$63,062 in the quarter ended March 31, 2005. The increase in deferred offering
costs primarily related to offering costs, such as accounting fees, legal fees,
and selling expenses, that we incurred in connection with the public offering.
We made principal payments on our long-term debt of $28,703 and $44,536 in
the
quarters ended March 31, 2006 and 2005, respectively.
Cash
flow
provided from financing activities was $242,533 in the year ended December
31,
2005, as compared to $453,765 in the year ended December 31, 2004. We increased
borrowings on our line of credit in 2005 and long term debt in the aggregate
amount of approximately $115,000 primarily to purchase manufacturing equipment
to improve the Brewery and vehicles for our Southern California direct
distribution program. In addition, we received cash from the sale of common
stock of approximately $197,000 in the public offering in 2005 and approximately
$334,000 from the issuance of preferred stock in 2004. The slight increase
in
cash provided by financing activities from 2004 to 2005 was offset by larger
increases in cash used in financing activities from 2004 to 2005. Increases
in
deferred offering costs increased to $332,858 in 2005 from $219,955 in 2004.
The
increase in deferred offering costs primarily related to offering costs, such
as
accounting fees, legal fees, and selling expenses, that we incurred in
connection with the public offering. We made principal payments on our long-term
debt of $263,815 and $208,852 in the years ended December 31, 2005 and 2004,
respectively. We also paid to Judy Reed the amount of $21,000 in 2005 as
repayment of debt.
During
the quarter ended March 31, 2006, we had a net loss of $369,597. At March 31,
2006, we had a working capital deficiency of $1315,156 and an
accumulated deficit of approximately $3,630,000.
During
the year ended December 31, 2005, we had a net loss of $825,955. At December
31,
2005, we had a working capital deficiency of $1,594,758 and an
accumulated deficit of approximately $3,260,000.
We
have a
“best efforts” commitment from an underwriter to assist us in continuing the
process of raising capital through a public offering of our common stock which
we commenced in 2005. We believe that we will be successful in raising
additional funds from the public offering. However we cannot predict the exact
amount which will be raised. We intend to resume the offering upon completion
of
a rescission offer to persons who have purchased shares in the offering to
date.
We expect the offering to commence during the summer of 2006. Until the
commencement of the offering, we will continue to experience challenges with
managing cash flow, but we believe that we have enough liquidity to operate
the
business in the short term. The addition of cash from the public offering,
if
successful, would provide us the ability to improve our liquidity position
and
provide capital to continue to expand the business. The remaining amount of
common stock that we can sell in connection with the offering is 1,666,844
shares at an anticipated offering price of $4.00 per share. If the remainder
of
the shares were sold, we would receive approximately $6,445,000, net of offering
expenses.
We
have
entered into an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock.
Each of
the designated purchasers may also participate in the purchase of shares of
common stock to be distributed in the public offering. Since up to all of the
rescission shares would be purchased by the designated purchasers, none of
the
rescission shares would be purchased directly by us and would not deplete
proceeds from our public offering or other of our then current cash balances.
The rescission shares, which may be purchased by the designated purchasers
in
the rescission offer, would be deemed to be registered shares for the benefit
of
the designated purchasers pursuant to a registration statement to be filed
by us
relating to the rescission offer under the Securities Act, effective as of
the
commencement date of the rescission offer without any further action on the
part
of the designated purchasers. If
we are
required to pay the obligation which may be created under the rescission offer,
such a refund would materially and adversely effect our financial
position.
We
may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If
we are
not able achieve profitable operations at some point in the future, we
eventually may have insufficient working capital to maintain our operations
as
we presently intend to conduct them or to fund our expansion and
marketing and product development plans.
In
addition, our losses may increase in the future as we expand our manufacturing
capabilities and fund our marketing plans and product development. These losses,
among other things, have had and will continue to have an adverse effect on
our
working capital, total assets and stockholders’ equity. If we are unable to
achieve profitability, the market value of our common stock will decline and
there would be a material adverse effect on our financial
condition.
We
are
conducting the public offering to raise an additional approximate $6,445,000
of
net
proceeds from the sale of our common stock. We intend to use the proceeds from
the public offering for working capital, the expansion and development of our
sales and marketing activities and to invest in infrastructure to increase
our
operational and manufacturing efficiencies. However, the public offering is
being conducted on a “best efforts” basis, and we cannot assure you that we will
sell the maximum amount of securities being offered hereby. Accordingly, if
we
cannot receive adequate proceeds from the public offering, we may be limited
in
our ability to expand our business operations as rapidly as we would deem
necessary at any time, unless we are able to obtain an additional financing.
There can be no assurance that we will be able to obtain such financing on
acceptable terms, or at all. If adequate funds are not available or are not
available on acceptable terms, we may not be able to pursue our business
objectives. This inability could adversely affect our business, results of
operations and financial condition.
As
we are
not required to use our capital sources to pay for the repurchase of shares
in
the rescission offer, we currently believe that our available cash resources
and
cash flow from operations, without any additional net proceeds from the public
offering, will be sufficient to sustain our business operations for at least
13
months after the date of this prospectus. However, we would be required to
reduce our level of operations, including reducing infrastructure, promotions,
personnel and other operating expenses.
In
addition, our ability to implement our full business expansion plan is largely
dependent upon the outcome of the public offering. If we do not receive the
maximum proceeds from the public offering, some or all of the elements of our
expansion plan may have to be curtailed or delayed unless we are able to find
alternative external sources of working capital. We would need to raise
additional funds to respond to business contingencies, which may include the
need to:
· |
fund
more rapid expansion,
|
· |
fund
additional marketing expenditures,
|
· |
enhance
our operating infrastructure,
|
· |
respond
to competitive pressures, and
|
· |
acquire
other businesses.
|
We
cannot
assure you that additional financing will be available on terms favorable to
us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. We have evaluated the impact of the adoption
of SFAS 151, and do not believe the impact will be significant to our overall
results of operations or financial position.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets,
an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
The amendments made by Statement 153 are based on the principle that exchanges
of non-monetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
non-monetary exchanges of similar productive assets and replace it with a
broader exception for exchanges of non-monetary assets that do not have
commercial substance. Previously, Opinion 29 required that the accounting for
an
exchange of a productive asset for a similar productive asset or an equivalent
interest in the same or similar productive asset should be based on the recorded
amount of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some non-monetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for non-monetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for non-monetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. We have evaluated the impact of the adoption
of
SFAS 153, and do not believe the impact will be significant to our overall
results of operations or financial position.
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Statement 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting
for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. We have evaluated the impact of the adoption of SFAS
123(R), and do not believe the impact will be significant to our overall results
of operations or financial position. All options issued prior to December 31,
2005 vested immediately, and therefore, there is no associated unamortized
compensation that will be recorded in future periods relating to these
options.
In
May
2005 the FASB issued SFAS Number 154, “Accounting Changes and Error
Corrections.” This SFAS provides guidance on accounting for and reporting of
accounting changes and error corrections. We have evaluated the impact of SFAS
154 and do not believe the impact will be significant to our overall results
of
operations or financial position.
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.
On
September 22, 2005, the SEC issued rules to delay by one-year the required
reporting by management on internal controls over financial reporting for
non-accelerated filers. The new SEC rule extends the compliance date for such
registrants to fiscal years ending on or after July 15, 2007. Accordingly,
we
qualify for the deferral until the year ending December 31, 2007 in order to
comply with the internal control reporting requirements.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
Background
We
develop, manufacture, market, and sell natural non-alcoholic and “New Age”
beverages, candies and ice creams. “New Age Beverages” is a category that
includes natural soda, fruit juices and fruit drinks, ready-to-drink teas,
sports drinks and water. We currently manufacture, market and sell six unique
product lines:
· |
Virgil’s
Root Beer and Cream Sodas,
|
· |
Reed’s
Ginger Juice Brews,
|
· |
Reed’s
Ginger Candies, and
|
· |
Reed’s
Ginger Ice Creams
|
We
sell
most of our products in specialty gourmet and natural food stores, supermarket
chains, retail stores and restaurants in the United States and, to a lesser
degree, in Canada. We primarily sell our products through a network of natural,
gourmet and independent distributors. We also maintain an organization of
in-house sales managers who work mainly in the stores serviced by our natural,
gourmet and mainstream distributors and with our distributors. We also work
with
regional, independent sales representatives who maintain store and distributor
relationships in a specified territory. In Southern California, we have our
own
direct distribution system.
We
produce and co-pack our products principally at our company-owned facility
in
Los Angeles, California, known as the Brewery, and at a contracted co-packing
facility in Pennsylvania. We also co-pack certain of our products at smaller
co-packing facilities in the United States and in Europe.
Key
elements of our business strategy include:
· |
increased
national direct sales and
distribution,
|
· |
increased
store placement with mainstream stores and
retailers,
|
· |
strong
national distributorships,
|
· |
stimulate
strong consumer demand for our existing brands and
products,
|
· |
develop
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:
· |
sales
to mainstream, natural and specialty food stores and in the United
States
and, to a lesser degree, Canada, through our regional distributors
and
sales representatives,
|
· |
direct
sales effort to large national retailers,
and
|
· |
direct
distribution by our trucks and drivers to retailers in Southern
California.
|
We
believe that these marketing efforts have contributed to our growth. We intend
to continue to expand our sales personnel in each of these marketing areas
with
the proceeds from the public offering.
In
addition, since 2003, we have introduced new products and offer
specialty beverage packaging options not typically available in the
marketplace
into the
marketplace that have contributed to our growth in sales. These products include
a 5-liter “party keg” version of our Virgil’s Root Beer and Cream Soda, 12-ounce
long neck bottles of our Virgil’s Cream Soda and 750 ml size bottles of our
Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew and a one
pint version of our Virgil’s Root Beer with a swing-lid. In addition, we have
recently introduced a new flavor, our Black Cherry Cream soda in a 12-ounce
bottle. These new packaging options are being utilized in our marketing
efforts.
We
create
consumer demand for our products by
· |
supporting
in-store sampling programs of our
products,
|
· |
generating
free press through public
relations,
|
· |
advertising
in national magazines targeting our
customers,
|
· |
maintaining
a company website (www.reedsgingerbrew.com),
and
|
· |
participating
in large public events as sponsors.
|
Our
business expansion plans are contingent to a great extent on the success of
the
public offering. If all or most of the shares being offered hereby are sold,
we
expect to be able to increase our marketing, advertising and distribution
campaigns, and the number of products we offer. The failure to raise the maximum
proceeds offered hereby will limit our ability to expand our
operations.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our Internet
address is www.reedsgingerbrew.com.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
Historical
Development
In
June
1987, Christopher J. Reed, our founder and Chief Executive Officer, began
development of Reed’s Original Ginger Brew, his first beverage creation. After
two years of development, the product was introduced to the market in Southern
California stores in 1989. By 1990, we began marketing our products through
natural food distributors and moved our production to a larger facility in
Boulder, Colorado.
In
1991,
we incorporated our business operations in the state of Florida under the name
of Original Beverage Corporation and moved all of our production to a co-pack
facility in Pennsylvania. We began exhibiting at national natural and specialty
food trade shows, which brought national distribution in natural, gourmet and
specialty foods and the signing of our first mainstream supermarket distributor.
Our products began to receive trade industry recognition as an outstanding
new
product. The United States National Association of the Specialty Food Trade,
or
NASFT, named Original Ginger Brew as an “Outstanding Beverage Finalist” in the
United States, and the Canadian Fancy Food Association, or CFFA, awarded us
“Best Imported Food Product.”
Throughout
the 1990’s, we continued to develop and launch new ginger brew varieties. Reed’s
Ginger Brews reached broad placement in natural and gourmet foods stores
nationwide through major specialty, natural/gourmet and mainstream food and
beverage distributors.
In
1997,
we began licensing the products of China Cola and eventually acquired the rights
to that product in December 2000. In addition, we launched Reed’s Crystallized
Ginger Candy, a product which we manufacture in Fiji under a proprietary,
natural, non-sulfured process. In 1999, we purchased the Virgil’s Root Beer
brand from the
Crowley
Beverage Company. The brand has won numerous gourmet awards. In 2000, we began
to market three new products: Reed’s Original Ginger Ice Cream, Reed’s Cherry
Ginger Brew and a beautiful designer 10-ounce gift tin of our Reed’s
Crystallized Ginger Candy. In December 2000, we purchased an 18,000 square
foot
warehouse property, the Brewery, in Los Angeles, California, to house our west
coast production and warehouse facility. The Brewery now also serves as our
principal executive offices. In 2001, we changed our state of incorporation
to
Delaware and also changed our name to Reed’s, Inc. We also introduced our Reed’s
Chocolate Ginger Ice Cream and Reed’s Green Tea Ginger Ice Cream products and
expanded our confectionary line with two new candy products: Reed’s Crystallized
Ginger Baking Bits and Reed’s Ginger Candy Chews. In 2002, we launched our
Reed’s Ginger Juice Brew line, with four flavors of organic juice blends. In
November 2002, we completed our first test runs of Reed’s and Virgil’s products
at the Brewery and in January 2003, our first commercially available products
came off the Los Angeles line. In 2003, we commenced our own direct distribution
in Southern California and introduced sales of our 5-liter Virgil’s party keg.
In 2004, we expanded our product line to include Virgil’s Cream Soda (including
in a 5-liter keg), Reed’s Spiced Apple Brew in a 750 ml. champagne bottle
and draught Virgil’s Root Beer and Cream Soda. In 2006, we expanded our product
line to include Virgil’s Black Cherry Cream Soda.
Industry
Overview
Our
beverages are classified as New Age beverages, a category that includes natural
soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks and
water. According to Beverage Marketing Corporation, in 2004, total wholesale
dollar sales in the New Age segment were approximately $16.5 billion in
wholesale dollar sales, an increase of 11.3% from 2003. (Source: Beverage World
Magazine, April 15, 2006.)
Annual
confectionary sales (including chocolate, non-chocolate and gum sales) in the
United States were approximately $27.9 billion in 2005, of which approximately
$8.7 billion was non-chocolate candy. (Source: National Confectioners
Association, 2006 Year in Review.)
According
to the International Dairy Foods Association (IDFA), total U.S. sales of ice
cream and frozen desserts were estimated at approximately $21 billion. The
packaged ice cream industry includes economy, regular, premium and super-premium
products. Super-premium ice cream, such as Reed’s Ginger Ice Creams, is
generally characterized by a greater richness and density than other kinds
of
ice cream. This higher quality ice cream generally costs more than other kinds
and is usually marketed by emphasizing quality, flavor selection, texture and
brand image. IICA attributes almost all of the market growth over the past
10
years to sales of super-premium and premium ice creams, particularly the
innovative products. Sales of premium and super-premium styles account for
approximately 42% of the total industry revenues, versus approximately 15%
for
all the “light” formulations combined. (Source: CNN/Money, July 29,
2005.)
Our
Products
We
currently manufacture and sell 15 beverages, three candies and three ice creams.
We make all of our products using premium all-natural ingredients.
We
produce carbonated and non-carbonated products. Most sales of our beverage
products are of our sodas. According to Spence Information Services (SPINS),
which is the only sales information service catering to the natural food trade,
for the year 2003,
· |
Reed’s
Ginger Brews and Virgil’s Root Beer held three of the top ten items based
on dollar and unit sales among all sugar/fructose sweetened sodas
in the
natural foods industry in the United States, with Reed’s Extra Ginger Brew
holding the number one position,
and
|
· |
Reed’s
Original Ginger Brew and Virgil’s were two of the top ten brands based on
dollar and unit sales among all sugar/fructose sweetened sodas in
the
natural foods industry in the United States, with Reed’s Original Brew
holding the number one position.
|
Our
carbonated products include six varieties of Reed’s Ginger Brews, Virgil’s Root
Beer and Cream Sodas, China Cola and Cherry China Cola. We also sell four
varieties of a new line of non-carbonated ginger brews called Reed’s Ginger
Juice Brews.
Our
candy
products include Reed’s Crystallized Ginger Candy, Reed’s Crystallized Ginger
Baking Bits and Reed’s Ginger Candy Chews.
Our
ice
cream products include Reed’s Original Ginger Ice Cream, Reed’s Chocolate Ginger
Ice Cream and Reed’s Green Tea Ginger Ice Cream.
Beverages
Reed’s
Ginger Brews
Ginger
ale is the oldest known soft drink. Before modern soft drink technology existed,
non-alcoholic beverages were brewed at home directly from herbs, roots, spices,
and fruits. These handcrafted brews were then aged like wine and highly prized
for their taste and their tonic, health-giving properties. Reed’s Brews are a
revival of this home brewing art and we make them with care and attention to
wholesomeness and quality, using the finest fresh herbs, roots, spices, and
fruits. Our expert brew masters brew each batch and age it with great
pride.
We
believe that Reed’s Ginger Brews are unique in their kettle brewed origin among
all mass-marketed soft drinks. Reed’s Ginger Brews contain between 8 and 26
grams of fresh ginger in every 12-ounce bottle. We use no refined sugars as
sweeteners. Our products differ from commercial soft drinks in three particular
characteristics: sweetening, carbonation and coloring for greater adult appeal.
Instead of using injected-based carbonation, we produce our carbonation
naturally, through slower, beer-oriented techniques. This process produces
smaller, longer lasting bubbles that do not dissipate rapidly when the bottle
is
opened. We do not add coloring. The color of our products comes naturally from
herbs, fruits, spices, roots and juices.
In
addition, since Reed’s Brews are pasteurized, they do not require or contain any
preservatives. In contrast, modern commercial soft drinks generally are produced
using natural and artificial flavor concentrates prepared by flavor
laboratories, tap water, and highly refined sweeteners. Typically, manufacturers
make a centrally processed concentrate that will lend itself to a wide variety
of situations, waters, and filling systems. The final product is generally
cold-filled and requires preservatives for stability. Colors are added that
are
either natural, although highly processed, or artificial.
In
addition, while we make no claim as to any medical or therapeutic benefits
of
our products, we have found friends and advocates among alternative, holistic,
naturopathic, and homeopathic medical practitioners, dieticians and medical
doctors, who tell us that they recommend Reed’s Extra Ginger Brew for their
patients as a simple way to ingest a known level of ginger. The United States
Food and 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.
We
currently manufacture and sell six varieties of Reed’s Ginger
Brews:
· |
Reed’s
Original Ginger Brew was
our first creation, and is a Jamaican recipe for homemade ginger
ale using
17 grams of fresh ginger root, lemon, lime, honey, fructose, pineapple,
herbs and spices. Reed’s Original Ginger Brew is 20% fruit
juice.
|
· |
Reed’s
Extra Ginger Brew is
the same approximate recipe, with 26 grams of fresh ginger root for
a
stronger bite. Reed’s Extra Ginger Brew is 20% fruit
juice.
|
· |
Reed’s
Premium Ginger Brew is
the no-fructose version of Reed’s Original Ginger Brew, and is sweetened
only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20%
fruit juice.
|
· |
Reed’s
Raspberry Ginger Brew is
brewed from 17 grams of fresh ginger root, raspberry juice and lime.
Reed’s Raspberry Ginger Brew is
20% raspberry juice and is sweetened with fruit juice and
fructose.
|
· |
Reed’s
Spiced Apple Brew uses
8 grams of fresh ginger root, the finest tart German apple juice
and such
apple pie spices as cinnamon, cloves and allspice. Reed’s Spiced Apple
Brew is 50% apple juice and sweetened with fruit juice and
fructose.
|
· |
Reed’s
Cherry Ginger Brew is
the newest addition to our Ginger Brew family, and is naturally brewed
from: filtered water, fructose, fresh ginger root, cherry juice from
concentrate and spices. Reed’s Cherry Ginger Brew is 22% cherry
juice.
|
All
six
of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores as
singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is
sold by select retailers in a special 12-pack. Reed’s Spiced Apple Brew is now
available in a 750 ml. champagne bottle.
Virgil’s
Root Beer
Over
the
years, Virgil’s Root Beer has won numerous awards and has a reputation among
many as one of the best root beers made anywhere. Virgil’s Root Beer won the
“Outstanding Beverage” award at the NASFT’s International Fancy Food and
Confection Show in 1997.
Virgil’s
is a premium root beer. We use all-natural ingredients, including filtered
water, unbleached cane sugar, anise from Spain, licorice from France, bourbon
vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia,
wintergreen from China, sweet birch and molasses from the southern United
States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from
Peru, and cassia oil from China.
We
collect these ingredients worldwide and gather them together at the brewing
and
bottling facilities we use in the United States and Germany. We combine and
brew
these ingredients under strict specifications and finally heat-pasteurize
Virgil’s Root Beer, to ensure quality.
We
sell
Virgil’s Root Beer in four packaging styles: 12-ounce bottles in a four-pack, a
special ceramic-swing-lid style pint bottle, a 5-liter self-tapping party keg
and a draught “pony keg.”
Virgil’s
Cream Soda
We
launched Virgil’s Cream Soda in January 2004. We make this product with the same
attention to quality that makes Virgil’s Root Beer so popular.
Virgil’s
Cream Soda is a gourmet cream soda. We brew Virgil’s Cream Soda the same way we
brew Virgil’s Root Beer. We use these all-natural ingredients, including
filtered water, unbleached cane sugar and bourbon vanilla from
Madagascar.
Virgil’s
Cream Soda is currently sold in 12-ounce long neck bottles in colorful 4-packs,
a 5-liter party keg version and in our draught format.
In
2006,
we expanded our product line to include Virgil’s Black Cherry Cream Soda in a
12-ounce bottle.
China
Cola
We
consider China Cola to be the best tasting and most natural cola in the world.
We restored China Cola to its original delicious blend of raw cane sugar,
imported Chinese herbs, essential oils and natural spices. China Cola contains
no caffeine. It comes in two varieties, Original China Cola and Cherry China
Cola.
Original
China Cola is made from filtered water, raw cane sugar, szechwan poeny root,
cassia bark, Malaysian vanilla, oils of lemon, 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.
Reed’s
Ginger Juice Brews
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 created this product,
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 contain: filtered water, organic fresh ginger
root, and organic white grape juice from concentrate. Specifically,
· |
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.
Reed’s
Ginger Candies
Reed’s
Crystallized Ginger Candy
Reed’s
Crystallized Ginger was the first crystallized ginger on the market in the
United States to be sweetened with raw cane instead of refined white sugar.
Reed’s Crystallized Ginger is custom-made for us in Fiji.
The
production process is an ancient one that has not changed much over time. After
harvesting baby ginger (the most tender kind), the root is diced and then
steeped for several days in large vats filled with simmering raw cane syrup.
The
ginger is then removed and allowed to crystallize into soft, delicious nuggets.
Many peoples of the islands have long enjoyed these treats for health and
pleasure.
We
sell
this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins,
16-ounce re-sealable Mylar bags, and in bulk. We also sell Reed’s Crystallized
Ginger Baking Bits in bulk.
Reed’s
Ginger Candy Chews
For
many
years, residents of Southeast Asia from Indonesia to Thailand have enjoyed
soft,
gummy ginger candy chews. We sell Reed’s Ginger Candy Chews individually wrapped
in soft-packs of ten candies and as individually wrapped loose pieces in bulk.
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.
Reed’s
Ginger Ice Creams
We
make
Reed’s Ginger Ice Creams with 100% natural ingredients, using the finest
hormone-free cream and milk. We combine fresh milk and cream with the finest
natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane
sugar to make a delicious ginger ice cream with a super premium, ultra-creamy
texture and Reed’s signature spicy-sweet bite. Our ice creams are made for us,
according to our own recipes, at a dairy in upstate New York.
We
sell
three Reed’s Ginger Ice Cream products:
· |
Reed’s
Original Ginger Ice Cream made
from milk, cream, raw cane sugar, Reed’s Crystallized Ginger Candy (finest
ginger root, raw cane sugar), ginger puree, and guar gum (a natural
vegetable gum),
|
· |
Chocolate
Ginger Ice Cream made
from milk, cream, raw cane sugar, finest Belgian cocoa (used to make
Belgian chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger
root, raw cane sugar), chocolate shavings (sugar, unsweetened chocolate,
Belgian cocoa, soy lecithin and real vanilla), ginger puree, and
guar gum
(a natural vegetable gum) creating the ultimate chocolate ginger
ice
cream, and
|
· |
Reed’s
Green Tea Ginger Ice Cream made
from milk, cream, the finest green tea, raw cane sugar, ginger puree,
Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar),
and guar gum (a natural vegetable gum) creating the ultimate green
tea
ginger ice cream.
|
We
sell
Reed’s Ginger Ice Creams in pint containers and cases of eight pints. We also
intend to supply Reed’s Ginger Ice Creams in foodservice volume
packaging.
New
Product Development
We
are
always working on development to continue expanding from our Reed’s Ginger Brew,
Virgil’s product line, Reed’s Ginger Juice Brew, Reed’s Ginger Ice Cream, and
Reed’s Ginger Candy product lines and packaging styles. However, research and
development expenses in the last two years have been nominal. We intend to
expend some, but not a significant amount, of funds on research and development
for new products and packaging. We intend to introduce new products and
packaging as we deem appropriate from time to time for our business
plan.
Among
the
advantages of our owned and self-operated Brewery are the flexibility to try
innovative packaging and the capability to experiment with new product flavors
at less cost to our operations or capital. Currently, we sell a half-liter
Virgil’s Root Beer swing-lid bottle that is made for us in Europe. We intend to
produce several of our beverages in one-liter swing-lid bottles in the United
States. Our Reed’s Original Ginger Brew, Extra Ginger Brew Spiced and Apple Brew
are available in a 750 ml. champagne bottle and other products are planned
to be
available with this packaging in the near future.
Manufacture
of Our Products
We
produce our carbonated beverages at two facilities:
· |
a
facility that we own in Los Angeles, California, known as The Brewery,
at
which we produce certain soda products for the western half of the
United
States, and
|
· |
a
packing, or co-pack, facility in Pennsylvania, known as the Lion
Brewery,
with which they contract to supply us with product we do not produce
at
The Brewery. The term of our agreement with Lion Brewery expires
on May
31, 2007 and renews automatically for successive two-year terms unless
terminated by either party. The Lion Brewery assembles our products
and
charges us a fee, generally by the case, for the products they
produce.
|
Our
west
coast Brewery facility is running at 40% of capacity. We had difficulties with
the underutilization of the Brewery at 40% of capacity as a result of working
out problems associated with the flavor of our ginger brew products produced
at
the Brewery, causing us to increase freight and other associated expenses with
producing and shipping such products nationally from our east coast co-packing
facility. Management is committed to selling a high quality, great tasting
product. Since the east coast co-packer is producing such a product, management
has elected to continue to sell that product on the west coast, even though
it
negatively impacts our gross margins. As we are able to make the Brewery become
more fully utilized, we believe that we will experience improvements in gross
margins due to freight and production savings.
Our
Ginger Juice Brews are co-packed for us at H.A. Ryder 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. Our
arrangements with H.A Ryder, Ronnybrooke Dairy and Hofmark Brewery are on an
order by order by basis.
We
follow
a ‘fill as needed’ manufacturing model to the best of our ability and we have no
significant backlog of orders.
Substantially
all of the raw materials used in the preparation, bottling and packaging of
our
products are purchased by us or by our contract packers in accordance with
our
specifications. Reed’s Crystallized Ginger is made to our specifications in
Fiji. Reed’s Ginger Candy Chews are made 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 protection against a major supply
constriction or calamity.
We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that the Brewery has ample capacity to handle
increased West Coast business. To the extent that any significant increase
in
business requires us to supplement or substitute our current co-packers, we
believe that there are readily available alternatives, so that there would
not
be a significant delay or interruption in fulfilling orders and delivery of
our
products. In addition, we do not believe that growth will result in any
significant difficulty or delay in obtaining raw materials, ingredients or
finished product that is repackaged at the Brewery.
Our
Primary Markets
We
target
a niche in the soft drink industry known as New Age beverages. The soft drink
industry generally characterizes New Age Beverages as being made more naturally,
with upscale packaging, and often creating and utilizing new and unique flavors
and flavor combinations.
The
New
Age beverage segment is highly fragmented and includes such competitors as
SoBe,
Snapple, Arizona, Hansen’s and Jones Soda, among others. These brands have the
advantage of being seen widely in the national market and being commonly well
known for years through well-funded ad campaigns. Despite our products’ having a
relatively high price for a premium beverage product, no mass media advertising
and a relatively small presence in the mainstream market compared to many of
our
competitors, we believe that results to date demonstrate that Reed’s Ginger
Brews and Virgil’s sodas are making market inroads among these significantly
larger brands. See “Business - Competition.”
We
sell
the majority of our products in natural food stores, mainstream supermarket
chains and foodservice locations, primarily in the United States and, to a
lesser degree, in Canada.
Natural
Food Stores
Our
primary and historical marketing source of our products has been natural food
and gourmet stores. These stores include Whole Foods Market, Wild Foods, Trader
Joe's and Wild Oats. We also sell in gourmet restaurants and delis.
We
believe that our products have achieved a leading position in their niche in
the
fast-growing natural food industry.
With
the
advent of large natural food store chains and specialty merchants, the natural
foods segment continues to grow each year in direct competition with the
mainstream grocery trade.
Mainstream
Supermarkets and Retailers
We
sell
our products in over 1,000 mainstream supermarkets throughout the United States,
and to a lesser extent, in Canada. These stores include national and regional
supermarket chains, such as Kroger, Ralph’s, Raley’s, Safeway and Winn-Dixie.
Generally, these stores market our products in specialty natural and gourmet
sections within the stores, although we are increasing our presence in
mainstream soft drink sections in these stores.
Supermarkets,
particularly supermarket chains and prominent local supermarkets, often impose
slotting fees before permitting new product placements in their store or chain.
These fees can be structured to be paid one-time only or in installments. We
pursue broad-based slotting in supermarket chains throughout the United States
and, to a lesser degree, in Canada. However, our direct sales team in Southern
California and our national sales management team have been able to place our
products without having to pay slotting fees much of the time. However, slotting
fees for new placements normally cost between $10 and $100 per store per new
item placed.
We
also
sell our products to large national retailers who place our products within
their national distribution streams. These retailers include Costco, Sam’s Club
and Trader Joe’s.
Foodservice
placement
We
also
market our beverage products to industrial cafeterias, bars and restaurants.
We
intend to place our beverage products in stadiums, sports arenas, concert halls,
theatres, and other cultural centers as a long-term marketing plan. In addition,
we plan to market our ice creams in restaurants nationwide.
International
Sales
We
have
developed a limited market for our products in Canada, Europe and Asia. Sales
outside of North America currently represent less than 1% of our total sales.
Sales in Canada represent about 1.3% of our total sales.
The
European Union is an open market for Reed’s with access to that market due in
part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in
Germany. We market our products in Europe through a master distributor in
Amsterdam and sub-distributors in the Netherlands, Denmark, the United Kingdom
and Spain. We are currently negotiating with a Dutch company in Amsterdam for
wider European distribution.
American
Trading Corp. 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 mainstream, natural and specialty food
distributors in the United States and Canada. We sell directly to our
distributors, who in turn sell to retail stores. We also use our own sales
group
and independent sales representatives to promote our products for our
distributors and direct sales to our retail customers. In Southern California,
we have our own direct distribution in addition to other local distributors.
We
plan to expand our direct distribution into other markets.
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. Where a market
does
not support or lend itself to direct distribution, we intend to enlist local
mainstream beverage distributors to carry our products. Our increased efforts
in
marketing also will require us to hire additional sales representatives and
other marketing expenses. We plan to use a portion of the proceeds of the public
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. We will be dependent upon obtaining the proceeds from
the public offering to implement our marketing expansion plans.
We
currently maintain two separate sales organizations, one of which handles
natural food store sales and the other of which handles mainstream store sales.
We currently have three in-house sales managers and eight independent sales
representatives. These sales forces consist of in-house sales managers and
independent sales representatives who support our distributors and direct
selling efforts. The natural food store 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.
Our
sales
force markets existing products, run promotions and introduce new items. Our
in-house sales managers are responsible for the distributor relationships and
larger chain accounts that require headquarter sales visits and managing our
independent sales representatives.
We
also
offer our products and promotional merchandise directly to consumers via the
Internet through our website, www.reedsgingerbrew.com.
Marketing
to Distributors
We
market
to distributors using a number of marketing strategies, including direct
solicitation, telemarketing, trade advertising and trade show exhibition. These
distributors include natural food, gourmet food, and mainstream distributors.
Our distributors sell our products directly to natural food, gourmet food and
mainstream supermarkets for sale to the public. We maintain direct contact
with
the distributors through our in-house sales managers. In limited markets, where
use of our direct sales mangers are not cost-effective, we utilize food brokers
and outside representatives.
Marketing
to Retail Stores
We
market
to retail stores by utilizing trade shows, trade advertising, telemarketing,
direct mail pieces and direct contact with the store. Our sales mangers and
representatives visit these retail stores to sell directly in many regions.
Sales to retail stores are coordinated through our distribution network and
our
regional warehouses.
Direct
Sales and Distribution
In
June
2003, we started Direct Sales and Distribution (DSD) to stores in Southern
California, using a direct hired sales team and our delivery trucks. Our
in-house sales manager works directly with our new route drivers and with
distributors in the Southern California area. A DSD system allows us to have
greater control over our marketing efforts, as we become less dependent on
distributors who have relationships with our competitors. We hope to expand
our
DSD network to areas outside of Southern California as our resources will
allow.
Southern
California sales represented approximately $750,000 and $400,000 in 2005 and
2004, respectively. These new direct-distribution accounts also include retail
locations, including many new independent supermarkets, “mom and pop” markets
and foodservice locations. In addition, direct distribution facilitates our
new
placements at hospitals, the Getty Center in Los Angeles, Fox Studios and other
cultural and institutional accounts.
Marketing
to Consumers
Advertising.
We
utilize several marketing strategies to market directly to consumers.
Advertising in targeted consumer magazines such as “Vegetarian Times” and “New
Age” magazine, in-store discounts on the products, in-store product
demonstration, street corner sampling, coupon advertising, consumer trade shows,
event sponsoring and our website www.reedsgingerbrew.com
are all
among current consumer-direct marketing devices.
In-Store
Draught Displays.
As part
of our marketing efforts, we have started to offer in-store draught displays,
or
Kegerators. While we believe that packaging is an important part of making
successful products, we also believe that our products and marketing methods
themselves need to be exceptional to survive in today’s marketplace. Our
Kegerator is an unattended, in-store draught display that allows a consumer
to
sample our products at a relatively low cost per demonstration. Stores offer
premium locations for these new, and we believe unique, draught
displays.
On
Draught Program.
Our
West Coast Brewery has initiated an on-draught program. We have installed
draught locations at Fox Studios commissaries and in approximately 12
restaurants in Southern California. Currently, we are serving Virgil’s Root
Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger Brew on draught. In addition,
all of our other carbonated drinks are available in draught format.
Proprietary
Coolers. The
placement of in-store branded refrigerated coolers by our competitors has proven
to have a significant positive effect on their sales. We are currently testing
our own Reed’s branded coolers in a number of locations.
Competition
The
beverage industry is highly competitive. The principal areas of competition
are
pricing, packaging, development of new products and flavors and marketing
campaigns. Our products compete with a wide range of drinks produced by a
relatively large number of manufacturers. Most of these brands have enjoyed
broad, well-established national recognition for years, through well-funded
ad
and other branding campaigns. In addition, the companies manufacturing these
products generally have greater financial, marketing and distribution resources
than we do.
Important
factors affecting our ability to compete successfully include taste and flavor
of products, trade and consumer promotions, rapid and effective development
of
new, unique cutting edge products, attractive and different packaging, branded
product advertising and pricing. We also compete for distributors who will
concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution and secure adequate shelf space in retail
outlets. Competitive pressures in the New Age beverage categories could cause
our products to be unable to gain or to lose market share or we could experience
price erosion.
We
believe that our innovative beverage recipes and packaging and use of premium
ingredients and a trade secret brewing process provide us with a competitive
advantage and that our commitments to the highest quality standards and brand
innovation are keys to our success.
Our
premium New Age beverage products compete generally with all liquid refreshments
and in particular with numerous other New Age beverages, including: SoBe,
Snapple, Mistic, IBC, Stewart’s, Henry Weinhard, Arizona, Hansen’s, Knudsen
& Sons and Jones Sodas.
Our
Virgil’s and China Cola lines compete with a number of other natural soda
companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and
Natural Brews.
We
also
generally compete with other traditional soft drink manufacturers and
distributors, such as Coke and Pepsi.
Reed’s
Crystallized Ginger Candy competes primarily with other candies and snacks
in
general and, in particular, with other ginger candies. The main competitors
in
ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and
Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one
among these brands that is sulfur-free.
Reed’s
Ginger Ice Creams compete primarily with other premium and super-premium ice
cream brands. Our principal competitors in the ice cream business are
Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of
smaller natural food ice cream companies.
Proprietary
Rights
We
own or
have made applications for several trademarks that we consider material to
our
business, including Reed’s, Virgil’s and China Cola. Two of our material
trademarks are registered trademarks in the U.S. Patent and Trademark Office:
Reed’s(R) and China Cola(R), and we have reapplied for a trademark on the name
Virgil’s. 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 use a portion of the proceeds of the public offering to obtain international
registration of certain trademarks in foreign jurisdictions, as we see
fit.
In
addition, we consider our finished product and concentrate formulae, which
are
not the subject of any patents, to be trade secrets. Our brewing process is
a
trade secret. This process can be used to brew flavors of beverages other than
ginger ale and ginger beer, such as root beer, cream soda, cola, and other
spice
and fruit beverages. We have not sought any patents on our brewing processes
because we would be required to disclose our brewing process in patent
applications.
We
generally use non-disclosure agreements with employees and distributors to
protect our proprietary rights.
Government
Regulation
The
production, distribution and sale in the United States of many of our products
is subject to the Federal Food, Drug and Cosmetic Act; the Dietary Supplement
Health and Education Act of 1994; the Occupational Safety and Health Act;
various environmental statutes; and various other federal, state and local
statutes and regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such products. California
law
requires that a specific warning appear on any product that contains a component
listed by the State as having been found to cause cancer or birth defects.
The
law exposes all food and beverage producers to the possibility of having to
provide warnings on their products because the law recognizes no generally
applicable quantitative thresholds below which a warning is not required.
Consequently, even trace amounts of listed components can expose affected
products to the prospect of warning labels. Products containing listed
substances that occur naturally in the product or that are contributed to the
product solely by a municipal water supply are generally exempt from the warning
requirement. While none of our beverage products are required to display
warnings under this law, we cannot predict whether an important component of
any
of our products might be added to the California list in the future. We also
are
unable to predict whether or to what extent a warning under this law would
have
an impact on costs or sales of our products.
Measures
have been enacted in various localities and states that require that a deposit
be charged for certain non-refillable beverage containers. The precise
requirements imposed by these measures vary. Other deposit, recycling or product
stewardship proposals have been introduced in certain states and localities
and
in Congress, and we anticipate that similar legislation or regulations may
be
proposed in the future at the local, state and federal levels, both in the
United States and elsewhere.
Our
facilities in the United States are subject to federal, state and local
environmental laws and regulations. Compliance with these provisions has not
had, and we do not expect such compliance to have, any material adverse effect
upon our capital expenditures, net income or competitive position.
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which
approximated $40,000 in 2005. This is a standard cost of doing business in
the
soft drink industry.
In
California, and in certain other states where we sell our products, we are
required to collect redemption values from our customers and remit those
redemption values to the state, based upon the number of bottles of certain
products sold in that state.
In
certain other states and Canada where our products are sold, we are also
required to collect deposits from our customers and to remit such deposits
to
the respective state agencies based upon the number of cans and bottles of
certain carbonated and non-carbonated products sold in such states.
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
We
own an
18,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street
in an unincorporated area of Los Angeles County, near downtown Los Angeles.
The
property is located in the Los Angeles County Mid-Alameda Corridor Enterprise
Zone. Businesses located in the enterprise zone are eligible for certain
economic incentives designed to stimulate business investment, encourage growth
and development and promote job creation.
We
purchased the facility in December 2000 for a purchase price of $850,000,
including a down payment of $102,000. We financed approximately $750,000 of
the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a building
improvement loan for $168,000 from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. Christopher J. Reed, our
founder and Chief Executive Officer, personally guaranteed both loans. Both
loans are due and payable on November 29, 2025, with interest at the New York
prime rate plus 1%, adjusted monthly, with no cap or floor. As of December
31,
2005, the principal and interest payments on the two loans combined were $7,037
per month. This facility serves as our principal executive offices, our West
Coast Brewery, and bottling plant and our Southern California warehouse
facility.
Legal
Proceedings
From
time
to time, we are a party to claims and legal proceedings arising in the ordinary
course of business. Our management evaluates our exposure to these claims and
proceedings individually and in the aggregate and provides for potential losses
on such litigation if the amount of the loss is estimable and the loss is
probable.
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserts claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contends that we negligently manufactured the soda resulting in at least
one personal injury. Consac seeks $2.6 million in damages, plus interest and
attorneys fees. Some of the allegations made against the company are covered
by
insurance and some allegations are not covered by insurance. Although we believe
that we have meritorious defenses to this proceeding, there can be no assurances
as to its outcome.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common
stock in connection with our initial public offering pursuant to a Registration
Statement on Form SB-2. The shares issued in connection with the initial public
offering may have been issued in violation of either federal or state securities
laws, or both, and may be subject to rescission. In order to address this issue,
we intend to make a rescission offer to the holders of these shares prior to
the
effective date of this registration statement.
If
this
rescission offer is accepted, we could be required to make aggregate payments
to
the holders of these shares up to $1,332,624, plus statutory interest. This
exposure is calculated by reference to the acquisition price of $4.00 per share
for the common stock in connection with the initial public offering, plus
accrued interest at the applicable statutory rate. It is our intention that
if
any of the shares are tendered for rescission, the shares will be purchased
by
others and not from our funds. If we are required to pay the obligation which
may be created under the rescission offer, such a refund would materially and
adversely effect our financial position.
Federal
securities laws do not provide that a rescission offer will terminate a
purchaser’s right to rescind a sale of stock that was not registered as required
or was not otherwise exempt from such registration requirements. If any or
all
of the offerees reject the rescission offer, we may continue to be liable under
federal and state securities laws for up to an amount equal to the value of
all
shares of common stock issued in connection with the initial public offering
plus any statutory interest we may be required to pay. We also understand that
the SEC and certain state regulators, including California, have requested
additional information regarding the rescission offer. If it is determined
that
we offered securities without properly registering them under federal or state
law, or securing an exemption from registration, regulators could impose
monetary fines or other sanctions as provided under these laws.
Except
as
set forth above, we believe that there are no material litigation matters at
the
current time. Although the results of such litigation matters and claims cannot
be predicted with certainty, we believe that the final outcome of such claims
and proceedings will not have a material adverse impact on our financial
position, liquidity, or results of operations.
General
Our
directors currently have terms which will end at our next annual meeting of
the
stockholders or until their successors are elected and qualify, subject to
their
prior death, resignation or removal. Officers serve at the discretion of the
board of directors. Except as described below, there are no family relationships
among any of our directors and executive officers. Our board members are
encouraged to attend meetings of the board of directors and the annual meeting
of stockholders. The board of directors held two meetings and adopted two
unanimous written consents in lieu of meetings in 2005.
The
following table sets forth certain biographical information with respect to
our
directors and executive officers:
Name
|
|
Position
|
|
Age
|
|
|
|
|
|
Christopher
J. Reed
|
|
President,
Chief Executive Officer, Chief Financial Officer and Chairman of
the
Board
|
|
47
|
Eric
Scheffer
|
|
Vice
President and National Sales Manager - Natural Foods
|
|
38
|
Robert
T. Reed, Jr.
|
|
Vice
President and National Sales Manager - Mainstream
|
|
50
|
Robert
Lyon
|
|
Vice
President Sales - Special Projects
|
|
56
|
Judy
Holloway Reed
|
|
Secretary
and Director
|
|
46
|
Mark
Harris
|
|
Director
|
|
49
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
Director
|
|
51
|
Michael
Fischman
|
|
Director
|
|
50
|
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.
Prior to joining us, Mr. Reed was employed with SunGard Availability Services
from 1987 through 2003. He started with SunGard as an Account Manager. Over
the
years, Mr. Reed earned promotions to Director of Sales in 1989, Vice President
of Sales in 1992 and Senior Vice President of Sales in 1997. In March 2000,
Mr.
Reed was appointed President of SunGard eSourcing, a subsidiary of SunGard
Availability Services, with annual revenue in excess of $70 million and over
300
employees. During Mr. Reed’s tenure with SunGard Availability Services, revenues
increased from $30 million to over $1.2 billion. He earned a Bachelors of
Science degree in Business and Finance from 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
in mainstream markets. Over the past five years, Mr. Lyon also has operated
an
organic rosemary farm in Malibu, California, selling bulk to re-packagers.
In
the 1980s and 1990s, Mr. Lyon operated a successful water taxi service with
20
employees and eight vessels of his own design. He also built the national sales
team for a jewelry company, Iberia from 1982 through 1987. Mr. Lyon holds
several U.S. patents. He earned a Business Degree from Northwestern Michigan
University in 1969.
Judy
Holloway Reed has
been
with us since 1992 and, as we have grown, has run the accounting, purchasing
and
shipping and receiving departments at various times since the 1990s. Ms. Reed
has been one of our directors since June 2004, 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 Chief Financial Officer.
Mark
Harris has
been
a member of our board of directors since April 2005. Mr. Harris is an
independent venture capitalist and has been retired from the work force since
2002. In late 2003, Mr. Harris joined a group of Amgen colleagues in funding
NeoStem, Inc., a company involved in stem-cell storage, archiving, and research
to which he is founding angel investor. From 1991 to 2002, Mr. Harris worked
at
biotech giant Amgen managing much of the company’s media production for internal
use and public relations. Mr. Harris spent the decade prior working in the
aerospace industry at Northrop with similar responsibilities.
Dr.
Daniel S.J. Muffoletto, N.D. has
been
a member of our board of directors since April 2005. Dr. Muffoletto has
practiced as a Naturopathic Physician since 1986. He has been chief executive
officer of Its Your Earth, a natural products marketing company since June
2004.
From 2003 to 2005, Dr. Muffoletto worked as sales and marketing director for
Worthington, Moore & Jacobs, a Commercial Law League member firm serving
FedEx, UPS, DHL and Kodak, among others. From 2001 to 2003, he was the
owner-operator of the David St. Michel Art Gallery in Montreal, Québec. From
1991 to 2001, Dr. Muffoletto was the owner/operator of a Naturopathic
Apothecary, Herbal Alter*Natives of Seattle, Washington and Ellicott City,
Maryland. The apothecary housed Dr. Muffoletto’s Naturopathic Practice. Dr.
Muffoletto received a Bachelors of Arts degree in Government and Communications
from the University of Baltimore in 1977, and conducted postgraduate work in
the
schools of Public Administration and Publication Design at the University of
Baltimore from 1978 to 1979. In 1986, he received his Doctorate of Naturopathic
Medicine from the Santa Fe Academy of Healing, Santa Fe, New
Mexico.
Michael
Fischman has
been
a member of our board of directors since April 2005. Since 1998, Mr. Fischman
has been President and chief executive officer of the APEX course, the corporate
training division of the International Association of Human Values. In addition,
Mr. Fischman is a founding member and the director of training for USA at the
Art of Living Foundation, a global non-profit educational and humanitarian
organization at which he has coordinated over 200 personal development
instructors since 1997. Among Mr. Fischman’s personal development clients are
the World Bank, Royal Dutch Shell, the United Nations, the US Department of
Probation, the Washington, D.C. Police Department, and Rotary Clubs
International.
Other
than the relationship of Christopher J. Reed, Judy Holloway Reed, and Robert
T.
Reed, Jr., none of our directors or executive officers are related to one
another.
Peter
Sharma, III resigned as one of our directors on January 27, 2006.
Currently
our Chief Executive Officer, Christopher J. Reed, serves as our Chief Financial
Officer. Mr. Reed does not have any formal financial training as a Chief
Financial Officer. During the next 12 months, we intend to hire a Chief
Financial Officer. 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.
Corporate
Governance
We
are
committed to having sound corporate governance principles. Such principles
are
essential to running our business efficiently and to maintaining our integrity
in the marketplace.
We
believe that our directors should have the highest professional and personal
ethics and values, consistent with our longstanding values and standards. They
should have broad experience at the policy-making level in business or banking.
They should be committed to enhancing shareholder value and should have
sufficient time to carry out their duties and to provide insight and practical
wisdom based on experience. Their service on other boards of public companies
should be limited to a number that permits them, given their individual
circumstances, to perform responsibly all director duties for us. Each director
must represent the interests of all shareholders. When considering potential
director candidates, the Board also considers the candidate’s character,
judgment, diversity, age and skills, including financial literacy and experience
in the context of our needs and the needs of the board of
directors.
The
board
of directors does not currently have standing committees audit, nominations
or
compensation committees. The Board intends to form such committees and adopt
charters for such committees in the future. Our Chief Executive Officer and
all
senior financial officers, including the Chief Financial Officer, are bound
by a
Code of Business Conduct and Ethics that complies with Item 406 of Regulation
S-B of the Exchange Act. The Code of Business Conduct and Ethics is posted
on
our Internet website (www.reedsgingerbrew.com)
under
the Corporate Governance page (this website address is not intended to function
as a hyperlink, and the information contained on our website is not intended
to
be a part of this Report).
The
Board
has determined that three members of our board of directors, Mr. Harris, Dr.
Mufoletto and Mr. Fischman Board are independent under the revised listing
standards of The Nasdaq Stock Market, Inc. We intend to maintain at least two
independent directors on our board of directors in the future
Executive
Compensation
The
following table sets forth certain information concerning compensation of
certain of our executive officers, including our Chief Executive Officer and
all
other executive officers, or the Named Executives, whose total annual salary
and
bonus exceeded $100,000, for the years ended December 31, 2005, 2004 and
2003:
|
|
Annual
Compensation
|
|
Long-term
Compensation
|
|
All
Other
Compensation
|
|
Name
and Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Other
Annual
Compensation
|
|
Securities
Underlying
Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Christopher
J. Reed.
Chief
Executive Officer and President
|
|
|
2005
2004
2003
|
|
$
|
150,000
150,000
150,000
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
0
0
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
None
of
our other employees received total compensation in excess of $100,000 during
the
years ended December 31, 2003-2005.
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.
Committee
Interlocks and Insider Participation
No
interlocking relationship exists between any member of our board of directors
and any member of the board of directors or compensation committee of any other
companies, nor has such interlocking relationship existed in the
past.
Option/SAR
Grants and Exercises
No
options were granted to or exercised by employees during 2004. In 2005, we
granted options to purchase up to 218,500 shares of our common stock at $4.00
per share to nine of our employees, all of which have vested.
Employment
Agreements
There
are
no written employment agreements with any of our officers or key employees,
including Christopher J. Reed. We do not have any agreements which provide
for
severance upon termination of employment, whether in context of a change of
control or not.
2001
Stock Option Plan
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, 291,000
options have been issued under the plan, all of which have vested. On August
28,
2001, our board of directors adopted the plan and the plan was approved by
our
stockholders.
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 primary difference between “incentive stock options” and “non-qualified
stock options” is that once an option is exercised, the stock received under an
“incentive stock option” has the potential of being taxed at the more favorable
long-term capital gains rate, while stock received by exercising a
“non-qualified stock option” is taxed according the ordinary income tax rate
schedule.
The
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, 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, 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 us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Our
amended certificate of incorporation also provides discretionary indemnification
for the benefit of our directors, officers, and employees, to the fullest extent
permitted by Delaware law, as it may be amended from time to time. Insofar
as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, or persons controlling us, pursuant
to
the foregoing provisions, we have been informed that in the opinion of the
SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Pursuant
to our 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.
We
have
three loans payable to Robert T. Reed, Sr., the father of our founder, President
and Chief Executive Officer, Christopher J. Reed. At March 31, 2006, the
aggregate outstanding principal balance of the loans was $252,358 and the
aggregate accrued and unpaid interest was $94,207. Mr. Reed has suspended
payments due him from time to time under each of these loans. His current
agreement suspends our payment obligation on each of these loans until October
1, 2007.
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. As of March 31, 2006, the outstanding
principal balance of the loan was $24,648 and accrued and unpaid interest was
$8,001.
The
second loan from Mr. Reed 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.
As of March 31, 2006, the outstanding principal balance of the loan was $177,710
and accrued and unpaid interest was $76,420. So long as the debt is outstanding,
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 March 31, 2006, the loan was
convertible into 127,065 shares of common stock.
The
third
loan from Mr. Reed was made to us in October 2003 to provide $50,000 for working
capital. This loan bears interest at 8% per annum. As of March 31, 2006,
the outstanding principal balance of the loan was $50,000 and accrued and unpaid
interest was $9,786.
We
had
issued warrants to Mr. Reed to purchase up to 262,500 shares at $0.02 for his
work in 1991 in helping the start up of our company. The original term of the
warrants was until December 31, 1997. We extended the term of these warrants
twice, once to December 31, 2000 and again to June 1, 2005. These extensions
were granted in consideration of the extensions Mr. Reed had granted us on
the
repayment of his various loans made to us. These warrants were exercised in
full
on May 31, 2005.
In
September 2004, Robert T. Reed Jr., our Vice President and National Sales
Manager - Mainstream and a brother of Christopher J. Reed, pledged certain
securities (which do not include any of our securities which are owned by Mr.
Reed) in his personal securities account on deposit with Merrill Lynch as
collateral for repayment of the line of credit. The amount of the line of credit
is based on a percentage value of such securities. At March 31, 2006, the
outstanding balance on the line of credit was $642,209, and there was $47,140
available under the line of credit. The line of credit bears interest at a
rate
of rate of 3.785% per annum plus LIBOR (8.695% as of March 31, 2006). In
consideration for Mr. Reed’s pledging his stock account at Merrill Lynch as
collateral, we have agreed to pay Mr. Reed 5% per annum of the amount we
borrow from Merrill Lynch, as a loan fee. During the years ended December 31,
2005 and 2004, we paid Mr. Reed $15,250 and $3,125, respectively, under this
agreement. In addition, Christopher J. Reed has pledged all of his shares of
common stock to Robert T. Reed, Jr. as collateral for the shares pledged by
Robert T. Reed, Jr.
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
have
entered into an agreement with Mark Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock.
Each of
the designated purchasers may also participate in the purchase of shares of
common stock to be distributed in the public offering. Since up to all of the
rescission shares would be purchased by the designated purchasers, none of
the
rescission shares would be purchased directly by us and would not deplete
proceeds from our public offering or other of our then current cash balances.
The rescission shares, which may be purchased by the designated purchasers
in
the rescission offer, would be deemed to be registered shares for the benefit
of
the designated purchasers pursuant to a registration statement to be filed
by us
relating to the rescission offer under the Securities Act, effective as of
the
commencement date of the rescission offer without any further action on the
part
of the designated purchasers. If
we are
required to pay the obligation which may be created under the rescission offer,
such a refund would materially and adversely effect our financial
position.
We
believe that the terms of each of the foregoing transactions were as favorable
to us as the terms that would have been available to us from unaffiliated
parties.
Beginning
in January 2000, we extended an interest-free line of credit to one of our
consultants, Peter Sharma, III who was a member of our board until January
27,
2006. In July 2005, a repayment schedule began at $1,000 per month and ending
with a balloon payment for the remaining balance, due on December 31, 2007.
As
of December 31, 2005, management has chosen to reserve the entire amount of
the
outstanding balance of $124,210. Management is pursuing collection efforts.
Mr.
Sharma was a registered representative of Brookstreet Securities Corporation
until May 4, 2006. Brookstreet is one of our underwriters in the public
offering. Mr. Sharma received compensation of approximately $28,000 through
his
former relationship with Brookstreet. We are advised by Brookstreet that Mr.
Sharma will not participate in any future sales through Brookstreet in
connection with the public offering.
At
the
time of each of the transactions listed above, except for the loan in October
2003 from Robert T. Reed, Sr., we did not have any independent directors to
ratify such transactions.
In
2005,
we added three independent directors to our board. The Board of Directors,
inclusive of the independent directors, resolved to reauthorize all material
ongoing and past transactions, arrangements and relationships listed. In
addition, we intend that any transactions with officers, directors and 5% or
greater stockholders will be on terms no less favorable to us than could be
obtained from independent third parties and will be approved by a majority
of
our independent, disinterested directors and will comply with the Sarbanes-Oxley
Act and other securities laws and regulations.
The
following table reflects, as of the date of this prospectus, the beneficial
common stock ownership of: (a) each of our directors, (b) each named executive
officer, (c) each person known by us to be a beneficial holder of 5% or more
of
our common stock, and (d) all of our executive officers and directors as a
group.
Except
as
otherwise indicated below, the persons named in the table have sole voting
and
investment power with respect to all shares of common stock held by them. Unless
otherwise indicated, the principal address of each listed executive officer
and
director is 13000 South Spring Street, Los Angeles, California 90061.
|
|
|
|
Percentage
of Shares
|
|
|
|
Number
of Shares
|
|
Beneficially
Owned (1)
|
|
Name
of Beneficial Owner |
|
Beneficially
Owned
|
|
Before
this Offering
|
|
After
this Offering
|
|
Directors
and Named Executive Officers
|
|
|
|
|
|
|
|
Christopher
J. Reed (2)
|
|
|
3,200,000
|
|
|
60.06
|
%
|
|
45.75
|
%
|
Judy
Holloway Reed (2)
|
|
|
3,200,000
|
|
|
60.06
|
%
|
|
45.75
|
%
|
Mark
Harris (3)
|
|
|
4,000
|
|
|
*
|
|
|
*
|
|
Dr.
Daniel S.J. Muffoletto, N.D.
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Michael
Fischman
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Robert
T. Reed, Jr. (4)
|
|
|
387,500
|
|
|
7.13
|
%
|
|
5.45
|
%
|
Directors
and executive officers as a group (8 persons) (5)
|
|
|
3,727,000
|
|
|
66.83
|
%
|
|
51.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
5%
or greater stockholders
|
|
|
|
|
|
|
|
|
|
|
Joseph
Grace (6)
|
|
|
500,000
|
|
|
9.38
|
%
|
|
7.15
|
%
|
Robert
T. Reed, Sr. (7)
|
|
|
389,565
|
|
|
7.14
|
%
|
|
5.47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Beneficial
ownership is determined in accordance with the rules of the SEC.
Shares of
common stock subject to options or warrants currently exercisable
or
exercisable within 60 days of the date of this prospectus, are deemed
outstanding for computing the percentage ownership of the stockholder
holding the options or warrants, but are not deemed outstanding for
computing the percentage ownership of any other stockholder. Unless
otherwise indicated in the footnotes to this table, we believe
stockholders named in the table have sole voting and sole investment
power
with respect to the shares set forth opposite such stockholder's
name.
Unless otherwise indicated, the officers, directors and stockholders
can
be reached at our principal offices. Percentage of ownership is based
on
5,328,109 shares of common stock outstanding as of the date of this
prospectus, and gives effect to the sale of 333,156 shares pursuant
to the
public offering as of the date of this prospectus. Percentage of
share
ownership after the offering assumes the sale of all 2,000,000 shares
in
the public offering.
|
(2) |
Christopher
J. Reed and Judy Holloway Reed are husband and wife. The same number
of
shares of common stock is shown for each of them, as they may each
be
deemed to be the beneficial owner of all of such shares. These shares
have
been pledged as collateral to Robert T. Reed, Jr. to secure a pledge
of
Mr. Reed of his shares as collateral for a line of credit extended
to
us.
|
(3) |
Consists
of 4,000 shares of common stock, which can be converted at any time
from
1,000 shares of Series A preferred stock. The address for Mr. Harris
is
160 Barranca Road, Newbury Park, California
91320.
|
(4) |
Consists
of (i) 277,500 shares of common stock, (ii) options exercisable into
50,000 shares of common stock, and (iii) 60,000 shares of common
stock,
which can be converted at any time from 15,000 shares of Series A
preferred stock. Does not give effect to the agreement of Mr. Reed
to
purchase shares of our common stock in connection with the rescission
offer.
|
(5) |
Includes
three other executive officers (including Robert T. Reed, Jr., our
Executive Vice-President and National Sales Manager - Mainstream
(see
footnote 4 above), Robert Lyon, our Vice President Sales - Special
Projects (options to purchase up to 60,000 shares and Eric Scheffer,
our
Vice President and National Sales Manager - Natural Foods (500 shares
and
options to purchase up to 75,000 shares) who beneficially own in
the
aggregate of 523,000 shares of common
stock.
|
(6) |
The
address for Mr. Grace is 1900 West Nickerson Street, Suite 116, PMB
158,
Seattle, Washington 98119.
|
(7) |
Consists
of (i) 262,500 shares of common stock, and (ii) 127,065 shares of
common
stock, which can be converted from principal and accrued interest
on
certain convertible promissory notes at March 31,
2006.
|
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, $10.00 par value per share, which can be issued from time
to
time by our board of directors on such terms and conditions as they may
determine.
As
of the
date of this prospectus, there were 5,328,109 shares of common stock
outstanding, and 58,940 shares of Series A preferred stock issued and
outstanding. Assuming the sale of the maximum number of shares in connection
with the public offering and that no shares in the rescission offer will be
repurchased by us, upon
completion of the public offering, we will have outstanding 6,994,953 shares
of
common stock issued and outstanding.
We
will
not offer preferred stock to promoters, except on the same terms as it is
offered to all other existing shareholders or to new shareholders. We will
not
authorize the issuance of preferred stock unless such issuance is approved
by a
majority of our independent directors who do not have an interest in the
transaction and who have access, at our expense, to our legal counsel or their
independent legal counsel.
The
following description of our capital stock does not purport to be complete
and
is subject to, and is qualified by, our certificate of incorporation and
by-laws, which are filed as exhibits to the registration statement of which
this
prospectus is a part, and by the applicable provisions of Delaware
law.
Common
Stock
Holders
of our common stock are entitled to one vote per share on all matters requiring
a vote of stockholders, including the election of directors.
We
are a
Delaware corporation and our certificate of incorporation does not provide
for
cumulative voting. However, we may be subject to section 2115 of the California
Corporations Code. Section 2115 provides that, regardless of a company's legal
domicile, specified provisions of California corporations law will apply to
that
company if the company meets requirements relating to its property, payroll
and
sales in California and if more than one-half of its outstanding voting
securities are held of record by persons having addresses in California, and
such company is not listed on certain national securities exchanges or on the
Nasdaq National Market. Among other things, section 2115 may limit our ability
to elect a classified board of directors and requires cumulative voting in
the
election of directors. Cumulative voting is a voting scheme which allows
minority stockholders a greater opportunity to have board representation by
allowing those stockholders to have a number of votes equal to the number of
directors to be elected multiplied by the number of votes to which the
stockholder's shares are entitled and to "cumulate" those votes for one or
more
director nominees. Generally, cumulative voting allows minority stockholders
the
possibility of board representation on a percentage basis equal to their stock
holding, where under straight voting those stockholders may receive less or
no
board representation. The Supreme Court of Delaware has recently ruled, on
an
issue unrelated to voting for directors, that section 2115 is
an
unconstitutional exception to the “internal affairs doctrine” that requires the
law of the incorporating state to govern disputes involving a corporation’s
internal affairs, and is therefore inapplicable to Delaware corporations. The
California Supreme Court has not definitively ruled on section 2115, although
certain lower courts of appeal have upheld section 2115. As a result, there
is a
conflict as to whether section 2115 applies to Delaware corporations. Pending
the resolution of these conflicts, we will not elect directors by cumulative
voting.
Christopher
J. Reed, our President and Chief Executive officer, 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 the public offering
are sold. Consequently, Mr. Reed, as our principal stockholder, has the power,
and may continue to have the power, to have significant control over the outcome
of any such vote or any other matter, on which the stockholders may
vote.
Holders
of our common stock are entitled to receive dividends only if we have funds
legally available and the Board of Directors declares a dividend.
Holders
of our common stock do not have any rights to purchase additional shares. This
right is sometimes referred to as a 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.
There
is
no public market for our common stock.
Series
A Preferred Stock
Holders
of our Series A convertible preferred stock are entitled to receive out of
assets legally available, a 5% pro-rata annual non-cumulative dividend, payable
in cash or shares, on June 30 th
of
each
year commencing on June 30, 2005.
The
dividend can be paid in cash or, in the sole and absolute discretion of our
board of directors, in shares of common stock based on its then fair market
value. We cannot declare or pay any dividend on shares of our securities ranking
junior to the preferred stock until the holders of our preferred stock have
received the full non-cumulative dividend to which they are entitled. In
addition, the holders of our preferred stock are entitled to receive pro rata
distributions of dividends on an “as converted” basis with the holders of our
common stock.
As
of
June 30, 2005, we issued 7,362 shares of our common stock as a dividend to
the
holders of our Series A convertible preferred stock based on a $29,470 accrued
annual dividend payable.
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 upon which such stock is redeemed,
into four shares of common stock, subject to adjustment in the event of stock
splits, reverse stock splits, stock dividends, recapitalization,
reclassification, and similar transactions. We are obligated to reserve out
of
our authorized but unissued shares of common stock a sufficient number of such
shares to effect the conversion of all outstanding shares of Series A preferred
stock.
Except
as
provided by law, the holders of our Series A preferred stock do not have the
right to vote on any matters, including, without limitation, the election of
directors. However, so long as any shares of Series A preferred stock are
outstanding, we 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 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 the
date of this prospectus, we had outstanding options and warrants to purchase
an
aggregate of 904,241 shares of our common stock, with a range of exercise prices
from $2.00 to $6.00. The options and warrants expire at various dates between
2006 and 2010. We have outstanding options to purchase up to 291,000 shares
of
common stock at a weighted average exercise price of $3.80 per share, all of
which were granted pursuant to our 2001 Stock Option Plan. We have outstanding
warrants to purchase up to 613,241 shares of common stock at a weighted average
exercise price of $2.80 per share.
Convertible
Debt
We
have a
loan payable to Robert Reed, Sr. which 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. As of March 31, 2006, the outstanding principal balance of the
loan was $177,710 and accrued and unpaid interest was $76,240. So long as the
debt is outstanding, 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.
We
also
have a loan payable to Barry and Leslie Sandler pursuant to a promissory note,
dated September 26, 1995, in the principal amount of $9,000. The loan bears
interest at the rate of 10% per annum. So long as the debt is outstanding,
the
Sandlers have 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 $2.40 owed to them.
As
of
March 31, 2006, these loans were convertible into an aggregate of 136,158 shares
of common stock.
Underwriters’
Warrants
We
have
agreed to issue to our underwriters a five-year warrant, to purchase a number
of
shares of common stock equal to 10% of the shares sold in the public offering,
at an assumed purchase price of $6.60 per share. The warrants have a purchase
price of $0.001 per warrant. As of the date of this prospectus, we have agreed
to issue warrants to purchase up to an aggregate of 33,316 shares of common
stock based on the sale of 333,156 shares in the public offering to date. If
the
maximum number of shares are issued in the public offering, we will issue
warrants to purchase up to an aggregate of 200,000 shares of common stock based
on the sale of a maximum of 2,000,0000 shares which may be sold in the public
offering.
Anti-Takeover
Effects of Delaware Law and Our Certificate of
Incorporation
Certain
provisions of Delaware law and our certificate of incorporation could make
more
difficult the acquisition of us by means of a tender offer, a proxy contest,
or
otherwise, and the removal of incumbent officers and directors. These provisions
are expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control
of
us.
Our
Certificate of Incorporation includes provisions that:
· |
allow
the Board of Directors to issue, without further action by the
stockholders, up to 500,000 shares of undesignated preferred
stock.
|
We
are
subject to the provisions of Section 203 of the Delaware General Corporation
Law
regulating corporate takeovers. In general, Section 203 prohibits a
publicly-held Delaware corporation from engaging under certain circumstances,
in
a business combination with an interested stockholder for a period of three
years following the date the person became an interested stockholder
unless:
· |
prior
to the date of the transaction, the board of directors of the corporation
approved either the business combination or the transaction which
resulted
in the stockholder becoming an interested
stockholder.
|
· |
upon
completion of the transaction that resulted in the stockholder becoming
an
interested stockholder, the stockholder owned at least 85% of the
voting
stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (1) shares owned by persons who are directors and also
officers and (2) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer.
|
· |
on
or subsequent to the date of the transaction, the business combination
is
approved by the board and authorized at an annual or special meeting
of
stockholders, and not by written consent, by the affirmative vote
of at
least 66 2/3%
of the outstanding voting stock which is not owned by the interested
stockholder.
|
Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
An
interested stockholder is a person who, together with affiliates and associates,
owns or, within three years prior to the determination of interested stockholder
status, did own 15% or more of a corporation’s outstanding voting securities. We
expect the existence of this provision to have an anti-takeover effect with
respect to transactions our board of directors does not approve in advance.
We
also anticipate that Section 203 may also discourage attempts that might result
in a premium over the market price for the shares of common stock held by
stockholders.
These
provisions of Delaware law and our certificate of incorporation could have
the
effect of discouraging others from attempting hostile takeovers and, as a
consequence, they may also inhibit temporary fluctuations in the market price
of
our common stock that often result from actual or rumored hostile takeover
attempts. These provisions may also have the effect of preventing changes in
our
management. It is possible that these provisions could make it more difficult
to
accomplish transactions that stockholders may otherwise deem to be in their
best
interests.
Certain
Historical Information Regarding Securities Issuances
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. In addition, 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
an
historical reference, we here provide a chart recording all issuance of options
and warrants:
Table
of Warrants and Options issued with price and date:
Year
Issued
|
|
Option
Strike
Price
issued
|
|
Highest
Price Paid for
Common
Shares
|
|
1991
|
|
|
0.02
|
|
|
0.27
|
|
1992
|
|
|
1.00
|
|
|
1.00
|
|
2000
|
|
|
2.00
|
|
|
2.00
|
|
2001
|
|
|
3.00
|
|
|
3.00
|
|
2002
|
|
|
6.00
|
|
|
6.00
|
|
2005
|
|
|
4.00
|
|
|
4.00
|
|
For
historical reference and analysis, we provide here a reference table of all
issuance of common and preferred shares by Reed’s, Inc. (formerly known as
Original Beverage Corp.) in chronological order, beginning with issue of our
founder’s shares in 1991:
Historical
Table of Stock Issuance for Reed’s, Inc. (fka Original Beverage Corp.)
|
Type
of Issuance
|
|
Class*
|
|
No.
of Shares Issued
|
|
Price/Share
|
|
Year
of Issue
|
|
Founder’s
stock
|
|
|
C
|
|
|
3,200,000
|
|
|
0.0001
|
|
|
1991
|
|
Private
investment
|
|
|
C
|
|
|
187,500
|
|
|
0.267
|
|
|
1991
|
|
Private
investment
|
|
|
C
|
|
|
50,000
|
|
|
0.75
|
|
|
1993
|
|
Private
investment
|
|
|
C
|
|
|
10,000
|
|
|
1.50
|
|
|
1996
|
|
Exempt
private placement
|
|
|
C
|
|
|
141,100
|
|
|
1.50
|
|
|
1999
|
|
SCOR
direct public offering
|
|
|
C
|
|
|
450,275
|
|
|
2.00
|
|
|
2000
|
|
Exempt
private placement (existing shareholder)
|
|
|
C
|
|
|
250,000
|
|
|
2.00
|
|
|
2000
|
|
Note
conversion options exercise (from 1991)
|
|
|
C
|
|
|
200,000
|
|
|
0.75
|
|
|
2000
|
|
Warrant
exercise (from 1991)
|
|
|
C
|
|
|
37,500
|
|
|
1.00
|
|
|
2000
|
|
Employee
bonus grants
|
|
|
C
|
|
|
1,500
|
|
|
2.00
|
|
|
2000
|
|
China
Cola acquisition
|
|
|
C
|
|
|
130,000
|
|
|
2.00
|
|
|
2000
|
|
Options
exercise (from 1991)
|
|
|
C
|
|
|
20,000
|
|
|
1.00
|
|
|
2001
|
|
Employee
bonus grants
|
|
|
C
|
|
|
14,500
|
|
|
2.00
|
|
|
2001
|
|
Vendor
payment
|
|
|
C
|
|
|
3,200
|
|
|
2.00
|
|
|
2001
|
|
Exempt
private placement (existing shareholder)
|
|
|
C
|
|
|
500
|
|
|
3.00
|
|
|
2001
|
|
Loan
conversion option exercise (from 1991)
|
|
|
C
|
|
|
8,889
|
|
|
1.125
|
|
|
2001
|
|
Loan
conversion option exercise (from 1992)
|
|
|
C
|
|
|
11,877
|
|
|
1.50
|
|
|
2001
|
|
Exempt
private placement (existing shareholder)
|
|
|
C
|
|
|
3,750
|
|
|
4.00
|
|
|
2001
|
|
Employee
bonus grants
|
|
|
C
|
|
|
1,500
|
|
|
3.333
|
|
|
2003
|
|
Exempt
private placement (existing shareholder)
|
|
|
C
|
|
|
3,000
|
|
|
3.50
|
|
|
2003
|
|
Exempt
private placement (existing shareholders)
|
|
|
‡Pr
|
|
|
‡33,440
|
|
|
‡10.00
|
|
|
2004
|
|
Corporate
note conversion exercised (from 2001)
|
|
|
‡Pr
|
|
|
‡25,500
|
|
|
‡10.00
|
|
|
2004
|
|
Exercise
of options, exercise price of $0.20
|
|
|
C
|
|
|
262,500
|
|
|
0.20
|
|
|
2005
|
|
Issuance
of shares on preferred stock dividend
|
|
|
C
|
|
|
7,362
|
|
|
4.00
|
|
|
2005-06
|
|
Sale
of common stock in our public offering
|
|
|
C
|
|
|
333,156
|
|
|
4.00
|
|
|
2005-06
|
|
Average
share price excluding founder’s shares and initial seed, including conversion of
Pr -- $1.81/share
‡
Series
A Preferred at $10 par value convertible to 4 common shares
*
Type of
share issued C=Common, Pr=Preferred
There
has
been no public market for our stock. We cannot predict the effect, if any,
that
market sales of shares or the availability of shares for sale will have on
the
market price prevailing from time to time, if a market is established for our
common stock. Sales of our common stock in the public market after the
restrictions lapse as described below, or the perception that those sales may
occur, could cause the prevailing market price to decrease or to be lower than
it might be in the absence of those sales or perceptions.
Sale
of Restricted Shares
Upon
completion of the public offering, we will have outstanding a maximum of
6,994,953 shares of common stock. The shares of common stock being sold in
the
public offering will be freely tradable, other than by any of our “affiliates”
as defined in Rule 144(a) under the Securities Act, without restriction or
registration under the Securities Act. All remaining shares, and all shares
subject to outstanding options and warrants, were issued and sold by us in
private transactions and are eligible for public sale if registered under the
Securities Act or sold in accordance with Rule 144 or Rule 701 under the
Securities Act. These remaining shares are “restricted securities” within the
meaning of Rule 144 under the Securities Act. Of
the
shares of our common stock currently outstanding, 4,240,500 shares are
“restricted securities” under the Securities Act.
Lock-In
Arrangements
Our
officers, directors and 5% or greater stockholders have entered into a written
lock-in agreement placing restrictions on each such person from selling any
of
the shares of our common stock, warrants, options, convertible securities or
rights which may be converted into or exercised to purchase shares of our common
stock, or promotional shares, which they own or possess during the 24-month
period following the date of completion of the public offering. These lock-in
agreements have been entered by these persons in order to satisfy the
requirements of certain state securities laws and regulations in connection
with
this registration statement.
Rule
144
In
general, under Rule 144, as currently in effect, a person who owns shares that
were acquired from us or an affiliate of us at least one year prior to the
proposed sale is entitled to sell upon expiration of the selling restrictions
described above, within any three-month period, a number of shares that does
not
exceed the greater of:
· |
1%
of the number of shares of common stock then outstanding, which will
equal
approximately 69,940 shares immediately after the public offering,
assuming the sale of the maximum number of shares offered thereby,
or
|
· |
The
average weekly trading volume of the common stock during the four
calendar
weeks preceding the filing of a notice on Form 144 with respect to
such
sale.
|
Sales
under Rule 144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about us.
Rule 144 also provides that our affiliates who sell shares of our common stock
that are not restricted shares must nonetheless comply with the same
restrictions applicable to restricted shares with the exception of the holding
period requirement.
Rule
144(k)
Under
Rule 144(k), a person who is not deemed to have been one of our affiliates
for
purposes of the Securities Act at any time during the 90 days preceding a sale
and who has beneficially owned the shares proposed to be sold for at least
two
years, including the holding period of any prior owner other than our
affiliates, is entitled to sell such shares without complying with the manner
of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, “144(k) shares” may be sold immediately
upon the completion of the public offering.
Stock
Options
We
intend
to file a registration statement on Form S-8 under the Securities Act for shares
of our common stock subject to options outstanding or reserved for issuance
under our stock plans and shares of our common stock issued upon the exercise
of
options by employees. We expect to file this registration statement as soon
as
practicable after the public offering. However, any of the shares registered
on
Form S-8 which are subject to selling restriction agreements will not be
eligible for resale until the expiration of such selling restriction
agreements.
Transfer
Agent
We
have
engaged Transfer On-Line, Inc., Portland, Oregon, to act as our registrar and
transfer agent.
General
We
have
filed a registration statement for our initial public offering and intend to
continue the process of selling our shares in our public offering. 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. As of the date of this
prospectus, we have sold 333,156 shares resulting in gross proceeds to us of
$1,332,624, which are the subject of this rescission offer. However, whether
or
not these shares are repurchased under the rescission offer, the maximum number
of shares which may be sold from the date of this prospectus will be reduced
by
the number of shares sold to the date of this prospectus.
The
public offering is a best efforts offering through our underwriters, US EURO
Securities, Inc. and Brookstreet Securities Corporation and certain selected
broker-dealers. We intend to complete this rescission offer before we recommence
our public offering. We cannot give you assurances as to the number of shares
which will be sold in the public offering or the price at which the common
stock
will trade in the future, if at all.
No
minimum number of shares is required to be sold and as a result, we may only
sell a nominal amount of additional shares under the public 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.
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.
US
EURO
Securities, Inc. or US EURO, and Brookstreet Securities Corporation, or
Brookstreet, are members of the National Association of Securities Dealers,
or
NASD, and are the underwriters for the public offering. For serving as
underwriters of the public offering, we will pay the underwriters a selling
commission equal to 6% of the aggregate purchase price of the common stock
sold
in the public offering. We will also pay the underwriters 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 the public offering.
In
addition, we paid Brookstreet Securities Corporation a non-refundable fee of
$25,000, for legal and due diligence expenses.
Peter
Sharma, one of our former directors until his resignation on January 27, 2006,
also was a registered representative of Brookstreet until May 4, 2006. Mr.
Sharma had served as one of our directors and as a registered representative
of
Brookstreet during the period in which all of the prior sales in the public
offering were made. Under his agreement with Brookstreet, Mr. Sharma received
90% of all commissions generated in sales initiated by him as well as 50% of
the
underwriter’s concession and 50% of the non-accountable expense allowance in the
case of all sales in the public offering. In all sales initiated by the general
membership of Brookstreet, such representatives received 83% of commission
generated by their sales with Mr. Sharma receiving 7% of those commissions
as
the allocation agent for Brookstreet in the public offering. Mr. Sharma has
received compensation of approximately $28,000 through his former relationship
with Brookstreet. Mr. Sharma will not make any future offers or sales on our
behalf, or, as represented to us by the underwriters, on behalf of the
underwriters.
The
underwriters acknowledge their supervisory responsibility over independent
contractor registered representatives. Brookstreet has been the managing dealer
of approximately 12 private offerings and the lead underwriter of one public
offering.
The
underwriting agreement also includes the following terms:
· |
we
agree to use our best efforts to have the shares sold in the public
offering listed on a national stock exchange as soon as practicable
following the offering,
|
· |
the
underwriting agreement provides for reciprocal indemnification between
us
and the underwriters against certain liabilities in connection with
the
registration statement, including liabilities under the Securities
Act,
and
|
· |
for
a period of five years following the public offering, US EURO will
have
the right to designate an observer to our board of directors and
each of
its committees.
|
At
the
closing of the public offering, we will sell to the representative or its
designees at a purchase price of $0.001 per warrant, underwriters' warrants
to
purchase up to 10% of the shares sold at an exercise price of $6.60 per unit
(165% of the public offering price per share). The underwriters' warrants are
exercisable for a period of five years commencing on the final closing date
of the public offering. The underwriters' warrants contain provisions that
protect their holders against dilution by adjustment of the exercise price
and
number of shares issuable upon exercise on the occurrence of specific events,
including stock dividends or other changes in the number of our outstanding
shares. No holder of the underwriters' warrants will possess any rights as
a
stockholder unless the warrant is exercised. The underwriters' warrants may
not
be sold, transferred, assigned or hypothecated for a period of 180 days
from the effective date of the public offering, except to officers or
partners (but not directors) of the representative and members of the selling
group and/or their officers or partners. During the exercise period, the holders
of the underwriters' warrants will have the opportunity to profit from a rise
in
the market price of the common stock, which will dilute the interests of our
stockholders. We expect that the underwriters' warrants will be exercised when
we would, in all likelihood, be able to obtain any capital needed on terms
more
favorable than those provided by the underwriters' warrants. Any profit realized
by the representative on the sale of the underwriters' warrants or the
underlying shares of common stock may be deemed additional underwriting
compensation.
Our
underwriters may enter into selected dealers agreements with certain NASD
licensed brokers to participate in the public offering providing concessions
from the compensation payable to the underwriters. Participating broker-dealers,
other than our underwriters, will receive (and underwriter’s compensation will
accordingly be reduced) 6% of gross sales plus underwriter warrants in an amount
equal to 6% of the shares issued from investors identified by the participating
broker-dealer, under the public offering.
Under
our
agreement with our underwriters, we may terminate the public offering at any
time, for any reason, after the declared effective date of this Registration
Statement.
In
compliance with NASD rules, neither the warrants granted to our underwriters
or
any participating broker-dealer 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 the public
offering. The warrants and shares issuable upon their exercise may be
transferred to any NASD member participating in the public 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.
Notwithstanding NASD rules, pursuant to Section III.C.7. CR-EQUITY policy,
such
underwriter warrants are not transferable for the life of the warrant (five
years) and no such transfer in violation of Section III.C.7. shall
occur.
US
EURO
and Brookstreet are general securities broker/ dealers registered with the
SEC
and are NASD members. We may deem compensation we pay our underwriters as
underwriting commission. All compensation payable to participating NASD member
broker-dealers may also be deemed underwriter compensation.
We
are
obligated to pay the expenses of the public.
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 monies 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
We
intend
to apply for listing of our common stock on the Nasdaq Capital Market or the
American Stock Exchange following the completion of the public, if we are able
to qualify for such markets, and if not, we anticipate that US EURO Securities,
Inc. will apply for quotation of our common stock on the Over the Counter
Bulletin Board (“OTCBB”). The OTCBB is not a national securities exchange, and
many companies have experienced limited liquidity when traded through this
quotation system. We anticipate that US EURO Securities, Inc. will be one of
the
listed market makers for our application to the Nasdaq Small Cap Market or
the
American Stock Exchange. We will not make any application to have our common
stock listed on any public market until we complete our rescission offer. The
table below demonstrates the listing requirements for the NASDAQ Capital Market
and the OTCBB:
Listing
Requirement
|
|
NASDAQ
Capital Market
|
|
OTCBB
|
|
|
|
|
|
Market
value of publicly held shares
|
|
$5,000,000
|
|
N/A
|
Number
of publicly held shares
|
|
1,000,000
|
|
N/A
|
Number
of public shareholders
|
|
300
|
|
N/A
|
Bid
price of listed securities
|
|
$4.00
|
|
No
minimum
|
Shareholders’
equity
|
|
$5,000,000
|
|
No
minimum
|
Corporate
governance requirements
|
|
Yes
|
|
No
|
Market
makers
|
|
3
|
|
1
|
There
is
no public market for our common stock. Consequently, the offering price for
the
shares was determined by negotiation between us and the underwriters. Among
the
factors considered in determining the initial public offering price were our
record of operations, our current financial condition, our future prospects,
the
markets in which we operate, the economic conditions in and future prospects
for
the industry in which we compete, our management, and currently prevailing
general conditions in the equity securities markets, including current market
valuations of publicly traded companies considered comparable to our company.
The prices at which the shares will sell in the public market after the public
offering may be lower than the initial public offering price. Furthermore,
an
active trading market in our common stock may not develop or continue after
the
public.
In
connection with the offering, the underwriters may purchase and sell shares
of
common stock in the open market, if such a market is established following
the
public. These transactions may include short sales, syndicate covering
transactions and stabilizing transactions. Short sales involve syndicate sales
of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Transactions to close out the covered syndicate short position involve either
purchases of the common stock in the open market after the distribution has
been
completed. The underwriters also may make "naked" short sales of shares. The
underwriters must close out any naked short position by purchasing shares of
common stock in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure
on
the price of the shares in the open market after pricing that could adversely
affect investors who purchase in the offering. Stabilizing transactions consist
of bids for or purchases of shares in the open market while the offering is
in
progress.
The
underwriters also may impose a penalty bid. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when an underwriter
repurchases shares originally sold by that syndicate member in order to cover
syndicate short positions or make stabilizing purchases.
Any
of
these activities may have the effect of preventing or retarding a decline in
the
market price of the common stock. They may also cause the price of the common
stock to be higher than the price that would otherwise exist in the open market
in the absence of these transactions. The underwriters may conduct these
transactions in the open market. If the underwriters commence any of these
transactions, they may discontinue them at any time.
Promotional
Securities Lock-In Agreements
All
of
our directors, executive officers and 5% or-greater stockholders, have signed
a
written lock-in agreement placing restrictions on each such person from selling
any of the shares of our common stock, warrants, options, convertible securities
or rights which may be converted into or exercised to purchase shares of our
common stock, or promotional shares, which they own or possess during the
24-month period following the date of completion of the public (with the
exception of Joseph Grace who has agreed to lock-in 50% of his shares). These
lock-in agreements have been entered by these persons who may be deemed to
be
our promoters in order to satisfy the requirements of certain state securities
laws and regulations in connection with this registration
statement.
Generally,
each such person has agreed not to sell, pledge, hypothecate, assign, grant
any
option for the sale of, or otherwise transfer or dispose of, whether or not
for
consideration, directly or indirectly, any of the promotional shares, and all
certificates representing stock dividends, stock splits, recapitalizations
and
the like that are granted to, or received by, each such person with respect
to
the promotional shares, while such promotional shares are subject to such
agreements. The lock-in agreements provide exceptions for:
· |
transfers
by will, the laws of descent and distribution, operation of law or
by
court order,
|
· |
hypothecations
of a deceased security holder to pay expenses of the deceased security
holder’s estate (provided that the hypothecated security would remain
subject to the lock-in agreement),
and
|
· |
transfers
by gift to family members (provided that the gifted security would
remain
subject to the lock-in agreement).
|
Beginning
one year from the completion or termination of the public, 2.5% of the
promotional shares subject to the lock-in agreements would be released each
quarter on a pro-rata basis among all of the persons such to the lock-in
agreements. All remaining promotional shares would be released from lock-in
agreements on the second anniversary of the completion or termination of the
public. 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. The lock-in agreements would terminate if the purchase price
for all shares sold were returned to the investors.
In
the
event of a dissolution, liquidation, merger, consolidation, reorganization,
sale
of exchange of our assets or securities (including by way of a tender offer)
or
any other transaction or proceeding with a person who is not a promoter, which
results in the distribution of our assets or securities,
· |
the
holders of the promotional shares initially would not share in any
such
distribution until the persons who purchased shares of common stock
in the
public have received an amount equal to the purchase price for their
shares ($4.00) multiplied by the number of shares of common stock
that
they purchased in the public and which they still held at the time
of such
distribution (adjusted for stock splits, stock dividends,
recapitalizations and the like), and thereafter,
and
|
· |
all
holders of our equity securities participate on an equal, per share
basis
multiplied by the number of shares of equity securities that hey
hold at
the time of such distribution (subject to such
adjustments).
|
These
restrictions could be waived by the vote of holders of a majority of our
outstanding common stock, other than the persons subject to these agreements,
and our officers, directors, promoters or their associates of affiliates.
However, the voting rights of the common stock subject to the escrow are not
affected.
In
the
event of a dissolution, liquidation, merger, consolidation, reorganization,
sale
of exchange of our assets or securities (including by way of a tender offer)
or
any other transaction or proceeding with a person who is a promoter, which
results in the distribution of our assets or securities, the shares would remain
subject to the lock-in agreements.
Holders
of the securities subject to the lock-in agreements will generally have the
same
voting rights as similar equity securities not subject to such
agreements.
These
lock-in agreements are in addition to and supplement the 12-month lock-up
agreements that any of these persons have signed with our
underwriters.
The
promotional shares lock-in agreements relate to the following individuals and
securities owned or possessed by such persons as of the date of this
prospectus:
Security
Holder
|
|
Quantity
|
|
Type
of Security
|
Christopher
J. Reed and Judy Holloway Reed
|
|
3,200,000
|
|
shares
|
Robert
T. Reed, Jr. (1)
|
|
387,500
|
|
shares
and option shares
|
Robert
T. Reed, Sr. (2)
|
|
389,565
|
|
shares
and note shares
|
Peter
Sharma III
|
|
137,539
|
|
warrant
shares
|
Joseph
Grace
|
|
250,000
|
|
shares
|
Eric
Scheffer
|
|
75,500
|
|
shares
and options
|
Mark
Harris
|
|
4,000
|
|
shares
|
Total
|
|
4,444,104
|
|
|
|
|
|
|
|
(1) |
Robert
T. Reed, Jr. also may purchase shares of common stock in connection
with
the rescission offer, and such shares, if purchased by him, would
be
covered by the lock-in agreement.
|
(2) |
Includes
127,065 shares of common stock, which can be converted from principal
and
accrued interest on certain convertible promissory notes at March
31,
2006
|
The
validity of the shares of common stock offered hereby will be passed upon for
us
by Jenkens & Gilchrist, LLP, Los Angeles, California. Certain legal matters
in connection with this rescission offer will be passed upon for the
underwriters by Oswald & Yap, APC, Irvine, California.
Weinberg
& Company, P.A., independent registered public accounting firm, have audited
our consolidated financial statements (and schedule) at December 31, 2005,
and
for each of the two years in the period ended December 31, 2005, as set forth
in
their report. We have included our consolidated financial statements (and
schedule) in the prospectus and elsewhere in the registration statement in
reliance on Weinberg & Company, P.A.’s report, given on their authority as
experts in accounting and auditing.
Additionally,
we are subject to the information and periodic reporting requirements of the
Securities Exchange Act of 1934, and, in accordance therewith, will file
periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available
for
inspection and copying at the public reference room and web site of the SEC
referred to above.
We
have
filed with the SEC a registration statement on Form SB-2 under the Securities
Act with respect to the shares of common stock we are offering to purchase
hereby. This prospectus, which constitutes a part of the registration statement,
does not contain all of the information set forth in the registration statement
or the exhibits and schedules filed therewith. For further information about
us
and the common stock offered hereby, reference is made to the registration
statement and the exhibits and schedules filed therewith. Statements contained
in this prospectus regarding the contents of any contract or any other document
that is filed as an exhibit to the registration statement are not necessarily
complete, and each such statement is qualified in all respects by reference
to
the full text of such contract or other document filed as an exhibit to the
registration statement.
A
copy of
the registration statement and the exhibits and schedules filed therewith may
be
inspected without charge at the public reference room maintained by the SEC,
located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies
of
all or any part of the registration statement may be obtained from such offices
upon the payment of the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330 for further information about the public reference room. We
also
file annual, quarterly and current reports, proxy statements and other
information with the SEC. The SEC also maintains an Internet web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
the
site is www.sec.gov.
We
are
subject to the information and periodic reporting requirements of the Securities
Exchange Act of 1934, and, in accordance therewith, will file periodic reports,
proxy statements and other information with the SEC. Such periodic reports,
proxy statements and other information will be available for inspection and
copying at the public reference room and the SEC’s web site of referred to
above.
This
prospectus includes statistical data obtained from industry publications. These
industry publications generally indicate that the authors of these publications
have obtained information from sources believed to be reliable but do not
guarantee the accuracy and completeness of their information. While we believe
these industry publications to be reliable, we have not independently verified
their data.
|
F-1
|
|
F-2
|
|
F-3
|
|
F-4
|
|
F-5
|
|
F-6
|
|
F-7
|
We
have
audited the accompanying balance sheet of Reed’s, Inc. as of December 31, 2005
and the related statements of operations, changes in stockholders’ equity and
cash flows for the years ended December 31, 2005 and 2004. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based
on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly in all
material respects, the financial position of Reed’s, Inc. as of December 31,
2005 and the results of its operations and its cash flows for the years ended
December 31, 2005 and 2004 in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. However, the Company incurred a loss of
$825,955 and used $42,610 of cash in operating activities during the year
ended
December 31, 2005, and had a working capital deficiency of $1,594,758 as
of
December 31, 2005. These factors, among others, as discussed in Note 1 to
the
financial statements, raise substantial doubt about the Company's ability
to
continue as a going concern. Management's plans in regard to these matters
are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Weinberg
& Company, P.A.
Los
Angeles, California
April
7,
2006
REED’S,
INC.
|
|
March
31, 2006
(Unaudited)
|
|
December
31, 2005
|
|
CURRENT
ASSETS
|
|
Cash
|
|
$
|
195,457
|
|
$
|
27,744
|
|
Inventory
|
|
|
1,420,692
|
|
|
1,208,019
|
|
Trade
accounts receivable, net of allowance for doubtful accounts and
returns
and discounts of $82,000 at March 31, 2006 and $70,000 at December
31,
2005
|
|
|
742,009
|
|
|
534,906
|
|
Receivable
from sale
of common stock |
|
|
48,629
|
|
|
|
|
Other
receivables
|
|
|
9,363
|
|
|
10,563
|
|
Prepaid
expenses
|
|
|
37,976
|
|
|
74,279
|
|
Total
Current Assets
|
|
|
2,454,126
|
|
|
1,855,511
|
|
Property
and equipment, net of accumulated depreciation of $542,867 at March
31,
2006 and $508,136 at December 31, 2005
|
|
|
1,869,893
|
|
|
1,885,354
|
|
OTHER
ASSETS
|
Brand
names
|
|
|
800,201
|
|
|
800,201
|
|
Other
intangibles, net of accumulated amortization of $3,909 at March
31, 2006
and $3,723 at December 31, 2005
|
|
|
14,705
|
|
|
14,891
|
|
Deferred
stock offering costs
|
|
|
|
|
|
356,238
|
|
Total
Other Assets
|
|
|
814,906
|
|
|
1,171,330
|
|
TOTAL
ASSETS
|
|
$
|
5.138,925
|
|
$
|
4,912,195
|
|
LIABILITIES
AND STOCKHOLDER’S EQUITY
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,843,631
|
|
$
|
1,644,491
|
|
Lines
of credit
|
|
|
1,539,946
|
|
|
1,445,953
|
|
Current
portion of long term debt
|
|
|
168,877
|
|
|
169,381
|
|
Accrued
interest
|
|
|
142,648
|
|
|
136,240
|
|
Accrued
expenses
|
|
|
74,180
|
|
|
54,204
|
|
Total
Current Liabilities
|
|
|
3,769,282
|
|
|
3,450,269
|
|
Notes
payable, related party
|
|
|
252,358
|
|
|
252,358
|
|
Long
term debt, less current portion
|
|
|
1,032,374
|
|
|
1,060,573
|
|
Total
Liabilities
|
|
|
5,054,014
|
|
|
4,763,200
|
|
COMMITMENTS
AND CONTINGENCIES
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stock, $10.00 par value, 500,000 shares authorized, 58,940 shares
issued
and outstanding
|
|
|
589,402
|
|
|
589,402
|
|
Common
stock, $.0001 par value, 11,500,000 shares authorized, 5,281,247
and 5,042,197 shares issued and outstanding at March 31, 2006 and
December 31, 2005, respectively
|
|
|
528
|
|
|
503
|
|
Common
stock to be issued (7,362 shares)
|
|
|
29,470
|
|
|
29,470
|
|
Additional
paid in capital
|
|
|
3,094,171
|
|
|
2,788,683
|
|
Accumulated
deficit
|
|
|
(3,628,660
|
)
|
|
(3,259,063
|
) |
Total
stockholders’ equity
|
|
|
84,911
|
|
|
148,995
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
5,138,925
|
|
$
|
4,912,195
|
|
The
accompanying notes are an integral part of these financial statements
REED’S,
INC.
|
|
Three
Months Ended
March 31,
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
2005
|
|
2004
|
|
|
SALES
|
|
$
|
1,979,272
|
|
$
|
1,817,336
|
|
$
|
9,470,285
|
|
$
|
8,978,365
|
|
COST
OF SALES
|
|
|
1,688,876
|
|
|
1,486,287
|
|
|
7,745,499
|
|
|
7,103,037
|
|
GROSS
PROFIT
|
|
|
290,396
|
|
|
331,049
|
|
|
1,724,786
|
|
|
1,875,328
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
|
|
|
287,158
|
|
|
287,145
|
|
|
1,124,705
|
|
|
791,975
|
|
General &
Administrative
|
|
|
262,660
|
|
|
211,954
|
|
|
955,764
|
|
|
1,074,536
|
|
Provision
for amounts due from director
|
|
|
|
|
|
|
|
|
124,210
|
|
|
|
|
Legal
Fees
|
|
|
9,568
|
|
|
2,126
|
|
|
36,558
|
|
|
80,156
|
|
|
|
|
559,386
|
|
|
501,225
|
|
|
2,241,237
|
|
|
1,946,667
|
|
LOSS FROM
OPERATIONS
|
|
|
(268,990
|
)
|
|
(170,176
|
) |
|
(516,451
|
)
|
|
(71,339
|
)
|
OTHER
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Expense
|
|
|
(100,607
|
)
|
|
(71,210
|
)
|
|
(309,504
|
)
|
|
(255,032
|
)
|
Loss
on extinguishment of debt
|
|
|
|
|
|
—
|
|
|
|
|
|
(153,000
|
|
NET
LOSS
|
|
|
(369,597
|
)
|
|
(241,386
|
)
|
|
(825,955
|
)
|
|
(479,371
|
)
|
Preferred
stock dividend
|
|
|
|
|
|
|
|
|
(29,470
|
)
|
|
|
|
Net
Loss Attributable to Common Stockholders
|
|
|
(369,597
|
)
|
|
(241,386
|
)
|
|
(855,425
|
)
|
|
(479,371
|
)
|
LOSS
PER SHARE Available to common stockholders —
Basic
and Fully Diluted
|
|
|
(.07
|
)
|
|
(0.05
|
)
|
|
(0.18
|
)
|
|
(.10
|
)
|
WEIGHTED
AVERAGE SHARES OUTSTANDING,
Basic
and Fully Diluted
|
|
|
5,157,077
|
|
|
4,726,091
|
|
|
4,885,151
|
|
|
4,726,091
|
|
The
accompanying notes are an integral part of these financial statements
REED’S,
INC.
For
the Years Ended December 31, 2005
and
2004,
and
the Three Months Ended March 31, 2006 (Unaudited)
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Common
Stock to be Issued
|
|
|
Additional
Paid
In
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Accumulated
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2004
|
|
|
4,726,091
|
|
|
472
|
|
|
—
|
|
|
2,429,824
|
|
|
—
|
|
|
—
|
|
|
(1,723,627
|
)
|
$
|
706,669
|
|
Issuance
of preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,440
|
|
|
334,400
|
|
|
—
|
|
|
334,400
|
|
Conversion
of debt to preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,500
|
|
|
255,002
|
|
|
|
|
|
255,002
|
|
Recognition
of beneficial conversion feature on issuance of preferred stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
353,640
|
|
|
—
|
|
|
—
|
|
|
(200,640
|
)
|
|
153,000
|
|
Net
loss for year ended 2004
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(479,371
|
)
|
|
(479,371
|
)
|
Balance,
December 31, 2004
|
|
|
4,726,091
|
|
|
472
|
|
|
—
|
|
|
2,783,464
|
|
|
58,940
|
|
|
589,402
|
|
|
(2,403,638
|
)
|
|
969,700
|
|
Exercise
of warrants
|
|
|
262,500
|
|
|
26
|
|
|
|
|
|
5,224
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,250
|
|
Preferred
Stock Dividend
|
|
|
—
|
|
|
—
|
|
|
29,470
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
53,606
|
|
|
5
|
|
|
|
|
|
196,570
|
|
|
|
|
|
|
|
|
|
|
|
196,575
|
|
Deferred
stock offering costs charged to additional paid in capital
|
|
|
|
|
|
|
|
|
|
|
|
(196,575
|
)
|
|
|
|
|
|
|
|
|
|
|
(196,575
|
)
|
Net
loss for year ended December 31, 2005
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(825,955
|
)
|
|
(825,955
|
)
|
Balance
December 31, 2005
|
|
|
5,042,197
|
|
|
503
|
|
|
29,470
|
|
|
2,788,683
|
|
|
58,940
|
|
|
589,402
|
|
|
(3,259,063
|
)
|
|
148,995
|
|
Common
stock issued for cash and receivable from common stock
|
|
|
239,050
|
|
|
25
|
|
|
|
|
|
860,559
|
|
|
|
|
|
|
|
|
|
|
|
860,584
|
|
Deferred
stock offering costs charged to additional paid in capital
|
|
|
|
|
|
|
|
|
|
|
|
(555,071
|
)
|
|
|
|
|
|
|
|
|
|
|
(555,071
|
|
Net
loss for the three months ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(369,597
|
)
|
|
(369,597
|
)
|
Balance
March 31, 2006 (Unaudited)
|
|
|
5,281,247
|
|
|
528
|
|
|
29,470
|
|
|
3,094,171
|
|
|
58,940
|
|
|
589,402
|
|
|
(3,628,660
|
)
|
|
84,911
|
|
The
accompanying notes are an integral part of these financial statements
REED’S,
INC.
|
|
For
The Three Months Ended
March
31,
|
|
For
The Year Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
CASH
FLOWS
FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(369,597
|
)
|
$
|
(241,386
|
)
|
$
|
(825,955
|
)
|
$
|
(479,371
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
34,918
|
|
|
21,429
|
|
|
118,517
|
|
|
97,329
|
|
Provision
for amounts due from director
|
|
|
|
|
|
—
|
|
|
124,210
|
|
|
|
|
Loss
on extinguishment of debt
|
|
|
|
|
|
—
|
|
|
|
|
|
153,000
|
|
(Increase)
decrease in operating assets and increase (decrease) in operating
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(207,103
|
)
|
|
141,480
|
|
|
262,708
|
|
|
(231,557
|
)
|
Inventory
|
|
|
(212,673
|
)
|
|
6,584
|
|
|
93,006
|
|
|
(3,665
|
)
|
Prepaid
expenses
|
|
|
36,303
|
|
|
(41,267
|
)
|
|
(68,627
|
)
|
|
11,730
|
|
Other
receivables
|
|
|
1,200
|
|
|
(2,209
|
)
|
|
(7,400
|
)
|
|
7,589
|
|
Accounts
payable
|
|
|
199,140
|
|
|
197,752
|
|
|
232,367
|
|
|
233,447
|
|
Accrued
expenses
|
|
|
19,976
|
|
|
47,587
|
|
|
2,655
|
|
|
(9,755
|
)
|
Accrued
interest
|
|
|
6,408
|
|
|
5,495
|
|
|
25,909
|
|
|
45,233
|
|
Net
cash (used in) provided by operating activities
|
|
|
(491,428
|
)
|
|
135,465
|
|
|
(42,610
|
)
|
|
(176,020
|
)
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(19,271
|
)
|
|
(24,188
|
)
|
|
(181,654
|
)
|
|
(204,147
|
)
|
Due
from director
|
|
|
|
|
|
(12,813
|
)
|
|
(33,013
|
)
|
|
(44,040
|
)
|
Net
cash used in investing activities
|
|
|
(19,271
|
)
|
|
(37,001
|
)
|
|
(214,667
|
)
|
|
(248,187
|
)
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for deferred offering costs
|
|
|
(198,833
|
)
|
|
(63,062
|
)
|
|
(332,858
|
)
|
|
(219,955
|
)
|
Principal
payments on debt
|
|
|
(28,703
|
)
|
|
(44,536
|
)
|
|
(263,815
|
)
|
|
(208,852
|
)
|
Proceeds
from issuance of common stock
|
|
|
811,955
|
|
|
—
|
|
|
196,575
|
|
|
|
|
Proceeds
received from issuance of preferred stock
|
|
|
|
|
|
—
|
|
|
|
|
|
334,400
|
|
Proceeds
from borrowings
|
|
|
|
|
|
—
|
|
|
295,900
|
|
|
208,464
|
|
Net
borrowings (payments) on lines of credit
|
|
|
93,993
|
|
|
(194
|
)
|
|
367,731
|
|
|
339,708
|
|
Proceeds
on debt to related parties
|
|
|
|
|
|
—
|
|
|
(21,000
|
)
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
678,412
|
|
|
(107,792
|
)
|
|
242,533
|
|
|
453,765
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
167,713
|
|
|
(9,328
|
)
|
|
(14,744
|
)
|
|
29,558
|
|
CASH —
Beginning of year
|
|
|
27,744
|
|
|
42,488
|
|
|
42,488
|
|
|
12,930
|
|
CASH —
End of year
|
|
$
|
195,457
|
|
$
|
33,160
|
|
$
|
27,744
|
|
$
|
42,488
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
94,199
|
|
$
|
66,314
|
|
$
|
283,595
|
|
$
|
227,669
|
|
Taxes
|
|
$
|
|
|
$
|
—
|
|
$
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non
cash Investing and Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable converted to preferred stock
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
224,000
|
|
Accrued
interest converted to preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
31,002
|
|
Beneficial
conversion feauture
|
|
|
|
|
|
|
|
|
|
|
|
353,640
|
|
Common
stock issued in settlement of accrued interest on related party
debt upon
exercise of warrants
|
|
|
|
|
|
|
|
|
5,250
|
|
|
|
|
Common
stock to be issued in settlement of preferred stock dividend (7,362
shares)
|
|
|
|
|
|
|
|
|
29,740
|
|
|
|
|
Conversion
of a line of credit to term loan
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
The
accompanying notes are an integral part of these financial statements.
REED’S,
INC.
(1)
Operations
and Summary of Significant Accounting Policies
A)
Nature
of Operations
Reed’s,
Inc. (the “Company”) was organized under the laws of the state of Florida in
January 1991. In 2001, the Company changed its name from Original Beverage
Corporation to Reed’s, Inc. and changed its state of incorporation from Florida
to Delaware. The Company is engaged primarily in the business of developing,
manufacturing and marketing natural non-alcoholic beverages, as well as candies
and ice creams. The Company currently offers 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.
B)
Going Concern
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America,
which
contemplate continuation of the Company as a going concern. However, the
Company
had a net loss of $825,955 and utilized cash of $42,610 in operating activities
during the year ended December 31, 2005, and had a working capital deficiency
of
$1,564,758 at December 31, 2005. In addition, from
August 3, 2005 through April 17, 2006, the Company issued 333,156 shares
of its
common stock in connection with its initial public offering pursuant to a
Registration Statement on Form SB-2. The shares issued in connection with
its
initial public offering may have been issued in violation of either federal
or
state securities laws, or both, and may be subject to rescission. In order
to
address this issue, the Company will make a rescission offer to the holders
of
these shares. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might result
from this uncertainty. The Company plans to continue its initial public
offering after it concludes its rescission offer.
C)
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D)
Accounts
Receivable
The
Company evaluates the collectibility of its trade accounts receivable based
on a
number of factors. In circumstances where the Company becomes aware of a
specific customer’s inability to meet its financial obligations to the Company,
a specific reserve for bad debts is estimated and recorded, which reduces
the
recognized receivable to the estimated amount the Company believes will
ultimately be collected. In addition to specific customer identification
of
potential bad debts, bad debt charges are recorded based on the Company’s
historical losses and an overall assessment of past due trade accounts
receivable outstanding.
The
allowance for doubtful accounts and returns and discounts is established
through
a provision for returns and discounts charged against sales. Receivables
are
charged off against the allowance when payments are received or products
returned. The allowance for doubtful accounts and returns and discounts as
of
December 31, 2005 was $70,000 and was $82,000 (Unaudited) at March 31,
2006.
E)
Property
and Equipment and Related Depreciation
Property
and equipment is stated at cost. Depreciation is calculated using accelerated
and straight-line methods over the estimated useful lives of the assets as
follows:
Property
and Equipment Type
|
|
Years
of Depreciation
|
|
|
|
Building
|
|
|
39
years
|
Machinery
and equipment
|
|
|
7-12
years
|
Computer
|
|
|
3-5
years
|
Automobile
|
|
|
5
years
|
Office
equipment
|
|
|
7
years
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Management
regularly reviews property, equipment and other long-lived assets for possible
impairment. This review occurs quarterly, or more frequently if events or
changes in circumstances indicate the carrying amount of the asset may not
be
recoverable. If there is indication of impairment, management prepares an
estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition.
If
these cash flows are less than the carrying amount of the asset, an impairment
loss is recognized to write down the asset to its estimated fair value.
Management believes that the accounting estimate related to impairment of
its
property and equipment is a “critical accounting estimate” because: (1) it
is highly susceptible to change from period to period because it requires
management to estimate fair value, which is based on assumptions about cash
flows and discount rates; and (2) the impact that recognizing an impairment
would have on the assets reported on our balance sheet, as well as net income,
could be material. Management’s assumptions about cash flows and discount rates
require significant judgment because actual revenues and expenses have
fluctuated in the past and are expected to continue to do so.
F)
Intangible
Assets
The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible
Assets.” Goodwill and other intangible assets deemed to have indefinite lives
are not subject to annual amortization. The Company reviews, at least quarterly,
its investment in brand names and other intangible assets for impairment
and if
impairment is deemed to have occurred the impairment is charged to expense.
Intangible assets which have finite lives are amortized on a straight line
basis
over their remaining useful life; they are also subject to annual impairment
reviews. See Note 4.
Management
applies the impairment tests contained in SFAS number 142 to determine if
an
impairment has occurred. Accordingly, management compares the carrying value
of
the asset to its fair value in determining the amount of the impairment.
No
impairments were identified for the years ended December 31, 2005 and 2004
or for the three months ended March 31, 2006 and 2005 (Unaudited).
Management
believes that the accounting estimate related to impairment of its intangible
assets, is a “critical accounting estimate” because: (1) it is highly
susceptible to change from period to period because it requires management
to
estimate fair value, which is based on assumptions about cash flows and discount
rates; and (2) the impact that recognizing an impairment would have on the
assets reported on our balance sheet, as well as net income, could be material.
Management’s assumptions about cash flows and discount rates require significant
judgment because actual revenues and expenses have fluctuated in the past
and
are expected to continue to do so.
G)
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $100,000. The Company may be exposed
to risk
for the amounts of funds held in 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, 2005 and the three
months ended March 31, 2006 (Unaudited).
During
the years ended December 31, 2005 and 2004 the Company’s had two customers,
which accounted for approximately 39% and 15% and 39% and 14% of sales,
respectively. During the three months ended March 31, 2006 and 2005 (Unaudited),
those two customers accounted for approximately 45% and 18.7% and 40% and 15.7%,
respectively. No other customer accounted for more than 10% of sales in either
year. As of December 31, 2005, the Company had approximately $181,580 and
$38,000, respectively, of accounts receivable due from these customers. As
of March 31, 2006 , the Company had approximately $375,600 (Unaudited) and
$38,000 (unaudited) of accounts receivable from those customers.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
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.
H)
Fair
Value of Financial Instruments
The
carrying amount of the Company’s financial instruments including cash, accounts
and other receivables, accounts payable, accrued interest and accrued expenses
approximate their fair value as of December 31, 2005 and March 31,
2006 (Unaudited) due to their short maturities. The carrying amount of lines
of
credit, loans payable, related party and long term debt approximate fair
value because the related effective interest rates on these instruments
approximate the rates currently available to the Company.
I)
Cost
of sales
The
Company, with one exception, classifies shipping and handling costs of the
sale
of its products as a component of cost of sales. The one exception regards
shipping and handling costs associated with local sales and local distribution.
Since these activities are integrated, those costs are combined and are included
as selling expenses in the year ended 2005 and general and administrative
expenses in the year ended 2004. For the years ended December 31, 2005 and
2004
those costs were approximately $88,000 and $63,000, respectively. For the
three
months ended March 31, 2006 and 2005 those costs approximated $36,000
(Unaudited) and $19,000 (Unaudited), respectively.
In
addition, the Company classifies purchasing and receiving costs, inspection
costs, warehousing costs, freight costs, internal transfer costs and other
costs
associated with product distribution as costs of sales. Certain of these
costs
become a component of the inventory cost and are expensed to costs of sales
when
the product to which the cost has been allocated is sold.
Expenses
not related to the production of our products are classified as operating
expenses.
J)
Income
Taxes
Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for
the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. The Company considers future taxable
income and ongoing, prudent and feasible tax planning strategies, in assessing
the value of its deferred tax assets. If the Company determines that it is
more
likely than not that these assets will not be realized, the Company will
reduce
the value of these assets to their expected realizable value, thereby decreasing
net income. Evaluating the value of these assets is necessarily based on
the
Company’s judgment. If the Company subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the
value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
K)
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. These costs include attorney’s fees,
accountant’s fees, SEC filing fees, state filing fees, and other specific
incremental costs directly related to the initial public offering and related
issuance of common stock. At December 31, 2005, deferred offering costs were
$356,238. At March 31, 2006, there were no remaining deferred offering costs
(Unaudited). The offering associated with these costs is continuing. As proceeds
are received from the offering the deferred offering costs are charged to
additional paid in capital. During the year ended December 31, 2005, $196,575
of
deferred offering costs where charged to additional paid in capital. No such
charge was made to additional paid in capital during 2004, as the offering
had
not commenced until 2005. During the three months ended March 31, 2006 and
2005 $555,071 (Unaudited) and $-0- (Unaudited) of deferred offering costs
were
charged to additional paid in capital.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
L)
Stock
Options
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 issued to employees 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.
For
the
year ended December 31, 2005, 218,500 options were issued that immediately
vested. The pro forma disclosure related to the issuance and vesting of
these options is as follows:
Net
loss as reported
|
|
$
|
(825,955
|
)
|
Stock
based compensation
|
|
|
(530,955
|
)
|
|
|
|
|
|
Pro
forma loss
|
|
$
|
(1,356,910
|
)
|
|
|
|
|
|
Primary
and fully diluted loss per share, as reported
|
|
$
|
(0.18
|
)
|
Proforma
fully and diluted loss per share
|
|
$
|
(0.28
|
)
|
No
options were granted during 2004, or for the three months ended March 31,
2006
and 2005, (Unaudited) therefore, pro forma disclosure of the fair value method
is not applicable and is not presented. The assumptions used in calculating
the
fair value of the options granted during 2005, using the Black-Scholes option
pricing model, were: risk free interest rate, 4.05%, expected life, 5 years,
expected volatility, 70%,and no expected dividends.
M)
Revenue
Recognition
Revenue
is recognized on the sale of a product when the product is shipped, which
is
when the risk of loss transfers to our customers, and collection of the
receivable is reasonably assured. A Product is not shipped without an order
from
the customer and credit acceptance procedures performed. The allowance for
returns is regularly reviewed and adjusted by management based on historical
trends of returned items. Amounts paid by customers for shipping and handling
costs are included in sales.
N) Net
Loss Per Share
Loss
per
share calculations are made in accordance with SFAS No. 128, “Earnings
Per Share.” Basic loss per share is calculated by dividing net loss by weighted
average number of common shares outstanding for the year. Diluted loss per
share
is computed by dividing net loss by the weighted average number of common
shares
outstanding plus the dilutive effect of outstanding common stock warrants
and
convertible debentures.
For
the
years ended December 31, 2005 and 2004 and for the three months ended March
31, 2006 and 2005 the calculations of basic and diluted loss per share are
the
same because potential dilutive securities would have an anti-dilutive
effect.
The
potentially dilutive securities consisted of the following as of
December 31, 2005 and March 31, 2006 (Unaudited):
|
December
31,
2005
|
|
March
31, 2006
(Unaudited)
|
|
Warrants
|
613,241
|
|
613,241
|
Convertible
notes
|
133,954
|
|
136,158
|
Preferred
Stock
|
235,760
|
|
235,760
|
Options
|
291,000
|
|
291,000
|
|
|
|
|
Total
|
1,273,955
|
|
1,276,159
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
O)
Advertising
Costs
The
Company accounts for advertising production costs by expensing such production
costs the first time the related advertising is run.
Advertising
costs are expensed as incurred and are included in selling expense in the
amount
of $90,176 and $42,828 for the years ended December 31, 2005 and 2004,
respectively. Advertising costs for the three months ended March 31, 2006
and
2005 were $22,339 (Unaudited) and $14,533 (Unaudited),
respectively.
The
Company accounts for certain sales incentives, including slotting fees, as
a
reduction of gross sales, in accordance with Emerging Issues Task Force on
Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer or
Reseller of the Vendor’s Products.” These sales incentives for the years ended
December 31, 2005 and 2004 approximated $292,000 and $400,000, respectively.
The
sales incentives for the three months ended March 31, 2006 and 2005 approximated
$139,000 (Unaudited) and $92,000 (Unaudited), respectively.
P)
Reporting
Segment of the Company
Statement
of Financial Accounting Standards No. 131, “Disclosures about Segments of an
Enterprise and Related Information” (SFAS No. 131) requires certain disclosures
of operating segments, as defined in SFAS No. 131. Management has determined
that the Company has only one operating segment and therefore is not required
to
disclose operating segment information. The Company does not account for
the net
sales of its various products separately, and the disclosure required by
SFAS
No. 131 of product revenue is not presented because it would be impracticable
to
do so.
Q)
Comprehensive
Income
A
statement of comprehensive income is not presented in our financial statements
since we did not have any of the items of other comprehensive income in any
period presented.
R)
Recent
Accounting Pronouncements
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of
ARB No. 43, Chapter 4.” The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. The Company has evaluated the impact of
the
adoption of SFAS 151, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
shall be applied prospectively. The Company has evaluated the impact of the
adoption of SFAS 153, and does not believe the impact will be significant
to the
Company's overall results of operations or financial position.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment.” Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
“Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Statement 123, as originally issued
in 1995, established as preferable a fair-value-based method of accounting
for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that
begins
after June 15, 2005 and small business issuers will be required to adopt
for
reporting periods beginning after December 15, 2005. The Company has evaluated
the impact of the adoption of SFAS 123(R), and does not believe the impact
will
be significant to the Company's overall results of operations or financial
position. All options issued prior to December 31, 2005 vested immediately,
and
therefore, there is no associated unamortized compensation that will be recorded
in future periods relating to these options.
In
May
2005 the FASB issued SFAS Number 154, “Accounting Changes and Error
Corrections.” This SFAS provides guidance on accounting for and reporting of
accounting changes and error corrections. The Company has evaluated the impact
of SFAS 154 and does not believe the impact will be significant to the Company’s
overall results of operations or financial position.
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.
(The
rest of this page left blank intentionally)
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(2)
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or market, and is comprised
of the following as of December 31, 2005 and March 31, 2006
(Unaudited):
|
|
December
31, 2005
|
|
March
31, 2006 (unaudited)
|
Raw
Materials
|
|
$
|
678,343
|
|
$
|
845,326
|
Finished
Goods
|
|
|
529,676
|
|
|
575,366
|
|
|
$
|
1,208,019
|
|
$
|
1,420,692
|
(3)
Fixed
Assets
Fixed
assets are comprised of the following as of December 31, 2005 and March 31,
2006 (Unaudited):
|
|
December
31, 2005
|
|
March
31, 2006 (unaudited)
|
|
Land
|
|
$
|
409,546
|
|
$
|
409,546
|
|
Building
|
|
|
915,932
|
|
|
916,738
|
|
Vehicles
|
|
|
223,867
|
|
|
223,867
|
|
Machinery
and equipment
|
|
|
734,886
|
|
|
746,485
|
|
Office
equipment
|
|
|
109,259
|
|
|
116,124
|
|
|
|
|
2,393,490
|
|
|
2,412,760
|
|
Accumulated
depreciation
|
|
|
(508,136
|
)
|
|
(542,867
|
)
|
|
|
$
|
1,885,354
|
|
$
|
1,869,893
|
|
Depreciation
expense for the years ended December 31, 2005 and 2004 was $117,773 and
$96,585, respectively. Depreciation expense for the three months ended March
31,
2006 and 2005 was, $34,731(unaudited) and $21,451 (unaudited),
respectively.
(4)
Intangible
Assets
Brand
Names
Brand
Names consist of two (2) trademarks for natural beverages which the Company
acquired in previous years. As long as the Company continues to renew its
trademarks, these intangible assets will have an indefinite life. Accordingly,
they are not subject to amortization. The Company determines fair value for
Brand Names by reviewing the net sales of the associated beverage and applying
industry multiples for which similar beverages are sold. As of March 31,
2006
(Unaudited) and December 31, 2005, carrying amounts for Brand Names were
$800,201.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Other
Intangible Assets
Other
Intangible Assets as of December 31 ,2005 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Current
Year
Amortization
|
|
|
Useful
Life
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
3,723
|
|
$
|
745
|
|
|
300
months
|
Other
Intangible Assets as of March 31 ,2006 (Unuadited) consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
|
Gross
Amount
|
|
|
Accumulated
Amortization
|
|
|
Current
Period
Amortization
|
|
|
Useful
Life
|
Building
Loan Fees
|
|
$
|
18,614
|
|
$
|
3,909
|
|
$
|
186
|
|
|
300
months
|
The
estimated aggregate amortization as of December 31, 2005 for each of the
next five years is:
Year
|
|
|
Amount
|
2006
|
|
$
|
745
|
2007
|
|
|
745
|
2008
|
|
|
745
|
2009
|
|
|
745
|
2010
|
|
|
745
|
(5)
Lines
of Credit
The
Company had outstanding borrowings of $1,539,946 (Unaudited) and $1,445,953
and
as of March 31, 2006 and December 31, 2005, 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 prime rate, as published in the Wall Street Journal, plus
12% per
annum. The Company’s outstanding balance was $26,646 (Unaudited) and $27,321 at
March 31, 2006 and December 31, 2005, repectively. The interest rate in
effect at December 31, 2005 was 19.25%. The line of credit expires in
December 2009.
The
Company has a line of credit in the amount of $642,209 (Unaudited) and $482,264
at March 31, 2006 and December 31, 2005 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 personal stock account
on
deposit with Merrill Lynch as collateral. The line of credit bears interest
at a
rate of rate of 3.785% per annum plus LIBOR (8.255% as of December 31, 2005).
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 as a loan fee. During the years ended
December 31, 2005 and 2004, the Company paid Mr. Reed $15,250 and $3,125,
respectively, under this agreement. During the three months ended
March 31, 2006 and 2005 the interest paid to Mr. Reed was $ 5,875(Unaudited)
and
$3,125 (Unaudited), respectively.
The
Company has a line of credit with a finance company. This line of credit
allows
the Company to borrow a maximum amount of $1,910,000, based on a borrowing
base
of accounts receivables and inventory. The borrowing base on the accounts
receivable is 80% of all eligible receivables, which are primarily accounts
receivables under 90 days. The inventory borrowing base is 50% of eligible
inventory. As of March 31, 2006 and December 31, 2005, the amounts borrowed
on
this line of credit were $871,091(Unaudited) and $ 936,368, respectively.
The
interest rate on this line of credit is Prime plus 2.75%, making the interest
rate at December 31, 2005 10%. The line of credit expires in June 2006 and
is
guaranteed by Chris and Judy Reed, the principal stockholders of the Company.
This revolving line of credit is secured by all Company assets, including
accounts receivable, inventory, trademarks and other intellectual property,
building and equipment. As of December 31, 2005, the Company had approximately
$10,000 of availability on this line of credit. At March 31, 2006 the Company
had approximately $257,000 (Unaudited) of availability.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(6)
Notes
Payable to Related Parties
The
Company has three unsecured loans payable to Robert T. Reed, Sr., the
father of the Company’s founder Christopher J. Reed, in an amount of $252,358 as
of March 31, 2006 (Unaudited) and December 31, 2005.
The
first
loan bears interest at 10% per annum and matures in October 2007. The
outstanding principal balance of the loan as of March 31, 2006 (Unaudited)
and
December 31, 2005 was $24,648.
The
second loan bears interest at 8% per annum and matures in October 2007. The
outstanding principal balance of this loan as of March 31, 2006 (Unaudited)
and
December 31, 2005 was $177,710. As long as the debt is outstanding,
Mr. Reed has the right to convert this loan and accrued interest 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 December 31, 2005, the loan was convertible
into 125,313 shares of common stock. As of March 31, 2006 the loan was
convertible into 127,065 shares (Unaudited) of common stock.
The
third
loan bears interest at 8% per annum and matures in October 2007. The
outstanding principal balance of this loan as of March 31, 2006 (Unaudited)
and
December 31, 2005 was $50,000.
(7)
Long-term
Debt
Long-term
debt consists of the following:
|
|
December
31, 2005
|
|
March
31 2006
(Unaudited)
|
Note
payable to SBA in the original amount of $748,000 with interest
at the
Wall Street Journal prime rate plus 1% per annum, adjusted monthly
with no
cap or floor. The combined monthly principal and interest payments
are $5,851, subject to annual adjustments. The interest rate in
effect at
December 31, 2005 was 8%. The note is secured by land and building
and guaranteed by the majority stockholder. The note matures November
2025.
|
|
$674,582
|
|
$670,942
|
|
|
|
|
|
|
Notes
payable, unsecured, with interest at 10% per annum. Principal and
accrued interest are payable in full at the end of the note term.
Theses
notes were issued with warrants, exercisable at issuance. The warrants
have an exercise price of $3 and a term of 5 years. Principal and any
unpaid interest are due in June 2006.
|
|
50,000
|
|
50,000
|
|
|
|
|
|
|
Building
improvement loan with a maximum draw of $168,000. The interest
rate is at
the Wall Street Journal prime rate plus 1%, adjusted monthly with
no cap
or floor. The combined monthly principal and interest payments
are $1,186;
subject to annual adjustments. The rate in effect at December 31,
2005 was 8% per annum. The note is secured by land and building
and
guaranteed by the majority stockholder and matures
November 2025.
|
|
142,119
|
|
141,346
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
Notes
payable, 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
|
|
|
|
|
|
|
Note
payable to a bank, unsecured, interest rate is prime plus 3.25%.
The
interest rate in effect December 31, 2005 was10.5%. The note matures
in
December 2009.
|
|
|
50,000
|
|
46,563
|
|
|
|
|
|
|
Notes
payable to GMAC, secured by automobiles, payable in monthly installments
of $758 including interest at 0.0%, with maturity in 2008.
|
|
|
18,204
|
|
15,931
|
|
|
|
|
|
|
Notes
payable to Chrysler Financial Corp., secured by automobiles, payable
in
monthly installments of $658, including interest at 1.9% per annum,
with
maturity in 2008.
|
|
|
21,151
|
|
19,272
|
|
|
|
|
|
|
Equipment
line of credit up to a maximum of $150,000, secured by certain
plant
equipment. Payable in ratable monthly installments of principal and
applicable interest. This loan bears interest at prime plus 2.75% per
annum. The interest rate in effect at December 31, 2005 was 10.00%.
This
loan matures in May 2009.
|
|
|
93,900
|
|
86,700
|
|
|
|
|
|
|
Installment
loan secured by certain plant equipment. Payable in monthly installments
of $3,167 plus interest. This loan bears interest at prime plus
2.75% per
annum. The interest rate in effect at December 31, 2005 was 10.00%.
This
loan matures in June 2010.
|
|
|
170,998
|
|
161,497
|
|
|
|
|
|
|
Total
|
|
|
1,229,954
|
|
1,201,251
|
|
|
|
|
|
|
Less
current portion
|
|
|
169,381
|
|
168,877
|
|
|
|
$1,060,573
|
|
$1,032,374
|
The
aggregate maturities of long-term debt for each of the next five years and
thereafter are as follows as of December 31, 2005:
|
|
|
2006
|
|
$
|
169,381
|
2007
|
|
|
111,321
|
2008
|
|
|
102,654
|
2009
|
|
|
87,348
|
2010
|
|
|
38,090
|
Thereafter
|
|
|
721,160
|
Total
|
|
$
|
1,229,954
|
(8)
Stockholders’
Equity
Common
stock consists of $.0001 par value, 11,500,000 shares authorized,
5,281,247 (Unaudited) and 5,042,197 shares issued and outstanding as of
March 31, 2006 and December 31, 2005, respectively.
Preferred
stock consists of 500,000 shares authorized to Series A, $10.00 par
value, 5% non-cumulative, participating, preferred stock. As of March 31,
2005
(Unaudited) and December 31, 2005 there were 58,940 shares issued and
outstanding, with a liquidation preference of $10.00.
These
preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend
can be paid in cash or, in the sole and absolute discretion of our board
of
directors, in shares of common stock based on its then fair market value.
We
cannot declare or pay any dividend on shares of our securities ranking junior
to
the preferred stock until the holders of our preferred stock have received
the
full non-cumulative dividend to which they are entitled. In addition, the
holders of our preferred stock are entitled to receive pro rata distributions
of
dividends on an “as converted” basis with the holders of our common
stock.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
In
the
event of any liquidation, dissolution or winding up of the Company, or if
there
is a change of control event, then, subject to the rights of the holders
of our
more senior securities, if any, the holders of our Series A preferred stock
are
entitled to receive, prior to the holders of any of our junior securities,
$10.00 per share plus all accrued and unpaid dividends. Thereafter, all
remaining assets shall be distributed pro rata among all of our security
holders.
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 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.
During
2004, the Company sold its preferred stock in a private placement. 33,440
shares
were issued in connection with this offering and $334,400 of proceeds were
received. The Company recorded a beneficial conversion feature (BCF) in
accordance with Emerging Issues Task Force (EITF) 98-5. The BCF arises from
the
conversion price of the preferred stock being less than the fair market value
of
the common stock at the commitment date of the offering. The fair market
value
of the stock has been determined to be $4.00 per share, based on the initial
public offering price which is expected to be $4.00. The excess of the fair
market price of the underlying common stock over the conversion price is
$1.50.
Since the conversion feature of this offering allows for the conversion of
preferred stock into 4 shares of common stock for each share of preferred
stock,
133,760 shares of common stock could be issued if fully converted. Accordingly,
the BCF recorded was $200,640 and was reflected as a charge to accumulated
deficit during the year ended December 31, 2004.
In
addition, during 2004 the Company negotiated with certain of its debt holders
to
convert debt and accrued interest to preferred stock. In connection with
this
conversion $224,000 of debt principal and $31,002 of accrued interest were
converted in exchange for 25,500 shares of Series A Convertible Preferred
Stock. Upon conversion, the excess of the fair market price of the
underlying common stock over the conversion price of $1.50 per share as
described above, resulted in a loss on extinguishment of debt of $153,000.
In
connection with this transaction, the Company recorded a BCF of $153,000,
since
the conversion of all of the preferred stock associated with this transaction
could be converted into 102,000 shares of common stock at $1.50 per share
based
on the excess of the fair market price of the conversion price as described
above.
During
the year ended December 31, 2005, the Company accrued a $29,740 dividend
payable
to the preferred shareholders, which management has elected to pay in shares
of
common stock. As such, common stock to be issued as of December 31, 2005
represents the preferred stock dividend to be paid with the issuance of common
stock.
For
the
three months ended March 31, 2006, the Company issued 239,050 (Unaudited)
shares
of its common stock in connection with its initial public offering. From
April
1, 2006 to April 7, 2006 the Company issued 39,500 (Unaudited) shares of
its
common stock in connection with its initial public offering. The Company
received net proceeds of $860,584 (Unaudited) and $142,196 (Unaudited),
respectively, during the two time periods.
From
August 3, 2005 through April 7 2005, the Company issued 333,156 shares
of it
common stock in connection with its initial public offering pursuant to
a
Registration Statement on Form SB-2. The shares issued in connection with
the
initial public offering may have been issued in violation of either federal
or
state securities laws, of both, and may be subject to rescission. In order
to
address this issue, the Company will make a rescission offer to the holders
of
these shares. The Company will offer to rescind the holders of these shares
the
price paid for these shares plus interest, calculated from the date of
the
purchase through the date on which the rescission offer expires, at the
applicable statutory interest rate per year. If the rescission offer is
accepted
by all the offerees, the Company would have been required to make an aggregate
payment to the holders of these shares of up to approximately $1,332,624,
plus
statutory interest. The Company has made arrangements for related parties
to
purchase any of the shares tendered in connection with this rescission,
thereby
avoiding the expenditure of Company funds.
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(9)
Stock
Options and Warrants
A)
Stock
Options
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 years ended December 31, 2005 and 2004:
|
|
Options
|
|
|
|
Balance
January 1, 2004
|
|
|
72,500
|
Options
granted in 2004
|
|
|
—
|
Options
exercised in 2004
|
|
|
—
|
|
|
|
|
Balance
December 31, 2004
|
|
|
72,500
|
Options
granted in 2005
|
|
|
218,500
|
Options
exercised in 2005
|
|
|
---
|
|
|
|
|
Balance
December 31, 2005
|
|
|
291,000
|
No
option
activity occurred during the three months ended March 31, 2006
(Unaudited)
Exercise
Price
Range
|
|
Weighted
Average
Remaining
Number
|
Weighted
Average
Remaining
Contractual Life
|
|
|
37,500
|
44
months
|
|
|
17,500
|
42
months
|
|
|
218,500
|
60
months
|
|
|
17,500
|
42
months
|
|
|
|
|
Total
options
|
|
291,000
|
56
months
|
All
options are vested and exercisable as of December 31, 2005.
B)
Warrants
A
summary
of the warrants outstanding and exercisable at December 31, 2005 is as
follows:
|
|
|
|
|
Exercise
Price
Range
|
|
Weighted
Average
Remaining
Number
|
|
Weighted
Average
Remaining
Contractual Life
|
$2.00
|
|
119,876
|
|
42
months
|
$3.00
|
|
493,365
|
|
42
months
|
|
|
|
|
|
|
|
613,241
|
|
|
|
The
warrants expire at various dates in 2009 and all are fully
exercisable.
No
warrant activity occurred during the three months ended March 31, 2006
(Unaudited)
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(10)
Income
Taxes
At
December 31, 2005, the Company had available Federal and state net
operating loss carryforwards to reduce future taxable income. The amounts
available were approximately $2,745,000 for Federal purposes and $1,284,000
for
state purposes. The Federal carryforward expires in 2025 and the state
carryforward expires in 2010. 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 and will recognize a deferred tax asset at that
time.
Significant
components of the Company’s deferred income tax assets as of December 31, 2005
are as follows:
Deferred
income tax asset:
|
|
|
|
Net
operating loss carry forward
|
|
$
|
1,061,000
|
|
Valuation
allowance
|
|
|
(1,061,000
|
)
|
Net
deferred income tax asset
|
|
$
|
—
|
|
Reconciliation
of the effective income tax rate to the U.S. statutory rate is as
follows:
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
|
2005
|
|
|
2004
|
|
Tax
expense at the U.S. statutory income tax
|
|
|
(34.00
|
)%
|
|
(34.00
|
)%
|
Increase
in the valuation allowance
|
|
|
34.00
|
%
|
|
34.00
|
%
|
Effective
tax rate
|
|
|
—
|
|
|
—
|
|
(11)
Commitments
and Contingencies
Lease
Commitments
The
Company leases machinery under non-cancelable operating leases. Rental expense
for the years ended December 31, 2005 and 2004 was $67,816 and $55,157,
respectively. Rental expense for the three months ended March 31, 2006 and
2005
was $17,157 (Unaudited) and $17,093 (Unaudited).
Future
payments under these leases as of December 31, 2005 are as
follows:
|
|
|
2006
|
|
$
|
58,433
|
2007
|
|
|
20,968
|
2008
|
|
|
10,905
|
2009
|
|
|
4,173
|
Total
|
|
$
|
94,479
|
REED’S,
INC.
NOTES
TO FINANCIAL STATEMENTS — (Continued)
(12)
Legal
Proceedings
The
Company currently and from time to time is involved in litigation incidental
to
the conduct of its business. The Company is not currently a party to any
lawsuit
or proceeding which, in the opinion of its management, is likely to have
a
material adverse effect on it.
During
2005 and 2004 the Company incurred $30,901 and $80,156, respectively, of
legal
costs associated with a lawsuit which the Company has won. For the three
months
ended March 31, 2006 and 2005 those costs were $9,568 (Unaudited) and $2,126
(Unaudited), repectively. The Plaintiff has appealed. The judgment in favor
of
the Company is to have the Plaintiff reimburse the Company for its legal
defense
costs. If the Company is successful in the appeals process, it will record
income from the judgment when the monies are collected.
On
January 20, 2006, Consac Industries, Inc. (dba Long Life Teas and Long Life
Beverages) filed a lawsuit in the United States District Court for the Central
District of California against Reed’s Inc. and Christopher Reed, Case No.
CV06-0376. The complaint asserts claims for negligence, breach of contract,
breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s
manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for Consac.
Consac contends that we negligently manufactured the soda resulting in at
least
one personal injury. Consac seeks $2.6 million in damages, plus interest
and
attorneys fees. We contend that Consac was responsible for the soda’s condition
by providing a defective formula which had not been adequately tested.
Management has filed a motion to dismiss. We believe that we will successfully
defend Consac’s claims and the case is without merit. Some of the allegations
made against the company are covered by insurance and some allegations are
not
covered by insurance. While there is no assurance, we believe that the Consac
litigation will have no material adverse effect upon our
operations.
(13)
Related
Party Activity
The
Company has notes payable to related parties. See Note 6.
As
of
December 31, 2005, the Company was owed $124,210 from Peter Sharma, a former
director. For financial reporting purposes, Company Management has decided
to reserve 100% of this receivable as of December 31, 2005. The collection
of
the receivable was deemed by management to be impaired. Management is pursuing
collection efforts. In January 2006, the director, Peter Sharma, resigned
from
the Board of Directors.
In
June
2005, Robert T. Reed, Sr. converted 262,500 of warrants to 262,500 shares
of
common stock. In lieu of receiving cash, the Company reduced the amount of
accrued interest it owed on debt payable to Robert T Reed, Sr. The amount
of the exercise price and the corresponding reduction in accrued interest
was
$5,250.
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item 24.
Indemnification of Directors and Officers
Section
145 of the Delaware General Corporation Law (the “DGCL”), as the same exists or
may hereafter be amended, provides that a Delaware corporation may indemnify
any
persons who were, or are threatened to be made, parties to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding, provided such person acted in good faith and in a manner he or
she
reasonably believed to be in or not opposed to the corporation’s best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his or her conduct was illegal. A Delaware corporation may
indemnify any persons who are, were or are threatened to be made, a party to
any
threatened, pending or completed action or suit by or in the right of the
corporation by reason of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request
of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys’ fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he or she reasonably believed to be in
or
not opposed to the corporation’s best interests, provided that no
indemnification is permitted without judicial approval if the officer, director,
employee or agent is adjudged to be liable to the corporation. Where an officer,
director, employee, or agent is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
or
her against the expenses which such officer or director has actually and
reasonably incurred.
Section
145 of the DGCL further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him or her and incurred by him or her
in
any such capacity, arising out of his or her status as such, whether or not
the
corporation would otherwise have the power to indemnify him or her under Section
145 of the DGCL.
Our
amended certificate of incorporation provides that, to the fullest extent
permitted by Delaware law, as it may be amended from time to time, none of
our
directors will be personally liable to us or our stockholders for monetary
damages resulting from a breach of fiduciary duty as a director.
Our
amended certificate of incorporation also provides discretionary indemnification
for the benefit of our directors, officers, and employees, to the fullest extent
permitted by Delaware law, as it may be amended from time to time. Insofar
as
indemnification for liabilities arising under the Securities Act may be
permitted to our directors or officers, or persons controlling us, pursuant
to
the foregoing provisions, we have been informed that in the opinion of the
SEC,
such indemnification is against public policy as expressed in the Securities
Act
and is therefore unenforceable.
Pursuant
to our bylaws, we are required to indemnify our directors, officers, employees
and agents, and we have the discretion to advance his or her related expenses,
to the fullest extent permitted by law.
We
do not
currently provide liability insurance coverage for our directors and officers.
However, we intend to use a portion of the proceeds of the public offering
to
obtain such coverage for our directors and officers. We also intend to enter
into separate indemnification agreements with each of our directors and
executive officers that provide the maximum indemnity allowed to directors
and
executive officers by Section 145 of the DGCL and which allow for certain
additional procedural protections.
These
indemnification provisions and the indemnification agreements which we may
enter
into with our officers and directors may be sufficiently broad to permit
indemnification of our officers and directors for liabilities (including
reimbursement of expenses incurred) arising under the Securities
Act.
Item 25.
Other Expenses of Issuance and Distribution
The
following is a schedule of the estimated expenses (all of which will be borne
by
us) incurred in connection with the rescission offer:
Description |
|
|
Amount
to Be Paid
|
|
|
|
|
SEC
registration fee
|
|
$
|
143
|
|
|
|
|
Postage
and printing expenses
|
|
$
|
5,000
|
|
|
*
|
|
Legal
Fees
|
|
$
|
100,000
|
|
|
*
|
|
Accounting
fees
|
|
$
|
10,000
|
|
|
*
|
|
Blue
sky fees and expenses
|
|
$
|
5,000
|
|
|
*
|
|
TOTAL
|
|
$
|
120,143
|
|
|
|
|
Item 26.
Recent Sales of Unregistered Securities
The
following sets forth information regarding securities sold by us since January
1, 2003:
In
January 2003, we issued 1,500 shares of common stock as a year-end bonus to
our
employees. We recognized $4,500 of compensation expense. We believe the
securities were issued in reliance from exemptions from registration pursuant
to
Section 4(2) under the Securities Act.
In
July
2003, we sold 3,000 shares of common stock at $3.50 per share to an existing
stockholder who was at the time one of our affiliates. We believe the securities
were issued in reliance from exemptions from registration pursuant to Section
4(2) under the Securities Act.
From
March 2004 through October 2004, we conducted a private placement and raised
$334,400 from the sale of 33,440 shares of Series A convertible preferred
stock at a price of $10.00 per share. The sales were made to existing
stockholders and other persons who were familiar with our company. We believe
the securities were issued in reliance from exemptions from registration
pursuant to Section 4(2) or Regulation D under the Securities Act.
Also,
in
October 2004, 12 holders of our debt converted a total of $255,002 of debt
into
25,500 shares of Series A convertible preferred stock at a price of $10.00
per
share. We believe the securities were issued in reliance from exemptions from
registration pursuant to Section 4(2) or Regulation D under the Securities
Act.
On
May
31, 2005, Robert T. Reed, Sr., the father of our Chief Executive Officer,
Christopher J. Reed, converted warrants previously granted in 1991 into 262,500
shares of common stock. The exercise price was $0.02 per share. We believe
the
securities were issued in reliance from exemptions from registration pursuant
to
Section 4(2) or Regulation D under the Securities Act.
In
December 2005, we issued options to purchase up to 218,500 shares of common
stock to nine of our employees pursuant to our 2001 stock option plan. The
exercise price of these options is $4.00 and the options expire in December
2010. In accordance with the Company’s policy for accounting for stock options,
no compensation expense was recorded. We believe the securities were issued
in
reliance from exemptions from registration pursuant to Section 4(2) or
Regulation D under the Securities Act.
In
September 2005, we declared a dividend of 7,362 shares of our common stock
as a
dividend to the holders of our Series A convertible preferred stock based on
a
$29,470 accrued annual dividend payable. We issued the stock dividend in May
2006. The Series A convertible preferred stock bears a 5% annual, non-cumulative
dividend that may be in cash or in shares of our common stock based on its
then
fair market value. We believe the securities were issued in reliance from
exemptions from registration pursuant to Section 4(2) or Regulation D under
the
Securities Act.
From
August 3, 2005 through April 7, 2006, we issued 333,156 shares of common stock
in connection with the public offering. The shares may have been issued in
violation of federal or state securities laws, or both, and may be subject
to
rescission. In order to address this issue, we are making a rescission offer
to
the holders of these shares in connection with this registration statement.
If
our rescission offer is accepted by all offerees, we will be required to make
an
aggregate payment to the holders of these shares of up to approximately
$1,332,624, plus statutory interest. We have entered into an agreement with
Mark
Reed and Robert T. Reed, Jr. (the
“designated purchasers”) that they would irrevocably commit to purchase up to
all of the shares in the rescission offer that are tendered to us for
rescission. We would assign to the designated purchasers the right to purchase
any rescission shares at 100% of the amount required to pay the rescission
price
under applicable state law. As currently contemplated, the initial $250,000
of
rescission shares would be purchased by Mark Reed. If the number of rescission
shares tendered for rescission exceeds $250,000 of shares, Robert
T.
Reed, Jr. would
purchase the balance of the rescission shares tendered for rescission to us.
Each of the designated purchasers is a brother of Christopher J. Reed, our
President, Chief Financial Officer and the Chairman of the Board of Directors.
Robert T. Reed, Jr. also is our Vice
President and National Sales Manager - Mainstream and a beneficial owner of
approximately 7.29% of our common stock.
Item 27.
Exhibits
The
following exhibits are included herein or incorporated herein by
reference:
1.1
|
Underwriting
Agreement - US EURO Securities, Inc. #
|
|
|
1.2
|
Subscription
Agreement *
|
|
|
1.3
|
Underwriters’
Warrant #
|
|
|
1.4
|
Selected
Dealers’ 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 Jenkens & Gilchrist, LLP
|
|
|
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 *
|
|
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed *
|
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr. *
|
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr. *
|
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma, III *
|
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace *
|
|
10.7(f)
|
Promotional
Share Lock-In Agreement for Judy Holloway Reed *
|
|
10.7(g)
|
Promotional
Share Lock-In Agreement for Eric Scheffer *
|
|
10.7(h)
|
Promotional
Share Lock-In Agreement for Mark Harris
|
|
|
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 for Peter Sharma III for Sirius/Pureprophet, Ltd.
-
Vendor’s
Credit Line Agreement with Original Beverage Corp. *
|
|
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, Sr. *
|
|
|
10.16
|
Loan
Agreement with Robert T. Reed, Sr. *
|
|
|
10.17
|
Amendment
to Loan Agreement with Bay Business Credit *
|
|
|
10.18
|
Suspension
of Loan Payment Agreement with Robert T. Reed, Sr. *
|
|
|
10.19
|
Agreement
to Assume Repurchase Obligations
|
|
|
14.1
|
Code
of Ethics
|
|
|
23.1
|
Consent
of Weinberg & Co., P.A.
|
|
|
23.2
|
Consent
of Jenkens & Gilchrist, LLP (contained in Exhibit 5.1)
|
|
|
24
|
Power
of Attorney (included in the signature page to the Registration
Statement)
|
|
|
|
|
|
|
* |
Previously
filed as part of the registrant’s Registration Statement on Form SB-2
(File No. 333-120451)
and incorporated herein by this
reference.
|
# |
To
be filed by amendment.
|
Item
28. Undertakings
The
undersigned registrant will:
(a)(1)
File, during any period in which it offers or sells securities, a post-effective
amendment to this registration statement to:
(i)
Include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
(ii)
Reflect in the prospectus any facts or events which, individually or together,
represent a fundamental change in the information in the registration statement;
and notwithstanding
the forgoing, any increase or decrease in volume of securities offered (if
the
total dollar value 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 prospects filed with the Commission pursuant to Rule
424(b) (§230.424(b) of this chapter) if, in the aggregate, the changes in the
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.
(iii)
Include any additional or changed material information on the plan of
distribution.
(2)
For
determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona
fide
offering.
(3)
File
a post-effective amendment to remove from registration any of the securities
that remain unsold at the end of the offering.
(4)
For
determining liability of the undersigned small business issuer under the
Securities Act to any purchaser in the initial distribution of the securities,
the undersigned small business issuer undertakes that in a primary offering
of
securities of the undersigned small business issuer pursuant to this
registration statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned small business issuer
relating to the offering required to be filed pursuant to Rule 424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on behalf of
the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
(iii)
The
portion of any other free writing prospectus relating to the offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
(iv)
Any
other communication that is an offer in the offering made by the undersigned
small business issuer to the purchaser.
(e)
Insofar as indemnification for liabilities arising under the Securities Act
of
1933 (the “Act”) may be permitted to directors, officers and controlling persons
of the registrant pursuant to the provisions described in Item 24 above, or
otherwise, the registrant has been advised that in the opinion of the SEC for
matters under the securities laws, such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
In
the
event that a claim for indemnification against such liabilities (other than
the
payment by the registrant 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
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(g)
That,
for purposes of determining liability under the Securities Act to any
purchaser:
(1)
If
the small business issuer is relying on Rule 430B:
(i)
Each
prospectus filed by the undersigned small business issuer pursuant to Rule
424(b)(3) shall be deemed to be part of the registration statement as of
the date the filed prospectus was deemed part of and included in the
registration statement;
(ii)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7)
as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose
of providing the information required by section 10(a) of the Securities Act
shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter,
such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall
be
deemed to be the initial bona
fide offering
thereof. Provided,
however, that
no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that
is
part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such effective date, supersede or modify any statement
that was made in the registration statement or prospectus that was part of
the registration statement or made in any such document immediately prior to
such effective date; or
(2)
If
the small business issuer is subject to Rule 430C, include the
following:
Each
prospectus filed pursuant to Rule 424(b)as part of a registration statement
relating to an offering, other than registration statements relying on Rule
430B
or other than prospectus filed in reliance on Rule 430, shall be deemed to
be
part of and included in the registration statement as of the date it is first
used after effectiveness. Provided,
however, that
no
statement made in a registration statement or prospectus that is part of
the registration statement or made in a document incorporated or deemed
incorporated by reference into the registration statement or prospectus that
is
part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement
that
was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form 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, State of California, on June 21,
2006.
|
|
|
|
REED'S,
INC. |
|
|
|
|
By: |
/s/ Christopher
J. Reed |
|
|
|
Name:
Christopher J. Reed
Title:
Chief Executive Officer
|
KNOW
ALL
PERSONS BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Christopher J. Reed and Judy Holloway Reed, jointly
and
severally, as his attorneys-in-fact, with full power of substitution in each,
for him in any and all capacities to sign any amendments to this Registration
Statement on Form SB-2, and to file the same, with all exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitutes, may do or cause to be done by virtue
hereof.
In
accordance with the requirements of the Securities Act of 1933, as amended,
this
Registration Statement was signed by the following persons in the capacities
and
on the dates stated.
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/
Christopher J. Reed
|
|
Chief
Executive Officer, Chief Financial Officer and Chairman of the Board
of
Directors
|
|
June
21, 2006
|
Christopher
J. Reed |
|
(Principal
Executive Officer and Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
Judy Holloway Reed
|
|
Director
|
|
|
Judy
Holloway Reed |
|
|
|
|
|
|
|
|
|
/s/
Mark Harris
|
|
Director
|
|
|
Mark
Harris |
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
Daniel
S.J. Muffoletto |
|
|
|
|
|
|
|
|
|
/s/
Michael Fischman
|
|
Director
|
|
|
Michael
Fischman |
|
|
|
|
EXHIBIT
INDEX
1.1
|
Underwriting
Agreement - US EURO Securities, Inc. #
|
|
|
1.2
|
Subscription
Agreement *
|
|
|
1.3
|
Underwriters’
Warrant #
|
|
|
1.4
|
Selected
Dealers’ 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 Jenkens & Gilchrist, LLP
|
|
|
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 *
|
|
|
10.7(a)
|
Promotional
Share Lock-In Agreement For Christopher J. Reed *
|
|
10.7(b)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Jr. *
|
|
10.7(c)
|
Promotional
Share Lock-In Agreement For Robert T. Reed, Sr. *
|
|
10.7(d)
|
Promotional
Share Lock-In Agreement For Peter Sharma, III *
|
|
10.7(e)
|
Promotional
Share Lock-In Agreement For Joseph Grace *
|
|
10.7(f)
|
Promotional
Share Lock-In Agreement for Judy Holloway Reed *
|
|
10.7(g)
|
Promotional
Share Lock-In Agreement for Eric Scheffer *
|
|
10.7(h)
|
Promotional
Share Lock-In Agreement for Mark Harris
|
|
|
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 for Peter Sharma III for Sirius/Pureprophet, Ltd.
-
Vendor’s
Credit Line Agreement with Original Beverage Corp. *
|
|
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, Sr. *
|
|
|
10.16
|
Loan
Agreement with Robert T. Reed, Sr. *
|
|
|
10.17
|
Amendment
to Loan Agreement with Bay Business Credit *
|
|
|
10.18
|
Suspension
of Loan Payment Agreement with Robert T. Reed, Sr. *
|
|
|
10.19
|
Agreement
to Assume Repurchase Obligations
|
|
|
14.1
|
Code
of Ethics
|
|
|
23.1
|
Consent
of Weinberg & Co., P.A.
|
|
|
23.2
|
Consent
of Jenkens & Gilchrist, LLP (contained in Exhibit 5.1)
|
|
|
24
|
Power
of Attorney (included in the signature page to the Registration Statement)
|
|
|
|
|
|
|
* |
Previously
filed as part of the registrant’s Registration Statement on Form SB-2
(File No. 333-120451)
and incorporated herein by this
reference.
|
# |
To
be filed by amendment.
|
APPENDIX
A
FORM
OF NOTICE OF ELECTION
Reed’s,
Inc.
13000
South Spring Street
Los
Angeles, California 90061
Attn:
Christopher J. Reed
Dear
Mr.
Reed:
I
have
received and read the prospectus of Reed’s, Inc. (“Reed’s”) relating to its
rescission offer, dated ___________, 2006, pursuant to which Reed’s has offered
to repurchase certain shares of its common stock that may have been issued
in
violation of federal or state securities laws, or both. I acknowledge that
I
have had an opportunity to carefully review the information from Reed’s that I
consider important in making my election.
I advise
Reed’s as follows by placing an “X” in the proper spaces provided below (and
filling in the appropriate table(s), if applicable):
Shares
of Common Stock
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¨
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1.
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I
hereby elect to reject the rescission offer and desire to retain
the
shares.
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¨
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2.
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I
hereby elect to accept the rescission offer and rescind the sale
of
________________ (fill in number) shares and to receive a full refund
for
all sums paid therefore together with interest at the applicable
statutory
rate per year. My Stock Power(s) is/are also enclosed with this Notice
of
Election.
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Date
of Purchase
(The
date you were issued stock.
If
you do not know, leave blank.)
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Number
of Shares
Purchased
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Certificate
Number
(If
you do not know, leave blank.)
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IF
PERSONS DESIRING TO ACCEPT THIS RESCISSION OFFER INTEND TO MAKE USE OF THE
MAILS
TO RETURN THEIR STOCK POWER(S), INSURED REGISTERED MAIL, RETURN RECEIPT
REQUESTED, IS RECOMMENDED AND SHOULD ALSO PROVIDE THEIR DOCUMENTATION, INCLUDING
THIS NOTICE OF ELECTION, BY FACSIMILE TO CHRISTOPHER J. REED AT THE FOLLOWING
FACSIMILE NUMBER: (310) 217-9411.
TO
THE
EXTENT I HAVE ACCEPTED THE OFFER, I AGREE I WILL NOT HAVE ANY FURTHER RIGHT,
TITLE OR INTEREST IN THOSE SHARES OF COMMON STOCK AND ANY SUBSEQUENT
APPRECIATION IN THE VALUE OF THE SHARES UNDERLYING THE SHARES OF COMMON
STOCK.
For
California residents:
THIS
OFFER OF REPURCHASE HAS BEEN APPROVED BY THE CALIFORNIA COMMISSIONER OF
CORPORATIONS IN ACCORDANCE WITH SECTION 25507(b) OF THE CALIFORNIA CORPORATE
SECURITIES LAW OF 1968 ONLY AS TO ITS FORM.
SUCH
APPROVAL DOES NOT IMPLY A FINDING BY THE COMMISSIONER THAT ANY STATEMENTS MADE
HEREIN OR IN ACCOMPANYING DOCUMENTS ARE TRUE OR COMPLETE; NOR DOES IT IMPLY
A
FINDING THAT THE AMOUNT OFFERED BY REED’S, INC. IS EQUAL TO THE AMOUNT
RECOVERABLE BY THE BUYER OF THE SECURITY IN ACCORDANCE WITH SECTION 25503 IN
A
SUIT AGAINST REED’S, INC., AND THE COMMISSIONER DOES NOT ENDORSE THE OFFER AND
MAKES NO RECOMMENDATION AS TO ITS ACCEPTANCE OR REJECTION.
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Dated:
______________, 2006
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Print
name of stockholder:
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Name
of stockholder:
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Authorized
signature:
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Authorized
signature (if shares held in more than one name):
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Title
of authorized signatory (if applicable):
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Title
of authorized signatory (if applicable):
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Address
of stockholder:
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Phone
number of stockholder:
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Fax
number of stockholder:
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Email
of stockholder:
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APPENDIX
B
REED’S,
INC.
STOCK
POWER
FOR
VALUE RECEIVED,
the
undersigned hereby sells, assigns and transfers unto Reed’s, Inc., a Delaware
corporation or its designee, _________________ shares of Common Stock of Reed’s,
Inc., and does hereby irrevocably constitute and appoint Christopher J. Reed
and
Judy Holloway Reed, and any of them, the undersigned’s Attorney to transfer said
shares on the books of said corporation with full power of substitution in
the
premises.
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Dated:
_____________, 2006
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SELLING
STOCKHOLDER
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Print Name(s) of Selling Stockholder(s)
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Authorized
Signature
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Title
of Authorized Signatory (if applicable)
1
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Authorized
Signature (if shares held in more than one name)
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Title
of Authorized Signatory (if applicable)
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Address
of Selling Stockholder (Line 1)
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Address
of Selling Stockholder (Line 2)
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Phone
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Email
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Fax
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1
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Trustees,
officers and other fiduciaries or agents should indicate their title
or
capacity and print their names under their signatures.
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