Registration
Statement No. 333-120451
As
filed with the Securities and Exchange Commission on March 7,
2006
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
Post
Effective Amendment 6 to Form SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Reed’s,
Inc.
(Exact
name of registrant as specified in its charter)
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Delaware
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2086
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95-4348325
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(State
or other jurisdiction
of
incorporation or organization)
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(Primary
Standard Industrial
Classification
Code Number)
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(IRS
Employer
Identification
No.)
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Christopher
J. Reed
Reed’s,
Inc.
13000
South Spring Street, Los Angeles, California 90061
Telephone:
(310) 217-9400
(Name,
address and telephone number of agent for service)
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Copies
of all communications to:
Lawrence
W. Horwitz, Esq.
HORWITZ
& CRON
Four
Venture - Suite 390 ,
Irvine,
California 92618
Telephone:
(949) 450-4942
(Name,
address, and telephone number of registrant’s
counsel)
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Approximate
date of proposed sale to the public: As
soon as practicable after the effective date of this registration
statement.
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If
this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please
check the following box and list the Securities Act registration
statement
number of the earlier effective registration statement for the
same
offering. o
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If
this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list
the
Securities Act of 1933 registration statement number of the earlier
effective registration statement for the same offering. o
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If
this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list
the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
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If
delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. o
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Title
of Each Class of Securities to be Registered
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Amount
to be
Registered
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Maximum
Offering
Price Per Share
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Proposed
Maximum
Aggregate
Offering Price (1)
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Amount
of Registration Fee
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Common
stock, $.0001 par value
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2,
000,000
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$
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4.00
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$
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8,000,000
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$
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1,014
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Underwriter’s
warrants to purchase shares of common stock, $.001 par value (2)
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200,000
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$
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6.60
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---
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---
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Shares
of common stock underlying underwriter’s warrants
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200,000
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$
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6.60
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$
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1,320,000
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$
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101
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Totals
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2,200,000
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---
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$
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9,320,000
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$
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1,115
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CALCULATION
OF REGISTRATION FEE
(1)
Estimated solely for purposes of calculating the registration fee
in
accordance with Rule 457(o) under the Securities Act of 1933, as
amended.
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(2)
In connection with the sale of the common stock, we are granting to the
underwriter a warrant to purchase up to 200,000 shares of common stock at
a per
share purchase price equal to 165% of the public offering price per share.
Certain of these warrants maybe distributed to participating broker-dealers.
N o
registration fee is required pursuant to Rule 457(g).
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The
Registrant hereby amends this registration statement on such date
or dates
as may be necessary to delay its effective date until the Registrant
shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as the
Commission, acting pursuant to said Section 8(a), may determine.
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We
are not soliciting offers to buy these securities in any jurisdiction where
the
offer or sale is not permitted.
Dated March
7, 2006
REED’S,
INC.
We
develop, manufacture, market, and sell natural non-alcoholic beverages, as
well
as candies and ice creams.
We
are
offering up to 2,000,000 shares of our common stock. No public market
currently exists for our shares. The public offering price is $4.00 per
share. This price has been arbitrarily set. The shares are being offered
on a
best efforts basis through Brookstreet Securities Corporation, our underwriter,
a member of the National Association of Securities Dealers, Inc., for a
commission equal to 6% of the gross sales made in this offering. In addition,
Brookstreet will receive a lead underwriter’s concession of 1% of gross sales
made in this offering and a non-accountable expense allowance of 3% of gross
sales made in this offering. Brookstreet has entered into a Selected Dealers
Agreement with certain NASD licensed brokers to participate in this offering
providing concessions from the compensation payable to Brookstreet.
Participating broker-dealers, other than Brookstreet, will receive (and
Brookstreet’s compensation will accordingly be reduced) 6% of gross sales plus
underwriter warrants in an amount equal to 6% of the shares issued from
investors identified by the participating broker-dealer, under this offering.
There
is
no current public market for our shares and there is no assurance that a
public
market for our shares will ever develop. In the event a public market for
our
shares does not develop, purchasers in this offering may be unable to sell
the
shares for an extended period of time. Our underwriter currently intends
to
apply for quotation of our common stock upon the Over the Counter Bulletin
Board
(“OTCBB”) quotation system.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning
on page 3 to read about factors you should consider before buying shares of
our common stock.
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Per
Share
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If
200,000
Shares
are Sold(1) |
If
1,000,000
Shares
are Sold(1) |
If
2,000,000
Shares
are Sold(1) |
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Proceeds
to the Company
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$
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3.60
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$
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720,000
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$
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3,600,000
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$
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7,200,000
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Underwriter
Commission
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$
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0.40
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$
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80,000
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$
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400,000
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$
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800,000
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Proceeds
to the Company before estimated expenses of the offering
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$
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4.00
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$
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800,000
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$
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4,000,000
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$
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8,000,000
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Proceeds
to the Company after estimated expenses of the offering
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---
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$
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118,885
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$
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2,973,885
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$
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6,523,885
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(1)
The amounts shown are for illustrative purposes only. The offering
is a best efforts offering with no assurance that all or any shares
will
be sold.
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We
will not accept subscriptions to this offering from residents of
the
District of Columbia until at least 200,000 shares have been sold
elsewhere; we will not accept subscriptions to this offering from
residents of Pennsylvania and Texas until at least 500,000 shares
have
been sold; and we will not accept subscriptions to this offering
from
residents of Arizona until 800,000 shares have been sold.
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There
is no minimum number of shares we must sell in this offering. Offering
proceeds will not be placed in escrow. Upon receipt, offering proceeds
will be deposited into the Company’s operating account and used to conduct
the Company’s business affairs. The offering will terminate nine months
after the effective date of this prospectus unless terminated sooner
by
us.
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Neither
the Securities and Exchange Commission nor any state securities
regulators
have approved or disapproved these securities or determined if
this
prospectus is accurate or complete. Any representation to the contrary
is
a criminal offense.
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Brookstreet
Securities Corporation has been the subject of disciplinary actions
taken
by the NASD. For more information regarding these actions, please
contact
the NASD at (800) 289-9999.
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The
date
of this Prospectus is March 7, 2006
ii
TABLE
OF CONTENTS
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Section
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Page
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Prospectus
Summary
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1
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Risk
Factors
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3
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Forward
Looking Statements
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8
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Use
of Proceeds
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9
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Dividend
Policy
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10
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Capitalization
as of September 30, 2005
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11
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Dilution
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12
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
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15
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Business
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23
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Legal
Proceedings
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42
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Management
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43
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Certain
Relationships and Related Transactions
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47
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Principal
Stockholders
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49
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Description
of Our Securities
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50
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Shares
Available for Future Resale
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52
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Plan
of Distribution
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53
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Legal
Matters
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56
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Experts
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56
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Where
You Can Find More Information
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56
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Index
to Financial Statements
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F-1
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Dealers
who solicit prospective investors in the subject offering are required to
deliver a copy of this Prospectus commencing upon the effective date of the
subject Registration Statement and terminating 40 days thereafter. The initial
effective date of the Registration Statement, of which this Prospectus is
a
part, is August 3, 2005. This Registration Statement is a post-effective
amendment to the Registration Statement and is dated March 7, 2006.
PROSPECTUS
SUMMARY
This
summary highlights information found in greater detail elsewhere in this
prospectus. Prior to making an investment decision, you should read the entire
prospectus carefully; including the section entitled “Risk Factors” beginning on
page 3.
About
Our Company
We
are a
growing developer, manufacturer, marketer, and seller of New Age beverages,
as
well as candies and ice creams. “New Age Beverages” is a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports
drinks
and water. We currently offer 14 beverages, 2 candies, and 3 ice creams.
We
sell
the majority of our products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree,
in
Canada. Historically, most of our beverages were sold in the natural food
industry.
Our
current business strategy is to maintain a firm marketing focus in the natural
food marketplace while building a national direct sales and distribution
force
to take our proven products into mainstream market and distribution channels.
We
believe that the proceeds of this offering may greatly accelerate the success
of
this business strategy by providing working capital to finance an expanded
sales
and distribution network.
At
this
time, we produce our carbonated beverages at two facilities. Our Brewery
in Los
Angeles handles the western half of the United States and we have a contract
with The Lion Brewery, Inc., a packing, or co-pack, facility in Pennsylvania
for
the eastern United States. Our Ginger Juice Brews are co-packed for us in
Northern California. Our ice creams are co-packed for us at a dairy in upstate
New York.
We
have a
national network of natural and specialty food distributors in the United
States
and Canada. We also have mainstream beverage distributors in select markets.
In
Southern California, we have our own direct distribution in addition to other
local distributors. We currently rely upon one retailer for between 10-15%
of
our aggregate gross revenues. If we were to lose this retailer, our operations
would be materially effected.
We
currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both
sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced
by the
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits
to
maintain store and distributor relationships. In the future, we intend to
integrate both our distributions and sales forces.
In
December 2000, we purchased an 18,000 square foot warehouse, the Brewery,
at 13000 South Spring Street, Los Angeles, California 90061, in an
unincorporated area of Los Angeles County near downtown Los Angeles. This
facility serves as our principal executive offices, our West Coast bottling
plant, and our Southern California warehouse facility. Our telephone number
is
310.217.9400.
We
have
not generated a profit during our last two fiscal years and there is no
assurance that we will develop profitable operations in the future. Our net
operating loss for the calendar year 2004 was $479,371 and for 2003 it was
$771,997 and
our
loss for the nine months ended September 30, 2005 was $475,546. We are
offering a maximum of 2,000,000 of our shares. In the event the maximum amount
of this offering is sold, then the shares sold will represent 29% of the
then
outstanding common stock and Christopher Reed and his family members will
own
52.4% of our outstanding common stock.
This
offering is a best efforts offering through our underwriter, Brookstreet
Securities Corporation and certain selected broker-dealers. While there is
no
assurance, our underwriter currently intends to apply for quotation of our
common stock upon the Over the Counter Bulletin Board (“OTCBB”) quotation
system. This will require that we complete certain filings and disclosures
of
information to the National Association of Securities Dealers and to the
OTCBB
itself. Our shares are currently not traded on the public securities markets
and
even if our shares of common stock become quoted on the OTCBB, there is no
assurance that an active public market for our shares of stock will be
established.
Our
Internet address is www.reedsgingerbrew.com
.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
1
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Common
Stock being offered
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2,000,000
shares
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Offering
Price
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$4.00
per share
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Common
stock outstanding:
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Prior
to this offering
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4,726,091 shares
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After
this offering:
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if
200,000 shares are sold
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4,926,091 shares
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if
1,000,000 shares are sold
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5,726,091shares
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if
all 2,000,000 shares are sold
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6,726,091
shares
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Use
of Proceeds
We
plan
to use the net proceeds to hire additional sales representatives, launch
new
products, pay for retail slotting, expand our brand advertising, update our
West
Coast production facility, the Brewery, purchase fully-branded coolers, in-store
displays, hire a chief operating officer, and for working capital.
Summary
Financial Information
The
following historical financial information should be read in conjunction
with
the audited financial statements and the notes to those statements and the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this prospectus. The statements
of operations with respect to the years ended December 31, 2004 and 2003,
and the balance sheet data at December 31, 2004 are derived from, and are
qualified by reference to, the audited financial statements included elsewhere
in this prospectus. The historical results are not necessarily indicative
of
results to be expected for any future periods.
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Statements
of Operations Data :
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Nine
Months
Ended
September 30,
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Years
Ended
December 31,
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2005
(Unaudited)
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2004
(Unaudited)
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2004
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2003
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Sales
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$
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7,134,940
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$
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6,705,040
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$
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8,978,365
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$
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6,781,776
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Gross
profit
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1,313,053
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1,321,643
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1,875,328
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1,319,571
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Selling,
general and administrative expenses
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1,553,557
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1,375,412
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1,946,667
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1,414,148
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Income
(loss) from operations
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(240,504
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)
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(53,769
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)
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(71,339
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)
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(94,577
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)
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Net
Loss attributable to common stockholders
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(505,016
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)
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(385,248
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)
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(479,371
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)
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(771,997
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)
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Net
Loss per share, basic and diluted
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(0.10
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)
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(0.08
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)
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(0.10
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)
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(0.16
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)
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Weighted
average shares used to compute net loss per share
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4,845,909
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4,726,091
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4,726,091
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4,724,488
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Balance
Sheet Data:
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September
30, 2005
(Unaudited ) |
December
31, 2004
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Total
assets
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$
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5,491,017
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$
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5,098,403
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Current
liabilities
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3,646,828
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2,834,589
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Long-term
liabilities, less current portion
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1,344,785
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1,294,114
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Stockholders’
equity
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499,404
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969,700
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2
RISK
FACTORS
An
investment in our common stock is very risky. You should carefully consider
the
risk factors described below, together with all other information in this
prospectus, before making an investment decision. The trading price of our
common stock could decline due to any of these risks, and you could lose
all or
part of your investment. You also should refer to the other information set
forth in this prospectus, including our financial statements and the related
notes.
Risks
Relating to Our Business
We
have a history of operating losses. If we continue to incur operating losses,
we
eventually may have insufficient working capital to maintain operations as
presently set forth in our business plan.
As
of
December 31, 2004, we had an accumulated deficit of $2,403,638. For the years
ended December 31, 2004 and 2003, we incurred losses from operations of
$71,339 and $94,577, respectively. As of September 30, 2005, we had an
accumulated deficit of $2,879,184. For the nine months ended September 30,
2005
and September 30, 2004, we incurred losses from operations of $240,504 and
$53,769, respectively. If we are not able to begin to earn an
operating profit at some point in the future, we eventually may have
insufficient working capital to maintain our operations as we presently intend
to conduct them. In addition, we may not be able to contribute profit from
operations toward the expansion and other business plans discussed in this
prospectus.
The
beverage business is highly competitive.
We
compete for distributors, shelf space, and customers primarily with other
New
Age beverage companies including:
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·
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SoBe
(owned by Pepsi)
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·
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Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury
Schweppes)
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·
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Henry
Weinhard (owned by Phillip Morris)
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·
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Arizona
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·
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Hansen’s
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·
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Knudsen
& Sons
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·
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Jones
Sodas
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·
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A&W
Root Beer
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·
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Blue
Sky
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·
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Natural
Brews
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Several
of our competitors and potential competitors have financial resources greater
than ours, and Pepsi, Cadbury Schweppes, and Phillip Morris have substantially
greater financial resources than ours. These greater resources permit our
competitors to implement extensive advertising and promotional programs,
which
we have not been, and may not be, able to match. As competitors enter the
field,
our market share may fail to increase or may decrease despite our efforts
to
continue to produce superior products with higher quality ingredients and
a
brewing process that we believe remains a trade secret. See
“Business —
Competition.”
Competitors
in the soft drink industry include bottlers and distributors of nationally
advertised and marketed products as well as chain store and private label
soft
drinks. The principal methods of competition include brand recognition, price
and price promotion, retail space management, service to the retail trade,
new
product introductions, packaging changes, distribution methods, and advertising.
The
loss of our largest retailer would substantially reduce revenues.
During
2003, Trader Joe’s accounted for approximately 15% of our sales in 2003 and for
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.
Any
decrease in the supply of ginger, other key ingredients or finished products,
or
increase in the prices of such ingredients, could significantly increase
our
costs, and thereby reduce our profits.
We
depend
upon an uninterrupted supply of ginger and certain other ingredients, a
significant portion of which we obtain overseas, principally from China and
Brazil. We obtain almost all of our crystallized ginger from Fiji and our
Ginger
Chews from Indonesia. Any decrease in the supply of these ingredients or
increase in the prices of these ingredients as a result of any adverse weather
conditions, pests, crop disease, interruptions of shipment or political
considerations, among other reasons, could substantially increase our costs
and
adversely affect our financial performance.
3
The
loss of any of our third-party suppliers or service providers could impair
our
operations and substantially reduce our financial results.
We
rely
on third parties, called co-packers in our industry, to produce some of our
beverages, to produce our glass bottles and to bottle some of our beverages.
The
loss of our third-party suppliers or service providers could impair our
operations and adversely affect our financial performance.
The
loss of our third-party distributors could impair our operations and
substantially reduce our financial results.
We
depend
in large part on distributors to distribute our beverages and other products.
Most of our outside distributors are not bound by written agreements with
us and
may discontinue their relationship with us on short notice. Most distributors
handle a number of competitive products. In addition, our products are a
small
part of our distributors’ businesses. The loss of our third-party beverage
distributors could impair our operations and adversely affect our financial
performance.
Our
manufacturing process is not patented.
None
of
the manufacturing processes used in producing our products are subject to
a
patent or similar intellectual property protection. Our only protection against
a third party using our recipes and processes is confidentiality agreements
with
the companies that produce our beverages and with some of our employees.
If our
competitors develop substantially equivalent proprietary information or
otherwise obtain access to our knowledge, we will have greater difficulty
in
competing with them for business, and our market share could decline.
We
regard
the protection of our trademarks, trade dress, and trade secrets as critical
to
our future success. We have registered our trademarks in the United States.
We
also rely on a combination of laws and contractual restrictions, such as
confidentiality agreements, to establish and protect our proprietary rights,
trade dress, and trade secrets. However, laws and contractual restrictions
may
not be sufficient to protect the exclusivity of our intellectual property
rights, trade dress, or trade secrets. Furthermore, enforcing our rights
to our
intellectual property could involve the expenditure of significant management
and financial resources. See “Business — Proprietary Rights.”
We
face risks associated with product liability claims and product recalls.
Other
companies in the beverage industry have experienced product liability litigation
and product recalls arising primarily from defectively manufactured products
or
packaging. We maintain product liability insurance insuring our operations
from
any claims associated with product liability and we believe that the amount
of
this insurance is sufficient to protect us. We do not maintain product recall
insurance. On January 20th,
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. We believe that we
will
successfully defend Consac’s claims. While there is no assurance, we believe
that the Consac litigation will have no material adverse effect upon our
operations. In the event we were to experience additional product liability
or
product recall claim, our business operations could be materially and adversely
effected.
If
we are not able to retain the full-time services of Christopher J. Reed,
it will
be more difficult for us to manage our operations and our operating performance
could suffer.
Our
business is dependent, to a large extent, upon the services of Christopher
J.
Reed, our founder, President, Chief Executive Officer, Chairman of the Board,
and Chief Accounting 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
company does not employ a Chief Financial Officer among its executive staff.
Given the absence of formal financial training in our Chief Executive Officer’s
education and the increasing complexity of accountancy and cash management
for
reporting companies, CEO Chris Reed’s lack of knowledge in this area may affect
the future results of our operations.
We
need to manage our growth and implement and maintain procedures and controls
during a time of rapid expansion in our business.
The
cost
of manufacturing and packaging our products is approximately 80% of our
aggregate revenues. This gross margin places pressure upon our cash flow
and
cash reserves when our sales increase. As we experience significant growth,
such
an expansion has placed, and is expected to continue to place, a significant
strain on our management, operational and financial resources. Such growth
will
require improvements in our operational, accounting and information systems,
procedures and controls. If we fail to manage this growth properly, it could
divert our limited management, cash, personnel, and other resources from
other
responsibilities and could adversely affect our financial performance.
4
Our
management has broad discretion in the application of the net proceeds from
this
offering.
Our
Board
of Directors and management presently intend to utilize a substantial portion
of
the net proceeds of this offering for the specific purposes set forth in
“Use of
Proceeds.” However, we have broad discretion with respect to redirecting the
application and allocation of the net-proceeds of this offering in light
of
changes in circumstances and the availability of certain business opportunities.
As a result, any return on investment to investors will be substantially
dependent upon the discretion and judgment of our management with respect
to the
application and allocation of the net proceeds of the offering. See “Use of
Proceeds.”
We
have operated without independent directors in the past
We
have
not had two independent directors through a large portion of our history.
This
means that the material agreements between related parties have not been
negotiated with the oversight of independent directors; this means that most
agreements into which we have entered were at the absolute discretion of
the
majority shareholder, Chris Reed. Please see the “Certain Relationships and
Related Transactions” section for specific details of these transactions.
Risks
Relating to This Offering
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. It was and is our opinion that the adverse market conditions
referred to in our Application For Withdrawal were directly affected by lead
up
to the and initiation of the war in Iraq and the ensuing public uncertainty
and
market downturn; thus we withdrew the offering due to what we perceived as
poor
market conditions for a public offering in the economic climate surrounding
the 2003 Iraq War.
We
determined the offering price for the shares being offered arbitrarily. The
market price for the common stock after the offering may vary from the offering
price.
Prior
to
this offering, there was no public market for our common stock. We arbitrarily
determined the offering price for the shares being offered. The price bears
no
direct relationship to our assets, earnings, book value, or other such criteria
of value. For this reason, the market price after the offering may vary from
the
initial offering price.
There
is not yet a public trading market for our securities and if a market develops
for our securities, it could be limited, sporadic, and highly volatile.
We
cannot
assure you that an active market for our shares will be established or
maintained in the future. It is the intention of our underwriter to apply
for
quotation of our common stock on the Over The Counter Bulletin Board quotation
system (the “OTCBB”). The OTCBB is not a national securities exchange, and many
companies have experienced limited liquidity when traded through this quotation
system. Therefore, if you purchase shares of our common stock and later decide
to sell the shares, you may have difficulty selling the shares. Even if a
market
for our common stock is established, stockholders may have to sell our stock
at
prices substantially lower than the price they paid for it or might otherwise
receive than if a broad public market existed.
Since
there is no minimum number of shares which must be subscribed for before
we can
use the proceeds from sales, our expansion plans will be affected by the
number
of shares actually sold.
The
speed
with which we implement our expansion plans will depend, to a large degree,
on
the amount of funds available for expansion. Such funds may be provided by
the
sale of common stock in this offering, our existing lines of credit, and
revenues from sales, future loans or otherwise. If we sell less than all
the
shares in this offering, our ability to implement the expansion plans described
under “Use of Proceeds” and elsewhere in this prospectus could be delayed,
depending on the amount of other funds available to us for such purposes.
You
will experience immediate and substantial dilution in this offering.
The
initial public offering price is substantially higher than the net tangible
book
value of each outstanding share of common stock. Purchasers of common stock
in
this offering will suffer immediate and substantial dilution. The dilution
will
be $3.08 per share, or approximately 77%, in the net tangible book value of
the common stock from the public offering price if all 2,000,000 shares
being offered are sold. The dilution will be $3.54 per share (88%) if only
1,000,000 shares (50%) are sold, and $4.04 per share (101%) if only
200,000 shares (10%) are sold. See “Dilution.”
5
Our
ability to obtain needed additional financing is uncertain.
We
currently believe that our available cash resources, combined with the net
proceeds from this offering and cash flow from operations, will be sufficient
to
meet our anticipated working capital and capital expenditure requirements
for at
least 12 months after the date of this prospectus. We may need to raise
additional funds to respond to business contingencies, which may include
the
need to:
|
§
|
fund
more rapid expansion
|
|
§
|
fund
additional marketing expenditures
|
|
§
|
enhance
our operating infrastructure
|
|
§
|
respond
to competitive pressures
|
|
§
|
acquire
other businesses
|
We
cannot
assure you that additional financing will be available on terms favorable
to us,
or at all. If adequate funds are not available or if they are not available
on
acceptable terms, our ability to fund the growth of our operations, take
advantage of opportunities, develop products or services or otherwise respond
to
competitive pressures, could be significantly limited.
Our
ability to implement our full business expansion plan is largely dependent
upon
the outcome of this offering. Assuming no funds from this offering were
available, over the next 12 months, we would be able to launch the
750 ml. champagne bottles for approximately three to five of our products,
including our Reed’s Ginger Brew and swing-lid bottles for approximately two of
our products. In addition, we would be able to hire approximately two additional
sales representatives. Other elements of our expansion plan might have to
be
curtailed or delayed unless we could find alternative external sources of
working capital.
Future
financings could adversely affect your ownership interest and rights in
comparison with those of other 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 this offering.
If
we
issue any additional common stock or securities convertible into common stock,
such issuance will reduce the proportionate ownership and voting power of
each
other stockholder. In addition, such stock issuances might result in a reduction
of the book value of our common stock.
Pending
Litigation
On
January 20th,
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. We believe that we
will
successfully defend Consac’s claims. While there is no assurance, we believe
that the Consac litigation will have no material adverse effect upon our
operations.
Because
Christopher J. Reed controls a majority of our stock, he can control the
outcome, or greatly influence the outcome, of all matters on which stockholders
vote.
Christopher
J. Reed, our President, CEO, Chairman of the Board, and Chief Accounting
Officer
currently owns approximately 68% of our outstanding voting stock. If all
the
shares in this offering are sold, Mr. Reed will own approximately 48% of
our
outstanding voting stock. If 1,000,000 shares in this offering (50%) are
sold, Mr. Reed will own approximately 56% of our outstanding voting stock,
and
if only 200,000 shares in this offering (10%) are sold, he will own
approximately 65% 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. See “Principal Stockholders.”
A
substantial number of our shares will be available for sale in the public
market
after the offering and sales of those shares could adversely affect our stock
price.
6
Sales
of
a substantial number of shares of common stock into the public market after
this
offering, or the perception that such sales could occur, could substantially
reduce our stock price in any public market, and could impair our ability
to
obtain capital through an offering of equity securities. After this offering,
we
will have 6,726,091 shares of common stock outstanding if all
2,000,000 shares in this offering are sold, 5,726,091 shares of common
stock outstanding if 1,000,000 shares in this offering (50%) are sold,
and 4,926,091shares of common stock outstanding if 200,000 shares in
this offering (10%) are sold. All the shares of common stock sold in this
offering will be freely tradable without restriction or further registration
required under federal securities laws.
Of
the
shares of our common stock currently outstanding, 4,539,916 shares are
“restricted securities” under the Securities Act of 1933, as amended. Some of
these “restricted securities” will be subject to restrictions on the timing,
manner, and volume of sales of such shares. See “Shares Available For Future
Resale.”
Our
common stock may become subject to “penny stock” regulations that may affect the
liquidity for our common stock.
Our
common stock may become subject to the rules adopted by the Securities and
Exchange Commission, or SEC, that 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
to
such duties or other requirements of Securities’
laws
|
|
·
|
a
brief, clear, narrative description of a dealer market, including
“bid”
and “ask” prices for penny stocks and significance of the spread between
the “bid” and “ask” price
|
|
·
|
a
toll-free telephone number for inquiries on disciplinary actions;
definitions of significant terms in the disclosure document or
in the
conduct of trading in penny stocks,
and
|
|
·
|
such
other information and is in such form (including language, type,
size and
format), as the Commission shall require by rule or
regulation.
|
Prior
to
effecting any transaction in penny stock, the broker-dealer also must provide
the customer the following:
|
·
|
the
bid and offer quotations for the penny
stock
|
|
·
|
the
compensation of the broker-dealer and its salesperson in the
transaction
|
|
·
|
the
number of shares to which such bid and ask prices apply, or other
comparable information relating to the depth and liquidity of the
market
for such stock
|
|
·
|
the
liquidity of the market for such stock,
and
|
|
·
|
monthly
account statements showing the market value of each penny stock
held in
the customer’s account.
|
In
addition, the penny stock rules require that prior to a transaction in a
penny
stock not otherwise exempt from those rules, the broker-dealer must make
a
special written determination that the penny stock is a suitable investment
for
the purchaser and receive the purchaser’s written acknowledgment of the receipt
of a risk disclosure statement, a written agreement to transactions involving
penny stocks, and a signed and dated copy of a written suitability statement.
These disclosure requirements may have the effect of reducing the trading
activity in the secondary market for a stock such as our common stock if
it is
subject to the penny stock rules.
(The
rest of this page left blank intentionally)
7
FORWARD
LOOKING STATEMENTS
Some
of
the statements made in this prospectus, including certain statements made
under
“Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business” constitute
forward-looking statements.
In
some
cases, you can identify forward-looking statements by terminology such as
“may,”
“will,” “should,” “could,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” or “continue” or the negative of such
terms or other comparable terminology.
Forward-looking
statements involve known and unknown risks, uncertainties and other factors
that
may cause our actual results, levels of activity, performance, or achievements
to be materially different from any future results, levels of activity,
performance, or achievement expressed or implied by such forward-looking
statements.
Management
cautions that these statements are qualified by their terms and/or important
factors, many of which are outside the control of the Company, involve a
number
of risks, uncertainties and other factors that could cause actual results
and
events to differ materially from the statements made, including, but not
limited
to, the following:
|
·
|
The
Company’s ability to generate sufficient cash 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 the Company’s ability to gain or
maintain its share of sales in the
marketplace;
|
|
·
|
The
introduction of new products;
|
|
·
|
The
Company’s being subject to a broad range of evolving federal, state and
local laws and regulations including those regarding the labeling
and
safety of food products, establishing ingredient designations and
standards of identity for certain foods, environmental protections,
as
well as worker health and safety. Changes in these laws and regulations
could have a material effect on the way in which the Company produces
and
markets its products and could result in increased
costs;
|
|
·
|
Changes
in the cost and availability of raw materials and the ability to
maintain
our supply arrangements and relationships and procure timely and/or
adequate production of all or any of the Company’s
products;
|
|
·
|
The
Company’s ability to penetrate new markets and maintain or expand existing
markets;
|
|
·
|
Maintaining
existing relationships and expanding the distributor network of
the
Company’s products;
|
|
·
|
The
marketing efforts of distributors of the Company’s products, most of whom
also distribute products that are competitive with the Company’s
products;
|
|
·
|
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of the Company’s
products;
|
|
·
|
Decisions
by distributors, grocery chains, specialty chain stores, club stores
and
other customers to discontinue carrying all or any of the Company’s
products that they are carrying at any
time;
|
|
·
|
The
availability and cost of capital to finance the Company’s working capital
needs and growth plans;
|
|
·
|
The
Effectiveness of the Company’s advertising, marketing and promotional
programs;
|
|
·
|
Changes
in product category consumption;
|
|
·
|
Economic
and political changes;
|
|
·
|
Consumer
acceptance of new products, including taste test
comparisons;
|
|
·
|
Possible
recalls of the Company’s products;
and
|
|
·
|
The
Company’s ability to make suitable arrangements for the co-packing of any
of its products.
|
Although
we believe that the expectations reflected in the forward-looking statements
are
reasonable, we cannot guarantee future results, levels of activity, performance,
or achievements.
(The
rest of this page left blank intentionally)
8
USE
OF PROCEEDS
Estimated
net proceeds from this offering, based on an offering price of $4.00 per
share
and after deducting a 6% sales commission, a 1% lead underwriter’s concession, a
3% non-accountable broker expense allowance and other offering expenses
estimated to range from approximately $601,115 to $676,115, will range from
$0
to $6,523,885, depending upon the number of shares we sell in this offering.
The
offering is being made on a best efforts basis, and we do not know how many
shares, if any, will be sold in this offering.
The
primary purposes of this offering are to obtain additional capital, create
a
public market for our common stock, and facilitate future access to public
capital markets. In general, we intend to use the net proceeds from this
offering to increase working capital, hire additional sales representatives,
and
launch new products. Depending upon the amount raised in this offering, we
also
plan to purchase and place coolers, in-store displays and other marketing
tools;
expand brand advertising, fund supermarket slotting fees where applicable,
provide for improvements to our West Coast production facility, the Brewery,
and
hire a chief operating officer.
We
presently expect to use the estimated net proceeds from the offering
substantially as set forth in the table below, if the numbers of shares
indicated are sold in the offering:
|
Proposed
Use
|
Estimated
Amount if
200,000 Shares are
Sold
(10% of Total) |
Estimated
Amount if
1,000,000 Shares are Sold
(50% of Total) |
Estimated
Amount if
2,000,000 Shares are Sold
(100% of Total) |
||||||||||||||||
|
Gross
Offering Receipt
|
$
|
800,000
|
$
|
4,000,000
|
$
|
8,000,000
|
|||||||||||||
|
Underwriters’
Compensation
|
80,000
|
400,000
|
800,000
|
||||||||||||||||
|
Offering
Expenses
|
601,115
|
626,115
|
676,115
|
||||||||||||||||
|
Net
Proceeds
|
118,885
|
(100
|
)%
|
2,973,885
|
(100
|
)%
|
6,523,885
|
(100
|
)%
|
||||||||||
|
Additional
Sales Representatives
|
0
|
(0
|
)%
|
700,000
|
(24
|
)%
|
1,900,000
|
(29
|
)%
|
||||||||||
|
New
product launches
|
0
|
(0
|
)%
|
119,900
|
(4
|
)%
|
244,900
|
(4
|
)%
|
||||||||||
|
Retail
Slotting
|
0
|
(0
|
)%
|
750,000
|
(25
|
)%
|
1,500,000
|
(23
|
)%
|
||||||||||
|
Brand
Advertising
|
0
|
(0
|
)%
|
750,000
|
(25
|
)%
|
1,500,000
|
(23
|
)%
|
||||||||||
|
Cooler
and in-store displays
|
0
|
(0
|
)%
|
248,985
|
(9
|
)%
|
568,985
|
(9
|
)%
|
||||||||||
|
Chief
Operating Officer
|
0
|
(0
|
)%
|
100,000
|
(3
|
)%
|
100,000
|
(1
|
)%
|
||||||||||
|
West
Coast Brewery
|
0
|
(0
|
)%
|
150,000
|
(5
|
)%
|
150,000
|
(2
|
)%
|
||||||||||
|
Working
Capital
|
118,885
|
(100
|
)%
|
155,000
|
(5
|
)%
|
560,000
|
(9
|
)%
|
||||||||||
|
Total
Estimated Net Proceeds
|
$
|
118,885
|
(100
|
)%
|
$
|
2,973,885
|
(100
|
)%
|
$
|
6,523,885
|
(100
|
)%
|
|||||||
Additional
Sales Representatives. We
will
be able to hire from two to approximately 30 new sales representatives,
depending upon the net proceeds of this offering.
New
Product Launches. We
will
be able to launch from between five and approximately 20 new products, by
which
we mean SKUs, depending upon the net proceeds of this offering. Over the
next 12
- 24 months we plan to launch as many as six new SKUs in the Ginger Brew
line,
five new SKUs in the Virgil’s line, four new China Cola SKUs, three new frozen
confections, and two new candies.
Retail
Slotting. We
plan
to place our products in up to 30,000 new stores. Some stores, particularly
chains, require slotting fees to place product on store shelves. Currently,
we
do not pay slotting fees to place a majority of our products in stores. However,
in the future, we may have to pay slotting fees, depending upon the type
of
stores and chains where we place our products. See “Business — Our Primary
Markets — Mainstream Supermarkets.”
Brand
Advertising. We
plan
to use strategic consumer and trade targeted advertising to build brand
awareness, and support existing and new product placements. Our advertising
plans include print ads in magazine and newspapers, public relations events
and
consumer event sponsorships at which we offer samples of our products.
Cooler
and In-store Display Programs. Our
marketing plans include placing up to 2,000 Reed’s branded refrigerated coolers
and Reed’s branded in-store displays, which we call Kegerators, throughout the
United States and, to a lesser degree, in Canada. We consider coolers and
in-store displays to be efficient and proven marketing tools.
West
Coast Brewery. Depending
upon the net proceeds of this offering, we intend to purchase packaging
automation equipment for the Brewery. This will allow us to increase production
capacity and reduce overall time that our products can be in production,
while
decreasing labor costs.
9
In
June 2005, we entered into a revolving loan and security agreement pursuant
to
which we are able to borrow up to $1,900,000. See “Management’s Discussion and
Analysis and Results of Operations — Liquidity and Capital Resources.” We
intend to use a portion of any funds borrowed pursuant to this loan agreement,
in addition to the proceeds from the sale of the shares in this offering,
for
the uses described above.
If
fewer
than all 2,000,000 shares are sold in this offering, we will reduce or
eliminate some proposed uses as described in the table above. The speed with
which we expand our marketing and advertising for our products, and the number
of products we offer to the public, depends in large part on the number of
shares of common stock sold in this offering. If only a limited number of
shares
are sold, our expansion plans will take substantially longer to implement.
If
fewer
than 200,000 shares are sold, we will use most of the money to hire additional
sales representatives.
Assuming
no funds from this offering were available, over the next twelve months,
we
would be able to launch the 750 ml. champagne bottles for approximately
three to five of our products, including our Reed’s Ginger Brew and swing-lid
bottles for approximately two of our products. In addition, we would be able
to
hire approximately two additional sales representatives. Other elements of
our
expansion plan might have to be curtailed or delayed unless we could find
alternative external sources of working capital.
We
cannot
assure you that the above dollar amounts will be specifically allocated as
set
forth in the foregoing table. Our management has discretion in the application
of the actual net proceeds of the offering. Allocation of net proceeds is
further subject to future events including changes in general economic
conditions, changes in our strategy and our response to competitive pressures
and consumer preferences associated with the products we sell. Pending ultimate
application, the net proceeds will be invested in an interest-bearing bank
account or government securities.
The
“Use
of Proceeds” budget as laid out in the foregoing table represents our best
estimate as to the amounts that will be spent on each category of expenditure
listed. As we evaluate the effectiveness of each of the different expense
categories to grow the business profitably, we expect to modify these amounts
to
use these funds most effectively. We may find that our sales representatives
are
selling mostly our core brands and do not need or want more new product launches
but that funds are better used in purchasing more displays to fuel their
sales
activities. We may find that in-store displays create more cost effective
advertising than straight brand advertising. The evaluation of the use of
funds
is an ongoing, interactive function of management.
DIVIDEND
POLICY
We
have
never declared or paid any cash dividends on our common stock and do not
anticipate paying cash dividends. We currently intend to retain future earnings,
if any, to finance operations and expansion of our business.
We
are
obligated to pay a non-cumulative 5% dividend from lawfully available assets
to
the holders of our Series A preferred stock beginning on June 30, 2005 in
either
cash or additional shares of common stock at our discretion. See
“Description of Our Securities — Preferred Stock.”
(The
rest of this page left blank intentionally)
10
CAPITALIZATION
AS OF September 30, 2005
The
following table sets forth our capitalization as of September 30, 2005 and
as
adjusted to reflect the sale by us of 2,000,000 shares of common stock in
this offering and the application of the estimated net proceeds, assuming
an
offering price of $4.00 per share, after deducting underwriter commissions
and
estimated offering expenses. The table also shows the effect if only 50%
and 10%
of the offering is completed. The information in the table below is qualified
by, and should be read in conjunction with, our audited financial statements
and
related notes appearing elsewhere in this prospectus. The following table
assumes that the underwriter does not exercise its over-allotment option
and
excludes the following shares:
|
·
|
17,500
shares of common stock issuable upon exercise of outstanding options
issued by us under our 2001 Stock Option Plan at a weighted average
exercise price of $6.00;
|
|
·
|
482,500
additional shares of common stock reserved for future issuance
under our
2001 Stock Option Plan;
|
|
·
|
55,000
shares of common stock issuable upon exercise of outstanding options,
other than outstanding options issued under our 2001 Stock Option
Plan, at
a weighted average exercise price of
$2.32;
|
|
·
|
586,376 shares
of common stock issuable upon exercise of outstanding warrants
at a
weighted average exercise price of $2.80;
and
|
|
·
|
200,000
shares reserved for future issuance under the underwriter’s
warrant.
|
|
·
|
123,521 of
common stock upon conversion of
debt.
|
|
·
|
235,760
of common stock issued upon conversion of preferred
stock.
|
|
September
30, 2005
As
adjusted (Based on % of offering completed)
|
|||||||||||||
|
Current
Liabilities:
|
Actual
|
10
%
|
50
%
|
100
%
|
|||||||||
|
Current
portion of long-term debt
|
$
|
112,166
|
$
|
112,166
|
$
|
112,166
|
$
|
112,166
|
|||||
|
Lines
of credit
|
1,381,327
|
1,381,327
|
1,381,327
|
1,381,327
|
|||||||||
|
Total
current liabilities
|
1,493,493
|
1,493,493
|
1,493,493
|
1,493,493
|
|||||||||
|
Long-term
liabilities
|
|||||||||||||
|
Long-term
debt
|
1,092,427
|
1,092,427
|
1,092,427
|
1,092,427
|
|||||||||
|
Notes
payable to related parties
|
252,358
|
252,358
|
252,358
|
252,358
|
|||||||||
|
Total
Long-term liabilities
|
1,344,785
|
1,344,785
|
1,344,785
|
1,344,785
|
|||||||||
|
Stockholders’
equity:
|
|||||||||||||
|
Common
stock — par value $.0001 per share:
|
|||||||||||||
|
Authorized —
11,500,000 shares
|
|||||||||||||
|
Issued
and outstanding — 4,726,091 shares
|
472
|
492
|
572
|
672
|
|||||||||
|
Common
stock to be issued (269,867 shares)
|
34,720
|
34,720
|
34,720
|
34,720
|
|||||||||
|
Additional
paid-in capital
|
2,753,994
|
2,872,859
|
5,727,779
|
9,277,679
|
|||||||||
|
Preferred
stock
|
589,402
|
589,402
|
589,402
|
589,402
|
|||||||||
|
Accumulated
deficit
|
(
2,879,184
|
)
|
(
2,879,184
|
)
|
(
2,879,184
|
)
|
(
2,879,184
|
)
|
|||||
|
Total
stockholders’ equity
|
499,404
|
618,289
|
3,473,289
|
7,023,289
|
|||||||||
|
Total
Capitalization
|
$
|
3,337,682
|
$
|
3,456,567
|
$
|
6,311,567
|
$
|
9,861,567
|
|||||
11
DILUTION
Our
net
tangible book value at September 30, 2005 was $(759,762), or $(0.16) per
share.
Our net tangible book value per share is determined by subtracting the total
amount of our liabilities from the total amount of our tangible assets and
dividing the remainder by the weighted average number of shares of our common
stock outstanding.
The
as
adjusted net tangible book value after this offering will be $6,208,011,
or
$0.92 per share, after deducting estimated expenses of this offering, if
all the
shares in this offering are sold at an assumed offering price of $4.00 per
share. Therefore, purchasers of shares of common stock in this offering will
realize a minimum dilution of $3.08 per share, or about 77% of their
investment. If fewer than all shares offered hereby are sold, the dilution
will
be greater; at 200,000 shares sold, the dilution is 101% and at 1,000,000
shares
sold, the dilution is 88%. The following table illustrates this dilution,
assuming 200,000 shares are sold, 1,000,000 shares are sold, and
2,000,000 shares in this offering are sold:
|
If
200,000
Shares
are Sold
|
If
1,000,000
Shares
are Sold
|
If
2,000,000
Shares
are Sold
|
||||||||
|
Offering
Price per Share
|
$
|
4.00
|
$
|
4.00
|
$
|
4.00
|
||||
|
Net
tangible book value per common share at September 30, 2005
|
(0.16
|
)
|
(0.16
|
)
|
(0.16
|
)
|
||||
|
Increase
per common share attributable to new investors
|
0.12
|
0.62
|
1.08
|
|||||||
|
Net
tangible book value per share of common stock after the offering
|
(0.04
|
)
|
0.46
|
0.92
|
||||||
|
Dilution
per share of common stock to new investors
|
$
|
4.04
|
$
|
3.54
|
$
|
3.08
|
||||
|
Percentage
of dilution per share of common stock to new investors
|
101
|
%
|
88
|
%
|
77
|
%
|
||||
During
the five years prior to the date of the prospectus, we sold shares of common
stock for prices ranging from $1.00 to $4.00 per share.
Additional
dilution, not reflected in the foregoing table, will result to the extent
that
outstanding options and warrants to purchase our common stock are exercised
or
convertible debt or our Series A convertible preferred stock is converted
into shares of our common stock.
As
of
September 30, 2005, we had outstanding options and warrants to purchase an
aggregate of 658,876 shares of common stock at a weighted average
exercise price of $2.84 per share.
As
of
September 30, 2005, we had outstanding an aggregate $247,042 of convertible
debt, including accrued and unpaid interest, to purchase an aggregate
of 123,521 shares of common stock at a weighted average exercise price
of $2.00 per share.
As
of
September 30, 2005, we had 58,940 shares of preferred stock outstanding,
which
can be converted into 4 shares of the Company’s common stock, or 235,760 shares
of common stock at $2.50 per share of common stock.
We
have
not issued and will not issue options or warrants with an exercise price
less
than 85% of the fair market value of the underlying common stock on the day
of
the grant.
(The
rest of this page left blank intentionally)
12
Comparative
Data
The
following charts illustrate the pro forma proportionate ownership of our
common
stock upon completion of the Offering if 10%, 50%, and 100% of the Offering
is
sold. These charts compare the relative amounts paid, by the present
shareholders, and by investors in this Offering, assuming no changes in net
tangible book value other than those resulting from the Offering.
|
If
10% of
Offering
sold
(200,000
shares)
|
Shares
Purchased
|
Percentage
|
Total
Consideration
($ )
|
Percentage
|
Average
Price
per
Share Paid ($ )
|
|||||||||||
|
Existing
Shareholders (1)
|
4,726,091
|
95.9
|
%
|
2,783,936
|
77.7
|
%
|
0.59
|
|||||||||
|
New
Investors
|
200,000
|
4.1
|
%
|
800,000
|
22.3
|
%
|
4.00
|
|||||||||
|
Total
|
4,926,091
|
100
|
%
|
3,583,936
|
100
|
%
|
||||||||||
|
If
50% of
Offering
sold
(1,000,000
shares)
|
Shares
Purchased
|
Percentage
|
Total
Consideration
($ )
|
Percentage
|
Average
Price
per
Share Paid ($ )
|
|||||||||||
|
Existing
Shareholders (1)
|
4,726,091
|
82.5
|
%
|
2,783,936
|
41.1
|
%
|
0.59
|
|||||||||
|
New
Investors
|
1,000,000
|
17.5
|
%
|
4,000,000
|
58.9
|
%
|
4.00
|
|||||||||
|
Total
|
5,726,091
|
100
|
%
|
6,783,936
|
100
|
%
|
||||||||||
|
If
100% of
Offering
sold
(2,000,000
shares)
|
Shares
Purchased
|
Percentage
|
Total
Consideration
($ )
|
Percentage
|
Average
Price
per
Share Paid ($ )
|
|||||||||||
|
Existing
Shareholders (1)
|
4,726,091
|
70.3
|
%
|
2,783,936
|
25.8
|
%
|
0.59
|
|||||||||
|
New
Investors
|
2,000,000
|
29.7
|
%
|
8,000,000
|
74.2
|
%
|
4.00
|
|||||||||
|
Total
|
6,726,091
|
100
|
%
|
10,783,936
|
100
|
%
|
||||||||||
(1)
Based
on
the capital contribution from inception to September 30, 2005
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
|
|||||
13
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*
|
#
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
|
0.750
|
1993
|
|||||||||
|
Private
Investment
|
C
|
10,000
|
1.500
|
1996
|
|||||||||
|
Exempt
Private Placement
|
C
|
142,100
|
1.500
|
1999
|
|||||||||
|
SCOR
Direct Public Offering
|
C
|
450,275
|
2.000
|
2000
|
|||||||||
|
Exempt
Private Placement (existing shareholder)
|
C
|
250,000
|
2.000
|
2000
|
|||||||||
|
Note
Conversion Options (1991) Exercise
|
C
|
200,000
|
0.750
|
2000
|
|||||||||
|
Warrant
(1991) Exercise
|
C
|
37,500
|
1.000
|
2000
|
|||||||||
|
Employee
Bonus Grants
|
C
|
1,500
|
2.000
|
2000
|
|||||||||
|
China
Cola Acquisition
|
C
|
130,000
|
2.000
|
2000
|
|||||||||
|
Options
(1991) Exercise
|
C
|
20,000
|
1.000
|
2001
|
|||||||||
|
Employee
Bonus Grants
|
C
|
14,500
|
2.000
|
2001
|
|||||||||
|
Vendor
Payment
|
C
|
3,200
|
2.000
|
2001
|
|||||||||
|
Exempt
Private Placement (existing shareholder)
|
C
|
500
|
3.000
|
2001
|
|||||||||
|
Loan
Conversion Option (1991) Exercise
|
C
|
8,889
|
1.125
|
2001
|
|||||||||
|
Loan
Conversion Option (1992) Exercise
|
C
|
11,877
|
1.500
|
2001
|
|||||||||
|
Exempt
Private Placement (existing shareholder)
|
C
|
3,750
|
4.000
|
2001
|
|||||||||
|
Employee
Bonus Grants
|
C
|
1,500
|
3.333
|
2003
|
|||||||||
|
Exempt
Private Placement (existing shareholder)
|
C
|
3,000
|
3.500
|
2003
|
|||||||||
|
Exempt
Private Placement (existing shareholders)
|
‡Pr
|
‡33,440
|
‡10.000
|
2004
|
|||||||||
|
Corporate
Note (2001) Conversion Exercised
|
‡Pr
|
‡25,500
|
‡10.000
|
2004
|
|||||||||
|
Avg.
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, O=Option
**On
May 31, 2005 these options were exercised and converted to shares
of
common stock
|
(The
rest of this page left blank intentionally)
14
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this prospectus.
Except for historical information, the following discussion and analysis
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. See “Forward Looking Statements,” beginning at
page 8 of this prospectus.
Overview
We
develop, manufacture, market, and sell “alternative” or “New Age” beverages and
assorted foods. We currently manufacture, market and sell six unique product
lines:
|
·
|
Reed’s
Ginger Brews
|
|
·
|
Virgil’s
Root Beer and Cream Sodas
|
|
·
|
China
Colas
|
|
·
|
Reed’s
Ginger Juice Brews
|
|
·
|
Reed’s
Ginger Candies
|
|
·
|
Reed’s
Ginger Ice Creams
|
We
currently distribute and sell our products through a network of natural,
gourmet, and independent distributors, as well as through our growing in-house
direct sales and distribution team, throughout the United States and, to
a
lesser extent, in Canada. In 2003, we implemented direct sales to several
large
national retail accounts. These accounted for approximately 19% of our gross
sales in 2003 and approximately 22% of our gross sales in 2004. In addition,
in
2003 we created our own distribution system in southern California. This
accounted for approximately 1% of our gross sales in 2003 and approximately
4%
of our gross sales in 2004. The following table shows a breakdown of net
sales
with respect to the distribution channel.
|
Distribution
Channel
|
2003
sales
|
Percentage
sales
|
2004
sales
|
Percentage
sales
|
|||||||||
|
Direct
sales to large retailers
|
$
|
1,286,365
|
19
|
%
|
$
|
1,983,598
|
22
|
%
|
|||||
|
Our
local direct distribution
|
$
|
90,121
|
1
|
%
|
$
|
395,601
|
4
|
%
|
|||||
|
Natural,
Gourmet and Mainstream distributors
|
$
|
5,405,290
|
80
|
%
|
$
|
6,599,166
|
74
|
%
|
|||||
|
Total
|
$
|
6,781,776
|
100
|
%
|
$
|
8,978,365
|
100
|
%
|
New
products, or SKUs, that we launched in 2003 include a 5-liter “party keg”
version of our Virgil’s Root Beer and Virgil’s Cream Soda in 12-ounce long neck
bottles. Both of these high-margin items continued to contribute to growth
of
our sales for 2003 and 2004.
In
2003,
we expanded our marketing from our historical focus on natural and gourmet
foods
to include more mainstream markets. These efforts included selling our products
directly to large retail accounts, primarily Costco, BJ Wholesale, and Cost
Plus World Markets. In addition, through our current North American natural
and
gourmet distributors, we have focused sales to the natural food section of
mainstream supermarket chains. This has resulted in our products now being
sold
in Safeway, Kroger’s and numerous other national supermarket chains. Our local
distribution in southern California is placing our products directly into
accounts locally, including Ralph’s, Bristol Farms, and many independent
accounts.
We
gauge
the financial success of our company by a number of different parameters.
Because our industry typically values companies on a top-line basis, one
of our
main company goals is to increase net sales. We continue to increase net
sales
each year. Net sales have increased from $6.2 million in 2001 to
$6.4 million in 2002 to $6.8 million in 2003. In 2004 sales grew to
$9.0 million. We believe that the increase in net sales comes from three
sources: successes in our new local distribution, increases in our core business
and our new direct sales to large retailers.
Almost
as
important as increasing our net sales are increasing our gross margins. We
continue to work to reduce costs related to production of our products. In
2002,
we purchased and outfitted a West Coast production facility, the Brewery,
in
part to help reduce both production costs and freight costs associated with
our
West Coast sales. Gross profits declined after the construction of the Brewery.
Gross margins decreased from 24.8% in 2002 to 19.5% in 2003. We believe that
the
inefficiencies commensurate with a start-up period for the Brewery have been
a
principal cause of the decline of our gross margins in 2003. Gross margins
recovered to 20.9% in 2004, we believe that this increase in gross margin
is
because of the Brewery attaining greater functionality and efficiencies.
As the
Brewery continues to become more fully operational, we believe that we will
see
greater margin improvements due to freight and production savings. We expect
to
have the Brewery fully functional by the end of 2005. The following table
shows
the progress of productions at the Brewery and the savings being generated:
15
|
Year
|
produced
at
new
brewery
|
|
Candy
production
savings
($)
|
|
Cases
of beverages
produced
at
new
brewery
|
|
Freight
savings
beverages
($)
|
|
Total
savings
($)
|
|||||||
|
2002
|
0
|
$
|
0
|
0
|
$
|
0
|
$
|
0
|
||||||||
|
2003
|
33,514
|
$
|
33,514
|
16,835
|
$
|
22,390
|
$
|
55,904
|
||||||||
|
2004
|
31,278
|
$
|
31,278
|
113,816
|
$
|
151,372
|
$
|
182,650
|
||||||||
In
addition, through the Brewery, we have increased our capability to offer
specialty beverage packaging options not typically available in the marketplace,
such as our new 5-liter party keg line and our new 750 ml. champagne bottle
line. We also intend to manage general and administrative and selling expenses,
in order to improve our profitability.
Trends,
Risks, Challenges, Opportunities That May or Are Currently Affecting Our
Business
Our
main
challenges, trends, risks, and opportunities that could affect or are affecting
our financial results include but are not limited to:
Fuel
Prices -
As oil
prices continue to rise, our freight rates, which run at approximately 8%
of net
sales, have been increasing. We currently see freight rates increasing by
an
additional 5% to 10% in the near term. On the other hand, we expect that
the
Brewery will counter this trend, at least in part, by reducing our need for
cross-country freight services.
Low
Carbohydrate Diets and Obesity -
Consumers have been demanding lower carbohydrate products. This trend did
not
seem to affect our sales growth in 2004. We are watching this trend closely
and
have started developing low-carbohydrate versions of some of our beverages.
Distribution
Consolidation -
The
trend towards continued consolidation of the beverage distribution industry
through mergers and acquisitions has inspired us to start our own direct
distribution locally in southern California and to go to large national
retailers. Consolidation among natural foods industry distributors has not
had
an affect on our sales. However, this consolidation may limit the distributor
options outside natural foods to service mass-market food accounts.
Consumer
Demanding More Natural Foods -
The
rapid growth of the natural foods industry has been fueled by the growing
consumer awareness of the potential health problems due to the consumption
of
chemicals in the diet. Consumers are reading ingredient labels and choosing
products based on them. We design products with these consumer concerns in
mind.
We feel this trend toward more natural products is one of the main trends
behind
our growth. Recently, this trend in drinks has 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 products are designed with this consumer demand in mind also.
Supermarket
and Natural Food Stores -
More
and more supermarkets, in order to compete with the growing natural food
industry, have started including natural food sections. As a result of this
trend, our products are now available in supermarkets throughout the United
States. 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. See the “Business”
section regarding supermarket marketing.
Beverage
Packaging Changes -
Beverage packaging has continued to innovate. There is an increase in the
sophistication with respect to beverage packaging design. While we feel that
our
current core brands still compete on the level of packaging, we continue
to
experiment with new and novel packaging designs such as the 5-liter party
keg
and 750 ml champagne style bottles. We have further plans for other innovative
packaging designs. See the “Business” section for new product developments.
Cash
Flow Requirements -
Growth
of our company will depend on the availability of additional capital infusions
to finance. We have a financial history of losses and are dependent on
non-banking sources of capital, which tend to be more expensive and charge
higher interest rates. Any increase in costs of goods will further increase
losses and will further tighten cash reserves. We feel that we could raise
prices to offset this problem if it occurs. We haven’t increased our prices
since inception and we feel that the market has been increasing in terms
of
beverage prices in the last ten years.
16
Packaging
or Raw Material Price Increases -
An
increase in packaging or raw materials could be adverse to our cash flow
and
income. We have not had a significant increase in any of these costs for
many
years but the effect of the US dollar dropping in value with respect to other
major world currencies and rising fuel prices could possibly increase costs
of
the raw materials and packaging making up the cost of goods manufactured.
We
continue to search for packaging and production alternatives to reduce our
cost
of goods.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America, or GAAP. GAAP
requires us to make estimates and assumptions that affect the reported amounts
in our consolidated financial statements including various allowances and
reserves for accounts receivable and inventories, the estimated lives of
long-lived assets and trademarks and trademark licenses, as well as claims
and
contingencies arising out of litigation or other transactions that occur
in the
normal course of business. The following summarize our most significant
accounting and reporting policies and practices:
Trademark
License and Trademarks. Trademark
license and trademarks primarily represent the costs we pay for exclusive
ownership of the Reed’s(R) trademark in connection with the manufacture, sale
and distribution of beverages and water and non-beverage products. We also
own
the Virgil’s(R) trademark and the China Cola(R) trademark. In addition, we own a
number of other trademarks in the United States as well as in a number of
countries around the world. We account for these items in accordance with
SFAS No. 142, “Goodwill and Other Intangible Assets.” Under the provisions
of SFAS No. 142, we do not amortize indefinite-lived trademark licenses and
trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by
the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales
of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified
during
the years ended December 31, 2004 or 2003.
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, 2004 or 2003.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which
is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on
our
consolidated balance sheet, as well as net income, could be material.
Management’s assumptions about cash flows and discount rates require significant
judgment because actual revenues and expenses have fluctuated in the past
and 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.
17
Income
Taxes. Current
income tax expense is the amount of income taxes expected to be payable for
the
current year. A deferred income tax asset or liability is established for
the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. We consider future taxable income
and
ongoing, prudent, and feasible tax planning strategies, in assessing the
value
of our deferred tax assets. If our management determines that it is more
likely
than not that these assets will not be realized, we will reduce the value
of
these assets to their expected realizable value, thereby decreasing net income.
Evaluating the value of these assets is necessarily based on our management’s
judgment. If our management subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the
value
of the deferred tax assets would be increased, thereby increasing net income
in
the period when that determination was made.
Recent
Accounting Pronouncements
In
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 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. The Company has evaluated the impact of the
adoption of SFAS 152, 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.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. 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.
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.
18
Results
of Operations
Nine
Months Ended September 30, 2005 Compared to Nine Months Ended September 30,
2004
Net
Sales. Net sales increased by $429,900, or 6.4%, to $7,134,940 in the nine
months ended September 30, 2005 from $6,705,040 in the nine months ended
September 30, 2004. 2004 sales figures include a one time sale of $348,000
to
one customer. Given that our overall sales increased $429,900, our sales
increase to recurring customers approximated $778,000, for the nine months
ending September 30, 2005. This trend is consistent with management’s plans to
increase sales to its existing customer base as well as search for new
customers, thereby increasing its customer base. This net sales increase
was
primarily the result of sales growth of existing products. Existing product
growth came from the Virgil’s Root Beer line (7.5%) including the new 5 liter
party kegs and the cream soda and from the Reed’s Ginger Brew products line
(4.7%). While we keep limited data on the following, we believe these existing
product sales increases were due to increased sales in existing outlets and
the
expansion of the number of outlets carrying these products.
Gross
Profit. Gross profit was $1,313,053 for the nine months ended September 30,
2005, a decrease of $8,590 or 0.6% lower than the gross profit for the nine
months ended September 30, 2004 of $1,321,643. As a percentage of net sales,
gross profit decreased to 18.4% in the nine months ended September 30, 2005
from
19.7% in the nine months ended September 30, 2004. This decrease was due
to
increased fuel costs reflected in an increase in freight costs and increased
packaging costs due to fuel related price increases.
General
and Administrative & Selling Expenses. These expenses increased by $226,518
or 17.4% to $1,527,391 in the nine months ended September 30, 2005 from
$1,300,873 in the nine months ended September 30, 2004 and increased as a
percentage of net sales to 21.4% in the nine months ended September 30,
2005 from 19.4% in the nine months ended September 30, 2004. General and
administrative and selling expenses increased for the following reasons.
We had
an increase in commissions (2.1%) due to the increased reliance on outside
brokers. Selling expenses also increased due to demos in new accounts to
launch
our products in those accounts (6.7%). Professional fees such as accounting
fees
increased (1.6%) due to the public reporting. Sales salaries increased due
to
the increase in sales force staff. We expect the new level of expenses to
continue going forward but to not increase in the short term.
Interest
expense was $235,042 in the nine months ended September 30, 2005, compared
to
interest expense of $178,479 in the nine months ended September 30, 2004.
We had
higher interest expense in 2005 due to increased borrowing and an increase
in
the prime lending rate on our receivable line of credit with our lender,
BACC.
Twelve
Months Ended December 31, 2004 Compared to Twelve Months Ended
December 31, 2003
Net
sales
increased by $2,196,589, or 32.4%, to $8,978,365 in 2004 from $6,781,776
in
2003. The net sales increase was primarily the result of sales growth of
existing products (13.5%), and new products (18.9%). Existing product growth
came from the Virgil’s Root Beer 12 ounce bottle sales (5.6%) and from the core
Reed’s Ginger Brew products (7.9%) consisting of Reed’s Original, Reed’s Extra
and Reed’s Premium Ginger Brew. While we keep limited data on the following, we
believe these existing product sales increases were due to increased sales
in
existing outlets and the expansion of the number of outlets carrying these
products. New product growth came from the 5 liter Virgil’s Root Beer party keg
(13.7%) and from the new Virgil’s Cream Soda (5.2%). These new product launches
did not employ any special promotional discounts above and beyond our normal
promotional activity for any of our products. Sales of these new items have
continued to be steady and growing.
19
In
2004,
we incurred $400,000 of promotional expenses due to deals offered by our
sales
force in the sale of our products. This represented about 4.3% of gross sales.
In 2003, they were $240,000 and about 3.4% of gross sales. These deals are
accounted for as a direct reduction of sales. These percentage rates are
in line
with our historical rates and we do not anticipate them changing significantly.
These promotional expenses are monitored and kept in a certain range.
As
a
percentage of net sales, gross profit increased to 20.9% in 2004 from 19.5%
in
2003. This increase was due to reduced ingredient expenses (0.2%), reduced
warehouse expenses (0.3%) as a result of the West Coast brewery reducing
the
need for outside warehouse services, reduced depreciation as a percentage
of
sales (0.5%) and reduced production costs (2.2%) associated with savings
generated from the West Coast brewery continuing to come on line. These
increases were offset by higher freight costs (-1.8%) due to increased fuels
costs being passed on to the company.
Selling
expenses increased by $136,085 or 20.7% to $791,975 in 2004 from $655,890
in
2003 and decreased as a percentage of net sales to 8.7% in 2004 from 9.7%
in
2003. The increase in selling expenses was primarily due to increased sales
wages due to a larger sales force (19.5%) and more commissions due to increased
number of outside sales brokers (18.7%) offset by reduced selling expenses
(-8.4%) and reduced promotional expenses (-10.2%). Selling expenses reduced
due
to cheaper telephone services and increased coordination between the company’s
two sales forces to reduce duplicity in travel needs. Promotional expenses
reduced because the company reduced trade shows and advertising expenses.
The
focus of our marketing is shifting to more in store promotions and more direct
selling than trade show selling.
General
and administrative expenses increased by $316,277 or 41.7%, to $1,074,536
in
2004 from $758,258 in 2003 and increased as a percentage of net sales to
12.0%
in 2004 from 11.2% in 2003. The increase in general and administrative expenses
was primarily due to increased payroll expenses (23.1%) due to a larger staff
to
handle the increased business, increased transportation expenses (17.3%)
due to
the expansion of the local direct distribution, increased depreciation expenses
(9.0%) due to equipment being used for local distribution, increased tax
expenses (10.1%) due to the company paying state franchise taxes for two
years.
The remaining expense increases (40.5%) were spread evenly over the other
expenses categories and were a direct result of the increased sales during
2004.
Legal
Defense costs for 2004 were $80,156. These expenses were pursuant
defense for a lawsuit brought against us by a consultant alleging funds due
him from us. We mounted a successful defense in this action. We filed a post
trial motion for attorney fees and costs and were awarded $64,895. The case
is
in appeal and we project that we may incur additional legal expenses up to
$35,
000 over the next 12 months in pursuit of further defense in this case.
Interest
expense was $250,738 in 2003, compared to interest expense of $255,033 in
2004.
We had slightly higher interest expense in 2004 due to increased borrowing
on
our receivable line of credit with our lender, Bay
Business Credit.
In
addition, in 2003, we expensed $426,546 for a public offering of our common
stock, which offering was withdrawn. We filed the registration statement
for the
offering on October 25, 2001; it became effective on December 31, 2002; it
was
withdrawn on March 26, 2003. We did not complete the offering. We had a
nine-month window to sell shares and because the initial stock sales were
slow
and the stock market was depressed due to the Iraq war we withdrew the offering.
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20
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
September 30, 2005, we had a working capital deficit of $1,369,548, 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 losses
from operations, a decrease in accounts receivable, an increase in accounts
payable and an increase in use of our line of credit.
As
of
September 30, 2005, cash was $38,928, compared to $42,488 as of
December 31, 2004. Net cash provided by operating activities was $45,377
for the nine months ended September 30, 2005. This amount arose from a decrease
in accounts receivable and an increase in accounts payable and accrued expenses,
offset with our loss from operations and increase in prepaid expenses.
We
used
$113,832 in investing activities for the nine months ended September 30,
2005,
primarily for the purchase of equipment for our West Coast Brewery and a
loan
made to a director before we become public. The purchase of equipment was
for
the 5 liter party keg filler. This piece of equipment reduces the labor costs
by
over 75% in the manufacture of the party kegs.
Cash
flow
provided in financing activities was $64,895 for the nine months ended September
30, 2005 and was the result of increased borrowing on our line of credit,
principal borrowing on debt offset by principal payments of debt and deferred
offering expenses.
Our
prepaid expenses increased for the nine months ended September 30, 2005
primarily due to deposits made for machinery and product which were not on
hand
as of that date.
Inflation
Although
management expects that our operations will be influenced by general economic
conditions, we do not believe that inflation has a material effect on our
results of operations.
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21
22
BUSINESS
Background
We
are a
growing developer, manufacturer, marketer, and seller of New Age beverages,
as
well as candies and ice creams. New Age beverages is a category that includes
natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports
drinks,
and water.
We
currently offer 14 beverages, including six varieties of Reed’s Ginger Brews,
Virgil’s Root Beer and Cream Soda, China Cola and Cherry China Cola, and four
varieties of a new line of non-carbonated ginger brews called Reed’s Ginger
Juice Brews. Our recent products include Reed’s Crystallized Ginger Candy,
Reed’s Crystallized Ginger Baking Bits, Reed’s Ginger Candy Chews, Reed’s
Original Ginger Ice Cream, Reed’s Chocolate Ginger Ice Cream, and Reed’s Green
Tea Ginger Ice Cream.
We
sell
the majority of our products primarily in upscale gourmet and natural food
stores and supermarket chains in the United States and, to a lesser degree,
in
Canada. Historically, most of our beverages were sold in the natural food
industry.
Our
current business strategy is to maintain a firm marketing focus in the natural
food marketplace while building a national direct sales and distribution
force
to take our proven products into mainstream market and distribution
channels.
Key
elements of our business strategy include:
|
·
|
increased
direct sales and distribution;
|
|
·
|
increased
store placement in mass market;
|
|
·
|
strong
national distributorships;
|
|
·
|
stimulating
strong consumer demand for our existing brands and
products;
|
|
·
|
developing
additional unique alternative beverage brands and other products;
and
|
|
·
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specialty
packaging like our 5-liter party kegs, our ceramic swing-lid bottle
and
our 750 ml. champagne bottle.
|
Our
current sales efforts are focused in three areas. Our first area of focus
is
sales to natural and specialty food stores in the United States and, to a
lesser
degree, Canada, through our regional sales people in conjunction with regional
food brokerage organizations. The second area of focus is our local direct
store
distribution program, using Company-owned trucks and drivers to service a
majority of our retail accounts in southern California. The third area of
focus
is our direct sales effort that sells directly to large retailers and mainstream
beverage distributors. We believe that all three sales efforts are contributing
to our growth. We intend to continue to expand our sales personnel in each
of
these three sales efforts.
We
are
developing new packaging options of our most successful products. These new
packaging options are 750 ml. champagne bottle versions, European swing
lid-style bottles, and 5-liter party kegs. These new packaging options are
being
utilized in all three sales efforts.
We
create
consumer demand for our products in the following ways: we support sampling
programs of our products that sample approximately 30,000 people a week, we
generate free press through our in house public relations, we advertise in
national magazines targeting our customers, we maintain a company website
and we
participate in large public events as sponsors.
In
addition, our Brewery recently started contracting, or co-packing, production
for other companies’ products, although this is a small part of our business. We
do not maintain product recall insurance at the Brewery. Generally, we believe
that we maintain adequate insurance coverage for our business as it is currently
conducted.
Our
business expansion plans are contingent to a great extent by the success
of this
offering. If all or most of the shares being offered hereby are sold, we
will be
able to substantially increase our marketing, advertising and distribution,
as well as the number of products we offer. If only a smaller number of shares
are sold, we will need to expand at a much slower rate.
Our
principal executive offices are located at 13000 South Spring Street, Los
Angeles, California 90061. Our telephone number is (310) 217-9400. Our
Internet address is www.reedsgingerbrew.com
.
Information contained on our website or that is accessible through our website
should not be considered to be part of this prospectus.
We
incorporated in 1991 in Florida as Original Beverage Corporation. In October
2001, we changed our state of incorporation to Delaware and also changed
our
name to Reed’s, Inc.
23
Historical
Development
In
June
1987, Christopher J. Reed, our founder and CEO, began development of Reed’s
Original Ginger Brew, his first beverage creation. After two years of
development, it was ready for market in June 1989. Initial sales were in
11
southern California stores.
By
1990,
we brought on the next three natural food distributors. Production moved
to a
larger facility in Boulder, Colorado. In 1991, we moved all of our production
to
our co-pack facility in Pennsylvania. We began exhibiting at the national
natural and specialty food trade shows, which brought national distribution
in
natural, gourmet and specialty foods and the signing of our first mainstream
supermarket distributor. Sales topped $500,000.
Also
in
1991, the United States National Association of the Specialty Food Trade,
or
NASFT, and the Canadian Fancy Food Association, or CFFA, both gave us top
honors
as a new product that year. CFFA awarded us “Best Imported Food Product” at
their annual show and Original Ginger Brew was a NASFT “Outstanding Beverage
Finalist” in the United States.
Throughout
the 1990’s, we continued to develop and launch new ginger brew varieties. Reed’s
Ginger Brews reached broad placement in natural foods stores nationwide.
The
major natural food distributors and many specialty food and mainstream beverage
distributors started carrying our beverages. In 1997, we began licensing
the
products of China Cola. In addition, we launched Reed’s Crystallized Ginger
Candy. We have the candy manufactured in Fiji under a proprietary, natural,
non-sulfured process.
In
1999,
we purchased the Virgil’s Root Beer brand from Crowley Beverage Company. The
brand has won numerous gourmet awards. Because the Virgil’s brand is partially
produced under our auspices in Europe, this purchase also secured our entry
into
the European Union for our entire line of products.
In
2000,
we launched Reed’s Original Ginger Ice Cream and two more products: Reed’s
Cherry Ginger Brew and a beautiful designer 10-ounce gift tin of our Reed’s
Crystallized Ginger Candy. In December 2000, we acquired China Cola. Our
sales
broke through the $5 million level, reaching $5.7 million that year.
In
connection with our acquisition of China Cola in 2000, we agreed to pay
the
seller royalties equal to $0.75 per case sold. The minimum payments per
agreement year were $18,750 and the royalties expired on July 1, 2002.
In
December 2000, we also purchased an 18,000 square foot warehouse property,
the Brewery, to house our West Coast production facility. The Brewery now
also
houses our executive offices and serves as our southern California warehouse
facility.
In
2001,
we saw the national launch of Reed’s Chocolate Ginger Ice Cream and Reed’s Green
Tea Ginger Ice Cream. We also expanded our confectionary line with two new
candy
products: Reed’s Crystallized Ginger Baking Bits and Reed’s Ginger Candy Chews.
In
2002,
we launched our Reed’s Ginger Juice Brew line, with four flavors of organic
juice blends. In November, we completed our first test runs of Reed’s and
Virgil’s products at the new Brewery and in January 2003, our first commercially
available products came off the Los Angeles line.
We
filed
a registration statement on Form SB-2 offering 3,000,000 shares at $6.00
through
Blue Bay Capital Corp., which was declared effective by the SEC on
December 31, 2002. We withdrew that Registration Statement in March 2003 in
response to our analysis of capital market conditions in the economic climate
surrounding the 2003 Iraq War. We collected $11,160; all moneys collected
were
returned.
We
launched our own direct distribution in Los Angeles in April 2003. In its
first
year, it successfully opened hundreds of new accounts in stores that represent
a
completely new phase of expansion for our sales and distribution of our
products. These include successes in industrial foodservice, hospitals, motion
picture studios, local “mom and pop” groceries and mainstream supermarket
chains, both large and small. In November, we launched the 5-liter Virgil’s
party keg and sales for that single SKU reached $120,000 in the first month.
This was due to large, initial orders from Costco Club stores in
San Diego, Arizona, New England, and Texas. Market expansion in this area
continues to accelerate.
In
2004,
we launched Virgil’s Cream Soda, draught Virgil’s Root Beer, and draught Cream
Soda from the Brewery, with installations at the Getty Center in Los Angeles,
Fox Studios and other locations around Los Angeles. In May, our local southern
California direct sales effort landed direct distribution of our products
into
Ralph’s supermarkets. In October 2004, we launched our two newest products:
Virgil’s Cream Soda in a 5-liter keg and Reed’s Spiced Apple Brew in a
750 ml. champagne bottle.
24
Industry
Overview
Our
beverages are classified as New Age beverages, a category that includes natural
soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks and
water. In just four years, manufacturers’ sales of New Age beverages ballooned
from $8 billion in 1998 to more than $13 billion in 2002. This
represents an average growth of more than 11% per year. In 2004, dollar
sales are expected to reach $15 billion, reflecting average growth of 7.4%
from 2002. Estimates are that sales will reach more than $18 billion by
2008. (Source: Business Trends Analysts) The Alternative Beverage category
is a
small portion of the non-alcoholic beverage market, which has annual sales
in
excess of $80 billion.
The
candy
industry in the United States exceeds $23 billion in sales annually in
2003, of which approximately 40% is non-chocolate candy. The average American
consumes over 25 pounds of candy per year. (Source: National Confectioners
Association)
The
ice
cream industry in the United States generates more than $20 billion in
annual sales in 2003. (Source: International Dairy Foods Association and
the
United States Dairy Association) The packaged ice cream industry includes
economy, regular, premium, and super-premium products.
Super-premium
ice cream such as Reed’s Ginger Ice Creams is generally characterized by a
greater richness and density than other kinds of ice cream. This higher quality
ice cream generally costs more than other kinds and is usually marketed by
emphasizing quality, flavor selection, texture and brand image. Based on
supermarket sales, super-premium sales in the United States were
$700 million in 2003, or approximately 3.5% of all ice cream sales.
(Source: AC Nielsen Scan Trak) The highest supermarket sales increases in
2003 were seen by the premium and super-premium higher fat varieties. Sales
of
super-premium ice cream grew by more than 12% in 2003 over 2002. (Source:
International Dairy Foods Association)
Our
Products
We
currently manufacture and sell 14 beverages, two candies, and three ice
creams. We make all of our products using premium all-natural ingredients.
According to Spence Information Services (SPINS), which is the only sales
information service catering to the natural food trade; Reed’s Brews and
Virgil’s Root Beer currently hold three of the top ten positions based on dollar
sales among all beverages in the natural foods industry with Reed’s Extra Ginger
Brew holding the number 1 position. Our products include:
Beverages
Reed’s
Ginger Brews
Why
ginger? We have found friends and advocates among alternative, holistic,
naturopathic, and homeopathic medical practitioners, dieticians and medical
doctors. This is because our beverages contain a high volume of ginger. A
number
of practitioners have contacted us of their own accord, telling us of their
habit of recommending Reed’s Extra Ginger Brew for their patients as a simple
way to ingest a known level of ginger. Reed’s Ginger Brews contain between eight
and 26 grams of fresh ginger in every 12-ounce bottle.
While
we
make no claim as to any medical or therapeutic benefits of our products,
among
the applications frequently cited in third-party medical studies on ginger
are:
|
·
|
Recommended
use for prevention and relief of motion
sickness;
|
|
·
|
A
preferred alternative to aspirin in heart attack
prevention,
|
|
·
|
A
safe and effective alternative to pharmaceutical anti-ulcer
drugs,
|
|
·
|
Anti-inflammatory
treatment for arthritis,
|
|
·
|
Treatment
for a variety of digestive disorders, including both constipation
and
diarrhea,
|
|
·
|
Natural
therapy for menstrual discomfort, nausea, colds and influenza,
and
|
|
·
|
Anti-cancer
properties
|
|
·
|
References:
|
|
Ø
|
University
of Minnesota Press and ePress (October,
2003),
|
|
Ø
|
Vegetarian
Times (Jan. 2004),
|
|
Ø
|
Hormel
Institute of Phoenix, Az (Jan.
2004),
|
|
Ø
|
Common
Spice Or Wonder Drug (Herbal Free Press,
1993)
|
The
United States Food and Drugs Administration (FDA) include Ginger on their
GRAS
(generally recognized as safe) list, however, neither the FDA nor any other
government agency officially endorses or recommends the use of ginger as
a
dietary supplement.
25
Ginger
ale is the oldest known soft drink. Before modern soft drink technology existed,
non-alcoholic beverages were brewed at home directly from herbs, roots, spices,
and fruits. These handcrafted brews were then aged like wine and highly prized
for their taste and their tonic, health-giving properties. Reed’s Brews are a
revival of this home brewing art and we make them with care and attention
to
wholesomeness and quality, using the finest fresh herbs, roots, spices, and
fruits. Our expert brew masters brew each batch and age it with great pride.
We
believe that Reed’s Ginger Brews are unique in their kettle brewed origin among
all mass-marketed soft drinks. We use no refined sugars as sweeteners. Our
products differ from commercial soft drinks in three particular characteristics:
sweetening, carbonation, and coloring. Reed’s Ginger Brews present 20% less
sweetness, for greater adult appeal. Instead of using injected-based
carbonation, we produce our carbonation naturally, through slower, beer-oriented
techniques. This process produces smaller, longer lasting bubbles that do
not
dissipate rapidly when the bottle is opened. We do not add coloring. The
color
of our products comes naturally from herbs, fruits, spices, roots and juices.
In
addition, since Reed’s Brews are pasteurized, they do not require or contain any
preservatives. In contrast, modern commercial soft drinks generally are produced
using natural and artificial flavor concentrates prepared by flavor
laboratories, tap water, and highly refined sweeteners. Typically, manufacturers
make a centrally processed concentrate that will lend itself to a wide variety
of situations, waters, and filling systems. The final product is generally
cold-filled and requires preservatives for stability. Colors are added that
are
either natural, although highly processed, or artificial.
We
currently manufacture and sell six varieties of Reed’s Ginger Brews:
Reed’s
Original Ginger Brew was
our
first creation, and is a Jamaican recipe for homemade ginger ale using
17 grams of fresh ginger root, lemon, lime, honey, fructose, pineapple,
herbs, and spices. Reed’s Original Ginger Brew is 20% fruit juice.
Reed’s
Extra Ginger Brew is
the
same approximate recipe, with 26 grams of fresh ginger root for a stronger
bite. Reed’s Extra Ginger Brew is 20% fruit juice.
Reed’s
Premium Ginger Brew is
the
no-fructose version of Reed’s Original Ginger Brew, and is sweetened only with
honey and pineapple juice. Reed’s Premium Ginger Brew is 20% fruit juice.
Reed’s
Raspberry Ginger Brew is
brewed
from 17 grams of fresh ginger root, raspberry juice, and lime. It is 20%
raspberry juice and is sweetened with fruit juice and fructose.
Reed’s
Spiced Apple Brew uses
8 grams of fresh ginger root, the finest tart German apple juice, and such
apple pie spices as cinnamon, cloves, and allspice. Spiced Apple Brew is
50%
apple juice and sweetened with fruit juice and fructose.
Reed’s
Cherry Ginger Brew is
the
newest addition to our Ginger Brew family, and is naturally brewed from:
filtered water, fructose, fresh ginger root, cherry juice from concentrate,
and
spices. Reed’s Cherry Ginger Brew is 22% cherry juice.
All
six
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 in select Costco stores in a special 12-pack. Reed’s Spiced Apple Brew is
now available in a 750 ml. champagne bottle.
26
Virgil’s
Root Beer
Over the years, Virgil’s has won numerous awards and has a reputation among many
as one of the best root beers made anywhere. Virgil’s Root Beer won the
“Outstanding Beverage” award at NASFT’s International Fancy Food and Confection
Show three times, in 1994, 1996 and 1997. Bon
Apetít magazine
has also named Virgil’s Root Beer “Best Beverage.” Originally brewed in the
north of England, Virgil’s is now produced in the United States and Germany.
Virgil’s is a premium root beer. We use these all-natural ingredients:
|
·
|
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. At the breweries,
we combine and brew these ingredients under strict specifications and finally
heat-pasteurize Virgil’s Root Beer, to ensure quality.
We
sell
Virgil’s Root Beer in three packaging styles: 12-ounce bottles in a four-pack, a
special ceramic-swing-lid Grolsch Beer-style pint bottle, and a 5-liter
self-tapping party keg. We now make Virgil’s available in draught “pony kegs” as
well.
27
Virgil’s
Cream Soda
We
launched Virgil’s Cream Soda in January 2004 and initial sales have been strong.
We make this product with the same attention to quality that makes Virgil’s Root
Beer so popular.
Virgil’s
Cream Soda is a gourmet cream soda. We use these all-natural ingredients:
|
·
|
Filtered
water
|
|
·
|
Unbleached
cane sugar
|
|
·
|
Bourbon
vanilla from Madagascar
|
We
brew
Virgil’s Cream Soda the same way we brew Virgil’s Root Beer.
Virgil’s
Cream Soda is currently being sold in 12-ounce long neck bottles in colorful
4-packs and a 5-liter party keg version. We offer Virgil’s Cream Soda in our
draught format as well.
28
China
Cola
We
consider China Cola to be the best tasting and most natural cola in the world.
Now sweetened with raw cane, we restored China Cola to its original delicious
blend of imported Chinese herbs, essential oils, and natural spices. China
Cola
contains no caffeine. It comes in two varieties, Original China Cola and
Cherry
China Cola.
Original
China Cola is made from:
|
·
|
Filtered
water,
|
|
·
|
Raw
cane sugar,
|
|
·
|
Szechwan
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 did this in part
in
response to a strong trend we have seen toward organic ingredients and
non-carbonated beverages in the marketplace. We wanted to extend our ginger
brew
line and believe that these new flavors will cater to the growing market
for
organic non-carbonated beverages.
All
four
of our Reed’s Ginger Juice Brews start with:
|
·
|
filtered
water,
|
|
·
|
organic
fresh ginger root, and
|
|
·
|
organic
white grape juice from concentrate.
|
29
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.
30
Malibu
Teaz
Under
a
license agreement, we previously sold six different types of Malibu Teaz,
a line
of organic ready-to-drink teas and sweeteners. Under the license agreement,
profits were split equally between Malibu Teaz and us. In 2002,
we
entered into discussions to purchase Malibu Teaz but no agreement was reached.
At the end of 2002, we decided not to renew the license and we stopped selling
Malibu Teaz products.
Reed’s
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
process is an ancient one that has not changed much over time. After harvesting
baby ginger (the most tender kind), the root is diced and then steeped in
large
vats filled with simmering raw cane syrup. Steeping for several days, the
ginger
is then removed and allowed to crystallize into soft, delicious nuggets.
Many
peoples of the islands have long enjoyed these treats for health and pleasure.
We
sell
this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins,
16-ounce re-sealable Mylar bags, and in bulk. We also sell Reed’s Crystallized
Ginger Baking Bits in bulk.
31
Reed’s
Ginger Candy Chews
For
more
than 100 years, residents of Southeast Asia from Indonesia to Thailand have
enjoyed soft, gummy ginger candy chews. Individually wrapped, ten to a ‘Lucky
Strike’ style soft-pack, Reed’s has taken them a step further, adding more
ginger, using no gelatin (vegan-friendly) and making them slightly easier
to
unwrap than their Asian counterparts.
Reed’s
Ginger Candy Chews are made for us in Indonesia from sugar, maltose (malt
sugar), ginger, and tapioca starch.
We
sell
Reed’s Ginger Candy Chews individually wrapped in soft-packs of ten candies and
as individually wrapped loose pieces in bulk.
32
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. The three Reed’s
Ginger Ice Creams are:
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.
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 plan
to
supply Reed’s Ginger Ice Creams in foodservice volume packaging as well.
|
New
Product Development
|
We
plan
to continue expanding the Reed’s Ginger Brew, Reed’s Ginger Juice Brew, Reed’s
Ginger Ice Cream, and Reed’s Ginger Candy product lines. Other Reed’s Ginger
Product concepts and lines are under consideration. We also plan to expand
the
Virgil’s product line into additional new flavors and packaging styles.
33
Among
the
advantages of our owned and self-operated Brewery are the flexibility to
try
innovative packaging and the capability to experiment inexpensively with
new
product flavors with little risk to our operations or capital. For example,
to
the best of our knowledge, our Brewery is the first plant mass-producing
swing-lid bottled soft drinks in North America; we will soon produce several
of
our beverages in one-liter swing-lid bottles. Our Spiced Apple Brew is now
available in a 750 ml. champagne bottle and other products are planned to
be available with this packaging in the near future.
Currently,
we sell a half-liter Virgil’s Root Beer swing-lid bottle that is made for us in
Europe. The new one-liter bottles will be filled at the Brewery, allowing
us to
provide a greater amount of product at a substantially lower price. We have
received preliminary interest from several large national supermarket chains
for
this product.
Although
we are always working on new products and designs, research and development
expenses in the last two years have been nominal. We do not expect any
significant increases in research and development expenses.
Manufacture
of Our Products
At
this
time, we produce our carbonated beverages at two facilities. Our Brewery
in Los
Angeles handles the western half of the United States and we have a contract
with The Lion Brewery, Inc., a packing, or co-pack, facility in Pennsylvania
for
the eastern United States. The current two-year term of the agreement expires
on
May 31, 2005 and renews automatically for successive two-year terms unless
terminated by either party. The co-pack facility assembles our products and
charges us a fee, generally by the case, for the products they produce.
Our
Ginger Juice Brews are co-packed at H.A. Ryder for us in Northern California.
We
supply all the ingredients and packaging. The co-pack facility assembles
our
products and charges us a fee, by the case. Our ice creams are co-packed
for us
at Ronnybrooke dairy in upstate New York. We supply all the flavor additions
and
packaging and the dairy supplies the ice cream base. The co-pack facility
assembles our products and charges us a fee, by the unit produced for us.
We
have half-liter swing-lid bottles of our Virgil’s Root Beer line co-packed for
us at the Hofmark brewery in southern Germany. The co-pack facility assembles
our products and charges us a fee by the unit they produce for us. We do
not
have written contracts with H.A Ryder, Ronnybrooke Dairy or the German co-pack
facility.
34
We
follow
a ‘fill as needed’ manufacturing model to the best of our ability and we have no
significant backlog of orders.
Substantially
all of the raw materials used in the preparation, bottling and packaging
of our
products are purchased by us or by our contract packers in accordance with
our
specifications. Reed’s Crystallized Ginger is made to our specifications in
Fiji. Reed’s Ginger Candy Chews are made to our specifications in Indonesia, and
we repackage them at the Brewery in Los Angeles.
Generally,
we obtain the ingredients used in our products from domestic suppliers and
each
ingredient has several reliable suppliers. We have no major supply contracts
with any of our suppliers. As a general policy, we pick ingredients in the
development of our products that have multiple suppliers and are common
ingredients. This provides a level of insurance against a major supply
constriction or calamity.
We
believe that as we continue to grow, we will be able to keep up with increased
production demands. We believe that the Brewery has ample capacity to handle
increased West Coast business. To the extent that any significant increase
in
business requires us to supplement or substitute our current co-packers,
we
believe that there are readily available alternatives, so that there would
not
be a significant delay or interruption in fulfilling orders and delivery
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 of our industry has
grown
from $620 million in annual sales in 1989 to over $15 billion in
estimated annual revenues in 2004 (Source: Business Trend Analysts).
The
New
Age beverage segment is highly fragmented and includes such players as SoBe
(acquired by PepsiCo), Snapple (acquired by Cadbury Schweppes in 2000), Arizona
(2003 revenues over $200 million), Hansen’s (2003 revenues over
$110 million) and Jones Sodas (2003 revenues over $23 million), among
others. (Sources: BevNet, Beverage World, Yahoo Finance, and company filings
made with the SEC.) These brands have the advantage of being seen widely
in the
national market and being commonly well known for years through well-funded
ad
campaigns. Despite our products’ having a higher price, no mass media
advertising and a relatively small presence in the mainstream market compared
to
many of our competitors, we believe that results to date demonstrate that
Reed’s
Ginger Brews and Virgil’s sodas are holding up well among these significantly
larger brands. See “Business — Competition.”
We
sell
the majority of our products in natural food stores, gourmet shops, and
supermarket chains, primarily in the United States and, to a lesser degree,
in
Canada. In addition, we increasingly sell our products in restaurants,
delicatessens, neighborhood grocery markets, movie studios, hospitals and
industrial foodservice locations.
|
Natural
Foods
|
We
believe that our products have achieved a leading position in their niche
in the
fast-growing natural food industry. According to May 2001 data from the Spence
Information Service, a Nielson Company, or SPINS, our top-selling items are
in
over 90% of natural food stores in the United States. The last time we purchased
natural foods sales ratings surveys by SPINS, in 2001,
we
also
found three of our SKUs leading the top five and five of our SKUs in the
top ten
based on sales.
With
the
advent of large chains like Whole Foods and Wild Oats and specialty merchants
like Trader Joe’s, the natural foods segment continues to grow each year in
direct competition with the mainstream grocery trade.
|
Mainstream
Supermarkets
|
Our
products are currently placed in approximately 110 Safeway stores in Oregon
and
all 130 Raley’s stores in Northern California. Safeway and Raley’s data
show Reed’s Ginger Brews, with minimal advertising and promotions, performs in
the “middle of the pack” of highly advertised national brands in the New Age
Beverage segment of the market.
We
intend
to build on this success by placing Reed’s, Virgil’s and the rest of our lines
in the New Age section of as many of the nation’s 35,000 supermarkets as
possible.
Our
products are currently in supermarkets throughout the United States and Western
Canada, including the following:
35
|
Supermarket
Chain
|
|
Location
|
|
|
Acme
|
|
Pennsylvania
|
|
|
AJ’s
|
|
Arizona
|
|
|
Albertson’s
|
|
Texas,
Florida & California
|
|
|
A&P
|
|
Northeast
|
|
|
Bashas
|
|
Arizona
|
|
|
Bi-Lo
|
|
South
Carolina
|
|
|
Big
Save
|
|
Hawaii
|
|
|
Bristol
Farms
|
|
Southern
California
|
|
|
Bruno’s
|
|
Alabama
|
|
|
Byerly’s
|
|
Minnesota
|
|
|
Clemens
Family Markets
|
|
Pennsylvania
|
|
|
Costco
|
|
National
|
|
|
Dierbergs
Markets
|
|
Missouri
|
|
|
Dominick’s
Finer Foods
|
|
Illinois
|
|
|
Foodarama
|
|
New
England
|
|
|
Food
Emporium
|
|
New
York
|
|
|
Food
Lion
|
|
North
Carolina and Virginia
|
|
|
Fred
Meyers
|
|
Northwestern
U.S.
|
|
|
The
Fresh Market
|
|
North
Carolina
|
|
|
Gelson’s
|
|
Southern
California
|
|
|
Giant
Eagle
|
|
Pennsylvania
|
|
|
Giant
Food
|
|
Maryland
|
|
|
Hannaford
Bros.
|
|
Maine
|
|
|
Harris
Teeter
|
|
North
Carolina
|
|
|
HEB
|
|
Texas
|
|
|
Henry’s
|
|
San
Diego
|
|
|
Hy-Vee
|
|
Iowa
|
|
|
Ingles
Markets
|
|
Southeast
|
|
|
Jewel-Osco
|
|
Illinois
|
|
|
Kash
n Karry (Sweetbay)
|
|
Florida
|
|
|
King
Kullen
|
|
New
York
|
|
|
Kroger
|
|
Various
|
|
|
Larry’s
Markets
|
|
Seattle
|
|
|
Lowe’s
Food Stores
|
|
North
and South Carolina
|
|
|
Meijers
|
|
Michigan
|
|
|
Overwaitea/Save-On
Foods
|
|
Western
Canada
|
|
|
Patrini’s
|
|
San
Francisco
|
|
|
Pavilion’s
|
|
Southern
California
|
|
|
Publix
|
|
Florida
|
|
|
Quality
Food Centers
|
|
Northwestern
U.S.
|
|
|
Raley’s/Nob
Hill
|
|
Northern
California
|
|
|
Ralph’s
|
|
Southern
California
|
|
|
Ramey’s/Price
Cutter
|
|
Missouri
|
|
|
Randall’s
|
|
Houston
|
|
|
Rice’s
|
|
Houston
|
|
|
Safeway
|
|
National
and Western Canada
|
|
|
Sam’s
Club
|
|
National
|
|
|
Schnuck’s
Markets
|
|
Missouri
|
|
|
Sentry
Foods
|
|
Milwaukee
|
|
|
Shaw’s
Supermarkets
|
|
Massachusetts
|
|
|
Smith’s
|
|
Utah
|
|
|
Stater
Brothers
|
|
California
|
|
|
Stop
and Shop
|
|
Massachusetts
|
|
|
Super
Fresh
|
|
Philadelphia
|
|
|
Thriftway
|
|
Pacific
Northwest
|
|
|
Tops
Markets
|
|
New
York
|
|
|
Trader
Joe’s
|
|
National
|
|
|
Treasure
Island
|
|
Chicago
|
|
|
Vons
|
|
Southern
California
|
|
|
Wegman’s
|
|
New
York
|
|
|
Whole
Foods Markets
|
|
National
|
|
|
Winn-Dixie
|
|
New
Orleans
|
36
Supermarkets,
particularly supermarket chains and prominent local supermarkets, often impose
slotting fees before permitting new product placements in their store or
chain.
These fees can be structured to be paid one-time only or in installments.
We
pursue broad-based slotting in supermarket chains throughout the United States
and, to a lesser degree, in Canada. However, our direct sales team in southern
California and our national sales management team have been able to place
our
products without having to pay slotting fees much of the time. However, when
we
have to pay slotting fees for new placement, the slotting fee normally costs
between $10 and $100 per store per new item placed. We intend to use a
portion of the net proceeds of this offering to pay slotting fees. See “Use of
Proceeds.”
Foodservice
On-premise
(restaurant) activity in commercial and non-commercial locations is an
increasing component of total beverage sales. In recognition of this trend,
we
market aggressively to industrial cafeterias, bars, and restaurants. Placement
of our products in stadiums, sports arenas, concert halls, theatres, and
other
cultural centers is another long-term marketing priority. In addition, we
plan
to seek placement of our ice creams in restaurants nationwide.
International
Sales
A
limited
market has developed for our products in Europe and Asia, with increasing
activity from our distributor in the Netherlands and increasing purchases
by a
Japanese marketer. Sales outside of North America currently represent less
than
1% of our total sales. Sales in Canada represent about 1.3% of our total
sales.
The
European Union is an open market for Reed’s with access to that market due in
part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in
Germany. Reaction to the Reed’s brands at Natural Products Exposition Europe in
June 2000 was very positive. In October 2003, in Cologne, Germany at ANUGA,
one
of the world’s largest food shows, our products experienced a broad, positive
reception. We have already had some success in selling our products in Europe
through a master distributor in Amsterdam and sub-distributors in the
Netherlands, Denmark, the United Kingdom, and Spain. We are currently
negotiating with a Dutch company in Amsterdam for wider European distribution.
American
Trading Corp. in Japan orders our products on a regular basis for distribution
in Japan. We are holding preliminary discussions with other trading companies
and import/ export companies for the distribution of our products throughout
Japan, China and the rest of Asia. We believe that these areas are a natural
fit
for Reed’s ginger products, because of the importance of ginger in Asian diet
and nutrition.
Distribution,
Sales and Marketing
We
currently have a national network of natural and specialty food distributors
in
the United States and Canada. We also have mainstream beverage distributors
in
select markets. In southern California, we have our own direct distribution
in
addition to other local distributors.
We
plan
to expand our direct distribution into other markets. In addition, where
a
market does not support or lend itself to direct distribution, we intend
to
enlist local mainstream beverage distributors to carry our products.
We
plan
to use a significant portion of the proceeds of this offering toward hiring
the
additional sales people needed to support both the expansion of our existing
direct distribution and to grow sales through mainstream distributors. See
“Use
of Proceeds.”
37
Other
New
Age beverages employed this model for growth in their early years before
being
acquired by large beverage concerns. Snapple, SoBe, Arizona Teas, and Energy
Brands had or have large dedicated sales forces supporting extensive networks
of
beverage distributors. A few New Age beverage companies have put in place
their
own direct distribution, such as Odwala and Fresh Samantha. Which model we
ultimately favor will depend on results in the marketplace. We anticipate
using
a hybrid of both distribution strategies.
We
currently maintain two separate sales organizations, one of which handles
natural food sales and the other of which handles mainstream sales. Both
sales
forces consist of sales managers and sales representatives. The natural food
sales force works mainly in the natural and gourmet food stores serviced
by
natural and gourmet distributors. Representatives are responsible for the
accounts in their territory and they stay on a focused schedule of visits
to
maintain store and distributor relationships. In the future, we intend to
integrate both our distribution and sales forces.
It
is the
job of the in-house sales representative to merchandize existing products,
to
run promotions and to introduce new items. The sales manager is responsible
for
the distributor relationships and larger chain accounts that require headquarter
sales visits in addition to managing the sales representatives. We sell directly
to our distributors, who in turn sell to retail stores. Our representatives
maintain the pipeline flow of our products from our distributors (our direct
customers).
We
currently have two sales representatives working alongside our mainstream
distributors. Based upon their results, we anticipate expanding the number
of
direct hired sales representatives to work along side our mainstream
distributors. In addition, we have three sales representatives working with
our
southern California direct distribution services. Based on their results,
we
plan to rapidly hire more of these representatives.
We
are
placing vending machines, in-store draught displays, which we call Kegerators,
and fully branded coolers in our retail establishments.
We
also
offer our products and promotional merchandise directly to consumers via
the
Internet through our website, www.reedsgingerbrew.com
.
One
of
the main goals of our sales and marketing efforts is to increase the number
of
sales people and distributors focused on growing our brands. Our increased
efforts in marketing also will require us to hire additional sales
representatives, and lease additional equipment for Kegerators and coolers.
See
“Use of Proceeds.” We anticipate that as our sales force grows that additional
office support in accounting, production and purchasing will be required.
Marketing
to Distributors
We
market
to distributors using a number of marketing strategies, including direct
solicitation, telemarketing, trade advertising, and trade show exhibition.
These
distributors, who may also have relationships with our competitors, include
natural food, gourmet food, and mainstream distributors. Direct contact with
the
distributors is by in-house sales representatives. In limited markets, where
direct representation is too costly, we utilize food brokers and outside
representatives.
38
Marketing
to Retail Stores
We
market
to stores by utilizing trade shows, trade advertising, telemarketing, direct
mail pieces, and direct contact with the store. For our direct contact, we
have
sales representatives and brokers who visit stores to sell directly in many
regions. Sales to retail stores are coordinated through our distribution
network
and our regional warehouses. We intend to use a portion of the net proceeds
of
this offering to expand our direct sales force. See “Use of Proceeds.”
Direct
Sales and Distribution
In
June
2003, we started Direct Sales and Distribution (DSD) to stores in southern
California, using a direct hired sales team and Company owned delivery trucks.
Our sales representatives work closely with our new route drivers and with
distributors in areas farther away from our West Coast Brewery in Los Angeles.
This effort has increased our product distribution. Early efforts are producing
very encouraging results including placement in most of the supermarkets
in
southern California and other mainstream accounts.
While
we
do not break out sales figures on a regional basis, we can reasonably estimate
that Southern California sales traditionally represent about $1 million per
annum. The initial indication from our Southern California DSD team suggests
that this amount will increase. The local effort is currently selling at
about
$50,000 per month at the end of year 2004 and at the end of year 2003 the
sales
were averaging around $15,000 per month. This is mostly new business and
outside
our existing markets.
These
new direct-distribution accounts also include retail locations up and down
the
street, including many new independent supermarkets, "Mom and Pop" markets,
Japanese, Korean, Chinese, and Thai markets, foodservice, and delis, among
others. In addition, direct distribution facilitates our new placements at
hospitals, the Getty Center in Los Angeles, Fox Studios and other cultural
and
institutional accounts.
In-Store
Draught Displays
As
part
of our new direct distribution, 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 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 an extremely low cost per demonstration. Stores offer premium
locations for these new, and we believe unique, draught displays. Our product
sales in most of these stores have increased significantly from the exposure
of
the premium locations and product taste trials. We intend to use a portion
of
the net proceeds of this offering to increase the number of Kegerators we
place
in stores. See “Use of Proceeds.”
39
Marketing
to Consumers
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.
New
On-Draught Business
Our
West
Coast Brewery has initiated an on-draught program. The first draught location
we
have installed is at Fox Studios commissaries and restaurants. Sales have
exceeded our expectations and Fox has asked for more installations. Currently,
we are serving Virgil’s Root Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger
Brew on draught. In addition, all of our other carbonated drinks are available
in draught format. We have informal commitments from 50 or more locations
in
southern California, without having made a large marketing effort in this
direction.
Vending
Machines
To
our
knowledge, no other independent soft drink manufacturers, other than Coca-Cola
and PepsiCo, have placed fully branded, back lit vending machines nationwide.
We
believe we are the first natural soft drink manufacturer to create its own
fully
branded, backlit vending machine. We lease the vending machines and then
modify
them to our specifications. Over the next few years, we intend to expand
direct
consumer distribution through placement of these branded vending machines
in
additional locations in the United States and, to a lesser degree, in Canada.
The cost to lease the vending machines is relatively low. We will use a portion
of the proceeds of this offering to lease, brand and install more vending
machines. See “Use of Proceeds.”
Vending
machines present several advantages. As an outdoor source of product, a vending
machine acts as a 24 hours a day, 7 days a week point of purchase.
Using modern cellular technology, we will be able to track performance of
each
machine and the individual products within the machine. For example, this
means
that if Reed’s Extra Ginger Brew were outselling other products, we would see
this in real time and be able to respond by restocking the vending machine
promptly. Such data will also be invaluable as a tracking demographic, allowing
us to place more of what sells best in a particular neighborhood in a responsive
fashion or, in the case of a low performance location, to relocate the machine.
Our
vending machine program is currently in development; to date we have placed
one
vending machine in Malibu as a test.
Proprietary
Coolers
In-store
placements of branded refrigerated coolers by Snapple, SoBe, and Jones Soda,
among others, have proven to have a significant positive effect on their
sales.
For example, SoBe created its pervasive presence in the mass-marketplace
almost
entirely on a backbone of cooler placements and Jones saw a doubling of its
business in just 18 months based upon this concept. We are currently
testing our own Reed’s branded coolers in a number of locations.
Competition
Our
premium beverage products compete generally with all liquid refreshments
and in
particular with numerous other New Age beverages, including:
|
·
|
SoBe
(owned by Pepsi)
|
|
·
|
Snapple,
Mistic, IBC and Stewart’s (owned by Cadbury
Schweppes)
|
|
·
|
Henry
Weinhard (owned by Phillip Morris)
|
|
·
|
Arizona
|
|
·
|
Hansen’s
|
|
·
|
Knudsen
& Sons
|
|
·
|
Jones
Sodas
|
40
The
Virgil’s and China Cola lines compete with a number of other natural soda
companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and
Natural Brews.
Many
of
these brands have enjoyed broad, well-established national recognition for
years, through well-funded ad and other branding campaigns. In addition,
the
companies manufacturing these products generally have greater financial
resources than we do and have greater access to additional financing.
We
believe that our success to date is due in great part to our innovative beverage
recipes and packaging and use of premium ingredients and a trade secret brewing
process. We believe that our commitments to the highest quality standards
and
brand innovation are keys to our success.
Reed’s
Crystallized Ginger Candy competes primarily with other candies and snacks
in
general and, in particular, with other ginger candies. The main competitors
in
ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and
Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one
among these brands that is sulfur-free.
Reed’s
Ginger Ice Creams compete primarily with other premium and super-premium
ice
cream brands. Our principal competitors in the ice cream business are
Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of
smaller natural food ice cream companies. Most of these companies have greater
brand recognition, market share, and access to financing than we do.
We compete with other companies not only for consumer acceptance but also
for
shelf space in retail outlets and for marketing focus by distributors, most
of
whom also distribute other brands with which our products compete. The principal
methods of competition include product quality and taste, brand advertising,
trade and consumer promotions, pricing, packaging and the development of
new
products.
Our
sales
are less than 1% of the over-all marketplace in the New Age Beverage Set
Proprietary
Rights
We
own
several trademarks that we consider material to our business, including Reed’s,
Virgil’s and China Cola. In addition, we consider our finished product and
concentrate formulae, which are not the subject of any patents, to be trade
secrets.
Our
brewing process is a trade secret. This process can be used to brew flavors
of
beverages other than ginger ale and ginger beer, such as root beer, cream
soda,
cola, and other spice and fruit beverages. We have not sought any patents
on our
brewing processes because we would be required to disclose our brewing process
in patent applications.
Three
of
our material trademarks are registered trademarks in the U.S. Patent and
Trademark Office: Reed’s(R), Virgil’s(R), and China Cola(R). Registrations for
trademarks in the United States will last indefinitely as long as we continue
to
use and police the trademarks and renew filings with the applicable governmental
offices. We have not been challenged in our right to use any of our material
trademarks in the United States. We intend to obtain international registration
of certain trademarks under the Berne Convention.
We
sometimes use non-disclosure agreements with employees and distributors to
protect our proprietary rights.
Government
Regulation
The
production and marketing of our products are governed by the rules and
regulations of various federal, state, and local agencies, including the
United
States Food and Drug Administration. The Food and Drug Administration also
regulates the labeling of our products. We have not encountered any regulatory
action as a result of our operations.
41
Environmental
Matters
Our
primary cost of environmental compliance is in recycling fees, which are
estimated to be $30,000 in 2004. This is a standard cost of doing business
in
the soft drink industry.
In
California, and in certain other states where we sell our products, we are
required to collect redemption values from our customers and remit those
redemption values to the state, based upon the number of bottles of certain
products sold in that state.
Employees
We
currently have 30 full-time employees, as follows: one in general
management, nine in sales and marketing support, five in operations and 15
in
production. We employ additional people on a part-time basis as needed.
We
have
never participated in a collective bargaining agreement. We believe that
the
relationship with our employees is good.
Properties
In
December 2000, we purchased an 18,000 square foot warehouse, the Brewery,
at 13000 South Spring Street in an unincorporated area of Los Angeles
County, near downtown Los Angeles. The purchase price of the facility was
$850,000, including a down payment of $102,000. We financed the balance of
the
purchase price with a loan from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. We also obtained a building
improvement loan for $168,000 from U.S. Bank National Association, guaranteed
by
the United States Small Business Administration. Christopher J. Reed, our
founder and CEO, personally guaranteed both loans. Both loans have 25-year
terms, with interest at the New York prime rate plus 1%, adjusted monthly,
with
no cap or floor. As of December 2004, the principal and interest payments
on the
two loans combined were $5,926 per month. This facility serves as our principal
executive offices, our West Coast Brewery, and bottling plant and our southern
California warehouse facility.
The
property is located in the Los Angeles County Mid-Alameda Corridor Enterprise
Zone. Businesses located in the enterprise zone are eligible for economic
incentives designed to stimulate business investment, encourage growth and
development, and promote job creation. The incentives include a tax credit
for
wages paid to a qualified employee, up to $26,895 over a five-year period;
a
credit for the sales or use tax paid or incurred on the purchase of certain
qualified machinery or equipment; a business expense deduction for the cost
of
qualified property up to $20,000 purchased for exclusive use in the enterprise
zone; the ability to carry up to 100% of net operating losses over a maximum
of
15 years to reduce the amount of taxable enterprise zone income for those
years; and certain other financial incentives.
LEGAL
PROCEEDINGS
On
January 20th,
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. We believe that we
will
successfully defend Consac’s claims. While there is no assurance, we believe
that the Consac litigation will have no material adverse effect upon our
operations.
42
MANAGEMENT
General
The
following table sets forth certain information with respect to our directors
and
executive officers:
|
Name
|
|
Age
|
|
Position
|
|
|
Christopher
J. Reed
|
|
46
|
|
President,
Chief Executive Officer, Chief Financial Officer and Chairman of
the Board
|
|
|
Eric
Scheffer
|
|
37
|
|
Vice
President and National Sales Manager - Natural Foods
|
|
|
Robert
T. Reed, Jr.
|
|
49
|
|
Vice
President and National Sales Manager - Mainstream
|
|
|
Robert
Lyon
|
|
55
|
|
Vice
President Sales - Special Projects
|
|
|
Judy
Holloway Reed
|
|
45
|
|
Secretary
and Director
|
|
|
Mark
Harris
|
|
48
|
|
Independent
Director
|
|
|
Dr.
D.S.J. Muffoletto, N.D.
|
|
50
|
|
Independent
Director
|
|
|
Michael
Fischman
|
|
49
|
|
Independent
Director
|
|
Christopher
J. Reed founded
our company in 1987. Mr. Reed has served as our Chairman, President, Chief
Executive Officer, and Chief Financial Officer since our incorporation in
1991.
Mr. Reed has been responsible for our design and products including the original
product recipes, the proprietary brewing process, and the packaging and
marketing strategies. Mr. Reed received a B.S. in Chemical Engineering in
1980
from Rennselaer Polytechnic Institute in Troy, New York.
Eric
Scheffer has
been
our Vice President and National Sales Manager - Natural Foods since May
2001. From September 2000 to May 2001, Mr. Scheffer worked as Vice President
of
Sales for Rachel Perry Natural Cosmetics. Mr. Scheffer was national sales
manager at Earth Science, Inc. from January 1999 to September 2000, where
he
managed the United States and Canadian outside sales force. Mr. Scheffer
was
national sales manager at USA Nutritionals from June 1997 to January 1999,
where
he led a successful effort bridging their marketing from natural foods to
mainstream stores. He worked for Vita Source as Western sales manager from
May
1994 to June 1997 and was their first sales representative.
Robert
T. Reed Jr. has
been
our Vice President and National Sales Manager - Mainstream since January
2004. From 1988 through December 2003, Mr. Reed was Vice President of Strategic
Sales at SunGard Availability Services, during a period that company’s revenues
increased from $30 million to over $1.2 billion, earning the company a
place in the Fortune 500. Mr. Reed became President of the SunGard eSourcing,
the managed Internet services provider subsidiary of SunGard Availability
Services, an entity with revenues in excess of $70 million and over 300
employees. He earned a Bachelors of Science at Mount Saint Mary’s University in
1977. Mr. Reed is the brother of Christopher J. Reed, our Chairman, President,
Chief Executive Officer, and Chief Financial Officer.
Robert
Lyon has
been
our Vice President Sales - Special Projects since June 2002. In that capacity,
Mr. Lyon directs our southern California direct sales and distribution program,
our launch in mainstream markets. Over the past five years, Mr. Lyon also
ran an
organic rosemary farm in Malibu, California, selling bulk to re-packagers.
In
the 1980s and 1990s, Mr. Lyon started a successful water taxi service with
20
employees and eight vessels of his own design. He also built the national
sales
team for a jewelry company, Iberia. Mr. Lyon holds several U.S. patents.
He
earned a Business Degree from Northwestern Michigan University in 1969.
Judy
Holloway Reed has
been
with us since 1992 and, as we have grown, has run the accounting, purchasing,
and shipping and receiving departments at various times in the 1990s. Ms.
Reed
has been one of our directors since June 2004, our Secretary since October
1996
and our Director of Office Operations and Staff Management since June 2004.
In
the 1980s, Ms. Reed managed media tracking for a Los Angeles Infomercial
Media
Buying Group and was an account manager with a Beverly Hills, California
stock
portfolio management company. She earned a Business Degree from MIU in 1981.
Ms.
Reed is the wife of Christopher J. Reed, our Chairman, President, Chief
Executive Officer, and Chief Financial Officer.
43
Independent
Board Members
Mark
Harris has
been
a member of our board since April 2005. Mark 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 Mark 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 Aerospace with similar
responsibilities. Mr. Harris holds a degree in Cinematography.
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 is CEO of Its Your Earth,
a
natural products marketing company. From 2003 to 2005, Daniel worked as sales
and marketing director for Worthington, Moore & Jacobs, a Commercial Law
League member firm serving FedEx, UPS, DHL & Kodak among others. From 2001
to 2003, he was 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, WA and Ellicott
City,
MD; the apothecary housed Dr. Muffoletto’s Naturopathic Practice. Daniel holds a
B.A. in Government and Communications (U. of Baltimore, 1977), with postgraduate
work in the schools of Public Administration and Publication Design (U. of
Baltimore, 1978 - 1979). In 1986, he received his Doctorate of Naturopathic
Medicine from the Santa Fe Academy of Healing, Santa Fe, NM.
Michael
Fischman has
been
a member of our Board since April 2005. Since 1998, Michael has been President
and CEO 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.
Key
Employees. Our
key
employees include the following people:
Steven
Hernandez, age 48,
became our controller in March 2004. From 1997 to March 2004, Mr. Hernandez
was
an independent consultant in the manufacturing field in systems, including
cost
accounting consultant for Gillead Sciences, Inc. (February 2002 to March
2004),
cost accounting consultant for Flow Serve, Inc. (April 2001 to December 2002),
cost accounting manager for Crown Bolt, Inc. (1999 to April 2001) and cost
analyst at Health Valley Company (1997 to 1999). Mr. Hernandez also has
experience in cost accounting in the snack food and confectionery industries.
Mr. Hernandez earned his B.S. in Economics/Accounting from California State
University, Bakersfield in 1978.
During
the next 12 months, we intend to hire a Chief Operating Officer to handle
day-to-day operations. This will provide operations support to Christopher
J.
Reed. In addition, we intend to hire a Distribution Manager with extensive
experience in the beverage arena with specific experience in setting up a
regional distributor network.
We
have
three independent directors and will maintain at least two independent directors
on our board at all times in the future.
(The
rest of this page left blank intentionally)
44
Executive
Compensation
The
following table sets forth for the last three fiscal years each component
of
compensation paid or awarded to, or earned by, our executive officers.
|
Annual
Compensation
|
|||||||||||||
|
Salary
|
Salary
|
Salary
|
Bonus
|
||||||||||
|
Name
and Principal Position
|
2004
|
2003
|
2002
|
2002-2003
|
|||||||||
|
Christopher
J. Reed, President, CEO and CFO
|
$
|
150,000
|
$
|
150,000
|
$
|
150,000
|
----
|
||||||
|
Judy
Holloway Reed, Secretary,
Dir
of Office Operations (part-time)
|
12,000
|
12,000
|
N/A
|
----
|
|||||||||
|
Robert
T. Reed, Jr.,
Vice
President and National Sales Manager-Mainstream
|
50,000
|
50,000
|
N/A
|
----
|
|||||||||
|
Eric
Scheffer,
Vice
president and national Sales Manager-Natural Foods
|
60,000
|
60,000
|
60,000
|
----
|
|||||||||
Mr.
Reed’s salary has not changed since 2001, and there are no discussions underway
as of the date of this prospectus to increase his salary. We have not adopted
any retirement, pension, profit sharing, or other similar programs.
Director
Compensation
We
do not
pay any compensation to our non-employee directors for their attendance at
board
meetings.
We
have
not adopted any retirement, pension, profit sharing, or other similar programs.
Option/SAR
Grants and Exercises
During
2003, no stock options or stock appreciation rights, or SARs, were granted
to
Christopher J. Reed. At December 31, 2003, Mr. Reed held no unexercised
options or SARs.
No
options were granted to or exercised by employees during 2003 or 2004.
Employment
Agreements There
are
no written employment agreements with any of our officers or key employees,
including Christopher J. Reed.
2001
Stock Option Plan
Pursuant
to our 2001 Stock Option Plan, we are authorized to issue options to purchase
up
to 500,000 shares of common stock. As of the date of this prospectus,
17,500 options have been issued under the plan. In addition, options to purchase
55,000 shares were issued prior to the adoption of the 2001 stock option
plan.
As of December 31, 2004 there are 72,500 options outstanding.
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.
45
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.
46
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
We have three loans payable to Robert T. Reed, Sr.,
the father of our founder, President and CEO, Christopher J. Reed. The first
loan was made to us in May 1991 to provide $94,000 in working capital. This
loan
bears interest at 10% per annum and matures in October 2006. As of
September 30, 2005, the outstanding principal balance of the loan was $24,648
and accrued and unpaid interest was $6,771.
The
second loan from Robert T. Reed, Sr. was made to us in June 1999 to provide
$250,000 for the acquisition of Virgil’s Root Beer. This loan bears interest at
8% per annum and matures in October 2006. As of September 30, 2005, the
outstanding principal balance of the loan was $177,710 and accrued and unpaid
interest was $69,331. As 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 September 30, 2005, the loan was convertible
into 123,521 shares of common stock.
The third loan from Robert T. Reed, Sr., was made to us in October 2003 to
provide $50,000 for working capital. This loan bears interest at 8% per
annum and matures in October 2006. As of September 30, 2005, the
outstanding principal balance of the loan was $50,000 and accrued and unpaid
interest was $7,792.
Mr.
Reed,
Sr. has suspended payments due him from time to time. His current
agreement suspends our payment obligation until October 1, 2006 or we receive
financing in excess of $1,000,000, which ever occurs first.
Robert
T.
Reed Sr. has options to purchase 262,500 shares at $0.02 for his work in
1991
helping the start up of our company. The expiration date of these options
is
June 1, 2005. The original term of the options was until December 31, 1997.
We
affected extension of these options twice, once to December 31, 2000 and
again
to June 1, 2005. These extensions were granted in consideration of extensions
Mr. Reed, Sr. granted us on the repayment of his various loans made to us.
These
options were exercised 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, co-signed a note
for a line of credit we opened with Merrill Lynch and pledged his stock account
at Merrill Lynch as collateral. In consideration for Mr. Reed’s pledging his
stock account at Merrill Lynch as collateral, we pay Mr. Reed 5% per annum
of the amount we borrow from Merrill Lynch.
Robert
T.
Reed Jr.’s investment occurred as follows;
|
Class
of stock
|
#
of shares
|
Price/share
|
$
invested
|
Date
of issue
|
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