UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the
quarterly period ended March 31, 2009
o
|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
|
For the
transition period from ______ to______
Commission
file number
Commission
file number: 001-32501
REED'S
INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
35-2177773
|
(State
of incorporation)
|
(I.R.S.
Employer Identification No.)
|
13000 South Spring St.
Los Angeles, Ca.
90061
(Address
of principal executive offices) (Zip Code)
(310)
217-9400
(Registrant's
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
|
Large Accelerated
filer o |
|
Accelerated
filer
o |
|
Non-accelerated
filer o |
|
Smaller reporting
company x |
Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date: There were a total of 9,111,177 shares
of Common Stock outstanding as of May 12, 2009.
TABLE
OF CONTENTS
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
Item
1.
|
Condensed
Financial Statements |
3
|
|
|
|
|
Condensed
Balance Sheets - March 31, 2009 (unaudited) and December 31,
2008 |
3
|
|
|
|
|
Condensed
Statements of Operations for the three month periods ended March 31, 2009
and 2008 (unaudited) |
4
|
|
|
|
|
Condensed
Statement of Changes in Stockholders’ Equity for the three month period
ended March 31, 2009 (unaudited) |
5
|
|
|
|
|
Condensed
Statements of Cash Flows for the three month periods ended March 31, 2009
and 2008 (unaudited) |
6
|
|
|
|
|
Notes
to Condensed Financial Statements (unaudited) |
7
|
|
|
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations |
12
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk |
17
|
|
|
|
Item
4T.
|
Controls
and Procedures |
17
|
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings |
18
|
|
|
|
Item
1A.
|
Risk
Factors |
18
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds |
18
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities |
18
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders |
18
|
|
|
|
Item
5.
|
Other
Information |
18
|
|
|
|
Item
6.
|
Exhibits |
18
|
Part
I – FINANCIAL INFORMATION
Item
1. Financial Statements
REED’S,
INC.
CONDENSED
BALANCE SHEETS
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
(unaudited)
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
|
|
$ |
108,000 |
|
|
$ |
229,000 |
|
Inventory
|
|
|
2,873,000 |
|
|
|
2,837,000 |
|
Trade
accounts receivable, net of allowance for doubtful accounts and returns
and discounts of $97,000 as of March 31, 2009 and December 31,
2008
|
|
|
1,050,000 |
|
|
|
897,000 |
|
Prepaid
and other current assets
|
|
|
187,000 |
|
|
|
68,000 |
|
Total
Current Assets
|
|
|
4,218,000 |
|
|
|
4,031,000 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation of $1,228,000 as of March
31, 2009 and $1,150,000 as of December 31, 2008
|
|
|
4,056,000 |
|
|
|
4,133,000 |
|
Brand
names
|
|
|
800,000 |
|
|
|
800,000 |
|
Deferred
offering costs
|
|
|
80,000 |
|
|
|
62,000 |
|
Deferred
financing fees
|
|
|
45,000 |
|
|
|
77,000 |
|
Total
assets
|
|
$ |
9,199,000 |
|
|
$ |
9,103,000 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
2,301,000 |
|
|
$ |
1,929,000 |
|
Lines
of credit
|
|
|
1,274,000 |
|
|
|
1,354,000 |
|
Current
portion of long term debt
|
|
|
16,000 |
|
|
|
16,000 |
|
Accrued
interest
|
|
|
16,000 |
|
|
|
- |
|
Accrued
expenses
|
|
|
96,000 |
|
|
|
96,000 |
|
Total
current liabilities
|
|
|
3,703,000 |
|
|
|
3,395,000 |
|
|
|
|
|
|
|
|
|
|
Long
term debt, less current portion
|
|
|
1,743,000 |
|
|
|
1,747,000 |
|
Total
Liabilities
|
|
|
5,446,000 |
|
|
|
5,142,000 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $10 par value, 500,000 shares authorized, 47,121 shares outstanding
at March 31, 2009 and December 31, 2008
|
|
|
471,000 |
|
|
|
471,000 |
|
Common
stock, $.0001 par value, 19,500,000 shares authorized,
9,107,177 shares issued and outstanding at March 31, 2009 and
8,979,341 shares issued and outstanding at December 31,
2008
|
|
|
1,000 |
|
|
|
1,000 |
|
Additional
paid in capital
|
|
|
18,698,000 |
|
|
|
18,408,000 |
|
Accumulated
deficit
|
|
|
(15,417,000 |
) |
|
|
(14,919,000 |
) |
Total
stockholders’ equity
|
|
|
3,753,000 |
|
|
|
3,961,000 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
9,199,000 |
|
|
$ |
9,103,000 |
|
The
accompanying notes are an integral part of these condensed financial
statements
REED’S,
INC.
CONDENSED
STATEMENTS OF OPERATIONS
For the
Three Months Ended March 31, 2009 and 2008
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
3,417,000 |
|
|
$ |
3,564,000 |
|
Cost
of sales
|
|
|
2,570,000 |
|
|
|
3,044,000 |
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
847,000 |
|
|
|
520,000 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling
and marketing expense
|
|
|
659,000 |
|
|
|
1,124,000 |
|
General
and administrative expense
|
|
|
603,000 |
|
|
|
1,330,000 |
|
Total
operating expenses
|
|
|
1,262,000 |
|
|
|
2,454,000 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations
|
|
|
(415,000 |
) |
|
|
(1,934,000 |
) |
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
- |
|
|
|
1,000 |
|
Interest
expense
|
|
|
(83,000 |
) |
|
|
(57,000 |
) |
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(498,000 |
) |
|
$ |
(1,990,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per share - basic and diluted
|
|
$ |
(0.06 |
) |
|
$ |
(0.23 |
) |
Weighted
average number of shares outstanding - basic and diluted
|
|
|
9,041,483 |
|
|
|
8,764,683 |
|
The
accompanying notes are an integral part of these condensed financial
statements
REED’S,
INC.
CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY
For
the Three Months ended March 31, 2009
(Unaudited)
|
|
Common
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid–In
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2008
|
|
|
8,979,341 |
|
|
$ |
1,000 |
|
|
|
47,121 |
|
|
$ |
471,000 |
|
|
$ |
18,408,000 |
|
|
$ |
(14,919,000 |
) |
|
$ |
3,961,000 |
|
Fair
Value of Common Stock issued for services
|
|
|
127,836 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
143,000 |
|
|
|
– |
|
|
|
143,000 |
|
Fair
value vesting of options issued to employees
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
147,000 |
|
|
|
|
|
|
|
147,000 |
|
Net
loss
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(498,000 |
) |
|
|
(498,000 |
) |
Balance,
March 31, 2009
|
|
|
9,107,177 |
|
|
$ |
1,000 |
|
|
|
47,121 |
|
|
$ |
471,000 |
|
|
$ |
18,698,000 |
|
|
$ |
(15,417,000 |
) |
|
$ |
3,753,000 |
|
The
accompanying notes are an integral part of these condensed financial
statements
REED’S,
INC.
CONDENSED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(498,000 |
) |
|
$ |
(1,990,000 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
109,000 |
|
|
|
88,000 |
|
Fair
value of stock options issued to employees
|
|
|
147,000 |
|
|
|
(28,000 |
) |
Fair
value of common stock issued for services
|
|
|
143,000 |
|
|
|
321,000 |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(153,000 |
) |
|
|
(296,000 |
) |
Inventory
|
|
|
(35,000 |
) |
|
|
299,000 |
|
Prepaid
expenses and other current assets
|
|
|
(119,000 |
) |
|
|
35,000 |
|
Accounts
payable
|
|
|
372,000 |
|
|
|
52,000 |
|
Accrued
expenses
|
|
|
- |
|
|
|
27,000 |
|
Accrued
interest
|
|
|
16,000 |
|
|
|
(4,000 |
) |
Net
cash used in operating activities
|
|
|
(18,000 |
) |
|
|
(1,496,000 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(1,000 |
) |
|
|
(82,000 |
) |
Net
cash used in investing activities
|
|
|
(1,000 |
) |
|
|
(82,000 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Payments
for offering costs
|
|
|
(18,000 |
) |
|
|
- |
|
Payments
for deferred financing fees
|
|
|
- |
|
|
|
(35,000 |
) |
Net
repayments on existing lines of credit
|
|
|
(80,000 |
) |
|
|
- |
|
Principal
repayments on notes
|
|
|
(4,000 |
) |
|
|
(789,000 |
) |
Proceed
received from borrowings on debt
|
|
|
- |
|
|
|
1,770,000 |
|
Net
cash (used in) provided by financing activities
|
|
|
(102,000 |
) |
|
|
946,000
|
|
Net
decrease in cash
|
|
|
(121,000 |
) |
|
|
(632,000 |
) |
Cash
at beginning of period
|
|
|
229,000 |
|
|
|
743,000 |
|
Cash
at end of period
|
|
$ |
108,000
|
|
|
$ |
111,000
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
66,000
|
|
|
$ |
60,000
|
|
Taxes
|
|
$ |
-
|
|
|
$ |
-
|
|
The
accompanying notes are an integral part of these condensed financial
statements
REED’S,
INC.
Three
months Ended March 31, 2009 and 2008 (UNAUDITED)
1. Basis of
Presentation
The
accompanying interim condensed financial statements are unaudited, but in the
opinion of management of Reeds, Inc. (the Company), contain all adjustments,
which include normal recurring adjustments necessary to present fairly the
financial position at March 31, 2009 and the results of operations and cash
flows for the three months ended March 31, 2009 and 2008. The balance sheet as
of December 31, 2008 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements
that have been prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission, although management of the Company
believes that the disclosures contained in these financial statements are
adequate to make the information presented herein not misleading. For further
information, refer to the financial statements and the notes thereto included in
the Company’s Annual Report, Form 10-K, as filed with the Securities and
Exchange Commission on March 30, 2009.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosures of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expense during the reporting period. Actual results
could differ from those estimates.
The
results of operations for the three months ended March 31, 2009 are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ending December 31, 2009.
Income
(Loss) per Common Share
Basic
earnings (loss) per share is computed by dividing the net income (loss)
applicable to Common Stockholders by the weighted average number of shares of
Common Stock outstanding during the year. Diluted earnings (loss) per share is
computed by dividing the net income (loss) applicable to Common Stockholders by
the weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all dilutive
potential common shares had been issued, using the treasury stock method.
Potential common shares are excluded from the computation when their effect is
antidilutive.
For the
three months ended March 31, 2009 and 2008 the calculations of basic and diluted
loss per share are the same because potential dilutive securities would have an
anti-dilutive effect. The potentially dilutive securities consisted of the
following as of:
|
|
March
31,
|
|
|
March
31,
|
|
|
|
2009
|
|
|
2008
|
|
Warrants
|
|
|
1,868,236 |
|
|
|
1,668,236 |
|
Preferred
Stock
|
|
|
188,484 |
|
|
|
192,484 |
|
Options
|
|
|
792,500 |
|
|
|
563,333 |
|
Total
|
|
|
2,849,220 |
|
|
|
2,424,053 |
|
Recent
Accounting Pronouncements
In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued. SFAS
141R replaces SFAS 141 “Business Combinations”. SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The effective date, as well as the adoption date
for the Company was January 1, 2009. Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical financial statements at the time of
adoption.
In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142. This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The
effective date, as well as the adoption date for the Company was January 1,
2009. Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical financial statements at the time of adoption.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS
No. 160 requires: (a) noncontrolling interests in subsidiaries to be
separately presented within equity; (b) consolidated net income to be
adjusted to include the net income attributable to a noncontrolling interest;
(c) consolidated comprehensive income to be adjusted to include the
comprehensive income attributed to a noncontrolling interest;
(d) additional disclosures; and (e) a noncontrolling interest to
continue to be attributed its share of losses even if that attribution results
in a deficit noncontrolling interest balance. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. The effective date, as well as the adoption date for the
Company was January 1, 2009. Although SFAS 160 may impact our
reporting in future financial periods, we have determined that the standard did
not have any impact on our historical financial statements at the time of
adoption.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to
address application issues raised on initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities
arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for the first annual reporting period on or after December 31,
2008. The impact of FSP No. FAS 141(R)-1 on the Company’s financial
statements will depend on the number and size of acquisition transactions, if
any, engaged in by the company.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and level of activity for the
asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after
initial adoption, FSP FAS 157-4 requires comparative disclosures only for
periods ending after initial adoption. The Company does not expect the changes
associated with adoption of FSP FAS 157-4 will have a material effect on its
financial statements and disclosures.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 amends and expands the disclosure requirements
for derivative instruments and hedging activities and is effective for fiscal
years beginning after November 15, 2008. SFAS No. 161 became effective
for the Company January 1, 2009. The impact of the adoption of SFAS
No. 161 was not material to the Company’s financial
statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1
and APB 28-1 amend SFAS No. 107, “Disclosures About Fair Value of Financial
Instruments”, to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP FAS 107-1 and APB 28-1 also amend APB Opinion No.
28, “Interim Financial
Reporting”, to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. FSP FAS 107-1 and APB 28-1 does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, FSP FAS 107-1 and APB 28-1 requires
comparative disclosures only for periods ending after initial adoption. The
Company does not expect the changes associated with adoption of FSP FAS 107-1
and APB 28-1 will have a material effect on its financial statements and
disclosures.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS
115-2 and FAS 124-2 amend the other-than-temporary impairment guidance for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and
annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. FSP FAS 115-2 and FAS 124-2
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, FSP FAS 115-2
and FAS 124-2 require comparative disclosures only for periods ending after
initial adoption. The Company does not expect the changes associated with the
adoption of FSP FAS 115-2 and FAS 124-2 will have a material effect its
financial statements and disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC during the first quarter of 2009 did
not or are not believed by management to have a material impact on the Company’s
present or future financial position or results of operations.
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk
for the amounts of funds held in one bank in excess of the insurance limit. In
assessing the risk, the Company’s policy is to maintain cash balances with high
quality financial institutions. The Company had cash balances in excess of the
guarantee during the three months ended March 31, 2009.
During
the three months ended March 31, 2009 and 2008, the Company had two customers,
which accounted for approximately 36% and 19%, and 30% and 13% of sales,
respectively. No other customers accounted for more than 10% of sales in either
year. As of March 31, 2009, the Company had approximately $349,000 and $125,000,
respectively, of accounts receivable from these customers.
Reclassifications
Certain
amounts in the prior-year financial statements have been reclassified to conform
with the current-year presentation.
2. Inventory
Inventory
consists of the following at:
|
|
March
31,
2008
|
|
|
December
31,
2008
|
Raw
Materials
|
|
$ |
1,017,000 |
|
|
$ |
755,000 |
|
Finished
Goods
|
|
|
1,856,000 |
|
|
|
2,082,000 |
|
|
|
$ |
2,873,000 |
|
|
$ |
2,837,000 |
|
3. Line of
Credit
At March
31, 2009 and December 31, 2008, the aggregate amount outstanding under the line
of credit was $1,274,000 and $1,354,000 respectively, and the Company had
approximately $90,000 of availability on this line of credit at March 31, 2009.
Interest accrues and is paid monthly on outstanding loans under the credit
facility at a rate equal to 7.75% per annum plus the greater of 2% or the LIBOR
rate (8.25% at March 31, 2009). Borrowings under the credit facility are secured
by all of the Company's assets. The agreement terminates May 2010, and the
Company is subject to an early termination fee if the loan is terminated before
such date. The loan is secured by all of the business assets of the
Company and is personally guaranteed by the principal shareholder and Chief
Executive Officer.
The
Company is required to comply with a number of affirmative, negative and
financial covenants. As of March 31, 2009, the Company was in
compliance with these covenants.
4. Stockholders’
Equity
During
the three months ended March 31, 2009, the Company issued 127,836 shares of
common stock in exchange for consulting and legal services. The value
of the stock was based on the closing price of the stock on the issuance
date. The total value of shares issued for services was
$143,000.
5. Stock
Based Compensation
Stock
Options
During
the three months ended March 31, 2009, the Company issued 120,000 options to its
employees. On March 6, 2009, the Company repriced 420,000 employee
and director options to an exercise price of $0.75. Such options had
previously been issued at exercise prices between $1.99 per share and $8.50 per
share. The total increase in stock compensation expense, as a result
of the repricing, was $81,000; of which $23,000 was recognized in the quarter
ended March 31, 2009. Total stock-based compensation recognized on
the Company’s statement of operations for the three months ended March 31, 2009
was $147,000. As of March 31, 2009, the aggregate value of unvested
options was $585,000, which will vest over an average period of three
years. There were no stock options exercised in the three months
ended March 31, 2009. Stock options granted under our equity
incentive plans vest over 2 to 3 years from the date of grant, ½ and 1/3 per
year, respectively; and generally expire 5 years from the date of
grant.
We
calculated the fair value of each option award on the date of grant using the
Black-Scholes option pricing model. The weighted average grant date
fair value of options granted during the three months ended March 31, 2009 was
$0.66.
The
following weighted average assumptions were used to value option
grants:
|
|
Three
Months Ended
March 31, 2009
|
|
Expected
volatility
|
|
|
89%-
97% |
|
Expected
dividends
|
|
|
— |
|
Expected
average term (in years)
|
|
|
2.82 |
|
Risk
free rate - average
|
|
|
1.72% |
|
Forfeiture
rate
|
|
|
0% |
|
The
following table summarizes stock option activity for the three months ended
March 31, 2009 is presented below:
|
|
Shares
|
|
|
Weighted-Average
Exercise Price
|
|
|
Weighted-Average
Remaining
Contractual
Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding
at December 31, 2008
|
|
|
702,500 |
|
|
$ |
3.55 |
|
|
|
|
|
|
|
Granted
|
|
|
120,000 |
|
|
$ |
1.18 |
|
|
|
|
|
|
|
Exercised
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
Forfeited
or expired
|
|
|
(30,000 |
) |
|
$ |
1.99 |
|
|
|
|
|
|
|
Outstanding
at March 31, 2009
|
|
|
792,500 |
|
|
$ |
1.83 |
|
|
3.4
|
|
|
$ |
107,000 |
|
Exercisable
at March 31, 2009
|
|
|
261,667 |
|
|
$ |
2.73 |
|
|
2.0
|
|
|
$ |
25,000 |
|
|
|
|
Options
Outstanding at March 31, 2009
|
|
|
Options
Exercisable at
March
31, 2009
|
|
|
|
|
Number
of Shares
Outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number
of
Shares
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
0.01
- $1.99 |
|
|
|
590,000 |
|
|
|
3.99 |
|
|
$ |
0.89 |
|
|
|
102,500 |
|
|
$ |
0.75 |
|
$ |
2.00
- $4.99 |
|
|
|
135,000 |
|
|
|
1.32 |
|
|
$ |
3.31 |
|
|
|
125,000 |
|
|
$ |
3.26 |
|
$ |
5.00
- $6.99 |
|
|
|
17,500 |
|
|
|
0.17 |
|
|
$ |
6.00 |
|
|
|
17,500 |
|
|
$ |
6.00 |
|
$ |
7.00
- $8.50 |
|
|
|
50,000 |
|
|
|
3.18 |
|
|
$ |
7.55 |
|
|
|
16,667 |
|
|
$ |
7.55 |
|
|
|
|
|
|
792,500 |
|
|
|
|
|
|
|
|
|
|
|
261,667 |
|
|
|
|
|
Stock
Warrants
The
Company had 1,868,236 warrants outstanding at March 31, 2009. There
were no grants, expirations or exercises of outstanding warrants during the
three months ended March 31, 2009.
6. Related Party
Transactions
On
February 2, 2009, the Company issued 52,420 shares of its common stock, at the
market value, to two brothers of Christopher Reed, Chief Executive Officer of
the Company, in satisfaction of $65,000 due under an agreement for the
distribution of its products internationally. On April 23, 2009, the
Company repriced 200,000 warrants granted in connection with this distribution
agreement, to $1.35, the market value on that date. The warrants will
be valued and a corresponding expense will be recorded upon the attainment of
the sales goals identified when the warrants were granted.
7. Subsequent
Event
During
May 2009, the Company entered into escrow to sell its two buildings located in
Los Angeles. Concurrently, the Company has entered into a 15-year
lease agreement with the buyer of the buildings. The Company intends to apply
the proceeds from the sale of the buildings to payoff the mortgage financing
related to the property, as well as to payoff the outstanding debt under the
Company’s revolving line of credit, which is secured primarily by the Company’s
accounts receivable and inventory. While the terms of the sale and
lease agreements may be subject to changes prior to the close of escrow, Company
Management believes that the transactions may be completed by the end of
May 2009, or shortly thereafter.
On April
23, 2009, the Board of Directors of the Company approved a new class of
Preferred Stock for the purpose of selling the Preferred stock in the
Corporation’s rights offering. The Preferred Stock is designated as
Series B Convertible Preferred Stock, with a number of shares equal to the
maximum number of shares of the Corporation’s Common Stock, par value $.0001 per
share, that may from time to time be issued upon conversion of the Series B
Preferred in accordance with the terms thereof are hereby reserved for issuance
upon such conversion out of the authorized but unissued shares of Common
Stock.
On April
28, 2009, the Company issued 4,000 shares of its common stock for
services.
Item
2. Management’s Discussion and Analysis or Plan of Operation
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and the
related notes appearing elsewhere in this report. This discussion and analysis
may contain forward-looking statements based on assumptions about our future
business. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of certain factors, including but
not limited to those set forth under “Risk Factors” included in our Annual
Report on Form 10-K for the year ended December 31, 2008.
Overview
The
results for the quarter ended March 31, 2009 reflect a strong improvement in our
gross margins, along with a decrease in operating costs, as compared to the
prior year period. Our focus has been to minimize price discounting
and allowances, and to lower our costs of materials and
production. This has produced strong margin
improvement. During the quarter, we introduced our new Orange Cream
Soda product, and we believe that sales of this beverage will increase
rapidly. We have held our operating costs down, which has minimized
our losses from operations, and we believe that we will operate profitably
throughout our busy summer season and fiscal year.
Results
of Operations
Three
months ended March 31, 2009 Compared to Three months ended March 31,
2008
Sales of
$3,417,000 for the three months ended March 31, 2009 represented a decrease of
4%, as compared to the prior year same period. Generally, over 90% of
our sales are split evenly between our two most significant product lines,
Reed’s Ginger Brews and Virgil’s sodas, during both 2009 and
2008. The overall sales level reflects increases in several new and
existing ongoing accounts, offset by decreases due to special promotions that
occurred in 2008 that did not reoccur in 2009, as well as the effects of the
current adverse economy. During the prior year period, the Company
had announced a price increase, which created strong buying by several
distributors in anticipation of the increase.
Cost
of Goods Sold
Cost of
goods sold consists primarily of the costs of our ingredients, packaging,
production and freight. Cost of goods sold decreased by 16% to
$2,570,000 during the three months ended March 31, 2009 from $3,044,000 in
2008. Our costs of sales have been favorably impacted by reduced fuel
costs and lower commodity prices on certain ingredients. In
late 2009, we negotiated reductions in our co-packing fees, which decreased our
per-unit cost of goods sold in 2009. We are also producing higher
portions of our products at our own facility in Los Angeles, which is
anticipated to lower our per-unit costs and improve our margins. We
are also currently negotiating for significant reductions in glass
costs.
Gross
Profit
Our gross
profit increased to $847,000 in the three months ended March 31, 2009, from
$520,000 in 2008, an increase of $327,000 or 63%. The gross profit as
a percentage of sales improved to 25% in 2009, from 15% in 2008. This
gross profit margin increase is primarily due to price increases in the second
quarter of 2008, where we have raised prices on the Reed’s Ginger Brew line by
approximately 20% bringing it more in line with our competitors in the natural
soda category. In addition, we have improved our systems to track and manage the
approval and use of promotions and discounting, resulting in higher effective
prices and net gross margins. Finally, we have renegotiated our production costs
from our largest co-packer as described above.
Selling
and marketing expenses
Selling
and marketing expenses consist primarily of direct charges for staff
compensation costs, advertising, sales promotion, marketing and trade shows.
Selling and marketing costs decreased to $659,000 in the three months ended
March 31, 2009 from $1,124,000 in 2008, a net decrease of $465,000 or
41%. The decrease is primarily due to decreases in compensation and
travel costs of $626,000; offset by an increase in advertising and trade show
promotions of $22,000.
Our
strategic direction in sales is to focus on our product placements in our
estimated 10,500 supermarkets nationwide. This strategy replaces our strategy in
2008 that focused on both the supermarkets and a direct store delivery (DSD)
effort. As a result, our sales organization has been reduced by 16
compared to the level we had in 2008. We have found that the most effective
sales efforts are to grocery stores. We feel that the trend in
grocery stores to offer their customers natural products can be served with our
products. Our sales personnel are leveraging our success at natural
food grocery stores to establish new relationships with mainstream grocery
stores.
General
and Administrative Expenses
General
and administrative expense consists primarily of the cost of executive,
administrative, and finance personnel, as well as professional fees. General and
administrative expenses decreased to $603,000 during the three months ended
March 31, 2009 from $1,330,000 in the same period of 2008, a net decrease of
$727,000 or 55%. The decrease in 2009 is primarily due to a decrease in
professional fees expense of $251,000 and a decrease in compensation and related
costs of $175,000. In the 2008 period, we had a one-time non cash expense of
approximately $300,000 for professional consulting services, for which we issued
stock.
We
believe that our existing executive and administrative staffing levels are
sufficient to allow for moderate growth without the need to add personnel and
related costs for the foreseeable future.
Loss
from Operations
Our loss
from operations decreased to $415,000 in the three months ended March 31, 2009
from $1,934,000 in the same period of 2008. The improvement of
$1,519,000 was due to increased margins and lower costs of
marketing.
Interest
Expense
Interest
expense increased to $83,000 in the three months ended March 31, 2009, compared
to interest expense of $57,000 in 2008. The increase is due to the
increased borrowing under a long-term mortgage, secured by our buildings; and
under a line of credit agreement with First Capital LLC, secured primarily by
our inventory and accounts receivable.
Liquidity
and Capital Resources
As of
March 31, 2009, we had an accumulated deficit of $15,417,000 and we had working
capital of $515,000, compared to an accumulated deficit of $14,919,000 and
working capital of $636,000 at December 31, 2008. Cash and cash equivalents were
$108,000 as of March 31, 2009, as compared to $229,000 at December 31, 2008.
This decrease in our working capital and cash position was primarily
attributable to our net loss. In addition to our cash position on March 31,
2009, we had availability under our line of credit of approximately
$90,000.
Our
decrease in cash and cash equivalents to $108,000 at March 31, 2009 compared to
$229,000 at December 31, 2008 was the result of $18,000 used in operating
activities; $1,000 used in investing activities; and $102,000 used in financing
activities.
The
measures that we have taken in late 2008 to lower our cost of goods are yielding
current improvements in gross margins of approximately 10% over the 2008
period. We also have initiatives underway to improve our glass costs
as well as additional reductions in co-packing costs. At the current
sales run rates and prices, we believe that our Company will operate at
profitable levels in 2009.
We
believe that the Company has a number of options for gaining the necessary
working capital in 2009; needed to fund our seasonality, product launches and
other growth plans. Our primary capital source will be cash flow from
operations. We are also investigating improved working capital loans
that more fully value our assets for collateral. We may raise a
limited amount of funds through a combination of equity and debt; however, we’d
prefer to wait until our stock has a better market value so that we minimize
dilution. We believe that the Company can become leaner if our sales
goals do not materialize, and that our costs can be managed to produce
profitable operations. Historically, we have financed our operations
primarily through private sales of common stock, preferred stock, convertible
debt, a line of credit from a financial institution, and cash generated from
operations.
Net cash
used in operations during 2009 was $18,000 compared with $1,496,000 used in
operations during the same period in 2008. Cash used in
operations during 2009 was primarily due to the net loss in period and to an
increase in prepaid costs, as compared to the same prior year
period.
Net cash
used in investing activities of $1,000 during 2009 compared with $82,000 during
2008 is primarily the result of equipment purchases.
Net cash
used in financing activities of $102,000 during 2009 was primarily due to
principal payments on debt. During the same period in 2008, we derived net
proceeds from the refinancing of our land and buildings of $1,770,000 , offset
by principal payments on debt of $789,000. Our line of credit lender is a
privately held, Senior Secured Commercial Lender. Our lender has communicated to
us that they are financially secure and have over $1 billion dollars in assets
with approximately 20% of equity capital. They communicated that they have
adequate lines of credits in place with banks to achieve their business goals.
They communicated that there are no requirements in place for them to repurchase
any of their outstanding stock. Based on these communications, we believe that
our lending source will be able to fund the full extent of our line of credit,
should we meet the requirements for such funding.
Our
operating losses have negatively impacted our liquidity and we are continuing to
work on decreasing operating losses, while focusing on increasing net sales. We
are currently borrowing near the maximum on our line of
credit. We believe the operations of the company are currently
running at approximately breakeven, after adjusting for non-cash expenses. We
believe that our current cash position and lines of credit will be sufficient to
enable us to meet our cash needs through at least the end of 2009. We believe
that if the need arises we can raise money through the equity
markets.
We may
not generate sufficient revenues from product sales in the future to achieve
profitable operations. If we are not able to achieve profitable operations at
some point in the future, we eventually may have insufficient working capital to
maintain our operations as we presently intend to conduct them or to fund our
expansion and marketing and product development plans. In addition, our losses
may increase in the future as we expand our manufacturing capabilities and fund
our marketing plans and product development. These losses, among other things,
have had and will continue to have an adverse effect on our working capital,
total assets and stockholders’ equity. If we are unable to achieve
profitability, the market value of our common stock will decline and there would
be a material adverse effect on our financial condition.
If we
continue to suffer losses from operations, the proceeds from our public offering
and private placement may be insufficient to support our ability to expand our
business operations as rapidly as we would deem necessary at any time, unless we
are able to obtain additional financing. There can be no assurance that we will
be able to obtain such financing on acceptable terms, or at all. If adequate
funds are not available or are not available on acceptable terms, we may not be
able to pursue our business objectives and would be required to reduce our level
of operations, including reducing infrastructure, promotions, personnel and
other operating expenses. These events could adversely affect our business,
results of operations and financial condition. We cannot assure you that
additional financing will be available on terms favorable to us, or at all. If
adequate funds are not available or if they are not available on acceptable
terms, our ability to fund the growth of our operations, take advantage of
opportunities, develop products or services or otherwise respond to competitive
pressures, could be significantly limited.
During
May 2009, we entered into escrow to sell our two buildings located in Los
Angeles. Concurrently, we have entered into a 15-year lease agreement
with the buyer of the buildings. The proceeds from the sale of the buildings
will be applied to payoff the mortgage financing related to the property, as
well as to payoff the outstanding debt under our revolving line of credit, which
is secured primarily by our accounts receivable and inventory. While
the terms of the sale and lease agreements may be subject to changes prior to
the close of escrow, we believe that there is a strong probability that the
transactions will be completed by the end of May 2009, or shortly
thereafter.
Critical
Accounting Policies and Estimates
Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, or GAAP. GAAP requires us to
make estimates and assumptions that affect the reported amounts in our financial
statements including various allowances and reserves for accounts receivable and
inventories, the estimated lives of long-lived assets and trademarks and
trademark licenses, as well as claims and contingencies arising out of
litigation or other transactions that occur in the normal course of business.
The following summarize our most significant accounting and reporting policies
and practices:
Revenue
Recognition. Revenue is recognized on the sale of a product
when the product is shipped, which is when the risk of loss transfers to our
customers, and collection of the receivable is reasonably assured. A
product is not shipped without an order from the customer and credit acceptance
procedures performed. The allowance for returns is regularly reviewed
and adjusted by management based on historical trends of returned items. Amounts
paid by customers for shipping and handling costs are included in
sales. The Company reimburses its wholesalers and retailers for promotional
discounts, samples and certain advertising and promotional activities used in
the promotion of the Company’s products. The accounting treatment for the
reimbursements for samples and discounts to wholesalers results in a reduction
in the net revenue line item. Reimbursements to wholesalers and retailers for
certain advertising and promotional activities are included in the advertising,
promotional and selling expenses line item.
Trademark License and
Trademarks. We own trademarks that we consider material to our
business. Three of our material trademarks are registered trademarks in the U.S.
Patent and Trademark Office: Virgil’s ®, Reed’s Original Ginger Brew All-Natural
Jamaican Style Ginger Ale ® and Tianfu China Natural Soda ®. Registrations for
trademarks in the United States will last indefinitely as long as we continue to
use and police the trademarks and renew filings with the applicable governmental
offices. We have not been challenged in our right to use any of our material
trademarks in the United States. We intend to obtain international registration
of certain trademarks in foreign jurisdictions.
We
account for these items in accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets.” Under the provisions of SFAS No. 142,
we do not amortize indefinite-lived trademark licenses and
trademarks.
In
accordance with SFAS No. 142, we evaluate our non-amortizing trademark
license and trademarks quarterly for impairment. We measure impairment by the
amount that the carrying value exceeds the estimated fair value of the trademark
license and trademarks. The fair value is calculated by reviewing net sales of
the various beverages and applying industry multiples. Based on our quarterly
impairment analysis the estimated fair values of trademark license and
trademarks exceeded the carrying value and no impairments were identified during
the three months ended March 31, 2009 or March 31, 2008.
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 three months ended March 31, 2009 or
March 31, 2008.
Management
believes that the accounting estimate related to impairment of our long lived
assets, including our trademark license and trademarks, is a “critical
accounting estimate” because: (1) it is highly susceptible to change from
period to period because it requires management to estimate fair value, which is
based on assumptions about cash flows and discount rates; and (2) the
impact that recognizing an impairment would have on the assets reported on our
balance sheet, as well as net income, could be material. Management’s
assumptions about cash flows and discount rates require significant judgment
because actual revenues and expenses have fluctuated in the past and we expect
they will continue to do so.
In
estimating future revenues, we use internal budgets. Internal budgets are
developed based on recent revenue data for existing product lines and planned
timing of future introductions of new products and their impact on our future
cash flows.
Accounts Receivable. We
evaluate the collectability of our trade accounts receivable based on a number
of factors. In circumstances where we become aware of a specific customer’s
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to the
estimated amount our management believes will ultimately be collected. In
addition to specific customer identification of potential bad debts, bad debt
charges are recorded based on our historical losses and an overall assessment of
past due trade accounts receivable outstanding.
Inventories. Inventories
are stated at the lower of cost to purchase and/or manufacture the inventory or
the current estimated market value of the inventory. We regularly review our
inventory quantities on hand and record a provision for excess and obsolete
inventory based primarily on our estimated forecast of product demand and/or our
ability to sell the product(s) concerned and production requirements. Demand for
our products can fluctuate significantly. Factors that could affect demand for
our products include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in cancellations of advance
orders or a reduction in the rate of reorders placed by customers. Additionally,
our management’s estimates of future product demand may be inaccurate, which
could result in an understated or overstated provision required for excess and
obsolete inventory.
Stock-Based Compensation. We
periodically issue stock options and warrants to employees and non-employees in
non-capital raising transactions for services and for financing costs. We
adopted SFAS No. 123R, “Accounting for Stock-Based Compensation” effective
January 1, 2006, and are using the modified prospective method in which
compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123R for all awards
granted to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date. We account for stock option and warrant grants
issued and vesting to non-employees in accordance with EITF No. 96-18:
“Accounting for Equity Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF 00-18
“Accounting Recognition for Certain Transactions involving Equity Instruments
Granted to Other Than Employees” whereby the fair value of the stock
compensation is based on the measurement date as determined at either a) the
date at which a performance commitment is reached, or b) at the date at which
the necessary performance to earn the equity instrument is
complete.
We
estimate the fair value of stock options pursuant to SFAS No. 123R using the
Black-Scholes option-pricing model, which was developed for use in estimating
the fair value of options that have no vesting restrictions and are fully
transferable. This model requires the input of subjective assumptions, including
the expected price volatility of the underlying stock and the expected life of
stock options. Projected data related to the expected volatility of stock
options is based on the historical volatility of the trading prices of the
Company’s common stock and the expected life of stock options is based upon the
average term and vesting schedules of the options. Changes in these subjective
assumptions can materially affect the fair value of the estimate, and therefore
the existing valuation models do not provide a precise measure of the fair value
of our employee stock options.
We
believe there have been no significant changes, during the three month period
ended March 31, 2009, to the items disclosed as critical accounting policies and
estimates in Management's Discussion and Analysis or Plan of Financial Condition
and Results of Operations in their Annual Report on Form 10-K for the year ended
December 31, 2008.
Recent
Accounting Pronouncements
In
December 2007, Financial Accounting Standards Board (FASB) Statement 141R,
“Business Combinations (revised 2007)” (SFAS 141R”) was issued. SFAS
141R replaces SFAS 141 “Business Combinations”. SFAS 141R requires
the acquirer of a business to recognize and measure the identifiable assets
acquired, the liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transactions costs related to
the business combination to be expensed as incurred. SFAS 141R applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The effective date, as well as the adoption date
for the Company was January 1, 2009. Although SFAS 141R may impact
our reporting in future financial periods, we have determined that the standard
did not have any impact on our historical financial statements at the time of
adoption.
In April
2008 the FASB issued FASB Staff Position (“FSP”) No. 142-3, “Determination of
the Useful Life of Intangible Assets” (“FSP 142-3”), which amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
142. This pronouncement requires enhanced disclosures concerning a
company’s treatment of costs incurred to renew or extend the term of a
recognized intangible asset. FST 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The
effective date, as well as the adoption date for the Company was January 1,
2009. Although FSP 142-3 may impact our reporting in future financial
periods, we have determined that the standard did not have any impact on our
historical financial statements at the time of adoption.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51.” SFAS
No. 160 requires: (a) noncontrolling interests in subsidiaries to be
separately presented within equity; (b) consolidated net income to be
adjusted to include the net income attributable to a noncontrolling interest;
(c) consolidated comprehensive income to be adjusted to include the
comprehensive income attributed to a noncontrolling interest;
(d) additional disclosures; and (e) a noncontrolling interest to
continue to be attributed its share of losses even if that attribution results
in a deficit noncontrolling interest balance. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008 and interim periods within
those fiscal years. The effective date, as well as the adoption date for the
Company was January 1, 2009. Although SFAS 160 may impact our
reporting in future financial periods, we have determined that the standard did
not have any impact on our historical financial statements at the time of
adoption.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies.”
FSP No. FAS 141(R)-1 amends and clarifies FASB Statement No. 141(R), to
address application issues raised on initial recognition and measurement,
subsequent measurement and accounting and disclosure of assets and liabilities
arising from contingencies in a business combination. FSP No. FAS 141(R)-1 is
effective for the first annual reporting period on or after December 31,
2008. The impact of FSP No. FAS 141(R)-1 on the Company’s financial
statements will depend on the number and size of acquisition transactions, if
any, engaged in by the company.
In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP FAS 157-4). FSP FAS 157-4
provides additional guidance for estimating fair value in accordance with SFAS
No. 157, Fair Value Measurements, when the volume and level of activity for the
asset or liability have significantly decreased. FSP FAS 157-4 also includes
guidance on identifying circumstances that indicate a transaction is not
orderly. FSP FAS 157-4 is effective for interim and annual reporting periods
ending after June 15, 2009, with early adoption permitted for periods ending
after March 15, 2009. FSP FAS 157-4 does not require disclosures for earlier
periods presented for comparative purposes at initial adoption. In periods after
initial adoption, FSP FAS 157-4 requires comparative disclosures only for
periods ending after initial adoption. The Company does not expect the changes
associated with adoption of FSP FAS 157-4 will have a material effect on its
financial statements and disclosures.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133.” SFAS No. 161 amends and expands the disclosure requirements
for derivative instruments and hedging activities and is effective for fiscal
years beginning after November 15, 2008. SFAS No. 161 became effective
for the Company January 1, 2009. The impact of the adoption of SFAS
No. 161 was not material to the Company’s financial
statements.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about
Fair Value of Financial Instruments” (FSP FAS 107-1 and APB 28-1). FSP FAS 107-1
and APB 28-1 amend SFAS No. 107, “Disclosures About Fair Value of Financial
Instruments”, to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. FSP FAS 107-1 and APB 28-1 also amend APB Opinion No.
28, “Interim Financial
Reporting”, to require those disclosures in summarized financial information at
interim reporting periods. FSP FAS 107-1 and APB 28-1 are effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted for
periods ending after March 15, 2009. FSP FAS 107-1 and APB 28-1 does not require
disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, FSP FAS 107-1 and APB 28-1 requires
comparative disclosures only for periods ending after initial adoption. The
Company does not expect the changes associated with adoption of FSP FAS 107-1
and APB 28-1 will have a material effect on its financial statements and
disclosures.
In April
2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation
of Other-Than-Temporary Impairments” (FSP FAS 115-2 and FAS 124-2). FSP FAS
115-2 and FAS 124-2 amend the other-than-temporary impairment guidance for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. FSP FAS 115-2 and FAS 124-2 does not amend existing
recognition and measurement guidance related to other-than-temporary impairments
of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and
annual reporting periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. FSP FAS 115-2 and FAS 124-2
does not require disclosures for earlier periods presented for comparative
purposes at initial adoption. In periods after initial adoption, FSP FAS 115-2
and FAS 124-2 require comparative disclosures only for periods ending after
initial adoption. The Company does not expect the changes associated with the
adoption of FSP FAS 115-2 and FAS 124-2 will have a material effect
on its financial statements and disclosures.
Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC during the first quarter of 2009 did
not or are not believed to have a material impact on our present or future
financial position or results of operations.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
A smaller
reporting company is not required to provide the information required by this
Item.
Item
4T. Controls and Procedures.
Evaluation of Disclosure
Controls and Procedures. Our management, with the participation of our
chief executive officer and our chief financial officer, carried out an
evaluation of the effectiveness of our “disclosure controls and procedures” (as
defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules
13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report
(the “Evaluation Date”). Based upon that evaluation, our chief
executive officer and our chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act (i) is recorded, processed, summarized and
reported, within the time periods specified in the SEC’s rules and forms and
(ii) is accumulated and communicated to our management, including our chief
executive officer and our chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control
over Financial Reporting. There was no change in our internal control
over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
1A. Risk Factors
A smaller
reporting company is not required to provide the information required by this
Item.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
On
February 11, 2009 52,420 shares of common stock were issued at the market value
as payment of $65,000 due under a distribution agreement. On February
17, 2009, 30,000 shares of common stock were issued at the market value as
payment of $33,300 due under a consulting agreement. Such
transactions were transaction exempt from registration under Section 4(2) of the
Securities Act of 1933, as amended.
Item
3. Defaults Upon Senior Securities
None
Item
4. Submission of Matters to a Vote of Security Holders
None
Item
5. Other Information
During
May 2009, the Company entered into escrow to sell its two buildings located in
Los Angeles. Concurrently, the Company has entered into a 15-year
lease agreement with the buyer of the buildings. The Company intends to apply
the proceeds from the sale of the buildings to payoff the mortgage financing
related to the property, as well as to payoff the outstanding debt under the
Company’s revolving line of credit, which is secured primarily by the Company’s
accounts receivable and inventory. While the terms of the sale and
lease agreements may be subject to changes prior to the close of escrow, Company
Management believes that the transactions may be completed by the end of
May 2009, or shortly thereafter.
Item
6. Exhibits
Exhibit No. |
Description
|
31.1 |
Certification of
Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
31.2 |
Certification of
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
32.1 |
Certification of
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
32.2 |
Certification of
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
Reed’s,
Inc.
(Registrant)
|
Date: May
13, 2009
|
/s/ Christopher Reed
|
|
Christopher
Reed
|
|
President
and Chief Executive Officer
|
|
(Principal
Executive Officer)
|
|
|
Date: May
13, 2009
|
/s/ James Linesch
|
|
James
Linesch Chief Financial
Officer
(Principal
Financial Officer)
|