UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-Q





(Mark
One)




x





For the
quarterly period ended September 30, 2009





o




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 xNo 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 oNo o


Yes  No


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 oNon-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 oNo 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 9,597,877 shares
of Common Stock outstanding as of November 13, 2009.














Special
Note Regarding Forward-Looking Statements





This
Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 2 of Part I of this
report include forward-looking statements. These 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
achievements expressed or implied by forward-looking statements.





In
some cases, you can identify forward-looking statements by terminology such as
"may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "proposed," "intended," or "continue" or the negative
of these terms or other comparable terminology. You should read statements that
contain these words carefully, because they discuss our expectations about our
future operating results or our future financial condition or state other
"forward-looking" information. There may be events in the future that we are not
able to accurately predict or control. Before you invest in our securities, you
should be aware that the occurrence of any of the events described in this
Quarterly Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events,
the trading price of our securities could decline and you could lose all or part
of your investment. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
growth rates, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report to conform these statements to actual results.





2





TABLE
OF CONTENTS







PART I - FINANCIAL
      INFORMATIONItem
      1. Condensed Financial StatementsCondensed
      Balance Sheets - September 30, 2009 (unaudited) and December 31,
      2008
            4Condensed
      Statements of Operations for the three and nine month periods ended
      September 30, 2009 and 2008 (unaudited)
            5Condensed
      Statement of Changes in Stockholders’ Equity for the nine month period
      ended September 30, 2009 (unaudited)
            6Condensed
      Statements of Cash Flows for the nine month periods ended September 30,
      2009 and 2008 (unaudited)
            7Notes to
      Condensed Financial Statements (unaudited)
            8Item
      2. Management's Discussion and Analysis of Financial Condition and
      Results of Operations
            14Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
            19Item 4T. Controls
      and Procedures
            20PART II - OTHER
      INFORMATIONItem 1. Legal
      Proceedings
            21Item 1A. Risk
      Factors
            21Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceed
            21Item
      3. Defaults Upon Senior Securities
            21Item
      4. Submission of Matters to a Vote of Security Holders
            21Item 5. Other
      Information
            21Item
      6. Exhibits
            21




3





Part
I – FINANCIAL INFORMATION


Item
1. Financial Statements




REED’S,
INC.


CONDENSED
BALANCE SHEETS






September
      30,
              2009
            
            
            December
      31,
              2008ASSETS
            
            (unaudited)Current
      assets:Cash
            
            $
            76,000
            
            
            $
            229,000Inventory
            
            
            3,176,000
            
            
            
            2,837,000Trade
      accounts receivable, net of allowance for doubtful accounts
      and    returns and discounts of $97,000 as of
      September 30, 2009 and December 31, 2008
            
            
            1,375,000
            
            
            
            897,000Prepaid
      and other current assets
            
            
            226,000
            
            
            
            68,000Total
      Current Assets
            
            
            4,853,000
            
            
            
            4,031,000Property
      and equipment, net of accumulated depreciation of $624,000 as of September
      30, 2009 and $1,150,000 as of December 31, 2008
            
            
            3,641,000
            
            
            
            4,133,000Brand
      names
            
            
            800,000
            
            
            
            800,000Deferred
      offering costs
            
            
            177,000
            
            
            
            62,000Deferred
      financing fees, net of amortization of $13,000 as of September 30, 2009
      and $40,000 as of December 31, 2008
            
            
            660,000
            
            
            
            77,000Total
      assets
            
            $
            10,131,000
            
            
            $
            9,103,000LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            1,758,000
            
            
            $
            1,929,000Lines
      of credit
            
            
            1,447,000
            
            
            
            1,354,000Current
      portion of long term debt
            
            
            -
            
            
            
            16,000Current
      portion of long term financing obligation
            
            
            37,000
            
            
            
            -Current
      portion capital leases
            
            
            23,000
            
            
            
            -Accrued
      interest
            
            
            25,000
            
            
            
            -Accrued
      expenses
            
            
            96,000
            
            
            
            96,000Total
      current liabilities
            
            
            3,386,000
            
            
            
            3,395,000Long
      term financing obligation, less current portion
            
            
            3,011,000
            
            
            
            -Capital
      leases payable, less current portion
            
            
            136,000
            
            
            
            -Long
      term debt, less current portion
            
            
            -
            
            
            
            1,747,000Total
      Liabilities
            
            
            6,533,000
            
            
            
            5,142,000Commitments
      and contingenciesStockholders’
      equity:Preferred
      stock, $10 par value, 500,000 shares authorized, 46,621 shares outstanding
      at September 30, 2009 and 47,121 shares outstanding atDecember
      31, 2008
            
            
            466,000
            
            
            
            471,000Series
      B Convertible Preferred stock, $.0001 par value, 1,846,738 shares
      authorized, no shares issued or outstanding at September 30, 2009 and
      December 31, 2008
            
            
            -
            
            
            
            -Common
      stock, $.0001 par value, 19,500,000 shares authorized,
      9,233,688 shares issued and outstanding at September 30, 2009 and
      8,979,341 shares issued and outstanding at December 31,
      2008
            
            
            1,000
            
            
            
            1,000Additional
      paid in capital
            
            
            19,846,000
            
            
            
            18,408,000Accumulated
      deficit
            
            
            (16,715,000
            )
            
            
            (14,919,000
            )Total
      stockholders’ equity
            
            
            3,598,000
            
            
            
            3,961,000Total
      liabilities and stockholders’ equity
            
            $
            10,131,000
            
            
            $
            9,103,000





The accompanying notes are an integral part of these condensed
financial statements




4





REED’S,
INC.


CONDENSED
STATEMENTS OF OPERATIONS


For
the Three Months and Nine Months Ended September 30, 2009 and 2008


(Unaudited)






Three
      months ended September 30,
              
              
              Nine
      months ended September 30,2009
              
              
              2008
              
              
              2009
              
              
              2008Sales
              
              $
              4,027,000
              
              
              $
              4,233,000
              
              
              $
              11,658,000
              
              
              $
              12,368,000Cost
      of sales
              
              
              3,038,000
              
              
              
              2,938,000
              
              
              
              8,722,000
              
              
              
              9,283,000Gross
      profit
              
              
              989,000
              
              
              
              1,295,000
              
              
              
              2,936,000
              
              
              
              3,085,000Operating
      expenses:Selling
      and marketing expense
              
              
              646,000
              
              
              
              819,000
              
              
              
              1,853,000
              
              
              
              2,994,000General
      and administrative expense
              
              
              623,000
              
              
              
              558,000
              
              
              
              1,896,000
              
              
              
              2,548,000Impairment
      of assets
              
              
              -
              
              
              
              -
              
              
              
              641,000
              
              
              
              -Total
      operating expenses
              
              
              1,269,000
              
              
              
              1,377,000
              
              
              
              4,390,000
              
              
              
              5,542,000Loss
      from operations
              
              
              (280,000
              )
              
              
              (82,000
              )
              
              
              (1,454,000
              )
              
              
              (2,457,000
              )Interest
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,000Interest
      expense
              
              
              (122,000
              )
              
              
              (92,000
              )
              
              
              (319,000
              )
              
              
              (199,000
              )Net
      loss
              
              
              (402,000
              )
              
              
              (174,000
              )
              
              
              (1,773,000
              )
              
              
              (2,655,000
              )Preferred
      stock dividend
              
              
              -
              
              
              
              -
              
              
              
              (23,000
              )
              
              
              (23,000
              )$
              (402,000
              )
              
              $
              (174,000
              )
              
              $
              (1,796,000
              )
              
              $
              (2,678,000
              )Net
      loss attributable to common stockholdersLoss
      per share – available to common stockholders basic and
    diluted
              
              $
              (0.04
              )
              
              $
              (0.02
              )
              
              $
              (0.20
              )
              
              $
              (0.30
              )Weighted
      average number of shares outstanding - basic and diluted
              
              
              9,215,171
              
              
              
              8,928,591
              
              
              
              9,125,887
              
              
              
              8,868,381





The
accompanying notes are an integral part of these condensed financial
statements




5




REED’S, INC.


CONDENSED STATEMENT OF CHANGES IN
STOCKHOLDERS’ EQUITY


For
the Nine Months ended September 30, 2009


(unaudited)









Common
      Stock
            
            
            Preferred
      StockShares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Additional
              Paid–In
              Capital
            
            
            Accumulated
      Deficit
            
            
            Total
                Stockholders’
      EquityBalance,
      December 31, 2008
            
            
            8,979,341
            
            
            $
            1,000
            
            
            
            47,121
            
            
            $
            471,000
            
            
            $
            18,408,000
            
            
            $
            (14,919,000
            )
            
            $
            3,961,000Fair
      Value of Common Stock issued for services
            
            
            189,397
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            247,000
            
            
            
            –
            
            
            
            247,000Conversion
      of preferred stock
            
            
            2,000
            
            
            
            –
            
            
            
            (500
            )
            
            
            (5,000
            )
            
            
            5,000
            
            
            
            –
            
            
            
            –Issuance
      of warrants in connection with financing obligation
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            653,000
            
            
            
            –
            
            
            
            653,000Sale
      of common stock
            
            
            50,000
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            150,000
            
            
            
            –
            
            
            
            150,000Preferred
      stock dividend
            
            
            12,950
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            23,000
            
            
            
            (23,000
            )
            
            
            –Fair
      value vesting of options issued to employees
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            360,000
            
            
            
            –
            
            
            
            360,000Net
      loss
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            –
            
            
            
            (1,773,000
            )
            
            
            (1,773,000
            )Balance,
      September 30, 2009
            
            
            9,233,688
            
            
            $
            1,000
            
            
            
            46,621
            
            
            $
            466,000
            
            
            $
            19,846,000
            
            
            $
            (16,715,000
            )
            
            $
            3,598,000




The
accompanying notes are an integral part of these condensed financial
statements




6




REED’S,
INC.


CONDENSED
STATEMENTS OF CASH FLOWS


For the Nine Months Ended September
30, 2009 and 2008


(Unaudited)







Nine
      Months Ended
                September
      30,2009
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (1,773,000
            )
            
            $
            (2,655,000
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
            
            
            324,000
            
            
            
            257,000Fair
      value of stock options issued to employees
            
            
            360,000
            
            
            
            58,000Fair
      value of common stock issued for services
            
            
            247,000
            
            
            
            335,000Impairment
      loss on assets
            
            
            641,000Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (478,000
            )
            
            
            (121,000
            )Inventory
            
            
            (339,000
            )
            
            
            34,000Prepaid
      expenses and other current assets
            
            
            (158,000
            )
            
            
            26,000Accounts
      payable and accrued expenses
            
            
            (171,000
            )
            
            
            (605,000
            )Accrued
      interest
            
            
            25,000
            
            
            
            21,000Net
      cash used in operating activities
            
            
            (1,322,000
            )
            
            
            (2,650,000
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (240,000
            )
            
            
            (186,000
            )Net
      cash used in investing activities
            
            
            (240,000
            )
            
            
            (186,000
            )Cash
      flows from financing activities:Proceeds
      from issuance of common stock
            
            
            150,000
            
            
            
            -Proceed
      received from borrowings on long term debt
            
            
            -
            
            
            
            1,770,000Principal
      repayments on long term debt
            
            
            (1,763,000
            )
            
            
            (796,000
            )Proceeds
      received from long term financing obligation
            
            
            3,056,000
            
            
            
            -Principal
      repayments on long term financing obligation
            
            
            (8,000
            )
            
            
            -Principal
      repayments on capital lease obligation
            
            
            (4,000
            )
            
            
            -Net
      (repayments) borrowings on lines of credit
            
            
            93,000
            
            
            
            1,290,000Payments
      for offering costs
            
            
            (115,000
            )
            
            
            -Payments
      for deferred finance fees
            
            
            -
            
            
            
            (88,000
            )Net
      cash provided by financing activities
            
            
            1,409,000
            
            
            
            2,176,000Net
      decrease in cash
            
            
            (153,000
            )
            
            
            (660,000
            )Cash
      at beginning of period
            
            
            229,000
            
            
            
            743,000Cash
      at end of period
            
            $
            76,000
            
            
            $
            83,000Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
            
            $
            293,000
            
            
            $
            178,000Taxes
            
            $
            -
            
            
            $
            -Non
      cash investing and financing activities:Preferred
      stock converted to common stock
            
            $
            5,000
            
            
            $
            10,000Fair
      value warrants granted for deferred financing fees
            
            $
            653,000
            
            
            $
            -Common
      stock issued in settlement of preferred stock dividend
            
            $
            23,000
            
            
            $
            23,000Property
      and equipment acquired through capital lease obligation
            
            $
            163,000
            
            
            $
            -





The
accompanying notes are an integral part of these condensed financial
statements




7





REED’S,
INC.





NOTES TO CONDENSED
FINANCIAL STATEMENTS


Nine
Months Ended September 30, 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 September 30, 2009 and the results of operations and cash
flows for the three and nine months ended September 30, 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 condensed 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 and amended on Form 10-K/A on August
19, 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 and nine months ended September 30, 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 and nine months ended September 30, 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:





September
      30,
            
            
            September
      30,2009
            
            
            2008Warrants
            
            
            2,208,236
            
            
            
            1,868,236Preferred
      Stock
            
            
            186,484
            
            
            
            188,484Options
            
            
            720,000
            
            
            
            652,500Total
            
            
            3,114,720
            
            
            
            2,709,220





Recent
Accounting Pronouncements





In June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles. The
FASB Accounting Standards CodificationTM (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its financial statements now use the new Codification numbering system. The
Codification does not change or alter existing GAAP and, therefore, it does not
have an impact on our financial position, results of operations and cash
flows.




8




In
April 2009, the FASB issued new accounting guidance relating to fair value
measurement to provide additional guidance for estimating fair value when the
volume and level of activity for an asset or liability have significantly
decreased.  Guidance on identifying circumstances that indicate a
transaction is not orderly is also provided.  If it is concluded that there
has been a significant decrease in the volume and level of market activity for
an asset or liability in relation to normal market activity, transaction or
quoted prices may not be determinative of fair value and further analysis of
transaction or quoted prices may be necessary.  A significant adjustment to
transaction or quoted prices may be necessary to estimate fair value under the
current market conditions.  Determination of whether a transaction is
orderly is based on the weight of relevant evidence.




The
disclosure requirements are expanded to include the inputs and valuation
techniques used to measure fair value and a discussion of changes in valuation
techniques and related inputs during the quarterly reporting period. 
Disclosures of assets and liabilities measured at fair value are to be presented
by major security type.  Disclosures are not required for earlier periods
presented for comparative purposes.  Revisions resulting from a change in
valuation technique or its application shall be accounted for as a change in
accounting estimate and disclosed, along with the total effect of the change in
valuation technique and related inputs, if practicable, by major category. 
The Company adopted the provisions of the new guidance as of April 1,
2009.  The adoption had no effect on the Company’s results of operations or
financial position.




On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred. We have applied
this guidance to business combinations completed since July 1,
2009.  Adoption of the new guidance did not have a material impact on
our financial statements.




In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.




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 and nine months ended September 30,
2009.




During
the nine months ended September 30, 2009 and 2008, the Company had two
customers, which accounted for approximately 17% and 32% in 2009, and 13% and
32% of sales in 2008, respectively. During the three months ended September 30,
2009 and 2008, the Company had two customers, which accounted for approximately
14% and 34% in 2009, and 14% and 36% of sales in 2008,
respectively.  No other customers accounted for more than 10% of sales
in either year. As of September 30, 2009, the Company had approximately $175,000
and $522,000, respectively, of accounts receivable from these
customers.




Fair
Value of Financial Instruments




During
September 2006, the Financial Accounting Standards Board (“FASB”) issued
guidance regarding fair value measurements, which was effective for fiscal years
beginning after November 15, 2007.  This guidance defines fair value,
establishes as framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  In February 2008, the FASB delayed the effective date
of the fair value guidance for all non-financial assets and liabilities, except
those that are recognized or disclosed at fair value in the financial statements
on a recurring basis, until January 1, 2008 for all financial assets and
liabilities.  This adoption did not have a significant impact on the
Company’s financial position or results of operations.




The
guidance defines fair value as the price that would be received to sell an asset
or paid to transfer a liability in the principal or most advantageous market for
the asset or liability in an orderly transaction between market participants at
the measurement date.  The guidance establishes a fair value
hierarchy, which prioritizes the inputs used in measuring fair value into three
broad levels as follows:




Level 1 –
Quoted prices in active markets for identical assets or
liabilities.


Level 2 –
Inputs, other than the quoted prices in active markets, that are observable
either directly or indirectly.


Level 3 –
Unobservable inputs based on the Company’s assumptions.




The
guidance requires the use of observable market data if such data is available
without undue cost and effort.




9




Reclassifications





Certain
amounts in the prior-year financial statements of $15,000 have been reclassified
from deferred offering costs to deferred financing fees to conform with the
current-year presentation.





2. Long
Term Financing Obligation
  On June
15, 2009, the Company closed escrow on the sale of its two buildings and its
brewery equipment and concurrently entered into a long-term lease agreement for
the same property and equipment. In connection with the lease the Company has
the option to repurchase the buildings and brewery equipment from 12 months
after the commencement date to the end of the lease term at the greater of the
fair market value or an agreed upon amount. Since the lease contains a buyback
provision and other related terms, the Company determined it had continuing
involvement that did not warrant the recognition of a sale; therefore, the
transaction has been accounted for as a long-term financing.  The
proceeds from the sale, net of transaction costs, have been recorded as a
financing obligation in the amount of $3,056,000. Monthly payments under the
financing agreement are recorded as interest expense and a reduction in the
financing obligation at an implicit rate of 9.9%. The financing obligation is
personally guaranteed up to a limit of $150,000 by the principal shareholder and
Chief Executive Officer, Christopher J. Reed.  In connection with the
lease, the Company issued 340,000 warrants to purchase its common stock at $1.20
per share for five years. The 340,000 warrants were valued at $653,000, using
the Black Scholes option pricing model. The following assumptions were utilized
in valuing the 340,000 warrants: strike price of $2.25; term of 5 years;
volatility of 110.9%; expected dividends 0%; and discount rate of 2.15%. The
340,000 warrants were recorded as deferred financing fees and are being
amortized over 15 years, the term of the purchase option.
  An
impairment charge in the amount of $641,000 was recorded during the nine months
ended September 30, 2009 as it was determined that the carrying value of the
buildings and brewery equipment was greater than the fair market value of those
assets on the date of the transaction.
  The
aggregate due under the financing obligation at September 30, 2009 was
$3,048,000.  Aggregate future obligations under the financing
obligation are as follows:


Year2010
            
            $
            37,0002011
            
            
            51,0002012
            
            
            67,0002013
            
            
            85,0002014
            
            
            105,000Thereafter
            
            
            2,703,000Total
            
            $
            3,048,000





3. Inventory




Inventory
consists of the following as of:





September
      30,
              2009
            
            
            December
      31,
              2008Raw
      Materials
            
            $
            1,133,000
            
            
            $
            755,000Finished
      Goods
            
            
            2,043,000
            
            
            
            2,082,000$
            3,176,000
            
            
            $
            2,837,000





4. Fixed
Assets




Fixed
assets are comprised of the following as of:





September
      30,
              2009
            
            
            December
      31,
              2008Land
            
            $
            1,107,000
            
            
            $
            1,410,000Building
            
            
            1,393,000
            
            
            
            1,769,000Vehicles
            
            
            320,000
            
            
            
            320,000Machinery
      and equipment
            
            
            1,056,000
            
            
            
            1,398,000Office
      equipment
            
            
            389,000
            
            
            
            386,0004,265,000
            
            
            
            5,283,000Accumulated
      depreciation
            
            
            (624,000
            )
            
            
            (1,150,000
            )$
            3,641,000
            
            
            $
            4,133,000




10




Machinery
and equipment at September 30, 2009 includes equipment held under capital leases
of $163,000, which was added during the quarter ended September 30,
2009.  Accumulated depreciation on equipment held under capital leases
was $5,000 at September 30, 2009.




5. Line of
Credit




At
September 30, 2009 and December 31, 2008, the aggregate amount outstanding under
the line of credit was $1,447,000 and $1,354,000 respectively, and the Company
had approximately $78,000 of availability on this line of credit at September
30, 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 (9.75% at September 30, 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.




On June
11, 2009, the loan agreement was amended to allow the sale of two buildings and
the brewery equipment (see Note 2).  The maximum credit limit was
reduced to $2 million and an additional reserve of $350,000 was applied to the
eligible collateral under the agreement.




The
Company is required to comply with a number of affirmative, negative and
financial covenants.  As of September 30, 2009, the Company was not in
compliance with the Fixed Charge Coverage Ratio.  On November 11,
2009, the Company has subsequently obtained a waiver of covenant
violations.




On
November 4, 2009, the Company executed a revolver line commitment with GemCap
Lending I, LLC to replace its existing line of credit (see Note
10).




6. Capital Lease
Commitments




During
the quarter ended September 30, 2009, the Company leased additional equipment
for its brewery operations with an aggregate value of  $163,000 under
four non-cancelable capital leases.  The leases are personally
guaranteed by the Company’s Chief Executive Officer.   The future
minimum lease payments under the capital leases as of September 30, 2009 are as
follows:





Periods
      Ending September 30,
            
            Capital
      Leases2010
            
            $
            49,0002011
            
            
            49,0002012
            
            
            49,0002013
            
            
            49,0002014
            
            
            41,000Total
      minimum obligations
            
            
            237,000Less:
      Amounts representing interest
            
            
            (78,000
            )Present
      value of minimum obligations
            
            
            159,000Less:
      Current portion
            
            
            (23,000
            )Non-current
      portion
            
            $
            136,000





7. Stockholders’
Equity




During
the nine months ended September 30, 2009, the Company issued 189,397 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 or
agreed upon date.  The total value of shares issued for services was
$247,000.  During the period ended September 30, 2009, the Company
also sold 50,000 shares of common stock for $3.00 per share or $150,000, granted
a stock dividend on its preferred stock of 12,950 common shares valued at
$23,000 in accordance with the dividend provision of the preferred stock
agreement, and issued 2,000 shares of common stock resulting from the conversion
of 500 shares of preferred stock.




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 reserved for issuance upon such
conversion out of the authorized but unissued shares of Common Stock of the
Company.




11




8. Stock Based
Compensation




Stock
Options




During
the nine months ended September 30, 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 $48,000 was
recognized in the nine months ended September 30, 2009.  Total
stock-based compensation recognized on the Company’s statement of operations for
the three and nine months ended September 30, 2009 was $91,000 and $360,000,
respectively.  As of September 30, 2009, the aggregate value of
unvested options was $366,000, which will vest over an average period of three
years.  There were no stock options exercised in the nine months ended
September 30, 2009.  Stock options granted under our equity incentive
plans vest over 2 to 3 years from the date of grant, 1⁄2 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 nine months ended September 30, 2009
was $0.66.




The
following weighted average assumptions were used to value option
grants:





Nine
      Months Ended
              September 30, 2009Expected
      volatility
            89%-
      97%Expected
      dividends
            —Expected
      average term (in years)
            2.82Risk
      free rate- average
            1.72%Forfeiture
      rate
            0%




The
following table summarizes stock option activity for the nine months ended
September 30, 2009:





Shares
            
            
            Weighted-Average
              Exercise Price
            
            
            Weighted-Average
              Remaining
              Contractual
              Terms (Years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at December 31, 2008
            
            
            702,500
            
            
            $
            3.55Granted
            
            
            120,000
            
            
            $
            1.18Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            (102,500
            )
            
            $
            2.85Outstanding
      at September 30, 2009
            
            
            720,000
            
            
            $
            1.70
            
            
            3.2
            
            
            $
            804,000Exercisable
      at September 30, 2009
            
            
            291,666
            
            
            $
            2.31
            
            
            2.6
            
            
            $
            282,000





The aggregate intrinsic value was calculated as the difference
between the market price and the exercise price of the Company’s stock, which
was $2.25 as of September 30, 2009.





The
following table summarizes information about stock options at September 30,
2009:





Options
      Outstanding at September 30, 2009
            
            
            Options
      Exercisable atSeptember
      30, 2009Range
      of
                Exercise
      Price
            
            
            Number
      of
                Shares
                Outstanding
            
            
            Weighted
      AverageRemaining
                Contractual
      Life (years)
            
            
            Weighted
                Average
                Exercise
      Price
            
            
            Numberof
                Shares
                Exercisable
            
            
            Weighted
                Average
                Exercise
      Price$0.01
      - $1.99
            
            
            
            590,000
            
            
            
            3.48
            
            
            $
            0.89
            
            
            
            188,332
            
            
            $
            0.75$2.00
      - $4.99
            
            
            
            80,000
            
            
            
            1.51
            
            
            $
            4.00
            
            
            
            70,000
            
            
            $
            4.00$5.00
      - $6.99
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -$7.00
      - $8.50
            
            
            
            50,000
            
            
            
            2.68
            
            
            $
            7.55
            
            
            
            33,334
            
            
            $
            7.55720,000
            
            
            
            
            
            
            
            
            
            
            
            291,666





12




Stock
Warrants




On April
23, 2009, 200,000 warrants were re-priced to $1.35 from a weighted average price
of $2.77.  Since these are performance-based warrants and no
performance criteria have been met as of September 30, 2009, no expense was
recognized in the re-pricing of these warrants. On May 7, 2009, the Company
granted 340,000 warrants in connection with a long-term financing obligation
(see Note 2).  The Company has 2,208,236 warrants outstanding at
September 30, 2009.




The
following table summarizes stock warrant activity for the nine months ended
September 30, 2009:




Shares
            
            
            Weighted-Average
              Exercise Price
            
            
            Weighted-Average
              Remaining
              Contractual
              Terms (Years)
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at December 31, 2008
            
            
            1,868,236
            
            
            $
            5.41Granted
            
            
            340,000
            
            
            $
            1.20Exercised
            
            
            —
            
            
            
            —Forfeited
      or expired
            
            
            —
            
            
            
            —Outstanding
      at September 30, 2009
            
            
            2,208,236
            
            
            $
            4.65
            
            
            2.3
            
            
            $
            563,000Exercisable
      at September 30, 2009
            
            
            2,008,236
            
            
            $
            4.98
            
            
            2.3
            
            
            $
            383,000





The
aggregate intrinsic value was calculated as the difference between the market
price and the exercise price of the Company’s stock, which was $2.25 as of
September 30, 2009.




9. 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.




10. Subsequent
Events




The
Company has evaluated subsequent events occurring between the end of our fiscal
quarter, September 30, 2009 and November 16, 2009 which is the date the
financial statements were issued.  The significant subsequent events
are listed below.




On
October 1, 2009, 60,000 warrants were issued in connection with long-term
financing obligation at exercise price of $1.20 for approximately five
years.




On
October 19, 2009, the Company executed an Asset Purchase Agreement with Sonoma
Cider Mill, Inc., to acquire certain assets of the Sonoma Sparkler
brand.  Since June 1, 2009, based on a non-binding letter of intent,
the Company has been packing and selling the six Sonoma Sparkler brand products
in anticipation of completion of this acquisition.  The assets
purchased in this transaction include the intellectual property known as the
Sonoma Sparkler label and formulas for six flavors currently on the market,
customer lists and vendor contact information, assignable licenses and permits
and existing inventory.  The aggregate purchase price under the
Agreement is $252,000. Initial payments of $45,000 were made prior to the
Agreement and the balance of $207,000 is payable in installments of $9,000 over
23 remaining months, continuing on the first of every month.




On
October 8, 2009, the Company sold an aggregate of 364,189 units (“Units”)
consisting of one share of our common stock (“Share”) and warrants to purchase
shares of our common stock (“Warrants”)at a price of $1.80 per Unit pursuant to
a public shelf registration on Form S-3.  The Warrants consist
of  (i) Series A Warrants, for the purchase of a number of shares of
common stock equal to 40% of a purchaser’s Shares, which have an initial
exercise price of $2.25 per share and are exercisable for a period of five years
commencing 183 days from the date of issuance, (ii) Series B Warrants, for the
purchase of a number of shares of common stock equal to 50% of a purchaser’s
Shares, which have an exercise price equal to $1.80 and are exercisable for 60
trading days commencing immediately, and (iii) Series C Warrants, for the
purchase of a number of a shares of common stock equal to 20% of a purchaser’s
Shares, which have an exercise price of $2.25 and are exercisable for five years
commencing 183 days from the date of issuance.  The Series B Warrants
and Series C Warrants were only issued to purchasers who purchase Units for an
aggregate purchase price of at least $125,000.   The Company paid
an 8% placement agent fee. The net proceeds to the Company from the shelf-take
down, after deducting placement agent fees and estimated offering expenses, were
approximately $563,000. At the closing, the Company issued 364,189 shares of
common stock, Series A Warrants to purchase 145,676 shares of common stock,
Series B Warrants to purchase 69,445 shares of common stock, and Series C
Warrants to purchase 27,778 shares of common stock.




On
November 4, 2009, the Company executed a binding revolver line commitment with
GemCap Lending I, LLC to replace its existing line of credit.  The
senior revolver facility is for $3,000,000, based on 80% of eligible accounts
receivable and 50% of eligible inventory, with a maximum inventory advance of
$1,500,000.  The line of credit bears interest of 18% per
annum.  The transaction is anticipated to close on or before November
18, 2009.




13




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.




Overview




The
results for the quarter ended September 30, 2009 reflect our continued reduction
in operating costs, as compared to the prior year period.  While sales
have fallen during this adverse economic period affecting the grocery industry,
we believe that our customer relationships are expanding and will result in
increasing sales of our branded products in 2011.  During the quarter
ended September 30, 2009, we invested over $300,000 in capital improvements to
our brewery and we are currently producing both branded and private label
products in our upgraded brewery.  Margins during the third fiscal
quarter have remained consistent with earlier fiscal quarters, considering
overall sales levels and fixed production costs.    As we
enter the 4th
quarter, the Company is well positioned for an increasing backlog of private
label business as well as strong sales increases of our branded product lines in
2010.  Our strategic plan is to apply the gross margin revenues
derived from our private label business to the increased promotion of our
branded products in the marketplace.




Results
of Operations




Three
months ended September 30, 2009 Compared to Three months ended September 30,
2008




Sales of
$4,027,000 for the three months ended September 30, 2009 represented a decrease
of 5% or $206,000, as compared to the prior year same period amount of
$4,233,000.  The decrease in revenues is primarily due to lower
volumes sold of our primary 12-ounce product lines, due to adverse economic
conditions affecting the grocery industry as a whole. The decrease was partially
offset by an increase in sales of new products, Virgil’s Orange Cream Soda and
Reed’s Energy Elixir; as well as sales of the Sonoma Sparkler brand products
starting in June 2009.




Cost
of Goods Sold




Cost of
goods sold consists primarily of the costs of our ingredients, packaging,
production and freight.  Cost of goods sold increased by 3% to
$3,038,000 during the three months ended September 30, 2009 from $2,938,000 in
2008.    The increases are primarily due to higher fixed
productions costs and to increased freight costs.  As our volume
increases and our plant approaches capacity, the fixed production costs will be
more fully absorbed into inventory production, reducing the average per-unit
cost.  We have not experienced significant increases in raw material
and packaging costs, and we are also currently negotiating further reductions in
glass costs, which will reduce our cost of goods sold in the
future.




Gross
Profit




Our gross
profit decreased to $989,000 in the three months ended September 30, 2009, from
$1,295,000 in 2008, a decrease of $306,000 or 24%.  The gross profit
as a percentage of sales decreased to 25% in 2009, from 31% in
2008.  This gross profit margin decrease is primarily due to the
increases in costs of goods sold 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 $646,000 in the three months ended
September 30, 2009 from $819,000 in 2008, a net decrease of $173,000 or
21%.  The decrease is primarily due to decreases in compensation and
travel costs of $184,000 and a decrease stock option expense of $37,000,
partially offset by an increase in advertising promotion and trade shows of
$44,000 and an increase in facilities-related costs of $4,000.




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 our 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 increased to $623,000 during the three months ended
September 30, 2009 from $558,000 in the same period of 2008, a net increase of
$65,000 or 12%. The increase in 2009 is primarily due to an increase in
compensation costs and professional fees expense of $75,000, partially offset by
a decrease in facilities-related costs of $10,000.




14




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 increased to $280,000 in the three months ended September 30,
2009 from $82,000 in the same period of 2008.  The 2009 loss is
primarily due to the lower sales and higher cost of goods sold in
2009.




Interest
Expense




Interest
expense increased to $122,000 in the three months ended September 30, 2009,
compared to interest expense of $92,000 in the same period of
2008.  The increase is due to the increase in long-term debt, as a
result of our sale-leaseback; and increased borrowing under a line of credit
agreement with First Capital LLC, secured primarily by our inventory and
accounts receivable.




Nine
months ended September 30, 2009 Compared to Nine months ended September 30,
2008




Sales of
$11,658,000 for the nine months ended September 30, 2009 represented a decrease
of 6% or $710,000, as compared to the 2008 same period amount of
$12,368,000.  The decrease in revenues is primarily due to a
promotional program in 2008, covering our 5-liter “party kegs” of root beer,
which did not recur in 2009; resulting in approximately $850,000 lower sales of
that product.  The volume of our primary 12-ounce products delivered
in 2009 was approximately 3% higher than the same 2008 period.




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 6% to
$8,722,000 during the nine months ended September 30, 2009 from $9,283,000 in
2008.  The 6% decrease in cost of goods sold is consistent with the 6%
decrease in sales during the same periods.




Gross
Profit




Our gross
profit decreased to $2,936,000 in the nine months ended September 30, 2009, from
$3,085,000 in 2008, a decrease of $149,000 or 5%.  The gross profit as
a percentage of sales was unchanged at 25% in 2009, as compared to
2008.




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 $1,853,000 in the nine months ended
September 30, 2009 from $2,994,000 in 2008, a net decrease of $1,141,000 or
38%.  The decrease is primarily due to decreases in compensation and
travel costs of $1,131,000, decreases in advertising promotion and trade shows
of $273,000, and decreases in facilities-related costs of $14,000; partially
offset by an increase in stock option expense of $277,000.




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 our 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 $1,896,000 during the nine months ended
September 30, 2009 from $2,548,000 in the same period of 2008, a net decrease of
$652,000 or 26%. The decrease in 2009 is primarily due to a decrease in
professional fees expense of $344,000 and a decrease in compensation costs of
$349,000; partially offset by an increase in facilities-related costs of
$14,000, and an increase in stock option expense of $27,000. 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.




15




Impairment
Loss




In
connection with the sale of our buildings and brewery equipment in June 2009,
and the concurrent lease-back of the same property and equipment, we recognized
an impairment loss on the assets of $641,000.  The loss recognized
from impairment is a result of the lower net carrying values of the assets at
the time of sale in relation to the market value of the property.




Loss
from Operations




Our loss
from operations decreased to $1,454,000 in the nine months ended September 30,
2009 from $2,457,000 in the same period of 2008.  The reduced loss in
2009 is substantially a result of the lower operating costs in
2009.




Interest
Expense




Interest
expense increased to $319,000 in the nine months ended September 30, 2009,
compared to interest expense of $199,000 in the same period of
2008.  The increase is due to the increase in long-term debt, as a
result of our sale-leaseback; and increased borrowing under a line of credit
agreement with First Capital LLC, secured primarily by our inventory and
accounts receivable.




Liquidity
and Capital Resources




As of
September 30, 2009, we had shareholders equity of $3,598,000 and we had working
capital of $1,467,000, compared to shareholders equity of $3,961,000 and working
capital of $636,000 at December 31, 2008. Cash and cash equivalents were $76,000
as of September 30, 2009, as compared to $229,000 at December 31, 2008. This
increase in our working capital was primarily attributable to the proceeds from
the financing transaction relating to our buildings and equipment, net of the
repayment of long-term debt.  In addition to our cash position on
September 30, 2009, we had availability under our line of credit of
approximately $78,000.




Our
decrease in cash and cash equivalents to $76,000 at September 30, 2009 compared
to $229,000 at December 31, 2008 was the result of $1,322,000 used in operating
activities; $240,000 used in investing activities; and $1,409,000 provided by
financing activities.




We
believe that the Company currently has the necessary working capital to support
existing operations through 2010; however, we foresee an additional requirement
for capital needed to fund our seasonality, product launches and other growth
plans.  Our primary capital source will be cash flow from operations,
as we gain profitability in 2010.  During October 2009, we raised net
proceeds of approximately $563,000 from an offering of our shares.  In
November 2009, we have entered an agreement to replace our revolving line of
credit, which will more fully value our assets for collateral and enable
increased borrowing for working capital purposes.  We are currently
involved in a rights offering to our existing shareholders that will provide
additional working capital, if successful.  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 $1,322,000 compared with $2,650,000 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 accounts receivable, prepaid costs and inventory; and to a decrease
in accounts payable.




Net cash
used in investing activities of $240,000 during 2009 compared with $186,000
during 2008 is primarily the result of equipment purchases.




Net cash
provided by financing activities of $1,409,000 during 2009 was primarily due to
proceeds from the sale of our buildings and equipment of $3,056,000 and the sale
of common stock of $150,000 offset by principal payments on long-term debt of
$1,763,000 and principal payments on the line of credit of $93,000. 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 $796,000.
Our line of credit lender is a privately held, Senior Secured Commercial
Lender.




On June
15, 2009, we closed escrow on the sale of our two buildings and its brewery
equipment and concurrently entered into a long-term lease agreement for the same
property and equipment. In connection with the lease we have the option to
repurchase the buildings and brewery equipment from 12 months after the
commencement date to the end of the lease term at the greater of the fair market
value or an agreed upon amount. Since the lease contains a buyback provision and
other related terms, we determined that we had continuing involvement that did
not warrant the recognition of a sale; therefore, the transaction has been
accounted for as a long-term financing.  The proceeds from the sale,
net of transaction costs, have been recorded as a financing obligation in the
amount of $3,056,000. Monthly payments under the financing agreement are
recorded as interest expense and a reduction in the financing obligation at an
implicit rate of 9.9%. The financing obligation is personally guaranteed by the
principal shareholder and chief executive officer.




16




On
October 8, 2009, we sold an aggregate of 364,189 units (“Units”) consisting of
one share of our common stock (“Share”) and warrants to purchase shares of our
common stock (“Warrants”)at a price of $1.80 per Unit pursuant to a public shelf
registration on Form S-3.  . The Warrants consist of (i) Series A
Warrants, for the purchase of a number of shares of common stock equal to 40% of
a purchaser’s Shares, which have an initial exercise price of $2.25 per share
and are exercisable for a period of five years commencing 183 days from the date
of issuance, (ii) Series B Warrants, for the purchase of a number of shares of
common stock equal to 50% of a purchaser’s Shares, which have an exercise price
equal to $1.80 and are exercisable for 60 trading days commencing immediately,
and (iii) Series C Warrants, for the purchase of a number of a shares of common
stock equal to 20% of a purchaser’s Shares, which have an exercise price of
$2.25 and are exercisable for five years commencing 183 days from the date of
issuance.  The Series B Warrants and Series C Warrants were only
issued to purchasers who purchased Units for an aggregate purchase price of at
least $125,000.   The Company paid an 8% placement agent fee. The
net proceeds to the Company from the shelf take-down, after deducting placement
agent fees and estimated offering expenses, were approximately $563,000. At the
closing, the Company issued 364,189 shares of common stock, Series A Warrants to
purchase 145,676 shares of common stock, Series B Warrants to purchase 69,445
shares of common stock, and Series C Warrants to purchase 27,778 shares of
common stock.




On
November 4, 2009, we executed a binding revolver line commitment with GemCap
Lending I, LLC to replace our existing line of credit.  The senior
revolver facility is for $3,000,000, based on 80% of eligible accounts
receivable and 50% of eligible inventory, with a maximum inventory advance of
$1,500,000.  The line of credit bears interest of 18% per
annum.  The transaction is anticipated to close on or before November
18, 2009.




On
November 5, 2009, our registration statement became effective for the
distribution of transferable rights to our shareholders.  We will
distribute to the holders of our common stock transferable rights to purchase up
to an aggregate of 225,000 shares of Series B Convertible Preferred Stock
("Series B Preferred") convertible into 1,125,000 shares of common stock. Each
four (4) rights will entitle the holder to purchase one share of Series B
Preferred at the subscription price of $10.00 per share. Each share of Series B
Preferred carries a five percent (5%) annual dividend for a term of three (3)
years, will have an initial stated value of $10.00 per share, and may be
convertible into shares of common stock at a conversion ratio of five (5) shares
of common stock for each share of Series B Preferred held at the time of
conversion, representing an initial conversion price of $2.00 per share, which
is subject to adjustment. We do not know whether this offering will be
successful or completed; however, we have reasonable assurance that it will
result in additional working capital provided to the Company.




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 that our current cash position and lines of
credit will be sufficient to enable us to meet our cash needs throughout 2010.
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, our working capital 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.




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.




17




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 FASB guidance, we do not amortize
indefinite-lived trademark licenses and trademarks.




In
accordance with FASB guidance, 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 nine months ended September 30, 2009 or September 30, 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 nine months ended September 30, 2009 or
September 30, 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 FASB guidance effective January 1, 2006, and are using the modified
prospective method in which compensation cost is recognized beginning with the
effective date (a) for all share-based payments granted after the effective date
and (b) for all awards granted to employees prior to the effective date that
remain unvested on the effective date. We account for stock option and warrant
grants issued and vesting to non-employees in accordance with accounting
guidance 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.




18




We
estimate the fair value of stock options 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 nine month period
ended September 30, 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 June
2009, the FASB issued authoritative guidance on accounting standards
codification and the hierarchy of generally accepted accounting principles. The
FASB Accounting Standards CodificationTM (“Codification”) has become the source
of authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
accordance with GAAP. All existing accounting standard documents are superseded
by the Codification and any accounting literature not included in the
Codification will not be authoritative. However, rules and interpretive releases
of the Securities Exchange Commission (“SEC”) issued under the authority of
federal securities laws will continue to be sources of authoritative GAAP for
SEC registrants. The FASB authoritative guidance is effective for interim and
annual reporting periods ending after September 15, 2009. Therefore, beginning
with our quarter ending September 30, 2009, all references made by it to GAAP in
its financial statements now use the new Codification numbering system. The
Codification does not change or alter existing GAAP and, therefore, it does not
have an impact on our financial position, results of operations and cash
flows.




In
April 2009, the FASB issued new accounting guidance relating to fair value
measurement to provide additional guidance for estimating fair value when the
volume and level of activity for an asset or liability have significantly
decreased.  Guidance on identifying circumstances that indicate a
transaction is not orderly is also provided.  If it is concluded that there
has been a significant decrease in the volume and level of market activity for
an asset or liability in relation to normal market activity, transaction or
quoted prices may not be determinative of fair value and further analysis of
transaction or quoted prices may be necessary.  A significant adjustment to
transaction or quoted prices may be necessary to estimate fair value under the
current market conditions.  Determination of whether a transaction is
orderly is based on the weight of relevant evidence.




The
disclosure requirements are expanded to include the inputs and valuation
techniques used to measure fair value and a discussion of changes in valuation
techniques and related inputs during the quarterly reporting period. 
Disclosures of assets and liabilities measured at fair value are to be presented
by major security type.  Disclosures are not required for earlier periods
presented for comparative purposes.  Revisions resulting from a change in
valuation technique or its application shall be accounted for as a change in
accounting estimate and disclosed, along with the total effect of the change in
valuation technique and related inputs, if practicable, by major category. 
The Company adopted the provisions of the new guidance as of April 1,
2009.  The adoption had no effect on the Company’s results of operations or
financial position.




On July
1, 2009, the Company adopted authoritative guidance issued by the FASB on
business combinations. The guidance retains the fundamental requirements that
the acquisition method of accounting (previously referred to as the purchase
method of accounting) be used for all business combinations, but requires a
number of changes, including changes in the way assets and liabilities are
recognized and measured as a result of business combinations. It also requires
the capitalization of in-process research and development at fair value and
requires the expensing of acquisition-related costs as incurred. We have applied
this guidance to business combinations completed since July 1,
2009.  Adoption of the new guidance did not have a material impact on
our financial statements.




In May
2009, the FASB issued new requirements for reporting subsequent events. These
requirements set forth the period after the balance sheet date during which
management of a reporting entity should evaluate events or transactions that may
occur for potential recognition or disclosure in the financial statements, the
circumstances under which an entity should recognize events or transactions
occurring after the balance sheet date in its financial statements, and
disclosures that an entity should make about events or transactions that
occurred after the balance sheet date. Disclosure of the date through which an
entity has evaluated subsequent events and the basis for that date is also
required.




Item
3.Quantitative and
Qualitative Disclosures About Market Risk.




A smaller
reporting company is not required to provide the information required by this
Item.




19




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 were not 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.  As of September 30,
2009, our disclosure controls and procedures were not effective at the
reasonable assurance level due to the material weaknesses in our internal
control over financial reporting described in our Form 10-K at December 31,
2008.




Changes in Internal Control
over Financial Reporting. In our Form 10-K at December 31, 2008, we
identified certain matters that constitute material weaknesses (as defined under
the Public Company Accounting Oversight Board Auditing Standard No. 2) in our
internal control over financial reporting as discussed on Management’s Report on
Internal Control Over Financial Reporting.  We are undergoing ongoing
evaluation and improvements in our internal control over financial
reporting.  Regarding our identified weaknesses, we have performed the
following remediation efforts:




Insufficient
disaster recovery or backup of core business functions.We
have installed a remote server running the software programs used for our
financial reporting processes, so that we can quickly recover our backup data
and use it at a remote location, in the event of a disaster.




Lack
of segregation of duties. We now have separate individuals
performing purchasing, accounts payable processing, and bank
reconciliations.  Our Chief Financial Officer supervises and reviews
the month end closing process.  Our Chief Operating Officer oversees
the cash disbursements.  Checks are signed by the Chief Executive
Officer.  At this time, we believe that we have established adequate
segregation of duties to the extent possible with our small staff
size.




Lack
of documented and reviewed system of internal control.We have
started to review and document our internal control over financial reporting and
we are also currently updating our risk assessment and preparing to test our
systems.  This process will continue through the 4th
quarter.




There was
no other 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.




20





PART II – OTHER
INFORMATION




Item
1.Legal
Proceedings




We are
subject to various legal proceedings from time to time in the ordinary course of
business, none of which are required to be disclosed under this Item
1.




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




During
the period covered by this Quarterly Report, the following shares of
unregistered common stock were issued at the market value as compensation for
services payable:




Shares
            
            
            TotalDate
            
            Issued
            
            
            ValueJuly
      20, 2009
            
            
            15,000
            
            
            
            29,100.00September
      16, 2009
            
            
            12,745
            
            
            
            24,000.00September
      16, 2009
            
            
            5,250
            
            
            
            10,762.50





On July
27, 2009 12,950 shares of common stock were issued as settlement of the Series A
Convertible Preferred Stock dividend in the amount of $23,000.  Such
transactions were transactions exempt from registration under Section 4(2) of
the Securities Act of 1933, as amended, on the basis of each recipient’s
pre-existing relationship with the Company.




Item
3.Defaults Upon
Senior Securities




None




Item
4.Submission of
Matters to a Vote of Security Holders




None




Item
5.Other
Information




None




Item
6.Exhibits




Exhibit
      No.
            Description10.1
            Asset Purchase
      Agreement between  Sonoma Cider Mill, Inc, and Reed’s, Inc.
      dated October 19, 2009.*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.*





*filed
herewith





21





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:  November
      13, 2009
            /s/Christopher J. ReedChristopher
      J.  ReedPresident
      and Chief Executive Officer(Principal
      Executive Officer)Date:  November
      13, 2009
            /s/James LineschJames
      LineschChief Financial Officer
              (Principal
      Financial Officer)





22