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Reed’s, Inc. Rating: Speculative Buy Howard HalpernREED $8.25 — (OTC BB) April 27, 2007 FY (12/05)A* FY (12/06)A FY (12/07) E Total revenues (in millions) $9.47 $10.48 $13.57 Earnings (loss) per share

FY (12/04)A* $8.98

($0.10) ($0.18) ($0.41) ($0.36) 52 - Week range $9.72 – $3.00 Fiscal year ends: December Shares outstanding as of 03-30-07 7.14 million Revenue/shares (ttm) $1.90 Approximate float 1.31 million Price/Sales (ttm) 4.3X Market Capitalization $59 million Price/Sales (2007)E 4.4X Tangible Book value/share $0.45 Price/Earnings (ttm) NMF Price/Book 18.3X Price/Earnings (2007)E NMF * Prior to the Company’s IPO becoming effective on December 12, 2006 Reed’s, Inc. (OTC BB: REED), headquartered in Los Angeles, CA, develops, manufactures, markets and sells natural non-alcoholic and New Age beverages, candies, and ice creams. The Company’s products are primarily sold through a network of natural, gourmet, and independent distributors. Key Investment Considerations:

We are initiating coverage of Reed’s, Inc. (OTC BB: REED) with a Speculative Buy rating and a twelve-month price target of $10.20 per share based on our 2007 forecast for sales per share and a relative price-to-sales analysis. The Company’s non-alcoholic Ginger Brews are unique in the beverage industry as they are brewed from fresh ginger, spices, and fruits. Its award-winning gourmet product lines include: Reed's Ginger Brews, Reed's Ginger Juice Brews, Reed's Ginger Candies, and Reed's Ginger Ice Creams. Also, included in Reed’s product portfolio are Virgil's Root Beer and China Cola product lines, which were acquired in 1999 and 2000, respectively. During December 2006, Reed’s completed an initial public offering of approximately 2.0 million common shares. After completion of the IPO, which generated net proceeds of approximately $7.2 million, the Company had approximately 7.143 million common shares outstanding. Management’s strategy is to maintain its marketing focus in the natural food marketplace for the New Age beverages in its product portfolio, while expanding sales into mainstream markets and distribution channels. Management also intends to use the proceeds of the recent IPO to provide working capital to finance an expanded in-house sales and distribution network on the East and West coasts of the United States. Based on public guidance issued by Management in the Company’s 2006 full year press release, an increased sales force, and expanded marketing effort, we estimate sales for 2007 of $13.565 million and net loss to common shareholders of $2.609 million or ($0.36) per share.

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The Company Reed’s, Inc. (OTC BB: REED), headquartered in Los Angeles, California, develops, manufactures, markets, and sells natural non-alcoholic New Age beverages, as well as candies and ice creams. New Age beverages is a category that includes natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks, and water. The Company’s product portfolio currently consists of fifteen beverages, three candies, and three ice creams. Management is primarily focused on increasing the beverage segment of the Company’s product portfolio. Reed’s products are primarily sold through a network of natural, gourmet, and independent distributors to specialty gourmet and natural food stores, supermarket chains, retail stores, and restaurants in the United States. Also, the Company maintains an organization of in-house sales managers who work mainly in the stores, as well as regional, independent sales representatives who maintain store and distributor relationships in a specified territory. In Southern California, Reed’s has its own direct distribution system. On December 29, 2006, the Company announced that it received approval for the listing of its common stock on the Over the Counter Bulletin Board and began trading on January 3, 2007. On December 12, 2006, the initial public offering for 2.0 million shares of Reed's common stock was completed and priced at $4.00 per share. In 1987, Christopher J. Reed founded the Company and began development of Reed’s Original Ginger Brew. By 1989, the product was introduced to eleven stores in Southern California. During 1990, the Company began marketing its products through natural food distributors and moved production to a larger facility in Boulder, Colorado. In 1991, Mr. Reed incorporated the business operations in the state of Florida under the name Original Beverage Corporation and moved all production to a co-pack facility in Pennsylvania. In October 2001, the name was changed to Reed's, Inc. and the state of incorporation was moved to Delaware. The chart that follows provides a timeline of events that comprise the history of Reed’s:

Year

Description

1997

Began licensing the products of China Cola; and Launched Reed’s Crystallized Ginger Candy, which is manufactured in Fiji under a

proprietary, natural, non-sulfured process.

1999

Purchased the Virgil’s Root Beer brand from the Crowley Beverage Company. Since

Virgil’s brand is partially produced under Reed’s auspices in Europe, the purchase secured entry into the European Union for its entire product line.

2000

Acquired China Cola and made royalty payments through July 1, 2000; Began to market Reed’s Original Ginger Ice Cream, Reed’s Cherry Ginger Brew, and a

designer 10-ounce gift-tin of Reed’s Crystallized Ginger Candy; and Purchased an 18,000 square foot warehouse property, called the Brewery, in Los Angeles,

California. This is the Company’s west coast production and warehouse facility, as well as serving as its principal executive offices.

2001 Introduced Chocolate Ginger Ice Cream and Green Tea Ginger Ice Cream products; and Expanded confectionary line to Crystallized Ginger Baking Bits and Ginger Candy Chews.

2002 Launched Reed’s Ginger Juice Brew line that includes four flavors of organic juice blends.

2003

First commercially available products were produced at the Company’s L.A. facility; Commenced direct distribution in Southern California; and Introduced sales of the 5-liter Virgil’s party keg.

2004 Expanded the product line to include Virgil’s Cream Soda, Reed’s Spiced Apple Brew in a

750 ml. champagne bottle, and draught Virgil’s Root Beer and Cream Soda.

2006

Expanded the product line to include Virgil’s Black Cherry Cream Soda. Of note,

Progressive Grocers, a top trade publication in the grocery industry voted this product as the “Best New Beverage product of 2006”.

Source: SEC Filings and Company Web-site.

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Management’s strategy is to maintain its marketing focus in the natural food marketplace (primarily for the Company’s New Age beverages within its product portfolio) while expanding sales into mainstream markets and distribution channels. Management also intends to use the proceeds of the IPO to provide working capital to finance an expanded in-house sales and distribution network on the East and West coasts of the United States for its fifteen beverages including Reed's Ginger Brews, Reed's Ginger Juice Brews, Virgil's Root Beer, and China Cola. The Company produces its carbonated beverages at two facilities:

− Its own facility known as The Brewery in Los Angeles, California. The facility produces certain soda products for the Western half of the United States. Currently, this facility runs at only 40% of capacity; and

− A packing/co-pack, facility in Pennsylvania, known as the Lion Brewery, with which Reed’s

contracts to supply itself with products not produced at The Brewery. The term of the agreement with Lion Brewery expires on May 31, 2007 and renews automatically for successive two-year terms unless terminated by either party. The Lion Brewery assembles products and charges a fee, generally by the case, for the products they produce. Since the Company has had difficulties with the flavor of its Ginger Brew product at the Brewery, this facility has supplied this product, causing increased freight and warehousing expenses.

The Company’s Ginger Juice Brews are co-packed by H.A. Ryder in Northern California. The co-pack facility assembles its products and charges a fee, by the case. The Company’s ice creams are co-packed by Ronnybrooke dairy in upstate New York, from which Reed’s supplies all the flavor additions and packaging and the dairy supplies the ice cream base. The co-pack facility assembles the product and charges a fee, by the unit produced. The half-liter swing-lid bottles of the Virgil’s Root Beer line are co-packed at the Hofmark Brewery in southern Germany. The co-pack facility assembles the product and charges a fee by the unit they produce. The arrangements with H.A Ryder, Ronnybrooke Dairy, and Hofmark Brewery are on an order by order basis. Product Portfolio The Company primary focus is the manufacturing and marketing of the fifteen beverages in its beverage portfolio. The beverage category accounted for 86.6% of total sales in 2006 compared to 84.8% of total sales in 2005. The Company’s portfolio includes ancillary products such as its ginger candies and ginger ice creams. All of the products sold by Reed’s are made using premium all-natural ingredients.

The Beverage Category Reed’s Ginger Brews Ginger ale is the oldest known soft drink. Prior to modern soft drink technology existing, non-alcoholic beverages were brewed at home directly from herbs, roots, spices, and fruits. These handcrafted brews were then aged like wine and highly prized for their taste and their tonic, health-giving properties. Management’s intent for Reed’s Ginger Brews is to revive this home brewing art and make the product with care and attention to wholesomeness and quality, using the finest fresh herbs, roots, spices, and fruits. The Company believes that Reed’s Ginger Brews are unique in their kettle brewed origin among all mass-marketed soft drinks. Management believes this since the product:

− Contains between 8 and 26 grams of fresh ginger in every 12-ounce bottle; − Contains no refined sugars as sweeteners; − Has naturally produced carbonation. As opposed to using injected-based carbonation. Reed’s

process is accomplished through slower, beer-oriented techniques, which produces smaller, longer lasting bubbles that do not dissipate rapidly when the bottle is opened; and

− Has naturally produced coloring. The color of the products comes naturally from herbs, fruits, spices, roots and juices.

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Reed’s Ginger Brews are pasteurized, which means they do not require or contain any preservatives. This is in contrast to modern commercial soft drinks that are generally produced using natural and artificial flavor concentrates prepared by flavor laboratories, tap water, and highly refined sweeteners. The following are the varieties of Ginger Brews manufactured by the Company:

− Reed’s Original Ginger Brew was its first product offering. It is a Jamaican recipe for homemade ginger ale using 17 grams of fresh ginger root, lemon, lime, honey, fructose, pineapple, herbs and spices.

− Reed’s Extra Ginger Brew is the same approximate recipe, with 26 grams of fresh ginger root for

a stronger bite.

− Reed’s Premium Ginger Brew is the no-fructose version of the original product. It is sweetened only with honey and pineapple juice.

− Reed’s Raspberry Ginger Brew is brewed from 17 grams of fresh ginger root, raspberry juice and

lime. This offering contains 20% raspberry juice and is sweetened with fruit juice and fructose.

− Reed’s Spiced Apple Brew uses 8 grams of fresh ginger root, the finest tart German apple juice and such apple pie spices as cinnamon, cloves and allspice. This offering contains 50% apple juice and sweetened with fruit juice and fructose.

− Reed’s Cherry Ginger Brew is latest addition and is naturally brewed from: filtered water,

fructose, fresh ginger root, cherry juice from concentrate and spices. Virgil’s Root Beer The product is designed to be a premium root beer, which uses all-natural ingredients, including filtered water, unbleached cane sugar, anise from Spain, licorice from France, bourbon vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia, wintergreen from China, sweet birch and molasses from the southern United States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from Peru, and cassia oil from China. The Company collects the ingredients worldwide and gathers them together at the brewing and bottling facilities in the United States and Germany. The ingredients are combined and brewed under strict specifications and in the end the product is heat-pasteurize to ensure quality. Virgil’s Cream Soda The product was launched in 2004 and is designed to be a gourmet cream soda. It is brewed the same way as Virgil’s Root Beer, using all-natural ingredients, including filtered water, unbleached cane sugar, and bourbon vanilla from Madagascar. In 2006, the Company expanded this line to include Virgil’s Black Cherry Cream Soda. China Cola Management stated in the Company’s SEC filings that it considers China Cola to be the best tasting and most natural cola in the world. Under Management’s guidance it was restored to its original blend of raw cane sugar, imported Chinese herbs, essential oils, and natural spices. China Cola contains no caffeine. Original China Cola is made from filtered water, raw cane sugar, szechwan poeny root, cassia bark, Malaysian vanilla, oils of lemon, oil of lime, oil of orange, nutmeg, clove licorice, cardamom, caramel color, citric acid, and phosphoric acid. Cherry China Cola is made from the same ingredients as original, with the addition of natural cherry flavor.

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Reed’s Ginger Juice Brews In 2002, the Company launched the Ginger Juice Brews line, which is a line of 100% juice products that are non-carbonated and brewed from organic fresh ginger root and sweetened with organic juices. Management created this product in response to a strong trend it saw toward organic ingredients and non-carbonated beverages in the marketplace. The product line, which contains filtered water, organic fresh ginger root, and organic white grape juice from concentrate, is comprised of:

− Reed’s Lemon Guava Ginger Juice Brew adds guava juice from concentrate and lemon juice from concentrate;

− Reed’s Strawberry Kiwi Ginger Juice Brew adds organic strawberry juice from concentrate and

organic kiwi juice from concentrate;

− Pineapple Orange Ginger Juice Brew adds organic pineapple juice from concentrate, organic orange juice from concentrate, and organic limejuice from concentrate; and

− Reed’s Cranberry Raspberry Ginger Juice Brew adds cranberry juice from concentrate, and

organic raspberry juice from concentrate.

The Candy Category Reed’s Crystallized Ginger Candy According to the Company, this product was the first crystallized ginger on the market in the United States to be sweetened with raw cane instead of refined white sugar. This offering is custom-made in Fiji. According to the Company’s SEC filing, the production process is an ancient one that has not changed much over time. After harvesting baby ginger (the most tender kind), the root is diced and then steeped (soaked in liquid) for several days in large vats filled with simmering raw cane syrup. The ginger is then removed and allowed to crystallize into soft, delicious nuggets. Reed’s sells this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins, 16-ounce re-sealable Mylar bags, and in bulk. Reed’s Ginger Candy Chews Residents of Southeast Asia enjoy soft, gummy ginger candy chews. Reed’s Ginger Candy Chews are individually wrapped in soft-packs of ten candies and as individually wrapped loose pieces in bulk. Management has added more ginger into the traditional product, using no gelatin (so it is vegan-friendly) and making them slightly easier to unwrap than their Asian counterparts. The product is made in Indonesia from sugar, maltose (malt sugar), ginger, and tapioca starch.

The Ice Cream Category Reed’s Ginger Ice Creams This ice cream offering is made from 100% natural ingredients, using hormone-free cream and milk. The Company combines fresh milk and cream with natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane sugar to make ginger ice cream with a super premium, ultra-creamy texture and Reed’s signature spicy-sweet bite. The ice creams are produced according to Reed’s own recipes, at a dairy in upstate New York in the following varieties:

− Reed’s Original Ginger Ice Cream;

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− Chocolate Ginger Ice Cream, which is made from milk, cream, raw cane sugar, Belgian cocoa (used to make Belgian chocolate), Reed’s Crystallized Ginger Candy (fresh baby ginger root, raw cane sugar), chocolate shavings, ginger puree, and guar gum (a natural vegetable gum); and

− Reed’s Green Tea Ginger Ice Cream, which contains all the originals ingredients plus green tea.

New Product Development Management intends to expend some time and funds on research and development for new products and packaging. The Company believes it will introduce new products and packaging as deemed appropriate from time to time. Among the advantages the Company has is its owned and self-operated facility in California, which provides the flexibility to try innovative packaging and the capability to experiment with new product flavors. Strategy We believe Management is strategically committed to rapidly grow top line results, work towards becoming cash flow positive, and move towards bottom line profitability, as well as maximize shareholder value through its commitment to producing, marketing, and sale of high quality products (primarily its non-alcoholic ginger brews ginger juice brews, Virgil Root Beer, and China Cola). The following are the key elements of Management’s business strategy to achieve its strategic goals:

− Utilizing more fully its California based facility. This facility is only running at 40% of capacity, which is why greater utilization should lead to improvements in gross margins resulting from lower production costs. Also, increased utilization at the West coast facility should lead to a reduction in freight costs as product will not need to be produced and shipped from the Company’s East coast co-packer;

− Increasing national direct sales and distribution of its products (primarily, Reed’s Ginger Brews,

Virgil sodas, and Ginger Juice Brews). In order to meet this objective, on March 5, 2007, the Company announced it hired two regional sales professionals:

Mark Slepak joined the Company as its East Coast Sales Representative. His

responsibilities include playing an active role in developing new business relationships, as well as expanding the approximately 30 current distributor relationships Reed’s has throughout the East coast. Mr. Slepak has over eight years of experience within the beverage industry, most recently serving as Northeast Sales Manager for Jones Soda (NasdaqCM: JSDA). His prior experience also includes serving as Senior Account Manager for Red Bull North America.

Erin Kliphardt joined the Company as its West Coast Sales Representative. Her responsibilities include managing the distribution network for the West Coast and expanding Reed’s mainstream retail opportunities. Ms. Kliphardt’s experience includes serving as Division Sales Manager West with IZZE Sparkling Juice and as managing sales and marketing efforts in the Northwest for FIJI Water.

The Company’s Founder and CEO stated in the release that the addition of these two professionals greatly expands Reed’s reach into key national sales accounts.

− Development of a strong national distributorship base. The following announcements should aid in developing that distributorship base:

On March 1, 2007, Nascent Wine Company, Inc. (d/b/a Nascent Food Service (OTC BB: NCTW)) announced it signed an exclusive distribution agreement with Reed’s. Terms of the agreement give Nascent the exclusive rights for all of Reed’s products, including Virgil’s Root Beer and Reed’s Ginger Brews throughout Mexico. According to the press release, Mexico is the

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largest consumer of soda per person and second largest as a nation, consuming 150 liters per capita with a total consumption of 15,900 million liters of soda; On April 10, 2007, the Company announced it entered into a distribution agreement with Great States Beverages for distribution of Reed’s soft drinks throughout New Hampshire and Eastern Massachusetts. Great States will offer Reed’s Ginger Brews, Virgil’s Root Beer, Cream Soda and BlackCherry Cream Soda, as well as China Cola and Cherry China Cola. Management believes this distribution agreement is a strategic partnership that should provide significant growth opportunity in the future. The press release states that Great State Beverages is a progressive organization with a great reputation for distributing high quality beverage products in the New Hampshire and Eastern Massachusetts marketplace; and On April 12, 2007, Reed’s Inc. announced it entered into an exclusive distribution agreement with Columbia Distributing. Terms of the agreement call for Columbia to distribute Reed’s brands through Oregon and Washington State. Columbia Distributing is a leading distributor of wine, beer and natural beverages to the Pacific Northwest. According to the press release, it has the largest privately owned delivery fleet of any beverage distributor in the Northwest, providing products to over 95% of Oregon, and 89% of Washington;

− Marketing to retail stores. The Company markets to retail stores by utilizing trade shows, trade

advertising, telemarketing, direct mail pieces, and direct contact with the store. The sales managers and representatives visit these retail stores to sell directly in many regions. Then sales to retail stores are coordinated through Reed’s distribution network and/or regional warehouses;

− Development of additional unique alternative beverage brands and/or product extension. By the

middle of April 2007, the Company was planning to launch diet versions of its Virgil's root beer and cream sodas;

− Innovative specialty packaging such as the Company’s s 5-liter party kegs, ceramic swing-lid

bottle, and 750 ml. champagne bottle; and

− Marketing to the consumer marketplace, which includes the following:

Advertising. This includes several marketing strategies directly to consumers. Print ads are targeted to consumer in magazines such as Vegetarian Times and New Age magazine. Other consumer-direct marketing devices used by the Company are:

o In-store discounts on the products; o In-store product demonstration; o Street corner sampling; o Coupon advertising; o Consumer trade shows; o Event sponsoring; and o Corporate Website: www.reedsgingerbrew.com.

In-Store Draught Displays. The Company has started to offer in-store draught (drinking)

displays, or Kegerators. The Kegerator is an unattended, in-store draught display that allows a consumer to sample the product(s) at a relatively low cost per demonstration. Stores offer premium locations for these new, and believed to be unique, draught displays.

On Draught Program. The Company’s West Coast Brewery has initiated an on-draught

program. Reed’s has installed draught locations at Fox Studios commissaries and in approximately 12 restaurants in Southern California. Currently, the Company is serving Virgil’s Root Beer, Virgil’s Cream Soda, and Reed’s Extra Ginger Brew on draught. In addition, all of its other carbonated drinks are available in draught format.

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Proprietary Coolers. The placement of in-store branded refrigerated coolers by its competitors has proven to have a significant positive effect on their sales. Therefore, Reed’s is currently testing its own Reed’s branded coolers in a number of locations.

Markets Reed’s, product portfolio consists of natural non-alcoholic New Age beverages (including Reed’s Ginger Brews and Reed’s Ginger Juice Brews), as well as candies and ice creams. New Age Beverages is a category that includes natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks, and water. Beverages in this category tend to contain less sugar, less carbonation, and natural ingredients, as well as offering consumers a health or functional kick. According to Jones Soda’s 2006 10-K filing, the Beverage Marketing Corporation offered the following statistic – New Age or the alternative beverage market generated total sales in 2005 of approximately $16.9 billion. Mintel International Group (a supplier of competitive media, product and consumer intelligence) published a report during July 2006 that offered the following commentary and statistic:

− In the non-alcoholic beverage market, consumers tend to exhibit polarizing behavior of either purchasing: premium beverages, which exhibit varying degrees of differentiation, or low-priced beverages, mainly private labels, which are perceived as commodities; and

− Sales growth within the non-alcoholic beverage market was 16% (2001 – 2006), reaching $82 billion.

A December 2006 report issued by AC Nielsen entitled ‘What’s Hot Around the Globe – Insights on Growth in Food & Beverage Products’, indicated that the non-alcoholic beverage market is contributing the largest value growth amount of 6% (see chart below):

(Source: December 2006 AC Nielsen report Insights on Growth in Food & Beverage Products) During January 2007, Euromonitor International issued a 2007 industry review that offered the following insights:

− Well being and rising disposable incomes will underpin the development of the global soft drinks market. Growing consumer interest in wellness remains a key to the trend, also boosting demand for products that are perceived as healthy are rising disposable income levels. That provides opportunities for value growth through ‘premiumation’, along with prospects for volume expansion in large emerging markets;

− The functional drink sector has experienced rapid growth over the past few years resulting from the development of hybrid drinks; and

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− Over the past two years, the carbonates sector has seen a flurry of new product launches. Also, the introduction of more natural ingredients has paved the way for the emergence of gourmet sodas. These developments have lead to per unit price of carbonates to increase steadily, which has offset weak volume growth.

In July 2006, the Just Drinks magazine authored an article describing powerful trends that could influence the beverage industry through 2012. The primarily trends are health, convenience, premium and indulgence. Those three are widely considered as the leading trends in the food and drink industry today. The chart that follows offers some insight to those trends in 2012:

Source: Just – Drinks July 2006 According to BCC Research (a technical market research firm), U.S. sales of functional or probiotics were estimated to be $764 million in 2005 and are expected to grow to over $1.1 billion in 2010. The following graphic shows the breakdown in sales by ingredients, supplements, and foods:

Source: BCC Research The December issue of Better Nutrition magazine discussed the benefits of spices. According to the article, ‘Spice it Up’, for centuries, spices have been used to preserve food and enhance its flavor, and as remedies for a long list of ailments. Since the rise of allopathic (a method of treating disease with remedies) medicine, much of that folk wisdom fell out of favor, and spices were replaced with prescription drugs. The article also contends that currently the pendulum is swinging back, and researchers are confirming what herbalists have known all along, the spice rack can be as potent as a medicine chest. Spices are rich sources of antioxidants and phytochemicals, both of which help cells repair damage, while easing symptoms of many common conditions. Ginger is a common ingredient in Ayurvedic (defined as the ancient Hindu science of

Reed’s, Inc.


health and medicine) and traditional Chinese medicines, ginger boasts an antioxidant power equal to vitamin C. According to the article, ginger’s reported health benefits include 1) Easing arthritis pains, 2) Improving digestion; and 3) Treating colds, coughs and flu. Also, Better Nutrition article states that some research has shown that ginger is more effective at combating motion sickness than typical pharmaceuticals such as Dramamine. The increased use of ginger could benefit the Company as some of its product portfolio included ginger (i.e., Reed’s Ginger Brews and Reed’s Ginger Juice Brews). Also, having successful ginger products could be beneficial in the future if the Company decides to market and export its Ginger product to Asian countries, as well as India. In Reed’s 2006 10-K filing, the Company stated that annual confectionary sales (including chocolate, non-chocolate and gum sales) in the United States amounted to nearly $27.9 billion in 2005, of which approximately $8.7 billion was non-chocolate candy (Source: National Confectioners Association, 2006 Year in Review). According to the Confectionery Industry Review, (source: National Confectioners Association), on a preliminary basis overall annual confectionary sales grew to approximately $28.9 billion from nearly $27.9 billion in 2005. According to the International Dairy Foods Association, total U.S. sales of ice cream and frozen desserts were estimated at approximately $21.6 billion in 2005 (this is the most recent figures available to the International Ice Cream Association). The packaged ice cream industry includes economy, regular, premium, and super-premium products. Super-premium ice cream (including Reed’s Ginger Ice Creams), is generally characterized by a greater richness and density than other kinds of ice cream. This type generally costs more than other kinds and is usually marketed by emphasizing quality, flavor selection, texture, and brand image. The International Ice Cream Association attributes almost all of the market growth over the past 10 years to sales of super-premium and premium ice creams, particularly innovative products. Competition The beverage industry is highly competitive and competition is primarily based on pricing, packaging, development of new products and flavors, as well as marketing campaigns. Reed’s products compete with a wide range of drinks produced by a relatively large number of manufacturers, most of which have enjoyed broad, well-established national recognition for years, through well-funded ad and other branding campaigns. In addition, the companies manufacturing and distributing these products generally have greater financial, marketing, and distribution resources. The Company’s premium New Age beverage products compete generally with all liquid refreshments and in particular with numerous other beverages, including: PepsiCo’s (SoBe), Cadbury Schweppes (Snapple, Mistic, IBC and Stewart’s), Henry Weinhard, Arizona, Hansen’s (NasdaqCM: HANS), Knudsen & Sons, and Jones Sodas (NasdaqCM: JSDA). Also, Reed’s Virgil’s and China Cola lines compete with a number of other natural soda companies, including Cadbury Schweppes (Stewarts and IBC), Henry Weinhard, Blue Sky, A&W and Natural Brews. Investors should also be aware that on a broad scale, competition includes other traditional soft drink manufacturers and distributors, such as The Coca-Cola Company (NYSE: KO) and PepsiCo (NYSE: PEP). We believe the most closely related publicly traded peer company to Reed’s is Jones Soda. Since 2002, Jones Soda has grown revenue from $18.6 million to $39.0 million in 2006. This translates to compounded annual growth rate of 20.4%. Also of note, according to SEC filings it took Jones Soda until 2003 to begin generating an operating profit. Between 1998 and 2002, Jones was losing money but as operation grew the losses narrowed until they became profitable in 2003. Management believes it is important to note that the Company’s innovative beverage recipes and packaging and use of premium ingredients and a trade secret brewing process provide Reed’s with a competitive advantage. Also, its commitments to the highest quality standards and brand innovation are keys to future success.

Reed’s, Inc.


Reed’s Crystallized Ginger Candy competes primarily with other candies and snacks in general and, in particular, with other ginger candies. The main competitors in ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and Frontier Herbs. Management believes that Reed’s Crystallized Ginger Candy is the only one among these brands that is sulfur-free. Reed’s Ginger Ice Creams compete primarily with other premium and super-premium ice cream brands. The Company’s principal competitors in the ice cream business are Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s, and a number of smaller natural food ice cream companies. Financial Results For the 12-month period ended December 31, 2006, versus the 12-month period ended December 31, 2005: • Sales grew to $10.484 million versus $9.470 million. • Gross margin improved to 19.63% versus 18.21%; • EBITDA loss was $1.326 million versus an EBITDA loss of $0.237 million; • S,G&A expenses increased to $3.540 million versus $2.080 million; and • Net loss was $2.243 million or ($0.41) per share versus a net loss of $0.855 million or ($0.18) per share. The Company reported that sales increased by 10.7% on a year-over-year basis, which resulted from growth in Reed’s Ginger Brew and Virgil’s Root Beer product lines of $1.0390 million versus the same period last year. Also, positively affecting the top line was an increase in candy sales of $0.045 million to $0.800 million. Mitigating the overall growth in top line results was reduced co-packing sales of approximately $0.067 million, as well as reduced ice cream sales of $0.003 million. We believe the increase in gross margin for 2006 of 142 basis points was primarily attributable to higher prices on the Company’s beverage products in combination with lower freight costs that resulted from Management’s ability to negotiate better rates and the ability to transfer some fright costs to customers. However, mitigating the overall improvement was increased promotional discounting, increased production expenses, higher packaging and ingredient costs. On a year-over-year basis, overall SG&A expenses increased in aggregate by $1.460 million. As a percentage of sales, S,G&A expenses increased to 33.77% versus 21.96% in 2005. The increase was primarily due to salaries that resulted from a larger sales force, increased fuel costs, higher recycling fees, and increased legal and accounting costs due to becoming a public reporting company. Also S,G&A was higher by approximately $0.835 million due to expenses related to a rescission offer the Company undertook to satisfy a possible securities law violation associated with sale of common stock and the resumption of sales of securities (see Risk Section under Legal for details). Other expenses increased to $0.325 million versus $0.161 million in 2005. The increased was due to settling a lawsuit brought by Consac Industries, Inc. (see Risk Section under Legal for details). For 2006, interest expense increased to $0.407 million from $0.310 million, due to increased borrowing on the Company’s receivable line of credit. At December 31, 2006, the Company had Federal net operating loss carryforwards of $4.9 million and state net operating loss carryforwards of $2.0 million. The Federal carryforward expires in 2026 and the state carryforward expires in 2011. According to the Company’s 2006 10-K filing, given the history of net operating losses, Management has determined that it is more likely than not, it will not be able to realize the tax benefit of the carryforwards. Balance Sheet as of December 31, 2006 At the end of 2006, the Company had cash and restricted cash of $1.639 million and $1.580 million, respectively, versus $0.028 million and none, respectively at the end of 2005. Working capital was $2.835 million, which was an increase from a working capital deficit of $1.594 million at the end of 2005. The improvement in working capital was primarily due to an increase in cash that resulted from the Company initial public offering that

Reed’s, Inc.


occurred on December 12, 2006. Total assets were $8.713 million, which was an increase from $4.912 million at the end of 2005. At the end of 2006, the Company had total liabilities of $4.090 million (including $0.821 million of long-term debt), an accumulated deficit of $5.502 million, and total shareholders’ equity of $4.034 million. At December 31, 2005, the Company had total liabilities of $5.352 million (including $1.3 million of long-term debt), an accumulated deficit of $3.259 million, and total shareholders’ deficit of $0.440 million. As of December 31, 2006, Reed’s had outstanding borrowings of approximately $1.356 million under the following line of credit agreements:

− An unsecured $0.050 million line of credit with US Bank which expires in December 2009. Interest is payable monthly at the prime rate, plus 12% per annum. The outstanding balance was approximately $0.025 million.

− Line of credit with Merrill Lynch. December 31, 2006, the outstanding balance on the line of credit was zero with approximately $0.701 million available under the line of credit. The line of credit bears interest at a rate of 3.785% per annum plus LIBOR (9.1% as of December 31, 2006).

− A $1.50 million line of credit with California United Bank. As of December 31, 2006, the amount borrowed on this line of credit was approximately $1.331 million. The interest rate on this line of credit is the prime rate, which was 8.25% at December 31, 2006. The line of credit expires in June 2008, is secured by all Company assets, except real estate. In addition, the Company has assigned a security interest in a deposit account at the bank (the restricted cash on the Company’s balance sheet). As of December 31, 2006, Reed’s had approximately $0.169 million of availability on this line of credit. Also, during the term of this line of credit the Company is required to have a minimum stockholders’ equity balance of $1.5 million.

According to the Company’s 2006 10-K filing, Management recognizes that operating losses negatively impact liquidity and is working on decreasing operating losses, while focusing on increasing net sales. Therefore, Management believes the Company’s current cash position and lines of credit will be sufficient to enable Reed’s to meet cash needs through at least the end of 2007. Investors should be aware of the following transaction that helped build the Company’s current cash position:

− On December 12, 2006, Reed’s Inc. completed the sale of 2.0 million shares of its common stock at an offering price of $4.00 per share (in an initial public offering). The public offering resulted in gross proceeds of $8.0 million, out of the proceeds, Reed’s paid aggregate commissions, concessions, and non-accountable expenses to the underwriters of $0.8 million, which translates to net proceeds of $7.2 million. Also, from August 3, 2005 through April 7, 2006, the Company issued 333,156 shares of common stock in connection with the public offering.

None of the proceeds were paid to directors, officers, affiliates or stockholders owning 10% or more of the Company’s common stock. Reed’s used approximately $0.340 million of the proceeds to pay expenses associated with a rescission offer (see Risk Section under Legal for details). The following table shows the uses of approximately $6.355 million of the net proceeds from the IPO, as of 12-31-2006:

Description Dollar amount in millions Commissions related to the public offering $0.800 million Other offering expenses $0.830 million Expenses related to the rescission offer $0.340 million Investment in a restricted money market account $1.575 million Payment to reduce line of credit $0.720 million Payment of accounts payable and current operating expenses $1.567 million Costs of hiring of additional sales personnel $0.499 million New product launch costs $0.004 million Sales delivery vehicles $0.020 million

Source: 2006 10-K filing

Reed’s, Inc.


Outlook We believe the following will need to occur over the next twelve-months in order for the Company to grow its business and generate increased top line results:

− Continue its strategy of exhibiting at national natural and specialty food trade shows to broaden industry awareness. In the past, this activity brought national distribution in natural, gourmet and specialty foods and the signing of mainstream supermarket distributors. Shortly after Reed’s commenced operations its products received trade industry recognition:

At the United States National Association of the Specialty Food Trade, Original Ginger

Brew was named an Outstanding Beverage Finalist in the United States; and At the Canadian Fancy Food Association, was awarded the Company Best Imported

Food Product.

− Strive to increase its national/international foot print through increasing the number of distributors. Just since March 2007, Management signed agreements with three distributors:

Great States Beverages, to distribute product throughout New Hampshire and Eastern

Massachusetts; Columbia Distributing, to distribute product throughout Oregon and Washington State;

and Nascent Wine Company, to distribute product throughout Mexico.

Based on the trend established during the first quarter of 2007, we expect to see additional distribution agreements (similar to the ones mentioned above) signed over the final three quarters of 2007; and

− Increase brand awareness at the consumer level. This should be accomplished through in-store draught displays (utilizing its Kegerator, an unattended draught that allows a consumer to sample the product), an on-draught program that it installed in 12 restaurants in Southern California, and testing its own branded coolers in supermarkets. Also, sampling programs, event sponsoring, and coupon advertising will be used to increase brand awareness.

Management issued the following public guidance when it issued its 2006 full year results:

− First quarter 2007 sales should increase 40% to 50% versus $1.979 million generated in the first quarter of 2006; and

− For 2007, sales should increase by 20% to 40% versus $10.484 million in 2006.

The quarterly and full year sales gains should be accomplished from an increased sales-force and expanded marketing effort that was made possible from the December 12, 2006, IPO that provided the Company with net cash proceeds of $7.2 million.

Projections Based on Management’s public guidance, an increased sales force, and expanded marketing effort, we estimate sales for 2007 of $13.565 million, an EBITDA loss of $2.080 million, and net loss to common shareholders of $2.609 million or ($0.36) per share. In 2006, the Company reported sales of $10.484 million, an EBITDA loss of $1.326 million, and net loss to common shareholders of $2.243 million or ($0.41) per share. Our forecast for 2007 is comprised of the following:

− Gross margins of 22.34%, which is an improvement from 19.63% in 2006. The improvement should result from better utilization of the Company’s California plant and a reduction in freight costs (from better utilization of the CA plant), compared to 2006;

Reed’s, Inc.


− S,G&A expenses of $5.310 million versus $3.540 million in 2006. The increase should occur from this increased sales force and expanded marketing effort;

− Interest expense of $0.300 million versus $0.407 million in 2006. The reduction should result from lower overall debt as the Company repaid approximately $0.720 million of its credit line from IPO proceeds. However, if the Company taps into its credit facility our forecast would need to be revised higher; and

− Average shares of approximately 7.180 million versus 5.523 million in 2006. The increase is due to the IPO that closed on December 12, 2006.

It is important for investors to be aware that quarterly top line results could fluctuate from our forecasts primarily due to the seasonality of Reed’s business. Highest sales tend to occur during the spring and summer months (second and third quarters of each year). Also, beverage sales can be adversely affected by sustained periods of bad weather. An additional caveat relates to the Company’s cash burn (we estimate approximately $0.520 million per quarter through the end of 2007) relative to cash on hand. As of December 31, 2006, the Company had cash on hand of $1.639 million and $1.580 million of restricted cash (which is on deposit at the bank that the Company has its credit facility with). Based on our forecast, the Company should have enough cash on hand through the end of 2007. However, if cash generated from operations is insufficient to satisfy future liquidity requirements, additional financing may be required in the form of selling additional public or private equity securities or obtaining debt financing. Management Christopher J. Reed – Founder, President, Chief Executive Officer, Chief Financial Officer and Chairman of the Board: Christopher Reed founded the Company in 1987. Mr. Reed has served as Chairman, President, Chief Executive and Chief Financial Officer since incorporation in 1991. He has been responsible for the design creation of the Company’s products, including the original product recipes, the proprietary brewing process and the packaging and marketing strategies. Mr. Reed received a B.S. in Chemical Engineering from Rennselaer Polytechnic Institute in Troy, New York. Eric Scheffer – Vice President and National Sales Manager - Natural Foods: Eric Scheffer has served as the Company’s Vice President and National Sales Manager - Natural Foods since May 2001. His prior experience includes serving as Vice President of Sales for Rachel Perry Natural Cosmetics and as National Sales Manager at Earth Science, Inc. Mr. Scheffer also served as the National Sales Manager at USA Nutritionals where he led a successful effort bridging their marketing from natural foods to mainstream stores. Additionally, he worked for Vita Source as Western Sales Manager. Robert T. Reed Jr. – Vice President and National Sales Manager - Mainstream: Robert Reed Jr. (the brother of Christopher Reed) has served as the Company’s Vice President and National Sales Manager - Mainstream since January 2004. Prior to joining the Company, Mr. Reed was employed with SunGard Availability Services where he started with as an Account Manager and earned promotions to Director of Sales, Vice President of Sales, and Senior Vice President of Sales. Mr. Reed then served as President of SunGard eSourcing, a subsidiary of SunGard Availability Services. He earned a Bachelors of Science degree in Business and Finance from Mount Saint Mary’s University. Robert Lyon – Vice President Sales - Special Projects: Robert Lyon has served as the Company’s Vice President Sales - Special Projects since June 2002. Mr. Lyon directs the Company’s Southern California direct sales and distribution program in mainstream markets. Over the past five years, Mr. Lyon also has operated an organic rosemary farm in Malibu, California, selling bulk to re-packagers. In the 1980s and 1990s, Mr. Lyon operated a successful water taxi service with 20 employees and eight vessels of his own design. He also built the national sales team for a jewelry company, Iberia. Mr. Lyon earned a Business Degree from Northwestern Michigan University.

Reed’s, Inc.


Risks Operating Losses The Company has incurred losses from operations in the past and there can be no assurance that it will operate at a profit in the future. If operating losses were to continue, eventually the Company may have insufficient working capital to maintain or expand operation according to Management’s current business plan. As of December 31, 2006, Reed’s Inc. had an accumulated deficit of $5.502 million, working capital of $2.835 million and stockholders’ equity of $4.034 million. For the years ended December 31, 2006 and 2005, the Company incurred losses from operations of $1.807 million and $0.516 million, respectively. In addition, the Company’s losses may increase in the future as expansion of its manufacturing capabilities occurs, as well as increased funding of marketing and product development. These losses, among other things, have had and will continue to have an adverse effect on working capital, total assets, and stockholders’ equity. If the Company is unable to achieve profitability, the market value of common stock could decline and there would likely be a material adverse effect on its financial condition. Potential Dilution The Company’s Board of Directors has the power to issue additional shares of common or preferred stock without stockholder approval. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of existing shareholders will be reduced, and newly issued securities may have rights, preferences, or privileges senior to those of current shareholders. If the Company issues any additional common stock or securities convertible into common stock that will reduce the proportionate ownership and voting power of current shareholders. Also, if Reed’s need to raise additional financing to support operations, there cannot be any assurance that additional financing will be available on terms favorable to the Company, or at all. If adequate funds are not available or they are not available on acceptable terms, it would most likely negatively impact the Company’s ability to fund growth in operations, take advantage of opportunities, develop products or services, or otherwise respond to competitive pressures. Investors should note that Reed’s has issued and outstanding options and warrants that may be exercised into 1.177 million shares of common stock and 58,940 shares of Series A preferred stock that may be converted into 235,760 shares of common stock. Of the shares of the Company’s common stock currently outstanding (7.143 million), approximately 3.90 million shares are restricted securities under the Securities Act. This means that some of these restricted securities will be subject to restrictions on the timing, manner, and volume of sales. Government Regulation The production, distribution, and sale in the United States of many of Reed’s products are subject to the Federal Food, Drug and Cosmetic Act, the Dietary Supplement Health and Education Act of 1994, the Occupational Safety and Health Act, various environmental statutes and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients. Specifically, California law requires that a warning appear on any product that contains a component listed by the State as having been found to cause cancer or birth defects. The law exposes all food and beverage producers to the possibility of having to provide warnings on their products because the law recognizes no generally applicable quantitative thresholds below which a warning is not required. Consequently, even trace amounts of listed components can expose affected products to the prospect of warning labels. Products containing listed substances that occur naturally in the product or that are contributed to the product solely by a municipal water supply are generally exempt from the warning requirement. While none of Reed’s beverage products are required to display warnings under this law, Management is unable to predict whether an important component of any of the Company’s products might be added to the California list in the future. At this time, Management is

Reed’s, Inc.


unable to predict whether or to what extent a warning under this law would have in terms of costs or sales of its portfolio of products. The Company’s facilities in the United States are subject to federal, state, and local environmental laws and regulations. Compliance with these provisions has not had, and should not have, any material adverse effect upon capital expenditures, net income, or competitive position. Customer Concentration Customers are material to the Company’s success; therefore, if Management is unable to maintain good relationships with existing customers, business could suffer. Also, investors should be cognizant that unilateral decisions could be taken by Reed’s distributors, which could cause convenience chains, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of the Company’s products that they are carrying at any time, which could cause business to suffer. United Natural Foods, the parent of certain of the Company’s retailers, accounted for total sales of approximately 39% in both 2006 and 2005. Trader Joe’s accounted for approximately 17% and 15% of sales during 2006 and 2005, respectively. The loss of United Natural Foods or Trader Joe’s as a retailer would substantially reduce revenues. Shareholder Control Christopher Reed, the Company’s Chairman of the Board, President, CEO, and CFO owns, approximately 44.8% of the outstanding voting stock. Therefore, Mr. Reed will be able to control the outcome, or greatly influence the outcome, on all matters requiring stockholder approval, including the election of directors, amendment of certificate of incorporation, and any merger, consolidation or sale of all or substantially all of the Company’s assets or other transactions resulting in a change of control. Reliance on Christopher J. Reed The business is dependent, to a large extent, upon the services of Christopher Reed, Founder, Chairman of the Board, President, CEO, and CFO. The Company depends on Mr. Reed’s creativity and leadership in running or supervising virtually all aspects of day-to-day operations and it does not have a written employment agreement with him. In addition, the Company does not maintain key person life insurance on Mr. Reed; therefore, in the event of the loss or unavailability, there can be no assurance that REED would be able to locate in a timely manner or employ qualified personnel to replace him. The loss of the services of Mr. Reed or failure to attract and retain other key personnel over time could jeopardize the Company’s ability to execute its business plan and could have a material adverse effect on business, results of operations, and financial condition. Also of note, Mr. Reed currently serves as CFO; however, he does not have any formal financial training as a Chief Financial Officer. Due to the increasing complexity of accountancy and cash management for reporting companies and the emphasis on internal controls over financial reporting, his lack of experience in this area may adversely affect the future results of operations and ability to maintain an adequate system of internal controls over financial reporting. Growth Management The cost of manufacturing and packaging is approximately 80% of aggregate revenues, which puts pressure upon cash flow and cash reserves when sales increase. It is Management’s intention to use the net proceeds of $7.2 million raised in the December 12, 2006 share offering to expand business operations. Management has already used $6.355 million of the proceeds. If the Company is to expand operations, it might put a significant strain on Management, as well as operational and financial resources. Therefore investors should be aware that it would require improvements in operational, accounting and information systems, procedures, and internal controls. If the Company fails to manage this anticipated expansion properly, it could divert limited resources from other responsibilities and could adversely affect financial performance.

Reed’s, Inc.


Corporate Governance Wall Street has increased its focus on corporate governance and placed increased emphasis on the accountability of Management and Directors to shareholders. Investors are also increasingly considering executive compensation and familial relationships. The above factors brought about the passage of the Sarbanes-Oxley Act of 2002 by Congress and signage by the President. Corporate governance may be an issue facing the Company in light of new rules and regulations being issued by government regulatory agencies. This could mean that the Company will eventually be required to hire additional personnel in order to diversify various operational, management, and compliance functions, as well as spend monies to comply with the various aspects of the Act. Loss of Co-packers Reed’s relies on third parties (called co-packers), to produce some of its beverages, to produce its glass bottles, and to bottle some of its beverages. Co-packing arrangements with main co-packers are under a contract that expires in 2007. The co-packing arrangements with other companies are on a short-term basis and such co-packers may discontinue their relationship with the Company on short notice. While this arrangement permits the Company to avoid significant capital expenditures, it exposes Reed’s to various risks:

Its largest co-packer, Lion Brewery, accounting for approximately 72% of total case production in 2006; If any of those co-packers were to terminate the co-packing arrangement or have difficulties in producing

beverages, the ability to produce the Company’s beverages would be adversely affected until it was able to make alternative arrangements; and

Having its business reputation adversely affected if any of the co-packers produced inferior quality

products. Seasonality The Company’s highest revenues occur during the spring and summer, the second and third quarters of each fiscal year. These seasonality issues may cause financial performance to fluctuate. In addition, beverage sales can be adversely affected by sustained periods of bad weather. Product Liability Other companies in the beverage industry have experienced product liability litigation and product recalls arising primarily from defectively manufactured products or packaging. Reed’s maintains product liability insurance so that its operations are insured from claims associated with product liability and Management believes that the amount of this insurance is sufficient. However, the Company does not maintain product recall insurance, which means in the event it was to experience a product recall claim, the business operations and financial condition could be materially and adversely affected. Federal Reserve Investors should be aware that if the Federal Reserve were to resume increasing interest rates (during their August, September, October, and December 2006 meetings, as well as January, February, and March 2007 meetings the Federal Reserves Open Market Committee did not increase the federal funds target rate by 25 basis points as it did seventeen of its previous meetings), it is likely to have a negative impact on valuation multiples. Legal Issue From time to time, the Company may be party to claims and legal proceedings arising in the ordinary course of business. Management will evaluate the Company’s exposure to claims and proceedings individually and in the aggregate and provide for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. On January 20, 2006, Consac Industries, Inc. (d/b/a Long Life Teas and Long Life Beverages) filed a lawsuit in the United States District Court for the Central District of California against Reed’s Inc. and Christopher Reed. The complaint asserted claims for negligence, breach of contract, breach of warranty, and breach of express indemnity relating to Reed’s, Inc.’s manufacture of approximately 13,000 cases of “Prism Green Tea Soda” for

Reed’s, Inc.


Consac. Consac contended that Reed’s negligently manufactured the soda resulting in at least one personal injury and sought $2.6 million in damages, plus interest and attorneys fees. Management contended that Consac was responsible for the soda’s condition by providing a defective formula which had not been adequately tested. In May 2006 both parties agreed to a mediation proceeding which was expected to commence in the third quarter of 2006. The parties then decided to move to a trial. On January 26, 2007, Reed’s, Inc. settled the lawsuit paying $0.300 million in connection with the settlement. From August 3, 2005 through April 7, 2006, the Company issued 333,156 shares of common stock in connection with its initial public offering pursuant to a Registration Statement on Form SB-2. The shares issued in connection with the initial public offering may have been issued in violation of either federal or state securities laws, or both, and may be subject to rescission. On August 12, 2006, the Company made a rescission offer to all holders of the outstanding shares that it believes are subject to rescission, pursuant to which they offered to repurchase these shares then outstanding from the holders. At the expiration of the rescission offer on September 18, 2006, the rescission offer was accepted by 34 of the offerees to the extent of 31,020 shares for an aggregate of approximately $0.129 million, including statutory interest. The shares that were tendered for rescission were agreed to be purchased by others and not from Reed’s internal funds. Miscellaneous Risk The Company’s financial results and equity values are subject to other risks and uncertainties known and unknown, including but not limited to competition, operations, financial markets, regulatory risk, and/or other events. These risks may cause actual results to differ from expected results. Trading Volume Liquidity is a potential concern. Based on our calculations, the average daily-volume since the Company began trading publicly (January 3, 2007 through April 24, 2007) has been 39,803 shares. Investors need to be aware that by nature a microcap stock can have significant price volatility. Conclusion We are initiating coverage of Reeds, Inc. (OTC BB: Reed) with a Speculative Buy rating and a twelve-month price target of $10.20 per share based on our forecast for total sales per share for 2007 and relative price to sales analysis (see next page for details). During December 2006, Reed’s completed an initial public offering of approximately 2.0 million shares of common stock. After completion of the IPO, which generated net proceeds of approximately $7.2 million, the Company had approximately 7.143 million common shares outstanding. According to our EBITDA calculation, the Company could burn approximately $2.0 million in cash during 2007. We believe that a better valuation for this equity should emerge as investors see evidence of a consistently growing top line, which should be accomplished based on:

1) Increased distribution of its non-alcoholic Ginger Brews, Virgil's Root Beer, and China Cola; 2) Increased sales force; and 3) Expanded marketing effort using the capital generated from the December 2006 IPO.

However, it is our view that an investment in the shares of REED is only suitable for highly risk tolerant investors that can withstand the ups and down of a Company that is in the process of building a solid foundation for future growth. The risks that investors should be aware of include:

− Cash burn; − Development of a wider distribution base for its beverage products; and − Losses from operations.

Reed’s, Inc.


Our twelve-month price target was established utilizing the following valuation model discounted by 25% to account for microcap and Company specific risks:

− A 7.21X price to sales multiple (see table below), which is the average 2007 multiple (as of April 20, 2007) for Hansen Natural and Jones Soda, applied to our revenue per share estimate of $1.89 for the twelve-month period ending December 31, 2007.

Company Name SymbolRecent Price

Shrs Out (M)

Market Cap. (M)

Sales per share

estimate '07

Price to sales

estimate '07

Hansen Natural Corp. HANS 38.69 90.85 3514.99 9.25 4.18Jones Soda Company JSDA 24.12 25.67 619.16 2.35 10.24

Peer Averages 7.21

Reed's Inc. REED 8.25 7.1 58.93 1.89 4.37

Reed’s, Inc.


Taglich Brothers Current Ratings Distribution

Investment Banking Services for Companies Covered in the Past 12 Months Rating # % Buy 1 3.57% Hold 0 0 Sell 0 0 Not Rated 0 0

Reed’s, Inc.


Meaning of Ratings Buy We believe the Company is undervalued relative to its market and peers. We believe its risk reward ratio strongly advocates purchase of the stock relative to other stocks in the marketplace. Remember, with all equities there is always downside risk. Speculative Buy We believe that the long run prospects of the Company are positive. We believe its risk reward ratio advocates purchase of the stock. We feel the investment risk is higher than our typical “buy” recommendation. In the short run, the stock may be subject to high volatility and continue to trade at a discount to its market. Neutral We will remain neutral pending certain developments. Underperform We believe that the Company may be fairly valued based on its current status. Upside potential is limited relative to investment risk. Sell We believe that the Company is significantly overvalued based on its current status. The future of the Company's operations may be questionable and there is an extreme level of investment risk relative to reward. Some notable Risks within the Microcap Market Stocks in the Microcap segment of the market have many risks that are not as prevalent in Large-cap, Blue Chips or even Small-cap stocks. Often it is these risks that cause Microcap stocks to trade at discounts to their peers. The most common of these risks is liquidity risk, which is typically caused by small trading floats and very low trading volume which can lead to large spreads and high volatility in stock price. In addition, Microcaps tend to have significant company specific risks that contribute to lower valuations. Investors need to be aware of the higher probability of financial default and higher degree of financial distress inherent in the microcap segment of the market. From time to time our analysts may choose to withhold or suspend a rating on a company. We continue to publish informational reports on such companies; however, they have no ratings or price targets. In general, we will not rate any company that has too much business or financial uncertainty for our analysts to form an investment conclusion, or that is currently in the process of being acquired.

Reed’s, Inc.


Public Companies mentioned in this report: Hansen’s (NasdaqCM: HANS), Jones Sodas (NasdaqCM: JSDA). The Coca-Cola Company (NYSE: KO) PepsiCo (NYSE: PEP) * The information and statistical data contained herein have been obtained from sources, which we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to changes in figures or our views. This is not a solicitation of any order to buy or sell. Taglich Brothers, Inc. is fully disclosed with its clearing firm, Pershing, LLC, is not a market maker and does not sell to or buy from customers on a principal basis. The above statement is the opinion of Taglich Brothers, Inc. and is not a guarantee that the target price for the stock will be met or that predicted business results for the company will occur. There may be instances when fundamental, technical and quantitative opinions contained in this report are not in concert. We, our affiliates, any officer, director or stockholder or any member of their families may from time to time purchase or sell any of the above-mentioned or related securities. Analysts and members of the Research Department are prohibited from buying or selling securities issued by the companies that Taglich Brothers, Inc. has a research relationship with, except if ownership of such securities was prior to the start of such relationship, then an Analyst or member of the Research Department may sell such securities after obtaining expressed written permission from the Director of Research. As of the date of this report, we, our affiliates, any officer, director or stockholder, or any member of their families do not have a position in the stock of the company mentioned in this report. All research issued by Taglich Brothers, Inc. is based on public information. Taglich Brothers, Inc. does not currently have an Investment Banking relationship with the company mentioned in this report and was not a manager or co-manager of any offering for the company with in the last three years. The company paid for the first year of distribution a fee of $21,000 (USD) on January 2007, and after the first year of publication will pay a monthly monetary fee of $1,750 (USD) to Taglich Brothers, Inc. for the creation and dissemination of research reports. I, Howard Halpern, the research analyst of this report, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities and issuers; and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report.

Reed’s, Inc. Consolidated Balance Sheets

(in thousands)


Dec. 2004 Full Year

Dec. 2005 Full Year

Dec. 2006 Full Year

ASSETSCurrent assets:Cash 42 28 1,639 Restricted cash - - 1,580 Inventory 1,301 1,208 1,511 Accounts receivable, net of allowance for doubtful accounts and returns and discounts 798 535 1,184

Receivable from sale of common stock - - - Other receivables 3 11 25 Prepaid expenses 6 74 164 Total current assets 2,150 1,856 6,104

Property, plant and equipment, net 1,821 1,885 1,795 Brand names 800 800 800 Other intangibles, net 16 15 14 Deferred stock offering costs 220 356 - Due from director 91 - -

Total assets 5,098$ 4,912$ 8,713$

LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable 1,412 1,644 1,695 Lines of credit 1,128 1,446 1,356 Current portion of long term debt 106 169 72 Note payable -- related party 21 - - Accrued interest 116 136 28 Accrued expenses 52 54 118 Total current liabilities 2,835 3,450 3,269

Loans payable, related party 252 252 - Long-term debt, less current portion 1,042 1,061 821

Preferred stock, $10 par value, 500,000 shares authorized 589 589 589

Stockholders' equity:Common stock, $0.001 par value, 11,500,000 shares authorized 0 1 1 Common stock to be issued - 29 - Additional paid in capital 2,783 2,789 9,535 Accumulated deficit (2,404) (3,259) (5,502) Total stockholders' equity 380 (440) 4,034

Total liabilities and stockholders' equity 5,098$ 4,912$ 8,713$

SHARES OUT 4,726 5,042 7,143

Reed’s, Inc. Annual Income Statement Model

For the Years Ended December 31, (in thousands)


FY2004A FY2005A FY2006A FY2007ESales 8,978 9,470 10,484 13,565

Cost of sales 7,103 7,745 8,427 10,535 Gross Profit 1,875 1,725 2,058 3,030 Gross Margins 20.89% 18.21% 19.63% 22.34%

Operating Expenses:Selling 792 1,125 1,352 1,685 General and administrative 1,075 956 2,187 3,625

Total Operating Expenses 1,867 2,080 3,540 5,310

EBITDA 106 (237) (1,326) (2,080)

Operating Income 9 (356) (1,482) (2,280) Operating Margin 0.10% -3.76% -14.13% -16.81%

Other Income (Expense)Interest expense (255) (310) (407) (300) Legal fees (includes expenses associated with rescission offer) (80) (37) (322) - Provision for amounts due from director - (124) (3) - Extinguishment of debt (153) - - -

Total Other Income (Expense) (488) (470) (732) (300)

Pre-Tax Income (479) (826) (2,214) (2,580) Pre-Tax Margins -5.34% -8.72% -21.11% -19.02%

Income tax expense (recovery) - - - - Tax Rate 0.00% 0.00% 0.00% 0.00%

Net income (loss) (479)$ (826)$ (2,214)$ (2,580)$

Preferred stock dividend - 29 29 29

Net Income (loss) attributable to common stockholders (479)$ (855)$ (2,243)$ (2,609)$

EPS -- Average shares (0.10)$ (0.18)$ (0.41)$ (0.36)$

Avg Shares Out-Fully Diluted 4,726 4,885 5,523 7,180

Percent of salesCost of sales 79.11% 81.79% 80.37% 77.66%Selling 8.82% 11.88% 12.90% 12.42%General and administrative 11.97% 10.09% 20.86% 26.72%

YEAR / YEAR GROWTHNet Sales 5.48% 10.71% 29.38%

Reed’s, Inc. Income Statement Model

For the Year Ended December 31, 2006 (in thousands)


Q1(03/06)A Q2 (06/06)A Q3 (09/06)A Q4 (12/06)A FY2006ASales 1,979 3,158 2,776 2,571 10,484

Cost of sales 1,689 2,590 2,139 2,009 8,427 Gross Profit 290 568 637 562 2,058 Gross Margins 14.67% 17.99% 22.96% 21.85% 19.63%

46.935Operating Expenses:Selling 287 313 407 345 1,352 General and administrative 263 387 517 1,021 2,187

Total Operating Expenses 550 700 924 1,365 3,540

EBITDA (225) (109) (243) (750) (1,326)

Operating Income (259) (133) (287) (803) (1,482) Operating Margin -13.11% -4.20% -10.33% -31.24% -14.13%

Other Income (Expense)Interest expense (101) (98) (112) (96) (407) Legal fees (includes expenses associated with rescission offer) (10) (357) (2) 47 (322) Provision for amounts due from director - - - (3) (3)

Total Other Income (Expense) (110) (455) (114) (53) (732)

Pre-Tax Income (370) (587) (401) (856) (2,214) Pre-Tax Margins -18.67% -18.60% -14.44% -33.28% -21.11%

Income tax expense (recovery) - - - - - Tax Rate 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) (370)$ (587)$ (401)$ (856)$ (2,214)$

Preferred stock dividend 29 29

Net Income (loss) attributable to common stockholders (370)$ (617)$ (401)$ (856)$ (2,243)$

EPS -- Average shares (0.07)$ (0.12)$ (0.08)$ (0.14)$ (0.41)$

Avg Shares Out-Fully Diluted 5,157 5,323 5,335 6,276 5,523

Percent of salesCost of sales 85.33% 82.01% 77.04% 78.15% 80.37%Selling 14.51% 9.93% 14.66% 13.40% 12.90%General and administrative 13.27% 12.26% 18.63% 39.69% 20.86%

YEAR / YEAR GROWTHNet Sales 8.91% 22.29% 1.49% 10.10% 10.71%

Reed’s, Inc. Income Statement Model

For the Year Ended December 31, 2007 (in thousands)


Q1(03/07)E Q2 (06/07)E Q3 (09/07)E Q4 (12/07)E FY2007E

Sales 2,870 3,975 3,485 3,235 13,565

Cost of sales 2,235 3,100 2,700 2,500 10,535 Gross Profit 635 875 785 735 3,030 Gross Margins 22.12% 22.01% 22.53% 22.72% 22.34%

Operating Expenses:Selling 375 425 435 450 1,685 General and administrative 850 875 925 975 3,625

Total Operating Expenses 1,225 1,300 1,360 1,425 5,310

EBITDA (540) (375) (525) (640) (2,080)

Operating Income (590) (425) (575) (690) (2,280) Operating Margin -20.56% -10.69% -16.50% -21.33% -16.81%

Other Income (Expense)Interest expense (75) (75) (75) (75) (300)

Total Other Income (Expense) (75) (75) (75) (75) (300)

Pre-Tax Income (665) (500) (650) (765) (2,580) Pre-Tax Margins -23.17% -12.58% -18.65% -23.65% -19.02%

Income tax expense (recovery) - - - - - Tax Rate 0.00% 0.00% 0.00% 0.00% 0.00%

Net income (loss) (665)$ (500)$ (650)$ (765)$ (2,580)$

Preferred stock dividend 29 29

Net Income (loss) attributable to common stockholders (665)$ (529)$ (650)$ (765)$ (2,609)$

EPS -- Average shares (0.09)$ (0.07)$ (0.09)$ (0.11)$ (0.36)$

Avg Shares Out-Fully Diluted 7,165 7,175 7,185 7,195 7,180

Percent of salesCost of sales 77.88% 77.99% 77.47% 77.28% 77.66%Selling 13.07% 10.69% 12.48% 13.91% 12.42%General and administrative 29.62% 22.01% 26.54% 30.14% 26.72%

YEAR / YEAR GROWTHNet Sales 45.00% 25.88% 25.54% 25.81% 29.38%

Reed’s, Inc. Cash Flow Statement

(in thousands)


FY2004A FY2005A FY2006ACash Flows from Operating ActivitiesNet Income (loss) (479)$ (826)$ (2,214)$ Depreciation and amortization 97 119 156 Loss on extinguishment of debt 153 - - Provision for amounts due from director - 124 3 Stock Option expense - - 6 Accounts receivable (232) 263 (649) Inventory (4) 93 (303) Prepaid expenses 12 (69) (90) Other receivables 8 (7) (17) Accounts payable 233 232 51 Accrued expenses (10) 3 64 Accrued interest 45 26 (10) Net cash Provided by Operations (176) (43) (3,003)

Cash Flows from Investing ActivitiesPurchase of property and equipment (204) (182) (65) Due from director (44) (33) Restricted cash - - (1,580) Net cash used in Investing (248) (215) (1,645)

Cash Flows from Financing ActivitiesDeferred offering costs (220) (333) (252) Principal payments on debt (209) (264) (328) Proceeds from issuance of common stock - 197 7,005 Proceeds received from issuance of preferred stock 334 - - Proceeds from borrowings on debt 208 296 - Payoff of previous line of credit - - (1,172) Net borrowings on lines of credit 340 368 1,081 Payments for stock offering costs - - - Payments on debt to related parties - (21) (75) Net cash provided by Financing 454 243 6,260

Net change in Cash 30 (15) 1,611

Cash Beginning of Period 13 42 28

Cash End of Period 42$ 28$ 1,639$

Documents

Initial Research Report - QualityStocksqualitystocks.net/pdfs/Reeds.pdf · Initial Research Report ... Reed's Ginger Juice Brews, ... supermarket chains, retail stores, and restaurants