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Reed’s Extra Ginger Brew is the same approximate recipe, with 25 grams of fresh ginger root for a stronger bite. Reed’s Extra Ginger Brew is 20% fruit juice.

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Reed’s Premium Ginger Brew is the no-fructose version of Reed’s Original Ginger Brew, and is sweetened only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20% fruit juice.

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Reed’s Raspberry Ginger Brew is brewed from 17 grams of fresh ginger root, raspberry juice and lime. Reed’s Raspberry Ginger Brew is 20% raspberry juice and is sweetened with fruit juice and fructose.

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

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Reed’s Cherry Ginger Brew is the newest addition to our Ginger Brew family, and is naturally brewed from: filtered water, fructose, fresh ginger root, cherry juice from concentrate and spices. Reed’s Cherry Ginger Brew is brewed from 22 grams of fresh ginger root.

Reed’s Natural Energy Elixir, an energy drink infused with all natural ingredients designed to provide consumers with a healthy and natural boost to energy levels

All six of Reed’s Ginger Brews are offered in 12-ounce bottles and are sold in stores as singles, in four-packs and in 24-bottle cases. Reed’s Original Ginger Brew is sold by select retailers in a special 12-pack. Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew are now available in 750 ml. champagne bottles. The Reed’s Extra Ginger Brew is also produced in a 7-ounce bottle and sold in eight-packs and 32-bottle cases. The Natural Energy Elixir is sold in a 10.5 oz can.

Virgil’s Root Beer

Over the years, Virgil’s Root Beer has won numerous awards and has a reputation among many as one of the best root beers made anywhere. Virgil’s Root Beer won the “Outstanding Beverage” award at the NASFT’s International Fancy Food and Confection Show in 1997.

Virgil’s is a premium root beer. We use all-natural ingredients, including filtered water, unbleached cane sugar, anise from Spain, licorice from France, bourbon vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia, wintergreen from China, sweet birch and molasses from the southern United States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from Peru and cassia oil from China.

We collect these ingredients worldwide and gather them together at the brewing and bottling facilities we use in the United States and Germany. We combine and brew these ingredients under strict specifications and finally heat-pasteurize Virgil’s Root Beer, to ensure quality.

We sell Virgil’s Root Beer in four packaging styles: 12-ounce bottles in a four-pack, a special swing-lid style pint bottle and a 5-liter self-tapping party keg.

Virgil’s Cream Soda

We launched Virgil’s Cream Soda in January 2004. We make this product with the same attention to quality that makes Virgil’s Root Beer so popular. Virgil’s Cream Soda is a gourmet cream soda. We brew Virgil’s Cream Soda the same way we brew Virgil’s Root Beer. We use all-natural ingredients, including filtered water, unbleached cane sugar and bourbon vanilla from Madagascar.

Virgil’s Cream Soda is currently sold in 12-ounce long neck bottles in colorful 4-packs and a 5-liter party keg version.

In 2006, we expanded our product line to include Virgil’s Black Cherry Cream Soda in a 12-ounce bottle. In 2009, we introduced Virgil’s Orange Cream Soda.

Virgil’s Real Cola

We launched Virgil’s Real Cola in February 2008. Virgil’s Real Cola is a classic cola recipe made naturally using the finest ingredients and unbleached cane sugar. Virgil’s Real Cola is made naturally without caffeine or preservatives.

Virgil’s Real Cola is sold in 12-ounce bottles.

In 2007, we further expanded our Virgil’s product line to include diet Root Beer, diet Black Cherry Cream Soda and diet Cream Soda. Our diet sodas are sweetened with Stevia and Xylitol. In April 2008, we introduced diet Real Cola.

China Cola

We consider China Cola to be the most natural cola in the world. We restored China Cola to its original delicious blend of raw cane sugar, imported Chinese herbs, essential oils and natural spices. China Cola contains no caffeine. It comes in two varieties, Original China Cola and Cherry China Cola. Original China Cola is made from filtered water, raw cane sugar ~~szechwan~~Szechwan poeny root, cassia bark, Malaysian vanilla, oils of lemon and oil of orange, nutmeg, clove, licorice, cardamom, caramel color, citric acid and phosphoric acid. Cherry China Cola is made from the same ingredients as Original China Cola, with the addition of natural cherry flavor. China Cola and ~~Cherry~~Che rry China Cola sell as singles, in four-packs and in 24-bottle cases.

R(x)eed’s Nausea Relief

We recently launched our Nausea Relief product for the Drug Store Channel. This product is based on our Ginger Brews with added B vitamins. Both ginger and B vitamins have been studied for their effectiveness in combating nausea. Our products have been designed with the FDA in mind and have the proper disclosure.

Sonoma Sparkler

Our Sonoma Sparkler products are sparkling juices in champagne-style bottles designed to be celebratory drinks for holidays and special occasions. We sell Natural Pear, Organic Apple, Peach and Lemon beverages.

Reed’s Ginger Candies

Reed’s Crystallized Ginger Candy

Reed’s Crystallized Ginger was the first crystallized ginger on the market in the United States to be sweetened with raw cane instead of refined white sugar. Reed’s Crystallized Ginger is custom-made for us in Fiji.

The production process is an ancient one that has not changed much over time. After harvesting baby ginger (the most tender kind), the root is diced and then steeped for several days in large vats filled with simmering raw cane syrup. The ginger is then removed and allowed to crystallize into soft, delicious nuggets. Many peoples of the ~~islands~~Islands have long enjoyed these treats for health and pleasure.

We sell this product in 3.5-ounce bags, 10-ounce enameled, rolled steel gift tins, 16-ounce re-sealable Mylar bags, and in bulk. We also sell Reed’s Crystallized Ginger Baking Bits in bulk.

Reed’s Ginger Chews

For many years, residents of Southeast Asia from Indonesia to Thailand have enjoyed soft, gummy ginger candy chews. We sell Reed’s Ginger Chews individually wrapped in hard-packs of ten candies and as individually wrapped loose pieces in bulk. The candies come in two flavors, Reed’s Ginger Chews and Reed’s Peanut Butter Ginger Chews. Reed’s has taken them a step further, adding more ginger, using no gelatin (vegan), making the candies potentially more appealing to the vegan market, and making them slightly easier to unwrap than their Asian counterparts. Reed’s Ginger Chews are made for us in Indonesia from sugar, maltose (malt sugar), ginger, and tapioca starch. In addition, the peanut butter ~~version~~versi on includes peanut butter.

Reed’s Ginger Ice Creams

We make Reed’s Ginger Ice Creams with 100% natural ingredients, using the finest hormone-free cream and milk. We combine fresh milk and cream with the finest natural ginger puree, Reed’s Crystallized Ginger Candy and natural raw cane sugar to make a delicious ginger ice cream with a super premium, ultra-creamy texture and Reed’s signature spicy-sweet bite. Our ice creams are made for us, according to our own recipes, at a dairy in upstate New York. We sell Reed’s Ginger Ice Creams in pint containers and cases of eight pints.

New Product Development

We are always working on developments to continue expanding from our Reed’s Ginger Brews, Virgil’s product line, Reed’s Ginger Ice Cream, and Reed’s Ginger Candy product lines and packaging styles. ~~We are also planning to launch Reed’s Natural Energy Elixir, an energy drink infused with all natural ingredients designed to provide consumers with a healthy and natural boost to energy levels, in~~ ~~mid~~ ~~2009.~~ However, research and development expenses in the last two years have been nominal. We intend to expend some, but not a significant amount, of funds on research and development for new products and packaging. We intend to introduce new products and packaging as we deem appropriate from time to time for our business plan.

Among the advantages of our ~~owned and~~ self-operated Brewery are the flexibility to try innovative packaging and the capability to experiment with new product flavors at less cost to our operations or capital. Currently, we sell a half-liter Virgil’s Root Beer swing-lid bottle that is made for us in Europe. We intend to produce several of our beverages in one-liter swing-lid bottles in the United States. Our Reed’s Original Ginger Brew, Extra Ginger Brew and Spiced Apple Brew are available in a 750 ml champagne bottle and other products are planned to be available with this packaging in the near future.

During 2009, we started developing and producing private-label products in our Los Angeles Brewery. Based on strong demand and our ability to be nimble and innovative, we believe that this segment of our business will grow rapidly.

Manufacture of Our Products

We produce our carbonated beverages at two facilities:

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a facility ~~that we own~~ in Los Angeles, California, known as The Brewery, at which we produce certain soda products for the western half of the United States, and

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a packing, or co-pack, facility in Pennsylvania which supplies us with product we do not produce at The Brewery. The term of our agreement with the co-packer terminates November 1, 2011 and grants Reed’s the option to extend the contract for an additional one year period. The co-packer assembles our products and charges us a fee, generally by the case, for the products they produce.

Our west coast Brewery facility is running at ~~41%~~about 60% of capacity. We have had difficulties with the flavor of our Ginger Brew products produced at the Brewery. As a result, we continue to supply our Ginger Brew products at the Brewery from our east coast co-packing facility, thereby causing us to incur increased freight and warehousing expenses on our products. Management is committed to selling a high quality, great tasting product and has elected to continue to sell certain of our Ginger Brew products produced from our east coast facility on the west coast, even though it negatively impacts our gross margins. As we are able to make the Brewery become more fully utilized, we believe that we will experience improvements in gross margins due to freight and production savings.

We follow a “fill as needed” manufacturing model to the best of our ability and we have no significant backlog of orders. Substantially all of the raw materials used in the preparation, bottling and packaging of our products are purchased by us or by our contract packers in accordance with our specifications. Reed’s Crystallized Ginger is made to our specifications in Fiji. Reed’s Ginger Candy Chews are made and packed to our specifications in Indonesia.

Generally, we obtain the ingredients used in our products from domestic suppliers and each ingredient has several reliable suppliers. We have no major supply contracts with any of our suppliers. As a general policy, we pick ingredients in the development of our products that have multiple suppliers and are common ingredients. This provides a level of protection against a major supply constriction or calamity.

We believe that as we continue to grow, we will be able to keep up with increased production demands. We believe that the Brewery has ample capacity to handle increased West Coast business. To the extent that any significant increase in business requires us to supplement or substitute our current co-packers, we believe that there are readily available alternatives, so that there would not be a significant delay or interruption in fulfilling orders and delivery of our products. In addition, we do not believe that growth will result in any significant difficulty or delay in obtaining raw materials, ingredients or finished product that is repackaged at the Brewery.

In July 2007, the FDA issued a statement that warned that fresh ginger from a specific importer was contaminated with a banned pesticide. We import ginger from China, but from a different importer than was named by the FDA. Our importer requires a pre-shipment lab test in order to perform chemical analysis. In addition to the pre-shipment chemical analysis, our importer has indicated to us that they verify that every container of ginger shipped has passed the Chinese Photosanitary inspection. Upon arrival at the Port of Long Beach, California, the ginger we import undergoes a food safety inspection by the USDA’s Agricultural Quality Inspection Unit. We believe the ginger we use is certified clean and good for human consumption.

Our Primary Markets

We target a niche in the soft drink industry known as New Age beverages. The soft drink industry generally characterizes New Age Beverages as being made more naturally, with upscale packaging, and often creating and utilizing new and unique flavors and flavor combinations.

The New Age beverage segment is highly fragmented and includes such competitors as SoBe, Snapple, Arizona, Hansen’s and Jones Soda, among others. These brands have the advantage of being seen widely in the national market and being commonly well known for years through well-funded ad campaigns. Despite our ~~products’~~products having a relatively high price for a premium beverage product, no mass media advertising and a relatively small presence in the mainstream market compared to many of our competitors, we believe that results to date demonstrate that Reed’s Ginger Brews and Virgil’s sodas are making market inroads among these significantly larger brands. See “Business - Competition.”

We sell the majority of our products in natural food stores, mainstream supermarket chains and foodservice locations, primarily in the United States and, to a lesser degree, in Canada and Europe.

Natural Food Stores

Our primary and historical marketing source of our products has been natural food and gourmet stores. These stores include Whole Foods Market, Wild Oats and Trader Joe’s. We also sell in gourmet restaurants and delis. We believe that our products have achieved a leading position in their niche in the fast-growing natural food industry. With the advent of large natural food store chains and specialty merchants, the natural foods segment continues to grow each year in direct competition with the mainstream grocery trade.

Mainstream Supermarkets and Retailers

We sell our products to 57 distributors who specialize in mainstream retailers, ~~55 distributors that specialize in~~ Natural Foods, and specialty ~~stores~~stores; and 40directly to customers who have distribution centers ~~of customers who~~that handle their own logistics.

Supermarkets, particularly supermarket chains and prominent local supermarkets, often impose slotting fees before permitting new product placements in their store or chain. These fees can be structured to be paid one-time only or in installments. We pursue broad-based slotting in supermarket chains throughout the United States and, to a lesser degree, in Canada. However, our direct sales team in Southern California and our national sales management team have been able to place our products without having to pay significant slotting ~~fees much of the time. However, slotting~~fees. Slotting fees for new placements normally cost between $10 and $100 per store per new item placed.

We also sell our products to large national retailers who place our products within their national distribution streams. These retailers include Costco, Sam’s Club, Cost Plus World Markets and Trader Joe’s.

Foodservice Placement

We also market our beverage products to industrial cafeterias, bars and restaurants. We intend to place our beverage products in stadiums, sports arenas, concert halls, theatres, and other cultural centers as a long-term marketing plan.

International Sales

We have developed a limited market for our products in Canada, Europe and Asia. Sales outside of North America currently represent less than 1% of our total sales. Sales in Canada represent about 1.3% of our total sales. We are currently analyzing our international sales and marketing plan. Our analysis will explore options that may include outsourcing the international sales effort to third or related parties.

The European Union is an open market for Reed’s with access to that market due in part to the ongoing production of Virgil’s Special Extra Nutmeg Root Beer in Germany. We market our products in Europe through a master distributor in Amsterdam and sub-distributors in the Netherlands, Denmark, the United Kingdom and Spain. We are currently negotiating with a Dutch company in Amsterdam for wider European distribution.

~~American Trading Corp.~~We have a export company that orders our products on a regular basis for distribution in Japan. We are holding preliminary discussions with other trading companies and import/ export companies for the distribution of our products throughout Asia, Europe and South America. We believe that these areas are a natural fit for Reed’s ginger products, because of the importance of ginger in International, but especially the Asian diet and nutrition. Recently, we launched into the South African marketplace and Israel. Both of these markets are showing early signs of success.

Distribution, Sales and Marketing

We currently have a national network of mainstream, natural and specialty food distributors in the United States and Canada. We sell directly to our distributors, who in turn sell to retail stores. We also use our own sales group and independent sales representatives to promote our products for our distributors and direct sales to our retail customers. In Southern California, we previously maintained our own direct distribution in addition to other local distributors and are in the process of discontinuing our direct distribution and redirecting our customers to local distributors.

One of the main goals of our sales and marketing efforts is to increase sales and grow our brands. Our sales force consists of ~~ten~~eight sales personnel (down from 33 at its peak in 2007) and several outside independent food brokerage companies. The reduction of our sales force from 2007 was instigated by the refocusing of our sales efforts from 2007’s global effort to market to all accounts up and down the street in 20 markets nationally to 2008’s refocus of expanding the sales to our existing approximately 7,000 supermarket customers. In addition, we are working to increase the number of stores that carry our products. To support our sales effort to our existing supermarket customers we are actively enlisting regional mainstream beverage distributors to carry our products. We are not abandoning our up and down the street sales marketing approach. But in most markets, we are delaying that effort until after we have expanded our sales and presence in supermarkets.

We have entered into agreements with our customers that commit us to fees if we terminate the agreements early or without cause. The agreements call for our customer to have the right to distribute our products to a defined type of retailer within a defined geographic region. As is customary in the beverage industry, if we should terminate the agreement or not automatically renew the agreement, we would be obligated to make certain payments to our customers. We have no plans to terminate or not renew any agreement with any of our customers.

Our sales force markets existing products, run promotions and introduces new items. Our in-house sales managers are responsible for the distributor relationships and larger chain accounts that require headquarter sales visits and managing our independent sales representatives.

In addition, we distribute our products internationally through Reed’s Brokerage, Inc., a company controlled by Mark Reed, and Robert T. Reed, both brothers of Christopher J. Reed.

We also offer our products and promotional merchandise directly to consumers via the Internet through our website, www.reedsgingerbrew.com.

Marketing to Distributors

We market to distributors using a number of marketing strategies, including direct solicitation, telemarketing, trade advertising and trade show exhibition. These distributors include natural food, gourmet food, and mainstream distributors. Our distributors sell our products directly to natural food, gourmet food and mainstream supermarkets for sale to the public. We maintain direct contact with the distributors through our in-house sales managers. In limited markets, where use of our direct sales managers is not cost-effective, we utilize food brokers and outside representatives.

Marketing to Retail Stores

~~Our main~~The primary focus ~~for 2009 will be~~of our sales efforts is supermarket sales. We have a small highly trained sales force that is directly contacting supermarket chains and setting up promotional ~~calendars for 2009. This is a new effort for us. In the past, the supermarkets have had little or no direct contact with us.~~calendars. In addition, we market to retail stores by utilizing trade shows, trade advertising, telemarketing, direct mail pieces and direct contact with the store. Our sales managers and representatives visit these retail stores to sell directly in many regions. Sales to retail stores are coordinated through our distribution network and our regional warehouses.

~~Marketing to Consumers~~

~~Advertising~~ . We utilize several marketing strategies to market directly to consumers. Advertising in targeted consumer magazines such as “Vegetarian Times” and “New Age” magazine, in-store discounts on the products, in-store product demonstration, street corner sampling, coupon advertising, consumer trade shows, event sponsoring and our website ~~www.reedsgingerbrew.com~~ ~~are all among current consumer-direct marketing devices.~~

~~In-Store Draught Displays~~. As part of our marketing efforts, we have started to offer in-store draught displays, or Kegerators. While we believe that packaging is an important part of making successful products, we also believe that our products and marketing methods themselves need to be exceptional to survive in today’s marketplace. Our Kegerator is an unattended, in-store draught display that allows a consumer to sample our products at a relatively low cost per demonstration. Stores offer premium locations for these new, and we believe unique, draught displays.

~~On Draft Program~~. Our West Coast Brewery has initiated an on-draught program. We have installed draught locations at Fox Studios commissaries and in approximately 12 restaurants or in-store deli counters in Southern California. Currently, we are serving Virgil’s Root Beer and Virgil’s Cream Soda on draught. In addition, all of our other carbonated drinks are available in draught format.

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

Competition

The beverage industry is highly competitive. The principal areas of competition are pricing, packaging, development of new products and flavors and marketing campaigns. Our products compete with a wide range of drinks produced by a relatively large number of manufacturers. Most of these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other branding campaigns. In addition, the companies manufacturing these products generally have greater financial, marketing and distribution resources than we do.

Important factors affecting our ability to compete successfully include taste and flavor of products, trade and consumer promotions, rapid and effective development of new, unique cutting edge products, attractive and different packaging, branded product advertising and pricing. We also compete for distributors who will concentrate on marketing our products over those of our competitors, provide stable and reliable distribution and secure adequate shelf space in retail outlets. Competitive pressures in the New Age beverage categories could cause our products to be unable to gain or to lose market share or we could experience price erosion.

We believe that our innovative beverage recipes and packaging and use of premium ingredients and a trade secret brewing process provide us with a competitive advantage and that our commitments to the highest quality standards and brand innovation are keys to our success.

Our premium New Age beverage products compete generally with all liquid refreshments and in particular with numerous other New Age beverages, including: SoBe, Snapple, Mistic, IBC, Stewart’s, Henry Weinhard, Arizona, Hansen’s, Knudsen & Sons and Jones Sodas.

Our Virgil’s and China Cola lines compete with a number of other natural soda companies, including Stewarts, IBC, Henry Weinhard, Blue Sky, A&W and Natural Brews.

We also generally compete with other traditional soft drink manufacturers and distributors, such as Coke, Pepsi and Cadbury Schweppes.

Reed’s Crystallized Ginger Candy competes primarily with other candies and snacks in general and, in particular, with other ginger candies. The main competitors in ginger candies are Royal Pacific, Australia’s Buderim Ginger Company, and Frontier Herbs. We believe that Reed’s Crystallized Ginger Candy is the only one among these brands that is sulfur-free.

Reed’s Ginger Ice Creams compete primarily with other premium and super-premium ice cream brands. Our principal competitors in the ice cream business are Haagen-Dazs, Ben & Jerry’s, Godiva, Starbucks, Dreyer’s and a number of smaller natural food ice cream companies.

Proprietary Rights

We own 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.

In addition, we consider our finished product and concentrate formulae, which are not the subject of any patents, to be trade secrets. Our brewing process is a trade secret. This process can be used to brew flavors of beverages other than ginger ale and ginger beer, such as root beer, cream soda, cola, and other spice and fruit beverages. We have not sought any patents on our brewing processes because we would be required to disclose our brewing process in patent applications.

We generally use non-disclosure agreements with employees and distributors to protect our proprietary rights.

Government Regulation

The production, distribution and sale in the United States of many of our Company’s products are subject to the Federal Food, Drug, and Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, federal, state and local workplace health and safety laws, various federal, state and local environmental protection laws and various other federal, state and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products. Outside the United States, the distribution and sale of our many products and related operations are also subject to numerous similar and other statutes and regulations.

A California law requires that a specific warning appear on any product that contains a component listed by the ~~state~~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. This is 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 or that are contributed to such products solely by a municipal water supply are generally exempt from the warning requirement. No Company beverages produced for sale in California are currently required to display warnings under this law. We are ~~unable~~unab le to predict whether a component found in a Company product might be added to the California list in the future, although the state has initiated a regulatory process in which caffeine will be evaluated for listing. Furthermore, we are also unable to predict when or whether the increasing sensitivity of detection methodology that may become applicable under this law and related regulations as they currently exist, or as they may be amended, might result in the detection of an infinitesimal quantity of a listed substance in a beverage of ours produced for sale in California.

Bottlers of our beverage products presently offer and use nonrefillable, recyclable containers in the United States and various other markets around the world. Some of these bottlers also offer and use refillable containers, which are also recyclable. Legal requirements apply in various jurisdictions in the United States and overseas requiring that deposits or certain ecotaxes or fees be charged for the sale, marketing and use of certain nonrefillable beverage containers. The precise requirements imposed by these measures vary. Other types of beverage container-related deposit, recycling, ecotax and/or product stewardship statutes and regulations also apply in various jurisdictions in the United States and overseas. We anticipate that additional, similar legal requirements may be proposed or enacted in the future at local, state and ~~federal~~fede ral levels, both in the United States and elsewhere.

All of our facilities and other operations in the United States are subject to various environmental protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. Our policy is to comply with all such legal requirements. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our capital expenditures, net income or competitive position.

Environmental Matters

Our primary cost of environmental compliance activity is in recycling fees ~~which approximated $131,000~~ and ~~$174,000 in 2008 and 2007, respectively. This is a standard cost of doing business in the soft drink industry.~~

~~In California, and in certain other states where we sell our products, we~~redemption values. We are required to collect redemption values from our customers and remit those redemption values to the state, based upon the number of bottles of certain products sold in that state.

In certain other states and Canada where our products are sold, we are also required to collect deposits from our customers and to remit such deposits to the respective state agencies based upon the number of cans and bottles of certain carbonated and non-carbonated products sold in such states.

In the year ended December 31, 2007, we upgraded our lighting system to an energy efficient and shatter proof system throughout the Brewery and the offices. We also initiated a trash recycling program for both the Brewery and the offices.

Employees

We have 3243 full-time employees, as follows: three in general management, ~~ten~~eight in sales and marketing support, ~~five~~six in admin and operations and 1626 in production. We employ additional people on a part-time basis as needed. We have never participated in a collective bargaining agreement. We believe that the relationship with our employees is good.

Item 2. Property

We ~~own an 18,000~~lease a facility of approximately 30,000 square foot warehouse, known as the Brewery, at 13000 South Spring Street in an unincorporated area of Los Angeles County, near downtown Los Angeles. The property is located in the Los Angeles County Mid-Alameda Corridor Enterprise Zone. Businesses located in the enterprise zone are eligible for certain economic incentives designed to stimulate business investment, encourage growth and development and promote job creation.

We purchased the facility in December 2000 for a purchase price of $850,000, including a down payment of $102,000. We financed approximately $750,000 of the purchase price with a loan from U.S. Bank National Association, guaranteed by the United States Small Business Administration. We also obtained a building improvement loan for $168,000 from U.S. Bank National Association, guaranteed by the United States Small Business Administration. Christopher J. Reed, our founder and Chief Executive Officer, personally guaranteed both loans. Both loans were due and payable on November 29, 2025, with interest at the New York prime rate plus 1%, adjusted monthly, with no cap or floor. As of December 31, 2007, the principal and interest payments on the two loans combined were $7,113 per month. This facilityfeet, which serves as our principal executive offices, our West Coast Brewery and bottling plant and our Southern California warehouse ~~facility until August 2007.~~

~~In August 2007, we purchased the building immediately adjacent to the Brewery on South Spring Street~~facility. The lease commenced in June 2009, and is for ~~$1,700,000 in cash. Since its purchase, this facility serves as our warehouse for mainly finished goods and raw materials. In March 2008, we borrowed~~ a ~~total~~term of $1,770,000 from Lehman Brothers secured by our real estate. This loan is personally guaranteed by Christopher J. Reed, our Chief Executive Officer. We have used the proceeds of this loan to pay off the outstanding loans on the Brewery and for working capital. The new loan is payable over a 30 year term, bears interest at 8.41% per annum and carries a prepayment penalty of 3% if the loan is repaid within fivefifteen years.

Item 3. Legal Proceedings

From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable.

From August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common stock in connection with our initial public offering. These securities represented all of the shares issued in connection with the initial public offering prior to October 11, 2006. These shares issued in connection with the initial public offering may have been issued in violation of either ~~federal~~Federal or ~~state~~State securities laws, or both, and may be subject to rescission.

On August 12, 2006, we made a rescission offer to all holders of the outstanding shares that we believe are subject to rescission, pursuant to which we 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 32 of the offerees to the extent of 28,420 shares for an aggregate of $119,000, including statutory interest. The shares that were tendered for rescission were agreed to be purchased by others and not from our funds.

Federal securities laws do not provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as required or was not otherwise exempt from such registration requirements. With respect to the offerees who rejected the rescission offer, we may continue to be liable under federal and state securities laws for up to an amount equal to the value of all shares of common stock issued in connection with the initial public offering plus any statutory interest we may be required to pay. If it is determined that we offered securities without properly registering them under federal or state law, or securing an exemption from registration, regulators could impose monetary fines or other sanctions as provided under these laws. However, we believe the rescission offer provides us with ~~additional~~additio nal meritorious defenses against any future claims relating to these shares.

Except as set forth above, we believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations.

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

The 2008 Annual Meeting of Stockholders of the Company was held on ~~December 31, 2008.~~November 20, 2009. At the meeting, the following individuals were elected as directors of the Company and received the number of votes set opposite their respective names:

								Votes Withheld,
						Votes		Abstentions,
Director	Votes For	Votes Against	Votes Withheld, Abstentions, Broker Non-Votes	Votes For		Against		Broker Non-Votes
Christopher J. Reed	5,487,608	-	575,976		6,542,104		-		1,129,140
Judy Holloway Reed	5,481,013	-	582,571		6,504,155		-		1,167,089
Mark Harris	5,535,096	-	528,488		6,500,566		-		1,170,678
Dr. D.S.J. Muffoletto, N.D.	5,533,154	-	530,430		6,500,120		-		1,171,124
Michael Fischman	5,535,096	-	528,488		6,500,566		-		1,170,678

In addition, at the meeting, our stockholders ratified the appointment by the board of directors of Weinberg & Company, P.A. as the Company’s independent registered public accounting firm for the ~~2008~~2009 fiscal year; with ~~5,705,489~~6,535,395 votes for, ~~350,481~~63,906 votes against, and ~~7,613~~1,071,941 Abstention/non-broker votes.

1514

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

~~Since November 27, 2007, our~~Our common stock ~~has been~~is listed for trading on the NASDAQ Capital Market trading under the symbol “REED”~~. Prior to November 27, 2007 our common stock was quoted on the OTC Bulletin Board under the symbol “REED.OB”~~. The following is a summary of the high and low bid prices of our common stock on the ~~OTC Bulletin Board during the periods presented and the high and low sales prices of our common stock on the~~ NASDAQ Capital Market for the periods ~~presented. OTC Bulletin Board bid prices represent inter-dealer prices, without retail mark-up, mark down or commissions, and may not necessarily represent actual transactions:~~presented:

	Bid Price (OTC Bulletin Board)				Sales Price
	High		Low		High		Low
Year Ending December 31, 2007
Year Ending December 31, 2008
First Quarter	$	7.17	$	3.00	$	6.24	$	1.50
Second Quarter		9.00		6.00		3.94		1.89
Third Quarter		10.55		6.75		3.30		1.45
Fourth Quarter		7.35		5.35		2.31		1.00

	Sales Price (NASDAQ Capital Market)				Sales Price
	High		Low		High		Low
Year Ending December 31, 2008
Year Ending December 31, 2009
First Quarter	$	6.24	$	1.50	$	1.41	$	0.75
Second Quarter		3.94		1.89		2.42		1.06
Third Quarter		3.30		1.45		2.50		1.80
Fourth Quarter		2.31		1.00		2.10		1.23

As of December 31, ~~2008,~~2009, there were approximately ~~248~~228 stockholders of record of the common stock (not including the number of persons or entities holding stock in nominee or street name through various brokerage firms) and approximately ~~8,979,341~~9,606,127 outstanding shares of common stock.

Unregistered Sales of Equity Securities

During the fiscal year ended December 31, ~~2008,~~2009, we sold the following equity securities that were unregistered under the Securities Act:

~~In March 2008, we issued 150,000~~During 2009, the Company sold 50,000 shares of common stock ~~to a consultant pursuant to a research and analysis services agreement.~~for $3.00 per share or $150,000. The shares were issued pursuant to an exemption from registration under Section 4(2) of the Securities Act.

~~In January 2008, we entered into an agreement for future consulting services. We have agreed to pay 11,960~~During 2009, the Company issued 197,647 shares of common stock ~~over~~in exchange for consulting and legal services. The value of the ~~six month engagement and~~stock was based on the closing price of the stock on the issuance or agreed ~~to register the~~upon date. The total value of shares ~~with the SEC in our next registration statement. From January to March 2008, we~~ issued ~~5,979 shares of common stock to the consultant under the agreement.~~for services was $260,000. The shares were issued pursuant to exemption from registration under Section 4(2) of the Securities Act.

During May and June 2008, we issued 5,981 shares of common stock for consulting services, 4,000 shares of common stock upon the conversion of 1,000 shares of preferred stock and 10,910 shares of common stock as a dividend to its preferred stockholder’s, in accordance with the preferred stock terms. The shares were issued pursuant to exemption from registration under Section 4(2) of the Securities Act.

~~During May and June of 2008, we granted 175,000 options to purchase common stock at an exercise pricesof $1.99 pursuant to exemption from registration under Section 4(2) of the Securities Act.~~

~~In December, 2008,~~2009, we granted options to purchase ~~150,000~~120,000 shares of common stock under our employee stock option plan at exercise prices of ~~$1.10~~$0.75 to ~~$1.34~~$1.30 pursuant to exemption from registration under Section 4(2) of the Securities Act.

On December 22, ~~2008,~~2009, we granted ~~50,750~~38,750 shares of common stock to our employees as bonuses. The closing price of our common stock on that date was ~~$1.11~~$1.32 per share. The shares were issued pursuant to exemption from registration under Section 4(2) of the Securities Act.

Dividend Policy

We have never declared or paid dividends on our common stock. We currently intend to retain future earnings, if any, for use in our business, and, therefore, we do not anticipate declaring or paying any dividends in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including the terms of our credit facility and our financial condition, operating results, current and anticipated cash needs and plans for expansion.

We are obligated to pay a non-cumulative 5% dividend from lawfully available assets to the holders of our Series A and Series B preferred stock in either cash or additional shares of common stock at our discretion. In ~~2008~~2009 and ~~2007,~~2008, we paid the dividend in an aggregate of ~~10,910~~12,950 and ~~3,820~~10,910 shares of common stock in each such year, respectively, and anticipate that we will be obligated to issue at least this many shares annually to the holders of the Series A preferred stock so long as such shares are issued and outstanding. Series B shareholders have not yet received annual dividends on the shares, as they were issued in December 2009.

Securities Authorized for Issuance Under Equity Compensation Plans

2001 Stock Option Plan and 2007 Stock Option Plan

We are authorized to issue options to purchase up to 500,000 shares of common stock under our 2001 Stock Option Plan, and we are authorized to issue options to purchase up to 1,500,000 shares of common stock under our 2007 Stock Option Plan. On August 28, 2001, our board of directors adopted the 2001 Stock Option Plan and the plan was approved by our stockholders. On October 8, 2007, our board of directors adopted the 2007 Stock Option Plan and the plan was approved by our stockholders on November 19, 2007.

The plans permit the grant of options to our employees, directors and consultants. The options may constitute either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code or “non-qualified stock options.” The primary difference between “incentive stock options” and “non-qualified stock options” is that once an option is exercised, the stock received under an “incentive stock option” has the potential of being taxed at the more favorable long-term capital gains rate, while stock received by exercising a “non-qualified stock option” is taxed according to the ordinary income tax rate schedule.

The plans are currently administered by the board of directors. The plan administrator has full and final authority to select the individuals to receive options and to grant such options as well as a wide degree of flexibility in determining the terms and conditions of options, including vesting provisions.

The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date of the grant of the option. The exercise price of an incentive stock option granted to a person owning more than 10% of the total combined voting power of the common stock must be at least 110% of the fair market value per share of common stock on the date of the grant. Options may not be granted under the plan on or after the tenth anniversary of the adoption of the plan. Incentive stock options granted to a person owning more than 10% of the combined voting power of the common stock cannot be exercisable for more than five years.

When an option is exercised, the purchase price of the underlying stock will be paid in cash, except that the plan administrator may permit the exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise determined by the plan administrator.

If an optionee ceases to be an employee, director, or consultant with us, other than by reason of death, disability, or retirement, all vested options must be exercised within three months following such event. However, if an optionee’s employment or consulting relationship with us terminates for cause, or if a director of ours is removed for cause, all unexercised options will terminate immediately. If an optionee ceases to be an employee or director of, or a consultant to us, by reason of death, disability, or retirement, all vested options may be exercised within one year following such event or such shorter period as is otherwise provided in the related agreement.

When a stock award expires or is terminated before it is exercised, the shares set aside for that award are returned to the pool of shares available for future awards.

No option can be granted under the plan after ten years following the earlier of the date the plan was adopted by the board of directors or the date the plan was approved by our stockholders.

2009 Consultant Stock Plan

We are authorized to issue up to 100,000 shares of common stock to employees, officers, directors, consultants, independent contractors, advisors, or other service providers to Reed’s under our 2009 Consultant Stock Plan. The 2009 Consultant Stock Plan was adopted by our board of directors on February 13, 2009 and is administered by a committee of the board of directors. The plan committee may from time to time, and subject to the provisions of the plan and such other terms and conditions as the plan committee may prescribe, grant to any eligible person one or more shares of common stock of Reed’s ("Award Shares"). The grant of Award Shares or grant of the right to receive Award Shares shall be evidenced by either a written consulting agreement or a separate written agreement confirming such grant, executed by Reed’s and the recipient, stating the number of Award Shares granted and stating all terms and conditions of such grant. During 2009, 60,416 shares of common stock were issued under the Plan.

The plan committee, in its sole discretion, may grant Award Shares in any of the following instances:

(i) as a "bonus" or "reward" for services previously rendered and compensated, in which case the recipient of the Award Shares shall not be required to pay any consideration for such Award Shares, and the value of such Award Shares shall be the fair market value of such Award Shares on the date of grant; or

(ii) as "compensation" for the previous performance or future performance of services or attainment of goals, in which case the recipient of the Award Shares shall not be required to pay any consideration for such Award Shares (other than the performance of his services).

Equity Compensation Plan Information

The following table provides information, as of December 31, ~~2008,~~2009, with respect to options outstanding and available under the 2001 Plan and 2007 Plan and certain other outstanding options:

Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)	Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column (a)) (c)	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a)		Weighted-Average Exercise Price of Outstanding Options,Warrants and Rights (b)		Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in Column(a))(c)

Equity compensation plans approved by security holders	702,500	$	3.55	1,297,500		600,000		$ 1.74		1,310,000
Equity compensation plans not approved by security holders	1,868,236	$	5.41	Not applicable		2,091,690		$ 4.70		Not applicable

TOTAL	2,570,736	$	4.90	1,297,500		2,691,690		$ 3.94		1,310,000

Item 6. Selected Financial Data

As a smaller reporting company, Reed’s is not required to provide disclosure pursuant to this Item 6.

Item 7. 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 Annual Report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this Annual Report.

Overview

We develop, manufacture, market, and sell natural non-alcoholic and “New Age” beverages, candies and ice creams. “New Age Beverages” is a category that includes natural soda, fruit juices and fruit drinks, ready-to-drink teas, sports drinks, and water. We currently manufacture, market and sell ~~five~~eight unique product lines:

●

~~Reed’s Ginger Brews,~~

	● ·	Reed’s Ginger Brews,

	·	Virgil’s Root Beer, Cream Sodas and Real Cola, including diet sodas


	·	China Colas,

	·	Reed’s Ginger Chews,

	●	~~China Colas,~~

●

~~Reed’s Ginger Chews, and~~

	●·	Reed’s Ginger Ice Creams,

	·	Sonoma Sparkle Sparkling Juices,

	·	R(x)eed’s Natural Ginger Nausea Relief, and

	·	Energy Elixir

In addition, we have a growing private label business that currently services two national chains. We sell most of our products in specialty gourmet and natural food stores, supermarket chains, retail stores and restaurants in the United States and, to a lesser degree, in Canada. We primarily sell our products through a network of natural, gourmet and independent distributors. We also maintain an organization of in-house sales managers who work mainly in the stores serviced by our natural, gourmet and mainstream distributors and with our distributors. We also work with regional, independent sales representatives who maintain store and distributor relationships in a specified territory.

Trends, Risks, Challenges, Opportunities That May or Are Currently Affecting Our Business

Our main challenges, trends, risks, and opportunities that could affect or are affecting our financial results include but are not limited to:

~~Fuel Prices~~ - Last year’s fuel price increases caused increases in our packaging, production and ingredient costs. Fuel prices have abated; however we continue to pursue alternative production, packaging and ingredient suppliers and options to help offset the effect of last year’s fuel price increases on these expenses.

Low Carbohydrate Diets and Obesity - Most of our products are not geared for the low carbohydrate market. Consumer trends have reflected higher demand for lower carbohydrate products. We monitor these trends closely and have developed low-carbohydrate versions of some of our beverages namely the Virgil’s line.

Distribution Consolidation - There has been a recent trend towards continued consolidation of the beverage distribution industry through mergers and acquisitions. This consolidation results in a smaller number of distributors to market our products and potentially leaves us subject to the potential of our products either being dropped by these distributors or being marketed less aggressively by these distributors. As a result, we initiated our own direct distribution to mainstream supermarkets and natural and gourmet foods stores in Southern California and to large national retailers. However, we are in the process of discontinuing our direct distribution and redirecting our customers to local distributors. Consolidation among natural foods industry distributors has not had an ~~adverse~~adve rse affect on our sales.

Consumers Demanding More Natural Foods - The rapid growth of the natural foods industry has been fueled by the growing consumer awareness of the potential health problems due to the consumption of chemicals in the diet. Consumers are reading ingredient labels and choosing products based on them. We design products with these consumer concerns in mind. We feel this trend toward more natural products is one of the main trends behind our growth. Recently, this trend in drinks has not only shifted to products using natural ingredients, but also to products with added ingredients possessing a perceived positive function like vitamins, herbs and other nutrients. Our ginger-based products are designed with this consumer demand in mind.

Supermarket and Natural Food Stores - More and more supermarkets, in order to compete with the growing natural food industry, have started including natural food sections. As a result of this trend, our products are now available in mainstream supermarkets throughout the United States in natural food sections. Supermarkets can require that we spend more advertising money and they sometimes require slotting fees. We continue to work to keep these fees reasonable. Slotting fees in the natural food section of the supermarket are generally not as expensive as in other areas of the store.

Beverage Packaging Changes - Beverage packaging has continued to innovate, particularly for premium products. There is an increase in the sophistication with respect to beverage packaging design. While we feel that our current core brands still compete on the level of packaging, we continue to experiment with new and novel packaging designs such as the 5-liter party keg and 750 ml. champagne style bottles. We have further plans for other innovative packaging designs.

Packaging or Raw Material Price Increases - An increase in packaging or raw materials has caused our margins to suffer and has negatively impacted our cash flow and profitability. We continue to search for packaging and production alternatives to reduce our cost of goods.

Cash Flow Requirements - Our growth will depend on the availability of additional capital infusions. We have a financial history of losses and are dependent on non-banking sources of capital, which tend to be more expensive and charge higher interest rates. Any increase in costs of goods will further increase losses and will further tighten cash reserves.

Interest Rates - We use lines of credit as a source of capital and are negatively impacted as interest rates rise.

Critical Accounting Policies

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements including various allowances and reserves for accounts receivable and inventories, the estimated lives of long-lived assets and trademarks and trademark licenses, as well as claims and contingencies arising out of litigation or other transactions that occur in the normal course of business. The following summarize our most significant accounting and reporting policies and practices:

Revenue Recognition. Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, and collection of the receivable is reasonably assured. A product is not shipped without an order from the customer and credit acceptance procedures performed. The allowance for returns is regularly reviewed and adjusted by management based on historical trends of returned items. Amounts paid by customers for shipping and handling costs are included in sales.

Trademark License and Trademarks. We own trademarks that we consider material to our business. Three of our material trademarks are registered trademarks in the U.S. Patent and Trademark Office: Virgil’s ®, Reed’s Original Ginger Brew All-Natural Jamaican Style Ginger Ale ® and Tianfu China Natural Soda ®. Registrations for trademarks in the United States will last indefinitely as long as we continue to use and police the trademarks and renew filings with the applicable governmental offices. We have not been challenged in our right to use any of our material trademarks in the United States. We intend to obtain international registration of certain trademarks in foreign jurisdictions.

We account for these items in accordance with ~~SFAS No. 142, “Goodwill~~Financial Accounting Standards Guidance and ~~Other Intangible Assets.” Under the provisions of SFAS No. 142,~~thus we do not amortize indefinite-lived trademark licenses and trademarks.

~~In accordance with SFAS No. 142, we~~We evaluate our non-amortizing trademark license and trademarks quarterly for impairment. We measure impairment by the amount that the carrying value exceeds the estimated fair value of the trademark license and trademarks. The fair value is calculated by reviewing net sales of the various beverages and applying industry multiples. Based on our quarterly impairment analysis the estimated fair values of trademark license and trademarks exceeded the carrying value and no impairments were identified during the years ended December 31, ~~2008~~2009 or December 31, ~~2007.~~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~~fai r value. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Quarterly, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. No impairments were identified during the years ended December 31, ~~2008~~2009 or December 31, ~~2007.~~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~~p roduct demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Stock-Based Compensation. We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We ~~adopted SFAS No. 123R, “Accounting~~account for ~~Stock-Based Compensation” effective January 1, 2006,~~stock option and ~~are using the modified prospective method in which compensation cost is recognized beginning with the effective date (a)~~warrant grants issued and vesting to employees based on the ~~requirements of SFAS No. 123R for all share-based payments granted after~~authoritative guidance provided by the ~~effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.~~Financial Accounting Standards Board. We account for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees” whereby the ~~fair~~authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the stock compensation is based onupon 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~~instruments is complete.

We estimate volatility and forfeitures based upon historical data. As permitted by the ~~fair value of stock options pursuant~~authoritative guidance issued by the Financial Accounting Standards Board, we use the “simplified” method to SFAS No. 123R using the Black-Scholes option-pricing model, which was developed for use in estimating the fair value of options that have no vesting restrictions and are fully transferable. This model requires the input of subjective assumptions, including the expected price volatility of the underlying stock anddetermine the expected life of ~~stock options. Projected data related~~an option grant due to the ~~expected volatility~~Company’s lack of ~~stock options~~sufficient historical exercise data to provide a reasonable basis, which is ~~based~~a result of the relative high turnover rates experienced in the past for positions granted options. All of these variables have an effect 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 theestimated fair value of our ~~employee stock options.~~share-based awards.

Results of Operations

Year ~~Ended~~ended December 31, ~~2008~~2009 Compared to Year ~~Ended~~ended December 31, ~~2007~~2008

~~Gross sales~~Sales of $15,178,000 for the year ended December 31, 2009 represented a decrease of 1% or $99,000, as compared to the 2008 ~~increased to $15,277,000 from $13,059,000 during 2007, a net increase~~sales of ~~$2,218,000, or 17%. Sales increased~~$15,277,000. The decrease in both our Virgil’s product line and our Reed’s Ginger Brews line. We experienced increases in the volumes of sales, especially in our Virgil’s product line; and increases in our prices, primarily on our Reed’s Ginger Brew lines. Generally, over 90% of our sales are split evenly between our two most significant product lines, Reed’s Ginger Brews and Virgil’s sodas, during both 2008 and 2007. The increase in sales wasrevenues 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 $900,000 lower sales of that product. The decrease was mitigated by an increase in ~~sales to newly introduced mainstream distributors~~the volume and ~~to an increase~~revenues from our primary 12-ounce products delivered in ~~our existing distribution channels of natural food distributors and retailers.~~2009, which was approximately 2% higher than the same 2008 period. A new brand contributed $470,000 in revenues during 2009 that were not in 2008 revenues.

Cost of Goods Sold

Cost of goods sold consists primarily of the costs of our ingredients, packaging, production and ~~production.~~freight. Cost of goods sold ~~increased~~decreased by 8%3% to ~~$11,891,000~~$11,566,000 during the year ended December 31, ~~2008~~2009 from $11,040,000 in 2007; as compared to the sales increase of 17% in the same comparable periods. Our costs of sales have been impacted by fuel and commodity price increases which have caused an increase in our costs of production from our co-packer. Fuel price increases in 2008 have increased our costs of delivery. The costs of glass vary, and the cost of ginger has increased by about 20%$11,891,000 in 2008. ~~In addition, we had increased costs of packaging. In late 2008, we negotiated reductions~~The 3% decrease in ~~our co-packing fees, which are anticipated to decrease our per-unit~~ cost of goods sold is consistent with the 1% decrease in ~~2009. In 2009, we are experiencing lower freight costs due to~~sales during the fall of fuel costs. We are also producing higher portions of our products at our own facility in Los Angeles, which is anticipated to lower our per-unit costs and improve our margins. We are also currently negotiating for significant reductions in glass costs.same periods.

Gross Profit

Our gross profit increased to ~~$3,386,000~~$3,612,000 in the year ended December 31, ~~2008,~~2009, from ~~$2,019,000~~$3,386,000 in ~~2007,~~2008, an increase of ~~$1,367,000~~$226,000 or ~~68%~~7%. The gross profit as a percentage of sales improved to 24%, as compared to 22% in 2008, ~~from 15% in 2007. This gross profit margin increase is primarily~~mostly due to price increases in 2008, where we have raised prices on the Reed’s Ginger Brew line by approximately 20% bringing it more in line with our competitors in the natural soda category. In addition, we have improved our systems to tracklower freight and manage the approval and use of promotions and discounting, resulting in higher effective prices and net gross margins. Finally, we have renegotiated our production costs from our largest co-packer and we anticipate a further increase in gross margins of approximately 5% in 2009, with current pricing.warehouse costs.

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 ~~$3,817,000~~$2,412,000 in the year ended December 31, ~~2008~~2009 from ~~$4,587,000~~$3,817,000 in ~~2007,~~2008, a net decrease of ~~$770,000~~$1,405,000 or ~~17%~~37%. The decrease is primarily due to decreases in compensation and travel costs of ~~$1,011,000~~$1,217,000, decreases in advertising promotion and ~~a decrease~~trade shows of $416,000, and decreases in ~~trade show~~facilities-related costs of ~~$333,000. Such decreases were~~$17,000; partially offset by an increase in ~~advertising in promotion~~stock option expense of ~~$229,000, an increase in broker commissions of $229,000, and an increase in office and equipment costs of $59,000.~~$245,000.

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 ~~2007~~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 ~~at December 31, 2007.~~in 2008. We have found that ~~the~~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.

Our decrease in trade show costs in 2008 was due to non-recurring promotions that occurred with one customer in 2007. Promotional expense increased in 2008 due to increased promotionally spending with supermarkets as we implement increased marketing programs with our supermarket partners. Brokerage commission expenses increased due to an increased use of brokerage firms to help penetrate and manage our supermarket business in 2008.

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~~decreased to ~~$3,140,000~~$2,632,000 during the year ended December 31, ~~2008~~2009 from ~~$2,621,000~~$3,140,000 in ~~2007,~~the same period of 2008, a net ~~increase~~decrease of ~~$519,000~~$508,000 or ~~20%~~16%. The ~~increase~~decrease in ~~2008~~2009 is primarily due to ~~an increase~~a decrease in professional fees expense of ~~$444,000~~$331,000 and a decrease in compensation costs of $296,000; partially offset by an increase in facilities-related costs of $85,000, and an increase in ~~insurance and operating costs~~stock option expense of ~~$74,000. The increase in professional fees, including legal, accounting and investor relation expenses was due to increased legal and accounting costs mostly related to~~$34,000. In the ~~increased costs of reporting and compliance with the Securities and Exchange Commission and Sarbanes-Oxley legislation. In addition,~~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.

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 ~~$3,571,000~~$2,073,000 in the year ended December 31, ~~2008~~2009 from ~~$5,489,000~~$3,571,000 in ~~2007.~~the same period of 2008. The ~~improvement~~reduced loss in 2009 is substantially a result of ~~$1,918,000 was due to increased sales, increased margins and~~the lower operating costs ~~of marketing. We have implemented cost-cutting measures throughout our business during 2008 and believe that this will result~~ in ~~over $2 million lower costs for the 2009 year.~~2009.

Interest Expense

Interest expense increased to ~~$244,000~~$486,000 in the year ended December 31, ~~2008,~~2009, compared to interest expense of ~~$182,000~~$244,000 in ~~2007.~~2008. The increase is due to the increase in long-term debt, as a result of our sale-leaseback; and increased borrowing ~~under a long-term mortgage, secured by our buildings; and~~ under a line of credit agreement, ~~with First Capital LLC,~~ secured primarily by our inventory and accounts receivable.

Liquidity and Capital Resources

As of December 31, ~~2008,~~2009, we had ~~an accumulated deficit~~shareholders equity of ~~$14,919,000~~$4,377,000 and we had working capital of ~~$636,000,~~$2,037,000, compared to ~~an accumulated deficit~~shareholders equity of ~~$11,081,000~~$3,961,000 and working capital of ~~$2,943,000~~$636,000 at December 31, ~~2007.~~2008. Cash and cash equivalents were ~~$229,000~~$1,306,000 as of December 31, ~~2008,~~2009, as compared to ~~$743,000~~$229,000 at December 31, ~~2007.~~2008. This ~~decrease~~increase in our working capital ~~and cash position~~ was primarily attributable to the proceeds from the financing transaction relating to our buildings and equipment, net ~~loss.~~of the repayment of long-term debt, and to the sales of our equity securities in the aggregate amount of $1,542,000, net of costs. In addition to our cash position on December 31, ~~2008,~~2009, we had availability under our line of credit of approximately ~~$33,000.~~$221,000.

Our ~~decrease~~increase in cash and cash equivalents to $1,306,000 at December 31, 2009 compared to $229,000 at December 31, 2008 ~~compared to $743,000 at December 31, 2007~~ was the result of ~~$2,468,000~~$1,317,000 used in operating ~~activities and $191,000~~activities; $356,000 used in investing activities; ~~offset by $2,145,000~~and $2,750,000 provided by financing activities.

The measures that we have taken in late 2008 to lower our cost of goods are yielding current improvements in gross margins of approximately 5% that we believe will extend throughout 2009. We also have initiatives underway to improve our glass costs as well as our ginger costs. Our completed operating cost reductions will lower operating expenses by over $2 million in 2009, as compared to 2008. At the current sales run rates and prices, we believe that our Company will operate at profitable levels in 2009.

We believe that the Company currently has ~~a number of options for gaining~~ the necessary working capital ~~in 2009; needed~~ to ~~fund our seasonality, product launches and other growth plans.~~support existing operations through 2010. Our primary capital source will be cash flow from ~~operations. We are also investigating improved working capital loans that~~operations, as we reach profitability in 2010. During October 2009, we raised net proceeds of approximately $563,000 from an offering of our shares. In November 2009, we entered into an agreement to replace our revolving line of credit, which more fully ~~value~~values our assets for ~~collateral. We may raise a limited amount~~collateral and enable increased borrowing for working capital purposes. In December 2009, we sold our Series B Preferred Stock for $829,000, net of ~~funds through a combination of equity and debt; however, we’d prefer to wait until our stock has a better market value so that we minimize dilution.~~offering costs. 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. In 2007, we completed a private placement to accredited investors, on subscriptions for the sale of 1,500,000 shares of common stock and warrants to purchase up to 749,995 shares of common stock, resulting in total proceeds received, net of underwriting commissions and the investment banking fee, of $8,040,000.

Net cash used in operations during ~~2008~~2009 was ~~$2,468,000~~$1,317,000 compared with ~~$5,806,000~~$2,468,000 used in operations during ~~2007.~~the same period in 2008. Cash used in operations during ~~2008~~2009 was primarily due to the net loss in the period and to ~~an increase~~a decrease in accounts ~~receivable collections, as compared to the same prior year period.~~payable.

Net cash used in investing activities of $356,000 during 2009 compared with $191,000 during 2008 ~~compared with $2,951,000 during 2007~~ is primarily the result of equipment ~~purchases during 2008 of $191,000 as compared to $2,651,000 in 2007.~~purchases.

Net cash provided by financing activities of ~~$2,145,000~~$2,750,000 during ~~2008~~2009 was primarily due to proceeds from the sale of our buildings and equipment of $3,056,000 and the sale of common and preferred stock of $1,604,000, offset by principal payments on long-term debt of $1,763,000. During the same period in 2008, we derived net proceeds from the refinancing of our land and buildings of $1,770,000 and net borrowings on our ~~obtaining of a~~revolving line of credit of $1,354,000; offset by principal payments on debt ~~payoffs~~ of $800,000. ~~As of December 31, 2008, we had outstanding borrowings of $1,354,000 under our line of credit agreement.~~ Our line of credit lender is a privately held, Senior Secured Commercial Lender. ~~Our 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 ~~communicated~~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 agre ement 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.

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 ~~us that they~~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 ~~financially secure~~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 ~~have over $1 billion dollars in assets with approximately~~are exercisable for 60 trading days commencing immediately, and (iii) Series C Warrants, for the purchase of a number of shares of common stock equal to 20% of ~~equity capital. They communicated that they~~a purchaser’s Shares, which have ~~adequate lines~~an exercise price of ~~credits in place~~$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.

In November 2009, we entered a revolver line commitment with ~~banks~~GemCap Lending I, LLC to ~~achieve their business goals. They communicated that there are no requirements in place~~replace our existing line of credit. The senior revolver facility is for ~~them to repurchase any~~$3,000,000, based on 80% of ~~their outstanding stock. Based on these communications, we believe that our lending source will be able to fund the full extent~~eligible accounts receivable and 50% of ~~our~~eligible inventory, with a maximum inventory advance of $1,500,000. The line of credit ~~should~~bears interest of 18% per annum.

During December 2009, we ~~meet the requirements~~sold 120,820 shares of Series B Preferred stock, for ~~such funding.~~net proceeds of $829,000, after offering costs.

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. At December 31, 2008, we had approximately $500,000 to $1,000,000 in excess inventory over our normal inventory levels, which is being used to fuel sales in the first quarter of 2009. We believe the operations of the company are currently running at approximately breakeven, after adjusting for non-cash expenses. Between the reduction of our inventory to more normal levels and our current breakeven operating status, we believe that our current cash position and lines of credit will be sufficient to enable us to meet our cash needs ~~through at least the end of 2009.~~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, ~~the proceeds from~~ our ~~public offering and private placement~~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~~There can be no assurance that additional financing will be available on terms favorable to us, or at all. If ~~adequate~~ade quate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited.

Recent Accounting Pronouncements

~~References~~In August 2009, the FASB issued ASU 2009-05, which amends ASC 820 to provide further guidance on measuring the fair value of a liability. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the ~~“FASB”,~~existence of a restriction that prevents the transfer of the liability, and ~~“SFAS” herein refer~~3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market, when no adjustments to the ~~“Financial Accounting Standards Board”, and “Statement~~quoted price of ~~Financial Accounting Standards”, respectively.~~the asset are required, are Level 1 fair value measurements. This standard became effective for the Company beginning in the fourth quarter of 2009. The Company’s adoption of ASU 2009-05 did not have a material impact on its financial position, results of operations or liquidity.

In ~~December 2007,~~January 2010, the FASB issued ~~FASB Statement~~Update No. ~~141 (R), “Business Combinations” (FAS 141(R)~~2010-6, “Improving Disclosures About Fair Value Measurements” (“ASU 2010-6”), which ~~establishes accounting principles~~requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and ~~disclosure requirements~~out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for all transactions in which a company obtains control over another business. Statement 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting ~~period~~periods beginning ~~on or~~ after December 15, ~~2008. Earlier adoption~~2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15,2010. The Company is ~~prohibited.~~currently evaluating the effect of this update on its financial position, results of operations and liquidity.

In ~~December 2007,~~October 2009, the FASB issued ~~SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS No. 160 establishes accounting and reporting standards~~authoritative guidance on revenue recognition that ~~require~~will become effective for the Company beginning July 1, 2010, with earlier adoption permitted. Under the new guidance on arrangements that the ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity; the amount of consolidated net income attributableinclude software elements, tangible products that have software components that are essential to the ~~parent and to the noncontrolling interest be clearly identified and presented on the face~~functionality of the ~~consolidated statement of income; and changes in a parent’s ownership interest while~~tangible product will no longer be within the parent retains its controlling financial interest in its subsidiary be accounted for consistently. SFAS No. 160 also requires that any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets forth the disclosure requirements to identify and distinguish between the interestsscope of the ~~parent~~software revenue recognition guidance, and ~~the interests of the noncontrolling owners. SFAS No. 160 applies~~software-enabled products will now be subject to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160 must be applied prospectively as of the beginning of the fiscal year in which it is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements are applied retrospectively for all periods presented.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The objective of SFAS No. 161 is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 applies to all derivative financial instruments, including bifurcated derivative instruments (and nonderivative instruments that are designed and qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items accounted for under SFAS No. 133 and its related interpretations. SFAS No. 161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission of the Public Company Accounting Oversight Board's amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”

other relevant revenue recognition guidance. We ~~do not~~ believe ~~the~~ adoption of ~~the above recent pronouncements~~this new guidance will not have a material ~~effect~~impact on ~~the Company’s results of operations,~~our financial ~~position or cash flows.~~statements.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future financial statements.

Inflation

~~Inflation~~

Although management expects that our operations will be influenced by general economic conditions, we do not believe that inflation has a material effect on our results of operations.

2523

Item 8. Financial Statements

	Report of Independent Registered Public Accounting Firm	F-1
~~Financial Statements:~~
	Financial Statements:

	Balance Sheets as of December 31, ~~2008~~2009 and December 31, ~~2007~~ 2008	F-2

	Statements of Operations for the years ended December 31, ~~2008~~2009 and ~~2007~~ 2008	F-3
	~~Statement~~
	Statements of Stockholders’ Equity for the years ended December 31, ~~2008~~2009 and ~~2007~~ 2008	F-4

	Statements of Cash Flows for the years ended December 31, ~~2008~~2009 and ~~2007~~ 2008	F-5

	Notes to Financial Statements	F-6

Report of Independent Registered Public Accounting Firm

We have audited the accompanying balance sheets of Reed’s, Inc. as of December 31, ~~2008~~2009 and ~~2007~~2008 and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Reed’s, Inc. as of December 31, ~~2008~~2009 and ~~2007~~2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ WEINBERG & COMPANY, P.A.

Weinberg & Company, P.A.

Los Angeles, California

~~February 26, 2009, except Note 5, as to which the date is~~ March ~~27, 2009~~17, 2010

F-1

REED’S, INC.

BALANCE SHEETS

	December 31, 2008			December 31, 2007			December 31, 2009			December 31, 2008
ASSETS
Current assets:
Cash	$	229,000		$	743,000		$	1,306,000		$	229,000
Inventory		2,837,000			3,028,000			2,884,000			2,837,000
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $97,000 as of December 31, 2008 and $408,000 as of December 31, 2007		897,000			1,161,000
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $90,000 and $97,000, respectively								866,000			897,000
Prepaid and other current assets		68,000			93,000			99,000			68,000
Total Current Assets		4,031,000			5,025,000			5,155,000			4,031,000

Property and equipment, net		4,133,000			4,249,000
Property and equipment, net of accumulated depreciation of $727,000 and $1,150,000, respectively								3,655,000			4,133,000
Brand names		800,000			800,000			1,029,000			800,000
Deferred offering costs		77,000			-			-			62,000
Deferred financing fees		62,000			13,000
Deferred financing fees, net of amortization of $10,000 and $40,000, respectively								131,000			77,000
Total assets	$	9,103,000		$	10,087,000		$	9,970,000		$	9,103,000

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	1,929,000		$	1,997,000		$	954,000		$	1,592,000
Lines of credit		1,354,000			-
Accrued expenses								127,000			96,000
Recycling fees payable								456,000			337,000
Line of credit								1,415,000			1,354,000
Current portion of long term debt		16,000			27,000			-			16,000
Accrued interest		-			4,000
Accrued expenses		96,000			54,000
Current portion of long term financing obligation								40,000			-
Current portion capital leases								24,000			-
Current portion note payable								102,000			-
Total current liabilities		3,395,000			2,082,000			3,118,000			3,395,000

Long term financing obligation, less current portion, net of discount of $726,000								2,274,000			-
Capital leases payable, less current portion								130,000			-
Note payable, less current portion								71,000			-
Long term debt, less current portion		1,747,000			766,000			-			1,747,000
Total Liabilities		5,142,000			2,848,000			5,593,000			5,142,000

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $10 par value, 500,000 shares authorized, 47,121 shares outstanding at December 31, 2008 and 48,121 shares outstanding at December 31, 2007		471,000			481,000
Common stock, $.0001 par value, 19,500,000 shares authorized, 8,979,341 shares issued and outstanding at December 31, 2008 and 8,751,721 shares issued and outstanding at December 31, 2007		1,000			1,000
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 46,621 and 47,121 shares issued and outstanding, respectively								466,000			471,000
Series B Convertible Preferred stock, $10 par value, 500,000 shares authorized, 120,820 shares issued and outstanding at December 31, 2009								1,208,000			-
Common stock, $.0001 par value, 19,500,000 shares authorized, 9,606,127 and 8,979,341 shares issued and outstanding, respectively								1,000			1,000
Additional paid in capital		18,408,000			17,838,000			20,203,000			18,408,000
Accumulated deficit		(14,919,000	)		(11,081,000	)		(17,501,000	)		(14,919,000	)
Total stockholders’ equity		3,961,000			7,239,000			4,377,000			3,961,000

Total liabilities and stockholders’ equity	$	9,103,000		$	10,087,000		$	9,970,000		$	9,103,000

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

~~F-2~~

~~REED’S, INC.~~

~~STATEMENTS OF OPERATIONS~~

~~For the Years Ended December 31, 2008 and 2007~~

2008

2007

Sales $ 15,277,000 $ 13,059,000
Cost of sales 11,891,000 11,040,000

Gross profit
3,386,000 2,019,000

Operating expenses:
Selling and marketing expense 3,817,000 4,587,000
General and administrative expense 3,140,000 2,621,000
Write-off note receivable - 300,000
Total operating expenses 6,957,000 7,508,000

Loss from operations
(3,571,000 ) (5,489,000 )

Interest income 1,000 120,000
Interest expense (244,000 ) (182,000 )

Net loss
(3,814,000 ) (5,551,000 )

Preferred stock dividend (24,000 ) (28,000 )

Net loss attributable to common stockholders $ (3,838,000 ) $ (5,579,000 )

Loss per share available to common stockholders - basic and diluted $ (0.43 ) $ (0.70 )
Weighted average number of shares outstanding - basic and diluted 8,884,338 8,009,009

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

~~F-3~~

~~REED’S, INC.~~

~~STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~For the Years Ended December 31, 2008 and 2007~~

Common Stock Preferred Stock

Shares Amount Shares Amount
Additional
Paid–In
Capital

Accumulated
Deficit

Total
Stockholders’
Equity

Balance, January 1, 2007
7,143,185 $ 1,000 58,940 $ 589,000 $ 9,535,000 $ (5,502,000 ) $ 4,623,000
Fair Value of Common Stock issued for services and equipment 1,440 – – – 11,000 – 11,000
Common stock, issued in connection with the June 30, 2007 preferred stock dividend 3,820 – – – 28,000 (28,000 ) –
Common stock issued upon conversion of preferred stock 43,276 – (10,819 ) (108,000 ) 108,000 – –
Common stock issued upon exercise of warrants 60,000 – – – 165,000 – 165,000
Common stock issued for cash, net of offering costs 1,500,000 – – – 7,626,000 – 7,626,000
Public Offering expenses – – – – (55,000 ) – (55,000 )
Fair value vesting of options issued to employees 420,000 420,000
Net loss – – – – – (5,551,000 ) (5,551,000 )
Balance, December 31, 2007 8,751,721 1,000 48,121 481,000 17,838,000 (11,081,000 ) 7,239,000
Fair Value of Common Stock issued for bonus and services 212,710 – – – 392,000 – 392,000
Common stock issued in connection with the June 30, 2008 preferred stock dividend 10,910 – – – 24,000 (24,000 ) –
Common stock issued upon conversion of preferred stock 4,000 – (1,000 ) (10,000 ) 10,000 – –
Fair value vesting of options issued to employees – – – – 144,000 144,000
Net loss – – – – – (3,814,000 ) (3,814,000 )
Balance, December 31, 2008 8,979,341 $ 1,000 47,121 $ 471,000 $ 18,408,000 $ (14,919,000 ) $ 3,961,000

The accompanying notes are an integral part of these financial statements

~~F-4~~F-2

REED’S, INC.

STATEMENTS OF ~~CASH FLOWS~~OPERATIONS

For the Years Ended December 31, ~~2008~~2009 and ~~2007~~ 2008

	2009			2008
Sales	$	15,178,000		$	15,277,000
Cost of sales		11,566,000			11,891,000

Gross profit		3,612,000			3,386,000

Operating expenses:
Selling and marketing expense		2,412,000			3,817,000
General and administrative expense		2,632,000			3,140,000
Impairment of assets		641,000			-
Total operating expenses		5,685,000			6,957,000

Loss from operations		(2,073,000	)		(3,571,000	)

Interest income		-			1,000
Interest expense		(486,000	)		(244,000	)

Net loss		(2,559,000	)		(3,814,000	)

Preferred stock dividend		(23,000	)		(24,000	)

Net loss attributable to common stockholders	$	(2,582,000	)	$	(3,838,000	)

Loss per share available to common stockholders - basic and diluted	$	(0.28	)	$	(0.43	)
Weighted average number of shares outstanding - basic and diluted		9,238,002			8,884,338

2008

2007

Cash flows from operating activities:
Net loss $ (3,814,000 ) $ (5,551,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 355,000 205,000
Loss on disposal of equipment 5,000 -
Fair value of stock options issued to employees 144,000 420,000
Fair value of common stock issued for services or bonuses 392,000 4,000
Write off of note receivable - 300,000
Changes in assets and liabilities:
Accounts receivable 264,000 23,000
Inventory 191,000 (1,517,000 )
Prepaid expenses and other current assets 25,000 96,000
Accounts payable (68,000 ) 302,000
Accrued expenses 42,000 (64,000 )
Accrued interest (4,000 ) (24,000 )
Net cash used in operating activities (2,468,000 ) (5,806,000 )
Cash flows from investing activities:
Purchase of property and equipment (191,000 ) (2,651,000 )
Increase in notes receivable - (300,000 )
Net cash used in investing activities (191,000 ) (2,951,000 )
Cash flows from financing activities:
Proceeds from issuance of common stock - 7,626,000
Payments for offering costs (77,000 ) (55,000 )
Payments for deferred financing fees (102,000 ) -
Decrease in restricted cash - 1,581,000
Proceeds from exercise of warrants - 165,000
Net borrowings (repayments) on existing lines of credit 1,354,000 (1,356,000 )
Principal repayments on notes (800,000 ) (263,000 )
Proceed received from borrowings on debt 1,770,000 163,000
Net cash provided by financing activities 2,145,000 7,861,000
Net decrease in cash (514,000 ) (896,000 )
Cash at beginning of year 743,000 1,639,000
Cash at end of year $ 229,000 $ 743,000

Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 248,000 $ 207,000
Taxes $ - $ -
Non Cash Investing and Financing Activities
Preferred Stock converted to common stock $ 10,000 $ 108,000
Common Stock issued in settlement of preferred stock dividend $ 24,000 $ 28,000
Common Stock issued in acquisition of property and equipment $ - $ 7,000

The accompanying notes are an integral part of these financial statements

F-3

REED’S, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2009 and 2008

					Series A						Series B				Additional						Total
	Common Stock				Preferred Stock						Preferred Stock				Paid-In			Accumulated			Stockholders'
	Shares		Amount		Shares			Amount			Shares		Amount		Capital			Deficit			Equity
Balance, December 31, 2007		8,751,721	$	1,000		48,121		$	481,000			-	$	-	$	17,838,000		$	(11,081,000	)	$	7,239,000
Fair Value of Common Stock issued for bonus and services		212,710		-		-			-			-		-		392,000			-			392,000
Common stock issued in connection with the June 30, 2008 preferred stock dividend		10,910		-		-			-			-		-		24,000			(24,000	)		-
Common stock issued upon conversion of preferred stock		4,000		-		(1,000	)		(10,000	)		-		-		10,000			-			-
Fair value vesting of options issued to employees		-		-		-			-			-		-		144,000			-			144,000
Net loss		-		-		-			-			-		-		-			(3,814,000	)		(3,814,000	)
Balance, December 31, 2008		8,979,341		1,000		47,121			471,000			-		-		18,408,000			(14,919,000	)		3,961,000

Fair Value of Common Stock issued for services and finance fees		197,647		-		-			-			-		-		260,000			-			260,000
Warrants issued in connection with purchase option		-		-		-			-			-		-		752,000			-			752,000
Common stock issued in connection with the June 30, 2009 preferred stock dividend		12,950		-		-			-			-		-		23,000			(23,000	)		-
Common stock issued upon conversion of preferred stock		2,000		-		(500	)		(5,000	)		-		-		5,000			-			-
Private sale of common stock		50,000		-		-			-			-		-		150,000			-			150,000
Sale of common stock in shelf offering		364,189		-		-			-			-		-		563,000			-			563,000
Sale of Series B preferred stock, net of offering costs		-		-		-			-			120,820		1,208,000		(379,000	)		-			829,000
Fair value vesting of options issued to employees		-		-		-			-			-		-		421,000			-			421,000
Net loss		-		-		-			-			-		-		-			(2,559,000	)		(2,559,000	)
Balance, December 31, 2009		9,606,127	$	1,000		46,621		$	466,000			120,820	$	1,208,000	$	20,203,000		$	(17,501,000	)	$	4,377,000

The accompanying notes are an integral part of these financial statements

F-4

REED’S, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2009 and 2008

	2009			2008
Cash flows from operating activities:
Net loss	$	(2,559,000	)	$	(3,814,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		469,000			355,000
Loss on disposal of equipment		-			5,000
Fair value of stock options issued to employees		421,000			144,000
Fair value of common stock issued for services		236,000			392,000
Impairment loss on assets		641,000			-
Decrease in allowance for doubtful accounts		(7,000	)		-
Changes in assets and liabilities:
Accounts receivable		38,000			264,000
Inventory		(37,000	)		191,000
Prepaid expenses and other current assets		(31,000	)		25,000
Accounts payable		(638,000	)		(113,000	)
Accrued expenses		31,000			38,000
Recycling Fees Payable		119,000			45,000
Net cash used in operating activities		(1,317,000	)		(2,468,000	)
Cash flows from investing activities:
Purchase of property and equipment		(356,000	)		(191,000	)
Net cash used in investing activities		(356,000	)		(191,000	)
Cash flows from financing activities:
Proceeds from issuance of common stock in shelf offering		563,000			-
Proceeds from private sale of common stock		150,000			-
Proceeds from the issuance of preferred stock		891,000			-
Payments for offering costs		-			(77,000	)
Payments for deferred financing fees		(117,000	)		(102,000	)
Proceeds received from long term financing obligation		3,056,000			-
Principal repayments on long term financing obligation		(16,000	)		-
Principal repayments on capital lease obligation		(9,000	)		-
Principal repayments on long term debt		(1,763,000	)		-
Payoff of former line of credit		(1,354,000	)		1,354,000
Net borrowings on existing lines of credit		1,415,000
Principal repayments on notes		(66,000	)		(800,000	)
Proceeds received from borrowings on long term debt		-			1,770,000
Net cash provided by financing activities		2,750,000			2,145,000
Net decrease in cash		1,077,000			(514,000	)
Cash at beginning of year		229,000			743,000
Cash at end of year	$	1,306,000		$	229,000
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest	$	457,000		$	248,000
Taxes	$	-		$	-
Non Cash Investing and Financing Activities
Preferred Stock converted to common stock	$	5,000		$	10,000
Fair value of warrants granted as valuation discounts	$	752,000		$	-
Common Stock issued in settlement of preferred stock dividend	$	23,000		$	24,000
Property and equipment acquired through capital lease obligation	$	163,000		$	-
Note payable issued for brand names	$	229,000		$	-
Note payable issued for inventory	$	10,000		$	-
Common stock issued for deferred financing fees	$	24,000		$	-
Deferred stock offering costs charged to paid in capital	$	62,000		$	-

The accompanying notes are an integral part of these financial statements

F-5

REED’S, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, ~~2008~~2009 AND ~~2007~~2008

(1)	Operations and Summary of Significant Accounting Policies

Nature of Operations

Reed’s, Inc. (the “Company”) was organized under the laws of the state of Florida in January 1991. In 2001, the Company changed its name from Original Beverage Corporation to Reed’s, Inc. and changed its state of incorporation from Florida to Delaware. The Company is engaged primarily in the business of developing, manufacturing and marketing natural non-alcoholic beverages, as well as candies and ice creams. The Company currently offers 6 Reed’s Ginger Brew flavors (Original, Premium, Extra, Cherry Ginger, Raspberry Ginger and Spiced Apple Ginger), 7 Virgil’s Root Beer, Cream Sodas and Real Cola beverages (Root Beer, Cream Soda, Black Cherry Cream Soda, Real Cola, the same four in a Diet version, plus the Special Edition Bavarian Nutmeg Root Beer) , 2 China Cola beverages (regular and cherry), 3 ~~kinds~~k inds of ginger candies (crystallized ginger, ginger chews and peanut butter ginger chews), and 3 flavors of ginger ice cream (Original, Green Tea, and Chocolate). In 2009, the Company also introduced its Reed’s Energy Elixir and acquired the Sonoma Sparkler brand product line. In 2010 we are introducing our R(x)eed's nausea relief product.

The Company sells its products primarily in upscale gourmet and natural food stores and supermarket chains in the United States and, to a lesser degree, in Europe and Canada.

Cash and Cash Equivalents

Cash and cash equivalents include unrestricted deposits and short-term investments with an original maturity of three months or less.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable

The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.

The allowance for doubtful accounts and returns and discounts is established through a provision for returns and discounts charged against sales. Receivables are charged off against the allowance when payments are received or products returned. The allowance for doubtful accounts and returns and discounts as of December 31, ~~2008~~2009 was approximately $90,000 and December 31, ~~2007~~2008 was approximately ~~$97,000 and $408,000 respectively.~~$97,000.

Property and Equipment and Related Depreciation

Property and equipment is stated at cost. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows:

Property and Equipment Type	Years of Depreciation
Building		39 years
Machinery and equipment		5-12 years
Vehicles		5 years
Office equipment		5-7 years

F-6

Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs quarterly, or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges) expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Management believes that the accounting estimate related to impairment of its property and equipment is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period ~~because~~be cause it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so.

~~F-6~~

Intangible Assets and Impairment Policy

The Company records intangible assets in accordance with ~~Statement of~~ Financial Accounting Standard ~~(SFAS) Number 142, “Goodwill~~Guidance. Intangible assets consist mostly of brand names and ~~Other Intangible Assets.” Goodwill and other intangible assets~~are deemed to have indefinite lives are not subject to annual amortization. The Company reviews, at least quarterly, its investment in brand names and other intangible assets for impairment and if impairment is deemed to have occurred the impairment is charged to expense. Intangible assets which have finite lives are amortized on a straight line basis over their remaining useful life; they are also subject to annual impairment reviews. ~~See Note 5.~~

Management applies the impairment tests ~~contained in SFAS Number 142~~ to determine if impairment has occurred. Accordingly, management compares the carrying value of the asset to its fair value in determining the amount of the impairment. No impairments were identified for the years ended December 31, ~~2008~~2009 and ~~2007.~~2008.

Management believes that the accounting estimate related to impairment of its intangible assets, is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and are expected to continue to do so. Based on Management’s assessment, there are no indicators of impairment at December 31, ~~2008~~2009 or ~~2007.~~2008.

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000 at December 31, ~~2008.~~2009. The Company may be exposed to risk for the amounts of funds held in bank accounts 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 years ended December 31, ~~2008~~2009 and ~~2007.~~2008.

During the year ended December 31, ~~2008,~~2009, the Company had two customers who accounted for approximately ~~32%~~31% and ~~14%~~15% of its sales, respectively; and during the year ended December 31, ~~2007~~2008 the same customers accounted for ~~35%~~32% and 14% of its sales, respectively. No other customer accounted for more than 10% of sales in either year. As of December 31, 2009 the Company had accounts receivable due from two customers who comprised $134,000 (14%) and $147,000 (15%), respectively, of its total accounts receivable; and at December 31, 2008 the Company had accounts receivable due from three customers who comprised $135,000 (14%), $183,000 (18%) and $102,000 (10%), respectively, of its total accounts ~~receivable; and at December 31, 2007 the Company had accounts receivable from one customer who comprised $660,000 (42%), of its total accounts~~ receivable.

The Company currently relies on a single contract packer for a majority of its production and bottling of beverage products. The Company has different packers available for their production of products. Although there are other packers and the Company has outfitted their own brewery and bottling plant, a change in packers may cause a delay in the production process, which could ultimately affect operating results.

Fair Value of Financial Instruments

~~Fair Value Measurements~~The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the consolidated balance sheets are ~~determined~~categorized by the ~~Company's adoption~~level of ~~SFAS No. 157, "Fair Value Measurements" ("SFAS 157") as of January 1, 2008,~~objectivity associated with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of SFAS 157 did not have a material impact on the Company's fair value measurements. SFAS 157 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. SFAS 157 establishes a fair value hierarchy, which prioritizes the inputs used ~~in measuring~~to measure their fair ~~value into three broad~~value. Authoritative guidance provided by the FASB defines the following levels ~~as follows:~~directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

Level ~~1-Quoted~~1—Quoted prices in active markets for identical assets or liabilities.

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

Level ~~3-Unobservable~~3—Unobservable inputs based on the Company's assumptions.

~~SFAS 157 requires the use of observable market data if such data is available without undue cost and effort.~~

The Company has no fair value items required to be disclosed.

F-7

Cost of sales

The Company ~~with one exception,~~ classifies shipping and handling costs, of the sale of its products as a component of cost of sales. The one exception regards shipping and handling costs associated with local sales and local distribution. Since these activities are integrated, those costs are combined and are included in selling expenses. For the years ended December 31, 2008 and 2007, those costs were approximately $108,000 and $225,000, respectively. In addition, the Company classifies purchasing and receiving costs, inspection costs, warehousing costs, freight costs, internal transfer costs and other costs associated with product distribution as costs of sales. Certain of these costs become a component of the inventory cost and are expensed to costs of sales when the product to which the cost has been allocated is sold. Expenses not related to the production of our products are classified as operating expenses.

Income Taxes

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax asset or liability is established for the expected future consequences of temporary differences in the financial reporting and tax bases of assets and liabilities. The Company considers future taxable income and ongoing, prudent and feasible tax planning strategies, in assessing the value of its deferred tax assets. If the Company determines that it is more likely than not that these assets will not be realized, the Company will reduce the value of these assets to their expected realizable value, thereby decreasing net income. Evaluating the value of these assets is necessarily based on the Company’s judgment. If the Company subsequently determined that the deferred tax assets, which had been written down, would be realized in the future, the value of the deferred tax assets would be increased, thereby increasing net income in the period when that determination was made.

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 accounts for certain sales incentives, including slotting fees, as a reduction of gross ~~sales, in accordance with Emerging Issues Task Force on Issue 01-9 “Accounting for Consideration Given by a Vendor to a Customer or Reseller of the Vendor’s Products.”~~sales. These sales incentives for the years ended December 31, 2009 and 2008 approximated $847,000 and ~~2007 approximated~~ $815,000, ~~and $955,000,~~ respectively.

Net Loss Per 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~~as their effect is antidilutive.

For the years ended December 31, ~~2008~~2009 and ~~2007~~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:

	December 31,
	2009		2008
Warrants		1,991,690		1,868,236
Series A Preferred Stock		186,484		188,484
Series B Preferred Stock		845,740		-
Options		690,000		702,500
Total		3,713,914		2,759,220

December 31,
2008 2007
Warrants 1,868,236 1,668,236
Preferred Stock 188,484 192,484
Options 702,500 749,000
Total 2,759,220 2,609,720

~~F-8~~

Advertising Costs

Advertising costs are expensed as incurred and are included in selling expense in the amount of ~~$154,000~~$291,000 and $174,000, for the years ended December 31, 2009 and 2008, ~~and 2007,~~ respectively.

F-8

~~Reporting Segment of the Company~~

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (SFAS No. 131) requires certain disclosures of operating segments, as defined in SFAS No. 131. Management has determined that the Company has only one operating segment and therefore is not required to disclose operating segment information. Management believes that the Company operates in one segment and evaluates its revenues and expenses in only one segment.

Stock Compensation Expense

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company ~~adopted Statement of~~accounts for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards (SFAS) No. 123R effective January 1, 2006, and is using the modified prospective method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123R for all awards granted to employees prior to the effective date of SFAS No. 123R that remained unvested on the effective date.Board. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with EITF No. 96-18: "Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity Instruments Granted to Other Than Employees”the authoritative guidance provided by the Financial Accounting Standards Board whereas the value of the stock compensation is based upon 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 instruments is complete.

We estimate volatility and forfeitures based upon historical data. As permitted by the authoritative guidance issued by the Financial Accounting Standards Board, we use the “simplified” method to determine the expected life of an option grant due to the Company’s lack of sufficient historical exercise data to provide a reasonable basis, which is a result of the relative high turnover rates experienced in the past for positions granted options. All of these variables have an effect on the estimated fair value of our share-based awards.

P)O)

Deferred Offering Costs

The Company capitalizes costs incurred related to its issuance of common stock until such time as the stock is issued. These costs included attorney’s fees, accountant’s fees, SEC filing fees, state filing fees, and other specific incremental costs directly related to the public offering and related issuance of common stock. As proceeds are received from the offering, the deferred offering costs were charged to additional paid in capital. During the years ended December 31, 2009 and 2008, $379,000 and ~~2007,~~ $0, ~~and $55,000,~~ respectively, of deferred offering costs were charged to additional paid in capital.

Q)P)

Recent Accounting Pronouncements

~~References~~In August 2009, the FASB issued ASU 2009-05, which amends ASC 820 to provide further guidance on measuring the fair value of a liability. It primarily does three things: 1) sets forth the types of valuation techniques to be used to value a liability when a quoted price in an active market for the identical liability is not available, 2) clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the ~~“FASB”~~existence of a restriction that prevents the transfer of the liability, and ~~“SFAS” herein refer~~3) clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market, when no a djustments to the ~~“Financial Accounting Standards Board” and “Statement~~quoted price of ~~Financial Accounting Standards”, respectively.~~the asset are required, are Level 1 fair value measurements. This standard became effective for the Company beginning in the fourth quarter of 2009. The Company’s adoption of ASU 2009-05 did not have a material impact on its financial position, results of operations or liquidity.

In ~~December 2007,~~January 2010, the FASB issued ~~FASB Statement~~Update No. ~~141 (R), “Business Combinations” (FAS 141(R)~~2010-6, “Improving Disclosures About Fair Value

Measurements” (“ASU 2010-6”), which ~~establishes accounting principles~~requires reporting entities to make new disclosures about recurring or nonrecurring fair-value measurements including significant transfers into and ~~disclosure requirements~~out of Level 1 and Level 2 fair-value measurements and information on purchases, sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair-value measurements. ASU 2010-6 is effective for all transactions in which a company obtains control over another business. Statement 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting ~~period~~periods beginning ~~on or~~ after December 15, ~~2008. Earlier adoption~~2009, except for Level 3 reconciliation disclosures, which are effective for annual periods beginning after December 15,2010. The Company is ~~prohibited.~~currently evaluating the effect of this update on its financial position, results of operations and liquidity.

~~F-9~~

In March 2008, the Company adopted FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). The objective of SFAS No. 161 is to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 161 applies to all derivative financial instruments, including bifurcated derivative instruments (and nonderivative instruments that are designed and qualify as hedging instruments pursuant to paragraphs 37 and 42 of SFAS No. 133) and related hedged items accounted for under SFAS No. 133 and its related interpretations. SFAS No. 161 also amends certain provisions of SFAS No. 131. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. SFAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption.

~~Management believes the~~other relevant revenue recognition guidance. We believe adoption of ~~the above mentioned accounting policies~~this new guidance will not have a material impact on ~~the Company’s results of operations,~~our financial ~~position or cash flow.~~statements.

F-9

(2)

Inventory

Inventory is valued at the lower of cost (first-in, first-out) or market, and is comprised of the following as of:

	December 31, 2008		December 31, 2007		December 31, 2009		December 31, 2008
Raw Materials	$	755,000	$	1,179,000
Raw Materials and Packaging					$	1,337,000	$	755,000
Finished Goods		2,082,000		1,849,000		1,547,000		2,082,000
	$	2,837,000	$	3,028,000	$	2,884,000	$	2,837,000

(3)	Fixed Assets

Fixed assets are comprised of the following as of:

	December 31, 2008			December 31, 2007			December 31, 2009			December 31, 2008
Land	$	1,410,000		$	1,410,000		$	1,108,000		$	1,410,000
Building		1,769,000			1,743,000			1,393,000			1,769,000
Vehicles		320,000			339,000			320,000			320,000
Machinery and equipment		1,398,000			1,250,000			1,169,000			1,398,000
Office equipment		386,000			374,000			392,000			386,000
		5,283,000			5,116,000			4,382,000			5,283,000
Accumulated depreciation		(1,150,000	)		(867,000	)		(727,000	)		(1,150,000	)
	$	4,133,000		$	4,249,000		$	3,655,000		$	4,133,000

During 2009, an impairment charge in the amount of $641,000 was recorded in connection with a sale and lease-back of the Company’s buildings and equipment (See Note 6), 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.

Depreciation expense for the years ended December 31, 2009 and 2008 was $356,000 and ~~2007 was~~ $302,000, ~~and $204,000,~~ respectively.

Machinery and equipment at December 31, 2009 includes equipment held under capital leases of $163,000. Accumulated depreciation on equipment held under leases was $13,000 as of December 31, 2009.

~~F-10~~

(4)	Intangible Assets

Brand Names

Brand Names consist of ~~two (2)~~three trademarks for natural beverages, two of which the Company acquired in previous ~~years.~~years and one brand acquired in 2009. As long as the Company continues to renew its trademarks, these intangible assets will have an indefinite life. Accordingly, they are not subject to amortization. The Company determines fair value for Brand Names by reviewing the net sales of the associated beverage and applying industry multiples for which similar beverages are sold. As of December 31, ~~2008~~2009 and ~~2007,~~2008, carrying amounts for Brand Names were ~~$800,000.~~$1,029,000 and $800,000, respectively.

Deferred Financing Fees

Deferred financing ~~fees~~ are comprised of the following as of:

	December 31, 2009			December 31, 2008
Loan fees relating to financing	$	141,000		$	102,000
Accumulated amortization		(10,000	)		(40,000	)
	$	131,000		$	62,000

December 31,
2008

December 31,
2007

Loan fees relating to financing $ 102,000 $ 18,000
Accumulated amortization (40,000 ) (5,000 )
$ 62,000 $ 13,000

F-10

Amortization expense for the years ended December 31, ~~2008~~2009 and ~~2007~~2008 was approximately $89,000 and $53,000 ~~and $1,000~~ respectively.

Amortization of deferred financing fees is as follows for the years ending December 31:

Year	Amount
2010	$	112,000
2011		5,000
2012		5,000
2013		5,000
2014		4,000
Total	$	131,000

Year Amount
2009 $ 29,000
2010 1,000
2011 1,000
2012 1,000
2013 1,000
Thereafter 29,000
Total $ 62,000

(5)	Lines of Credit

	December 31,
	2009		2008
Line of Credit (A)	$	-	$	1,354,000
Line of Credit (B)		1,415,000		-
	$	1,415,000	$	1,354,000

(A) In May 2008 the Company entered into a Credit and Security Agreement under which the Company was provided with a $2 million revolving credit facility. In July 2008, the line of credit was increased to $3 million. ~~The amount available to borrow is based on a calculation of eligible accounts receivable~~Interest accrued and ~~inventory. At December 31, 2008, the aggregate amount outstanding under the line of credit~~ was ~~$1,354,000 and the Company had approximately $33,000 of availability on this line of credit. Interest accrues and is~~ paid monthly on outstanding loans under the credit facility at a rate equal to 5.75% per annum plus the greater of 2% or the LIBOR ~~rate (7.65% at December 31, 2008).~~rate. The amount available to borrow was based on a calculation of eligible accounts receivable and inventory. Borrowings under the credit facility ~~are~~were secured by all of the Company's ~~assets. The agreement terminates May 2010,~~assets and the ~~Company is subject to an early termination fee if the~~ loan ~~is terminated before such date. The Agreement is secured by all of the business assets of the Company and is~~was personally guaranteed by the principal shareholder and Chief Executive Officer. The line of credit was closed in November 2009.

(B) On November 18, 2009, the Company executed a revolver line commitment with GemCap Lending I, LLC to replace its existing line of credit. The ~~Company~~senior revolver facility is ~~required to comply~~for $3,000,000, based on 80% of eligible accounts receivable and 50% of eligible inventory, with a ~~number~~maximum inventory advance of ~~affirmative, negative and financial covenants.~~$1,500,000. The line of credit bears interest of 18% per annum.

At December 31, ~~2008 the Company was in violation of the Fixed Charge Coverage Ratio and the Net Worth Covenant. On March 27,~~ 2009, the ~~Company has subsequently re-negotiated the financial covenants and obtained a waiver of covenant violations at December 31, 2008.~~

During the year ending December 31, 2007, the Company had an unsecured $50,000 line of credit with a bank which expired in December 2009. Interest was payable monthly at the prime rate, as published in the Wall Street Journal, plus 2% per annum. The Company paid off the line in the year ending December 31, 2007, and there was $50,000 availableaggregate amount outstanding under the line of credit ~~at December 31, 2008.~~

~~During the year ending December 31, 2007,~~was $1,415,000 and the Company ~~paid off $1,331,000 and closed a line~~had approximately $221,000 of ~~credit with a bank. The interest rate~~availability on this line of ~~credit was~~credit.

(6)	Lo3.Long Term Financing Obligation

	December 31,
	2009			2008
Long term financing obligation	$	3,040,000		$	-
Valuation discount		(726,000	)		-
	$	2,314,000		$	-

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 ~~Prime rate.~~

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 und er 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.

F-11

In connection with the financing obligation, the Company issued an aggregate of 400,000 warrants to purchase its common stock at $1.20 per share for five years. The 400,000 warrants were valued at $752,000 and reflected as a debt discount, using the Black Scholes option pricing model. The following assumptions were utilized in valuing the 400,000 warrants: strike price of $2.10 to $2.25; term of 5 years; volatility of 91.36% to 110.9%; expected dividends 0%; and discount rate of 2.15% to 2.20%. The 400,000 warrants were recorded as valuation discount and are being amortized over 15 years, the term of the purchase option. Amortization of valuation discount was $25,000 and $0, respectively, during the years ended December 31, 2009 and 2008.

The aggregate due under the financing obligation at December 31, 2009 was $3,040,000. Aggregate future obligations under the financing obligation are as follows:

Year
2010	$	40,000
2011		55,000
2012		71,000
2013		90,000
2014		111,000
Thereafter		2,673,000
Total	$	3,040,000

~~(6)~~(7)

~~Long-term~~Lo4.Long Term Debt

Long-term debt consists of the following as of:

December 31,
2008

December 31,
2007

Note payable to the Small Business Association in the original amount of $748,000 with interest at the Wall Street Journal prime rate plus 1% per annum, adjusted monthly with no cap or floor. The combined monthly principal and interest payments were $5,976, subject to annual adjustments. The interest rate in effect at December 31, 2007 was 8.5%. The note was secured by land and building and guaranteed by the majority stockholder.  The note was paid off in fiscal 2008. $ - $ 650,000

Building improvement loan with a maximum draw of $168,000. The interest rate is at the Wall Street Journal prime rate plus 1%, adjusted monthly with no cap or floor. The combined monthly principal and interest payments were $1,137; subject to annual adjustments. The rate in effect at December 31, 2007 was 7.08% per annum. The note was secured by land and building and guaranteed by the majority stockholder. The note was paid off in fiscal 2008. - 137,000

Note payable to GMAC, secured by an automobile, payable in monthly installments of $384 including interest at 0.0%.  the note was paid off in fiscal 2008. - 1,000

Notes payable to Chrysler Financial Corp., secured by automobiles, payable in monthly installments of $658, including interest at 1.9% per annum.  The notes were paid off in fiscal 2008. - 5,000

Note payable with a bank in the amount of $1,770,000. The note matures in February 2038. The note carries an 8.41% per annum interest rate, requires a monthly payment of principal and interest of $13,651, and is secured by all of the land and buildings owned by the Company, and is personally guaranteed by the majority stockholder. 1,763,000 -

          Total 1,763,000 793,000

          Less current portion 16,000 27,000
$ 1,747,000 $ 766,000

	December 31,		December 31,
	2009		2008
Note payable with a bank in the amount of $1,770,000. The note matures in February 2038. The note carries an 8.41% per annum interest rate, requires a monthly payment of principal and interest of $13,651, and is secured by all of the land and buildings owned by the Company, and is personally guaranteed by the majority stockholder.	$	-	$	1,763,000
Note payable from acquisition of brand in the amount of $239,000, recorded at an implicit rate of 5%, requires a monthly payment of $9,000, and matures in August 2011.		173,000		-
Total		173,000		1,763,000
Less current portion		102,000		16,000
	$	71,000	$	1 ,747,000

The aggregate maturities of long-term debt for each of the next five years and thereafter are as follows as of December 31:

Year	Amount
2010	$	102,000
2011		71,000
Total	$	173,000

Year Amount
2009 $ 16,000
2010 18,000
2011 19,000
2012 21,000
2013 23,000
Thereafter 1,666,000
Total $ 1,763,000

~~(7)~~(8)

Obligations Under Capital Leases

The Company has entered into various capital leases for equipment with monthly payments ranging from $438 to $1,545 per month, including interest, at interest rates ranging from 17.27% to 17.32% per annum. At December 31, 2009, monthly payments under these leases aggregated $4,081. The leases expire at various dates through 2014.

F-12

Future minimum lease payments under capital leases are as follows:

Years Ending December 31,
2010	$	49,000
2011		49,000
2012		49,000
2013		49,000
2014		29,000
Total payments		225,000
Less: Amount representing interest		71,000
Present value of net minimum lease payments		154,000
Less: Current portion		24,000
Non-current portion	$	130,000

(9)	Stockholders’ Equity

Preferred Stock

Series A

Series A Preferred stock consists of 500,000 shares authorized to Series A, $10.00 par value, 5% non-cumulative, participating, preferred stock. As of December 31, ~~2008~~2009 and ~~2007~~2008 there were 47,121 and 48,121 shares outstanding respectively, with a liquidation preference of $10.00.

~~F-12~~

These preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend can be paid in cash or, in the sole and absolute discretion of our board of directors, in shares of common stock based on its then fair market value. We cannot declare or pay any dividend on shares of our securities ranking junior to the preferred stock until the holders of our preferred stock have received the full non-cumulative dividend to which they are entitled. In addition, the holders of our preferred stock are entitled to receive pro rata distributions of dividends on an “as converted” basis with the holders of our common stock. During the year ended December 31, ~~2007~~2009 the Company accrued and paid a $23,000 dividend payable to the preferred shareholders, which management elected to pay through the issuance of 12,950 shares of its common stock; and during the year ended December 31, 2008 the Company accrued and paid a $28,000 dividend payable to the preferred shareholders, which management elected to pay through the issuance of 3,820 shares of its common stock; and during the year ended December 31, 2008 the Company accrued and paid a $24,000 dividend payable to the preferred shareholders, which management elected to pay through the issuance of 10,910 shares of its common stock.

In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event, then, subject to the rights of the holders of our more senior securities, if any, the holders of our Series A preferred stock are entitled to receive, prior to the holders of any of our junior securities, $10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets shall be distributed pro rata among all of our security holders. Since June 30, ~~2007,~~2008, we have the right, but not the obligation, to redeem all or any portion of the Series A preferred stock by paying the holders thereof the sum of the original purchase price per share, which was $10.00, plus all accrued and unpaid dividends.

The Series A preferred stock may be converted, at the option of the holder, at any time after issuance and prior to the date such stock is redeemed, into four shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification and similar transactions. We are obligated to reserve out of our authorized but unissued shares of common stock a sufficient number of such shares to effect the conversion of all outstanding shares of Series A preferred stock. During the year ended December 31, ~~2007, 10,819~~2009, 500 shares of preferred stock were converted into ~~43,276~~2,000 shares of common stock. During the year ended December 31, 2008, ~~1,000~~10,819 shares of preferred stock were converted into ~~4,000~~43,276 shares of common stock.

Except as provided by law, the holders of our Series A preferred stock do not have the right to vote on any matters, including, without limitation, the election of directors. However, so long as any shares of Series A preferred stock are outstanding, we shall not, without first obtaining the approval of at least a majority of the holders of the Series A preferred stock, authorize or issue any equity security having a preference over the Series A preferred stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any equity security other than any senior preferred stock.

F-13

Series B

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 authorized being shared with the Series A preferred stock. In the aggregate, both classes of preferred stock may not exceed 500,000 shares.

On November 13, 2009, the Company issued transferable rights to all common shareholders of record. Shareholders received one transferable right for each share held on the record date. Each transferable right entitled the investor to purchase one share of Series B preferred stock at the par value 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, and is convertible into shares of common stock at a conversion ratio of seven (7) shares of common stock, or a conversion price of $1.43. The shares carry a mandatory conversion feature when the Company’s common stock exceeds a closing price of $2.75 for five (5) consecutive trading days.

During December 2009, investors purchased 120,820 shares of Series B Preferred resulting in an aggregate of $1,208,000 in gross proceeds to the Company. The Company paid commissions of $88,000 and an expense allowance of $10,000 to the placement agent for the Series B offering and issued warrants to the placement to purchase up to 33,796 shares of common stock with an exercise price of $1.43 per share. The Company received proceeds after commissions and the expense allowance of approximately $1,110,000 in the aggregate, of which approximately $829,000 was received net of offering costs.

These preferred shares have a 5% pro-rata annual non-cumulative dividend payable quarterly for a period of three years. The dividend can be paid in cash or, in the sole and absolute discretion of our board of directors, in shares of common stock based on its then fair market value. We cannot declare or pay any dividend on shares of our securities ranking junior to the preferred stock until the holders of our preferred stock have received the full non-cumulative dividend to which they are entitled. During the year ended December 31, 2009, no dividends were accrued or paid. The first dividend date will be March 31, 2010.

The Series B preferred stock may be converted, at the option of the holder, at any time after issuance and prior to the date such stock is redeemed, into seven shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification and similar transactions. We are obligated to reserve out of our authorized but unissued shares of common stock a sufficient number of such shares to effect the conversion of all outstanding shares of Series B preferred stock. During the year ended December 31, 2009, no shares of preferred stock were converted into shares of common stock.

Except as provided by law, the holders of our Series B preferred stock do not have the right to vote on any matters, including, without limitation, the election of directors. However, so long as any shares of Series B preferred stock are outstanding, we shall not, without first obtaining the approval of at least a majority of the holders of the Series B preferred stock, authorize or issue any equity security having a preference over the Series B preferred stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any equity security other than any senior preferred stock.

Common Stock

Common stock consists of $.0001 par value, 19,500,000 shares authorized, 9,606,127 shares issued and outstanding as of December 31, 2009 and 8,979,341 shares issued and outstanding as of December 31, 2008 and 8,751,721 shares issued and outstanding as of December 31, 2007. During the year ending December 31, 2007, a majority of the Company’s shareholders approved an increase of its authorized shares from 11,500,000 to 19,500,000.

During 2007, the Company completed a private placement to accredited investors only, on subscriptions for the sale of 1,500,000 shares of common stock and warrants to purchase up to 749,995 shares of common stock, resulting in an aggregate of $9,000,000 of gross proceeds to the Company. The Company sold the shares of common stock at a purchase price of $6.00 per share. The warrants issued in the private placement have a five-year term and an exercise price of $7.50 per share. The Company paid commissions of $900,000 to the placement agent for the private placement and issued warrants to the placement agent to purchase up to 150,000 shares of common stock with an exercise price of $6.60 per share. We also issued additional warrants to purchase up to 15,000 shares of common stock with an exercise price of $6.60 per share and paid an additional $60,000 in cash to the placement agent as an investment banking fee. The Company received proceeds after commissions of approximately $8,100,000 in the aggregate, of which approximately $7,626,000 was received net of offering costs.2008.

During the year ended December 31, 2007, 440 shares of common stock with a value of $3,782 were issued to employees as a bonus, 1,000 shares with a value of $7,250 were issued to a consultant for services rendered related to the acquisition of real estate and 60,000 shares of common stock were issued from the exercise of 60,000 warrants and the Company received $165,000 upon their conversion.

During the year ended December 31, 2008, the Company issued 161,960 shares of common stock at stock prices ranging from $1.99 to $3.85 per share with a value of $336,000 in exchange for consulting services and 50,750 shares of common stock at a share price of $1.11 per share and a value of $56,000 to employees as a bonus.

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 resulting in gross proceeds of $656,000 to the Company 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 of $52,000. The Company received proceeds from the shelf-registration, after deducting placement agent fees and offering expenses, of 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.

F-14

During 2009, the Company also sold 50,000 shares of common stock for $3.00 per share or $150,000.

During the year ended December 31, 2009, the Company issued 181,147 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 $236,000. The Company issued 13,500 shares of common stock valued at $24,000 for financial fees related to the capital leases entered into during the 2009 fiscal year. The value of these shares has been recorded as deferred financing fees and is being amortized over the term of the capital leases (see Note 4).

On December 22, 2009, the Company granted 38,750 shares of common stock valued at $51,000, based upon the stock price on the date of grant, to its employees as bonuses. The shares of common stock were issued subsequent to year-end and have been included in accounts payable as of December 31, 2009.

~~(8)~~ (10)

Stock Options and Warrants

Stock Options

In 2001, the Company adopted the Original Beverage Corporation 2001 Stock Option Plan and in 2007 the Company adopted the Reed’s Inc 2007 Stock Option Plan (the “Plans”). The options under both plans shall be granted from time to time by the Compensation Committee. Individuals eligible to receive options include employees of the Company, consultants to the Company and directors of the Company. The options shall have a fixed price, which will not be less than 100% of the fair market value per share on the grant date. The total number of options authorized is 500,000 and 1,500,000, respectively for the Original Beverage Corporation 2001 Stock Option Plan and the Reed’s Inc 2007 Stock Option Plan.

~~F-13~~

During the years ended December 31, ~~2008~~2009 and ~~2007,~~2008, the Company issued ~~325,000~~120,000 and ~~474,000~~325,000 options, respectively, to purchase the Company's common stock at a weighted average price of ~~$1.62~~$1.18 and ~~$7.50,~~$1.62, respectively, to employees under the Plans. On March 6, 2009, the Company repriced 420,000 employee 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 $44,000 was recognized in the year ended December 31, 2009. The aggregate value of the options vesting, net of forfeitures, during the years ended December 31, 2009 and 2008 was $421,000 and ~~2007 was~~ $144,000, ~~and $420,000,~~ respectively, and has been reflected as compensation cost. As of ~~December~~D ecember 31, ~~2008,~~2009, the aggregate value of unvested options was ~~$610,000,~~$286,000, which will be amortized as compensation cost as the options vest, over 3 years.

~~In accordance with FAS 123R, the company recalculated its expected compensation for all~~The weighted-average grant date fair value of options ~~outstanding at December 31,~~granted during 2009 and 2008 was $1.18 and compared it to previously recorded compensation expense for options in that option pool. The amount of the cumulative adjustment to reflect the effect of the forfeited options is approximately $238,000. The amount of compensation expense which would have been recognized if the cumulative adjustment was not made would have been approximately $382,000.

$1.23, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. For the option awards from January 1, 2007 to September 30, 2007, the expected volatility is based on the volatilities of public entities which are in the same industry as the Company. Since October 1, 2007, expected volatility is based on the actual volatility based on the closing price of the Company’s stock. For purposes of determining the expected life of the option, the full contract life of the option is used. The risk-free rate for periods within the contractual life of the options is based on the U. S. Treasury yield in effect at the time of the grant.

~~The weighted-average grant date fair value of options granted during 2008 and 2007 was $1.23 and $4.68, respectively.~~

	Year ended December 31,
	2009	2008
Expected volatility	89%- 97%	107%-109%
Weighted average volatility	91%	109%
Expected dividends	—	—
Expected average term (in years)	2.82	4.3
Risk free rate - average	1.72%	2.75%
Forfeiture rate	0%	0%

Year ended December 31
2008 2007
Expected volatility 107%-109% 70%-90%
Weighted average volatility 109% 72%
Expected dividends — —
Expected average term (in years) 4.3 5
Risk free rate - average 2.75% 4.48%
Forfeiture rate 0% 0%

F-15

A summary of option activity as of December 31, ~~2008~~2009 and changes during the two years then ended is presented below:

	Shares			Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value		Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2007		363,500		$	3.84
Granted		474,000		$	7.50
Exercised		—			—
Forfeited or expired		(88,500	)	$	5.01
Outstanding at December 31, 2007		749,000		$	6.02	3.8	$	733,000	749,000	$6.02
Exercisable at December 31, 2007		298,333		$	3.81	2.7	$	609,000

Outstanding at January 1, 2008		749,000		$	6.02
Granted		325,000		$	1.62				325,000	$1.62
Exercised		—			—				—	—
Forfeited or expired		(371,500	)	$	6.83				(371,500)	$6.83
Outstanding at December 31, 2008		702,500		$	3.55	3.4		-	702,500	$3.55
Exercisable at December 31, 2008		286,667		$	4.59	2.0		-
Granted									120,000	$1.18
Exercised									—	—
Forfeited or expired									(132,500)	$2.38
Outstanding at December 31, 2009									690,000	$1.74	3.0	$300,000
Exercisable at December 31, 2009									334,999	$2.23	2.4	$141,000

The aggregate intrinsic value was calculated as the difference between the market price and the exercise price of the Company’s stock, which ~~is zero~~was $1.43 as of December 31, ~~2008 since none of the options were in-the-money.~~2009.

~~F-14~~

A summary of the status of the Company’s nonvested shares granted under the Company’s stock option plan as of December 31, ~~2008~~2009 and changes during the ~~two years~~year then ended is presented below:

	Shares			Weighted- Average Grant Date Fair Value					Weighted-
Nonvested at January 1, 2007		85,000		$	2.46
									Average
									Grant Date
						Shares			Fair Value
Nonvested at December 31, 2008							495,833			$0.86
Granted		474,000		$	4.68		120,000			$0.66
Vested		(28,333	)	$	2.46		(217,500	)		$0.87
Forfeited		(80,000	)	$	3.17		(43,333	)		$1.23
Nonvested at December 31, 2007		450,667		$	4.67
Granted		325,000		$	1.23
Vested		(74,167	)	$	4.34
Forfeited		(285,667	)	$	4.84
Nonvested at December 31, 2008		415,833		$	1.93
Nonvested at December 31, 2009							355,001			$0.74

Additional information regarding options outstanding as of December 31, ~~2008~~2009 is as follows:

	Options Outstanding at December 31, 2008						Options Exercisable at December 31, 2008					Options Outstanding at December 31, 2009			Options Exercisable at December 31, 2009
Range of Exercise Price	Number of Shares Outstanding		Weighted Average Remaining Contractual Life (years)		Weighted Average Exercise Price		Number of Shares Exercisable		Weighted Average Exercise Price		Range of Exercise Price	Number of Shares Outstanding	Weighted Average Remaining Contractual Life (years)	Weighted Average Exercise Price	Number of Shares Exercisable	Weighted Average Exercise Price

$0.01 - $1.99		325,000		4.70	$	1.62		-		-		560,000	3.26	$0.89	221,666	$0.79
$2.00 - $4.99		235,000		1.85	$	3.61		215,000	$	3.57		80,000	1.30	$4.00	80,000	$4.00
$5.00 - $6.99		17,500		0.42	$	6.00		17,500	$	6.00		-	-	-	-	-
$7.00 - $8.50		125,000		3.55	$	8.12		54,167	$	8.21		50,000	2.42	$7.55	33,333	$7.55
		702,500						286,667				690,000			334,999

F-16

Warrants

~~The following table summarizes warrant activity as of and for the two years ended December 31, 2008:~~

Shares
Weighted-Average
Exercise Price

Weighted-Average
Remaining
Contractual
Terms (Years)

Aggregate
Intrinsic
Value

Outstanding at January 1, 2007 813,241 $ 3.74
Granted 914,995 $ 7.34
Exercised (60,000 ) $ 2.75
Forfeited or expired - -
Outstanding at December 31, 2007 1,668,236 $ 5.75 3.4 $ 1,675,000
Exercisable at December 31, 2007 1,668,236 $ 5.75 3.4 $ 1,675,000

Outstanding at January 1, 2008 1,668,236 $ 5.75
Granted 200,000 $ 2.54
Exercised - -
Forfeited or expired - -
Outstanding at December 31, 2008 1,868,236 $ 5.41 2.6 -
Exercisable at December 31, 2008 1,668,236 $ 5.75 2.4 -

~~F-15~~

The aggregate intrinsic value was calculated, as of December 31, 2008, as the difference between the market price and the exercise price of the Company’s stock, which is zero since none of the warrants were in-the-money.

~~The 200,000 warrants granted during~~During the year ended December 31, 2008, 200,000 warrants were granted in connection with a distribution agreement between the Company and a company which is owned by two brothers of Christopher Reed, President of the Company. The warrants are issuable only upon the attainment of certain international product ~~sales. No warrants vested during the year ended December 31, 2008. Accordingly, no expense was recorded for these warrants.~~sales goals. 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. In April 2009, the 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 December 31, 2009, no expense was recognized in the re-pricing of these warrants. The value of the re-pricing was approxim ately $5,000 and the value of the warrants after re-pricing was $168,000, using the Black Scholes option pricing model. The following assumptions were utilized in valuing the 200,000 warrants: strike price of $1.35; term of 3 years; volatility of 99.8%; expected dividends 0%; and discount rate of 1.89%.

~~During~~In October 2009, the ~~year~~Company granted an aggregate 242,899 warrants at a price of $2.25 in connection with an equity placement of its common stock (see Note 9). 69,445 of the warrants expired unexercised on January 4, 2010. The remaining 173,454 options expire in five years. The aggregate value of the warrants was approximately $217,000, using the Black Scholes option pricing model. The following assumptions were utilized in valuing the 173,454 warrants: strike price of $2.25; term of 5 years; volatility of 90.20%; expected dividends 0%; and discount rate of 2.16%. The value of the warrants has not been reflected in the Company’s financial statements as it is a reclass between paid in capital accounts.

In December 2009, the Company granted 33,796 warrants at $1.79 per share to a dealer-manager in connection with the placement of its Series B preferred stock (see Note 9). The warrants were valued at $25,000, using the Black Scholes option pricing model. The following assumptions were utilized in valuing the 33,796 warrants: strike price of $1.79; term of 5 years; volatility of 71.74%; expected dividends 0%; and discount rate of 2.62%. The value of the warrants has not been reflected in the Company’s financial statements as it is a reclass between paid in capital accounts.

The following table summarizes warrant activity for the two years ended December 31, ~~2007,~~2009:

	Shares	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at December 31, 2007	1,668,236	$5.75
Granted	200,000	$2.54
Exercised	-	-
Forfeited or expired	-	-
Outstanding at December 31, 2008	1,868,236	$5.41
Granted	676,695	$1.56
Exercised	-	-
Forfeited or expired	(553,241)	$2.81
Outstanding at December 31, 2009	1,991,690	$4.70	3.0	$108,000
Exercisable at December 31, 2009	1,618,236	$5.38	2.8	$92,000

The aggregate intrinsic value was calculated, as of December 31, 2009, as the ~~Company granted 914,995 warrants to investors~~difference between the market price and ~~underwriters in relation to an underwriting agreement (see Note 7) valued at $3,902,000.~~the exercise price of the Company’s stock, which was $1.43 as of December 31, 2009.

The fair value of each warrant is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on the ~~volatilities~~historical volatility of ~~public entities which are in the same industry as~~ the Company. For purposes of determining the expected life of the ~~option,~~warrant, the full contract life of the ~~option~~warrant is used. The risk-free rate for periods within the contractual life of the ~~options~~warrants is based on the U. S. Treasury yield in effect at the time of the grant.

	~~Year ended~~ ~~December 31, 2007~~
~~Expected volatility~~		70	%
~~Weighted average volatility~~		70	%
~~Expected dividends~~		-
~~Expected term (in years)~~		5
~~Risk free rate~~		~~5.10~~	%

	Year ended December 31,
	2009	2008
Expected volatility	72% - 111%	108%
Weighted average volatility	100%	108%
Expected dividends	-	-
Expected term (in years)	5	5
Risk free rate	2.18%	5.10%

The weighted-average grant date fair value of warrants granted during ~~2007~~2009 and 2008 was ~~$4.27.~~$1.47 and $1.88 respectively.

F-17

The following table summarizes the outstanding warrants to purchase Common Stock at December 31, ~~2008.:~~2009:

Number
Exercise Prices
Expiration Date
104,876
$2.00
June 2009
648,365
$2.54 - $4.00
June 2009 – May 2013
1,114,995
$6.60 - $7.50
December 2011 – June 2012

Number	Exercise Price	Expiration Dates
400,000	$1.20	May 2014
200,000	$1.35	May 2013
33,796	$1.79	December 2014
242,899	$1.80 - $2.25	January 2010 – April 2015
365,000	$6.60	December 2011 – June 2012
749,995	$7.50	June 2012

~~(9)~~(11)

Income Taxes

At December 31, ~~2008~~2009 and ~~2007,~~2008, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately ~~$13,800,000~~$16,000,000 and ~~$10,500,000~~$13,600,000 for Federal purposes, respectively, and ~~$11,300,000~~$11,500,000 and ~~$9,300,000~~$10,200,000 for state purposes respectively. The Federal carryforward expires in ~~2028~~2030 and the state carryforward expires in ~~2013.~~2015. Given the Company’s history of net operating losses, management has determined that it is more likely than not the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit.

~~SFAS No. 109~~Accounting guidance requires that a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carry-forwards, the utilization of the Company’s net operating loss carry-forwards will likely be limited as a result of cumulative changes in stock ownership. The company has not recognized a deferred tax asset and, as a result, the change in stock ownership has not resulted in any changes to valuation allowances.

Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize a deferred tax asset at that time.

~~F-16~~

Significant components of the Company’s deferred income tax assets are as follows as of:

	December 31, 2008			December 31, 2007			December 31, 2009			December 31, 2008
Deferred income tax asset:
Net operating loss carry forward	$	6,200,000		$	4,800,000		$	5,800,000		$	5,000,000
Valuation allowance		(6,200,000	)		(4,800,000	)		(5,800,000	)		(5,000,000	)
Net deferred income tax asset		—			—			—			—

Delaware		35-2177773
State or other jurisdiction of incorporation or organization		I.R.S. Employer Identification Number

13000 South Spring Street
Los Angeles, California		90061
Address of principal executive offices		Zip Code


Title of Class		Name of each exchange where registered
Common Stock, $.0001 par value per share		The NASDAQ Stock Market LLC

TABLE OF CONTENTS

		Page
PART I		4
Item 1.	Business	4
Item 2.	Properties	14
Item 3.	Legal Proceedings	14
Item 4.	Submission of Matters to a Vote of Security Holders	1514

PART II		1615
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	1615
Item 6.	Selected Financial Data	1817
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1817
Item 8.	Financial Statements	2624
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	2725
Item ~~9A.~~9A(T).	Controls and Procedures	2725
Item 9B.	Other Information	2825

PART III		2926
Item 10.	Directors, Executive Officers and Corporate Governance	2926
Item 11.	Executive Compensation	3230
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	3431
Item 13.	Certain Relationships and Related Transactions and Director Independence	3532
Item 14.	Principal Accountant Fees and Services	3633

PART IV		3734
Item 15.	Exhibits, Financial Statement Schedules	37
		34

							Year Ended
	Year Ended December 31,						December 31,
	2008			2007			2009			2008
Federal Statutory tax rate	(34	)	%	(34	)	%		(34%	)		(34%	)
State tax, net of federal benefit	(5	)	%	(5	)	%		(5%	)		(5%	)
Change in valuation	(39	)	%	(39	)	%		(39%	)		(39%	)
Allowance	39		%	39		%		39 %			39 %
Effective tax rate	-		%	-		%		- %			- %

Name	Position	Age

Christopher J. Reed	President, Chief Executive Officer and Chairman of the Board	5051
James Linesch	Chief Financial Officer	5455
Thierry Foucaut	Chief Operating Officer	4445
Judy Holloway Reed	Secretary and Director	4950
Mark Harris	Director	5354
Daniel S.J. Muffoletto	Director	5455
Michael Fischman	Director	5354

	December 31, 2008		December 31, 2007
Note payable to the Small Business Association in the original amount of $748,000 with interest at the Wall Street Journal prime rate plus 1% per annum, adjusted monthly with no cap or floor. The combined monthly principal and interest payments were $5,976, subject to annual adjustments. The interest rate in effect at December 31, 2007 was 8.5%. The note was secured by land and building and guaranteed by the majority stockholder. The note was paid off in fiscal 2008.	$	-	$	650,000

Building improvement loan with a maximum draw of $168,000. The interest rate is at the Wall Street Journal prime rate plus 1%, adjusted monthly with no cap or floor. The combined monthly principal and interest payments were $1,137; subject to annual adjustments. The rate in effect at December 31, 2007 was 7.08% per annum. The note was secured by land and building and guaranteed by the majority stockholder. The note was paid off in fiscal 2008.		-		137,000

Note payable to GMAC, secured by an automobile, payable in monthly installments of $384 including interest at 0.0%. the note was paid off in fiscal 2008.		-		1,000

Notes payable to Chrysler Financial Corp., secured by automobiles, payable in monthly installments of $658, including interest at 1.9% per annum. The notes were paid off in fiscal 2008.		-		5,000

Note payable with a bank in the amount of $1,770,000. The note matures in February 2038. The note carries an 8.41% per annum interest rate, requires a monthly payment of principal and interest of $13,651, and is secured by all of the land and buildings owned by the Company, and is personally guaranteed by the majority stockholder.		1,763,000		-

Total		1,763,000		793,000

Less current portion		16,000		27,000
	$	1,747,000	$	766,000

	Year ended December 31
	2008	2007
Expected volatility	107%-109%	70%-90%
Weighted average volatility	109%	72%
Expected dividends	—	—
Expected average term (in years)	4.3	5
Risk free rate - average	2.75%	4.48%
Forfeiture rate	0%	0%

Number	Exercise Prices	Expiration Date
104,876	$2.00	June 2009
648,365	$2.54 - $4.00	June 2009 – May 2013
1,114,995	$6.60 - $7.50	December 2011 – June 2012

Year ending December 31,	Amount		Amount
2009	$	16,000
2010		8,000	$	8,000
2011		8,000		7,000
2012		1,000
Thereafter		0
Total	$	33,000	$	15,000

Name and Principal Position	Year	Salary		Bonus		Stock Awards		Option Awards ($)(1)		Non- Equity Incentive Plan Compensation		Non- Qualified Deferred Compensation Earnings		All Other Compensation			Total

Christopher J. Reed, Chief Executive Officer, former Chief Financial Officer (2)	2008	$	150,000		-		-		-		-		-	$	4,616	(3)	$	154,616
	2007	$	150,000		-		-		-		-		-	$	4,616	(3)	$	154,616
	2006	$	150,000		-		-		-		-		-	$	4,616	(3)	$	154,616

David Kane, former Chief Financial Officer (5)	2008	$	43,750		-		-		-		-		-		-		$	43,750
	2007	$	41,169		-		-	$	21,917		-		-		-		$	63,086

Thierry Foucaut, Chief Operating Officer (4)	2008	$	130,000	$	57,600			$	79,292								$	266,892
	2007	$	83,000	$	34,000			$	43,500								$	160,500

~~(1)~~	~~Vest as follows: 16,667 options vested on June 3, 2008 and 16,666 will vest on June 3, 2009, and 16,667 will vest on June 3, 2010.~~
~~(2)~~	~~Vest as follows: 16,667 will vest on December 6, 2009; 16,667 will vest on December 6, 2010; and 16,666 will vest on December 6, 2011.~~Represents value of automobile provided to Christopher J. Reed.

	Fees
	Earned or					Non-Equity
	Paid in			Stock	Option	Incentive Plan	All Other
	Cash			Awards	Awards	Compensation	Compensation	Total
Name	($)			($)	($)	($)	($)	($)
Judy Holloway Reed	$	875						$	875
Mark Harris	$	0						$	0
Daniel S.J. Muffoletto	$	12,831	(1)					$	12,831
Michael Fischman	$	1,175						$	1,175

(1)	Vest as follows: 25,000 options vest on January 3, 2010 and 25,000 will vest on January 3, 2011 and January 3, 2012 .
(2)	Vest as follows: 16,666 options will vest on June 3, 2010.
(3)	Vest as follows: 16,667 will vest on December 6, 2010 and 16,667 will vest on December 6, 2011.

Name of Beneficial Owner	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned (1)

Directors and Named Executive Officers
Christopher J. Reed (2)		3,200,000		35.1
Judy Holloway Reed (2)		3,200,000		35.1
James Linesch (6)		0		0.0
Mark Harris (3)		319		*
Daniel S.J. Muffoletto, N.D.		0		0.0
Michael Fischman		0		0.0
Thierry Foucaut (4)		16,667		*

Directors and executive officers as a group (7 persons)		3,216,986		35.3

5% or greater stockholders
Joseph Grace (5)		500,000		5.5

Name of Beneficial Owner	Number of Shares Beneficially Owned		Percentage of Shares Beneficially Owned(1)

Directors and Named Executive Officers
Christopher J. Reed (2)		3,153,238		31.2
Judy Holloway Reed (2)		3,153,238		31.2
Mark Harris (3)		319		*
Daniel S.J. Muffoletto, N.D.		0		*
Michael Fischman		0		*
James Linesch (4)		31,000		*
Thierry Foucaut (5)		61,000		*

Directors and executive officers as a group (7 persons)		3,245,557		31.8

5% or greater stockholders
Joseph Grace (5)		500,000		4.9
Pearl Elias (6)		666,363		6.6

(3)	The address for Mr. Harris is 160 Barranca Road, Newbury Park, California 91320.
(4)	Consists of 6,000 shares of common stock and options to purchase 25,000 shares of common stock. Does not include options to purchase 50,000 shares of common stock that vest over two years.
(5)	Consists of 11,000 shares of common stock and options to purchase up to ~~16,667~~50,000 shares of common stock. Does not include options to purchase up to ~~83,333~~50,000 shares of common stock which vest ~~in portions through the period ending December 2011.~~over two years.

(5)	The address for Mr. Grace is 1900 West Nickerson Street, Suite 116, PMB 158, Seattle, Washington 98119.
(6)	~~Does not include options to purchase up to 75,000 shares of common stock which vest over a three year period ending January 19, 2012.~~The address for Mrs. Elias is P.O. Box 340, Merion Station PA, 19066.


Date: March ~~27, 2009~~30, 2010	REED’S, INC. a Delaware corporation

	By:	/s/ Christopher J. Reed
		Christopher J. Reed Chief Executive Officer

Signature	Title	Date

/s/ CHRISTOPHER J. REED	Chief Executive Officer, President and Chairman of the Board of Directors	March ~~27, 2009~~30, 2010
Christopher J. Reed	(Principal Executive Officer)

/s/ JAMES LINESCH	Chief Financial Officer	March ~~27, 2009~~30, 2010
James Linesch	(Principal Financial Officer and Principal Accounting Officer)

/s/ JUDY HOLLOWAY REED	Director	March ~~27, 2009~~30, 2010
Judy Holloway Reed

/s/ MARK HARRIS	Director	March ~~27, 2009~~30, 2010
Mark Harris

/s/ DANIEL S.J. MUFFOLETTO	Director	March ~~27, 2009~~30, 2010
Daniel S.J. Muffoletto

/s/ MICHAEL FISCHMAN	Director	March ~~27, 2009~~30, 2010
Michael Fischman

3.1	Certificate of Incorporation of Reed’s, Inc. as filed September 7, 2001 (Incorporated by reference to Exhibit 3.1 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
3.2	Certificate of Amendment of Certificate of Incorporation of Reed’s, Inc. as filed September 27, 2004 (Incorporated by reference to Exhibit 3.2 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
3.3	Certificate of Amendment of Certificate of Incorporation of Reed’s, Inc. as filed December 18, 2007 (Incorporated by reference to Exhibit 3.3 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
3.4	Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Reed’s, Inc. as filed October 12, 2004(Incorporated by reference to Exhibit 3.3 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
3.5	Certificate of Correction to Certificate of Designations as filed November 10, ~~2004(Incorporated~~2004 (Incorporated by reference to Exhibit 3.4 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
3.6	Amended Certificate of Designation of Series B Convertible Preferred Stock, filed December 4, 2009. Filed herewith.
3.7	Bylaws of Reed’s Inc., as amended (Incorporated by reference to Exhibit 3.5 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
4.1	Form of common stock certificate (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
4.2	Form of Series A preferred stock certificate (Incorporated by reference to Exhibit 4.2 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
10.1	Brewing Agreement between Reed’s, Inc. and The Lion Brewery, Inc. dated May 15, 2001 (Incorporated by reference to Exhibit 10.2 to Reed’s, Inc.’s Registration Statement on Form ~~SB-2~~SB-2. Portions of the exhibit have been omitted pursuant to a request for confidential treatment. (File No. 333-120451))
10.2	Note in favor of the U.S. Small Business Administration dated December 11, 2000 (Incorporated by reference to Exhibit 10.3 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
10.3	Note in favor of the U.S .Small Business Administration dated December 11, 2000 (Incorporated by reference to Exhibit 10.4 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
10.4	Loan Agreement between Reed’s Inc. and California United Bank dated November 29, 2006 (Incorporated by reference to Exhibit 10.5 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-146012))
10.5	Brewing Agreement between Reed’s Inc. and The Lion Brewery, Inc. dated November 1, 2008 (Incorporated by reference to Exhibit ~~10.5~~10.1 to Reed’s, Inc.’s ~~Registration Statement on~~ Form ~~S-1 (File No. 333-156908))~~
10.6*	~~Employment Agreement between Reed’s, Inc. and David M. Kane dated September~~10Q/A filed December 18, ~~2007 (Incorporated by reference to Exhibit 10.6 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))~~

10.7*	Employment Agreement between Reed’s, Inc. and Rory Ahearn dated April 7, 2007 (Incorporated by reference to Exhibit 10.7 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))2009)
10.8*	Employment Agreement between Reed’s, Inc. and Neal Cohane dated August 1, 2007 (Incorporated by reference to Exhibit 10.8 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
10.9*	Employment Agreement between Reed’s, Inc. and Thierry Foucaut dated May 5, 2007 (Incorporated by reference to Exhibit 10.9 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
10.10*	Employment Agreement between Reed’s, Inc. and James Linesch dated December 29, 2008 (Incorporated by reference to Exhibit 10.10 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
10.11*	Employment Agreement between Reed’s, Inc. and Mark Reed dated August 7, 2007 (Incorporated by reference to Exhibit 10.11 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
~~10.12~~	Agreement to Assume Repurchase Obligations between Reed’s, Inc. and Mark Reed and Bob Reed, dated June 5, 2006 (Incorporated by reference to Exhibit 10.19 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. File No. 333-135186))
10.13	Promissory Note in favor of Lehman Brothers Bank, FSB dated February 22, 2008 (Incorporated by reference to Exhibit 10.13 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
~~10.14~~	Loan and Security Agreement between Reed’s, Inc. and Business Alliance Capital Corp. dated June 3, 2005 (Incorporated by reference to Exhibit 10.20 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. File No. 333-135186))
10.15	Loan and Security Agreement between Reed’s Inc. and First Capital Western Region LLC dated May 30, 2008 ( Incorporated by reference to Exhibit ~~10.1~~10.3 to Reed’s, Inc.’s ~~Current Report on~~ Form ~~8K dated July 16, 2008)~~10Q/A December 7, 2009)
10.16	Amendment Number One to Loan and Security Agreement between Reed’s Inc. and First Capital Western Region LLC dated June 16, 2008 (Incorporated by reference to Exhibit 10.1 to Reed’s, Inc.’s Current Report on Form 8K dated July 23, 2008)
10.17	Amendment Number Two to Loan and Security Agreement between Reed’s Inc. and First Capital Western Region LLC dated June 16, 2008 (Incorporated by reference to Exhibit 10.17 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
10.18	Amendment Number Three to Loan and Security Agreement between Reed’s Inc. and First Capital Western Region LLC dated September 24, 2008 (Incorporated by reference to Exhibit 10.18 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))

10.19		Waiver to Loan and Security Agreement dated January 5, 2009 (Incorporated by reference to Exhibit 10.19 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
10.20*		2001 Stock Option Plan (Incorporated by reference to Exhibit 4.3 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451)
10.21		Reed’s Inc. Master Brokerage Agreement between Reed’s, Inc. and Reed’s Brokerage, Inc. dated May 1, 2008 (Incorporated by reference to Exhibit 10.21 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))

10.22*		2007 Stock Option Plan (Incorporated by reference to Exhibit 10.22 to Reed's, Inc.'s Form 10K filed ~~herewith~~. March 27, 2009)
10.23*		2009 Consultant Stock Plan (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form S-8 (File No. 333-157359))
10.24		Amendment Number Four to ~~Loan~~loan and Security Agreement between ~~Reed's~~Reed’s Inc., and First Capital Western Region LLC dated March 27, 2009 (Incorporated by reference to Exhibit 10.24 to Reed's, Inc.'s Form 10K filed ~~herewith.~~March 27, 2009)
10.25		Standard Offer, Agreement, and Escrow Instructions for Purchase of Real Estate dated April 23, 2009, as amended (Incorporated by reference to Exhibit 10.1 to Reed's, Inc.'s Form 10Q/A as filed August 18, 2009)
10.26		Standard Industrial Commercial Lease Agreement dated May 7, 2009, as amended (Incorporated by reference to Exhibit 10.2 to Reed's, Inc.'s Form 10Q/A as filed August 18, 2009)
10.27		Asset Purchase Agreement between Reed's, Inc. and Sonoma Cider Mill, Inc. dated October 19, 2009 (Incorporated by Reference to Exhibit 10.1 to Reed's, Inc.'s Form 10Q/A as filed December 7, 2009)
10.28		Loan and Security Agreement by and between GemCap Lending I, LLC and Reed’s Inc. dated November 18, 2009 (Filed herewith)
14.1		Code of Ethics (Incorporated by reference to Exhibit 14.1 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-157359))
21		Subsidiaries of Reed’s, Inc., filed herewith.
23.1		Consent of Weinberg & Co., P.A., to the incorporation by reference to the previously filed ~~herewith.~~ Registration Statement (SEC File No. 333-157359), filed herewith
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 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002
32.2**		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002

*	Indicates a management contract or compensatory plan or arrangement.
**	The certifications attached as Exhibits 32.1 and 32.2 accompany the Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Reed’s, Inc. for purposes of Section 18 of the Securities Exchange Act