Item 1A. Risk Factors 13
Item 1B. Unresolved Staff Comments 31
Item 2. Properties 31
Item 3. Legal Proceedings 31
Item 4. Mine Safety Disclosures 31
Item 6. Selected Financial Data 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data 41
Item 9A. Controls and Procedures 42
Item 9B. Other Information 42
PART III 43
Item 10. Directors, Executive Officers and Corporate Governance 43
Item 11. Executive Compensation 47
Item 14. Principal Accountant Fees and Services 54
Item 15. Exhibits, Financial Statement Schedules 55
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This
Annual Report on Form 10-K (“Annual Report”), the other reports, statements, and information that we have previously
filed or that we may subsequently file with the Securities and Exchange Commission (“SEC”) and public announcements
that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference
certain statements that may be deemed to be forward-looking statements. The forward-looking statements included or incorporated
by reference in this Annual Report and those reports, statements, information and announcements address activities, events or
developments that Reed’s, Inc. (hereinafter referred to as “we,” “us,” “our” or “Reed’s”)
expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives,
assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are
often, but not always, made through the use of words or phrases such as “may,” “should,” “could,”
“predict,” “potential,” “believe,” “will likely result,” “expect,”
“will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,”
“projection,” “would” and “outlook” and similar expressions. Accordingly, these statements
involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in
them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document.
All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in
this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking
statements.
The
risk factors referred to in this Annual Report beginning on page 14 could cause actual results or outcomes to differ materially
from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking
statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation
to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement
is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for
us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
Management
cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control,
involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from
the statements made, including, but not limited to, the following risk factors:
●
Our ability to generate sufficient cash flow to support marketing and product development plans and general operating activities,
●
Decreased demand for our products resulting from changes in consumer preferences,
●
Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace,
●
The introduction of new products,
●
Our being subject to a broad range of evolving federal, state and local laws and regulations including those regarding the labeling
and safety of food products, establishing ingredient designations and standards of identity for certain foods, environmental protections,
as well as worker health and safety. Changes in these laws and regulations could have a material effect on the way in which we
produce and market our products and could result in increased costs,
●
Changes in the cost and availability of raw materials and the ability to maintain our supply arrangements and relationships and
procure timely and/or adequate production of all or any of our products,
●
Our ability to penetrate new markets and maintain or expand existing markets,
●
Maintaining existing relationships and expanding the distributor network of our products,
●
Decline in global financial markets and economic downturn resulting from the coronavirus COVID-19 global pandemic,
●
Business interruptions resulting from the coronavirus COVID-19 global pandemic,
●
Our ability to remediate weaknesses we identified in our disclosure controls and procedures and our internal control over financial
reporting in a timely enough manner to eliminate the risks posed by such material weaknesses in future periods,
●
Maintaining the listing of our common stock on the Nasdaq Capital Market or other national securities exchange,
●
The marketing efforts of distributors of our products, most of whom also distribute products that are competitive with our products,
●
Decisions by distributors, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all
or any of our products that they are carrying at any time,
●
The availability and cost of capital to finance our working capital needs and growth plans,
●
The effectiveness of our advertising, marketing and promotional programs,
●
Changes in product category consumption,
●
Economic and political changes,
●
Consumer acceptance of new products, including taste test comparisons,
●
Possible recalls of our products, and
●
Whether or not we will be entitled to forgiveness of our Paycheck Protection Program loan.
Although
we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance, or achievements.
PART
I
Item
1. Business
Overview
Reed’s
Inc., a Delaware corporation (“Reed’s”, the “Company,” “we,” or “us” throughout
this report) owns a leading portfolio of handcrafted, all-natural beverages that is sold in over 40,000 outlets nationwide (including
the natural and specialty food channel, grocery stores, mass merchants, drug stores, convenience stores, club stores and on-premise
locations including bars and restaurants). Reed’s two core brands are Reed’s Craft Ginger Beer and Reed’s
Real Ginger Ale and Virgil’s Handcrafted soda. Reed’s Craft Ginger Beers are unique due to the proprietary process
of using fresh ginger root combined with a Jamaican inspired recipe of natural spices, honey and fruit juices. Reed’s uses
this same handcrafted approach in its Reed’s Real Ginger Ale and Virgil’s line of great tasting, bold flavored
craft sodas, including its award-winning Virgil’s Root Beer.
Reed’s
is the leading ginger beer in the US; Virgil’s is the leading independent (not aligned with Coca-Cola, Pepsi or Keurig Dr.
Pepper) all-natural full line craft soda and is ranked fourth in the craft soda category.
Historical
Development
Reed’s
Original Ginger Brew, created in 1987 by Christopher J. Reed, our founder, and current Chief Innovation Officer and director,
was introduced to the market in Southern California stores in 1989. By 1990, we began marketing our products through United Natural
Foods Inc. (“UNFI”) and other natural food distributors and moved our production to a larger facility in Boulder,
Colorado.
In
1991, we incorporated our business operations in the state of Florida under the name of Original Beverage Corporation and moved
all production to a co-pack facility in Pennsylvania. Throughout the 1990’s, we continued to develop and launch new Ginger
Brew varieties. Reed’s Ginger Brews reached broad placement in natural and gourmet foods stores nationwide through UNFI
and other major specialty, natural/gourmet and mainstream food and beverage distributors.
In
1997, we began licensing the products of China Cola and eventually acquired the rights to that product in 2000. In 1999, we purchased
the Virgil’s Root Beer brand from the Crowley Beverage Company. In 2000, we moved into an 18,000-square foot warehouse property,
the Brewery, in Los Angeles, California, to headquarters. In 2001, pursuant to a reincorporation merger, we changed our state
of incorporation to Delaware and also changed our name to “Reed’s, Inc.”
In
September 2018, we completed the relocation of its headquarters to Norwalk, Connecticut. In December 2018, after a lengthy marketing
and bidding process, we sold the Brewery to a company owned by Christopher J. Reed, our founder. The sale of the Brewery marked
a fundamental shift in the nature of our operations and effectively eliminated our costs associated with excess manufacturing
capacity.
Industry
Overview
Reed’s offers its portfolio of
natural hand-crafted beverages in the craft specialty foods industry as natural alternatives to the $32 billion mainstream
carbonated soft drinks (“CSD”) market in the United States as measured by IRI Multi Outlet scan data. Reed’s
products are sold across the country and internationally in the following major channels: natural food, specialty food,
grocery, mass merchant, convenience, club, drug, and on-premise locations (bars and restaurants).
Even
after a year of the pandemic, overall sales growth of natural food and beverage products continues to outpace sales growth for
conventional products across all retail channels. We see ample opportunity to scale our natural beverage business and grow our
distribution in these channels.
Carbonated
Soft Drink Industry Overview
The
retail CSD category has rallied during the pandemic. This past year, after 13 years of declines, the retail CSD category grew
13%. The ginger ale segment grew even faster at 15.4% and is now a $1.1 billion dollar market. Ginger ale growth,
we believe, is driven primarily by a consumer perception of ginger ale as a healthier alternative to other sodas. Our new line
of ginger ales made with real ginger deliver on this perception and are poised to breakout in the segment.
In
the wake of COVID-19, consumers are shifting consumption to better-for-you products. We believe there is significant growth potential
from consumers switching away from mainstream beverages that contain artificial ingredients and preservatives towards great-tasting,
natural alternatives.
Consumer
Trends Driving Growth for Our Products
The
following is a list of consumer trends that are accelerating as we exit the pandemic, and which support our brands.
● Natural: Interest in all-natural products has gone mainstream.
● Clean Label: 62% of Americans are avoiding at least one ingredient.
Our
strategies will remain responsive to these macro consumer trends as we concentrate our efforts on developing the Company’s
sales and marketing functions.
Our
Products
We
make our hand-crafted beverages with only premium, natural ingredients. Our products are free of genetically modified organisms
(“GMOs”) and artificial preservatives. Over the years, Reed’s has developed several product offerings. In 2019,
we streamlined our focus to our core categories of Reed’s Ginger Beverages and Virgil’s Craft Sodas. In April
2020, we launched our new line of Reed’s Real Ginger Ales, in both Full Sugar and Zero Sugar versions, made with 2,000mg
of fresh organic ginger.
Reed’s
Craft Ginger Beer
Reed’s
Craft Ginger Beer is set apart from other ginger beers by its proprietary process of brewing fresh ginger root, its exclusive
use of all-natural ingredients, and its authentic Jamaican-inspired recipe. We do not use artificial preservatives, artificial
flavors, or colors, and Reed’s Ginger Beer is certified kosher. We offer different levels of fresh ginger content, ranging
from our lightest-spiced Original, to our medium-spiced Extra, and finally to our spiciest Strongest. We also offer three sweetener
options: one with cane sugar, honey and fruit juices; one with honey and pineapple juice; and another without sugar (Zero Sugar)
made from an innovative blend of natural sweeteners (developed in 2018 and commercialized in 2019).
As
of the end of 2020, the Reed’s Craft Ginger Beer line included five major varieties:
Reed’s
Original Ginger Beer – Our first to market product uses a Jamaican-inspired recipe that calls for fresh ginger root,
lemon, lime, honey, raw cane sugar, pineapple, herbs and spices.
Reed’s
Premium Ginger Beer – Our Original Ginger Beer sweetened with honey and pineapple juice. (No cane sugar added.)
Reed’s
Extra Ginger Beer – Contains 100% more fresh ginger than Reed’s Original recipe for extra spice.
Reed’s
Strongest Ginger Beer – Contains 200% more fresh ginger than Reed’s Original for the strongest spice.
Reed’s
Zero Sugar Extra Ginger Beer – launched in 2019 in bottles and cans, it uses a proprietary natural sweetening system
for a zero-calorie version of our Reed’s Extra Ginger Beer.
Reed’s
Real Ginger Ale
Reed’s
Real Ginger Ale is unique for the category because it combines real fresh ginger with the classic, refreshing taste that consumers
love. It contains nothing artificial and is Non-GMO project verified. We offer two sweetener options: one with cane sugar and
the other with our zero-calorie, all-natural sweetener blend.
NEW!
Reed’s Real Ginger Ale – launched in April 2020 in standard and slim cans. It is the only mass market ginger ale
made with organic fresh ginger.
NEW!
Reed’s Zero Sugar Real Ginger Ale – also launched in April 2020 in standard and slim cans. It uses our all-natural
sweetener blend to match the great taste of the cane sugar version in a zero-calorie drink.
Other
New Ginger Beverages under the Reed’s brand
NEW!
Reed’s Wellness Ginger Shots – launched in February 2020 offered in two varieties: Daily Ginger and Ginger Energize.
These convenient, shelf-stable shots provide a ginger boost on the go.
NEW!
Reed’s Zero Sugar Classic Mule – launched in June 2020 containing 7% ABV (Alcohol By Volume), is the ultimate
mule, made with fresh ginger root, to be enjoyed anytime, anywhere.
Virgil’s
Handcrafted Sodas
Virgil’s
is a premium handcrafted soda that uses only all-natural ingredients to create bold renditions of classic flavors. We don’t
use any artificial preservatives, any artificial colors, or any GMO-sourced ingredients, and our Virgil’s line is certified
kosher.
The
Virgil’s line includes the following products:
Handcrafted
Line: Virgil’s first Handcrafted soda was launched in 1994. It began as one man’s passion to create the finest
root beer ever produced and has since won numerous awards. Virgil’s difference is using all-natural ingredients to craft
bold, classic soda flavors. Virgil’s Handcrafted line includes Root Beer, Vanilla Cream, Black Cherry, and Orange Cream.
Zero
Sugar Line: Virgil’s launched a new line of Zero Sugar, Zero Calorie craft sodas in 2019. Each Zero Sugar soda is sweetened
with a proprietary blend of natural sweeteners with no added sugars. This all-natural line of Zero Sugar flavors includes Root
Beer, Cola, Black Cherry, Vanilla Cream, Orange Cream and Lemon-Lime. The product has recently been certified Keto compliant.
2021
Product Launches
During
the second quarter of 2021, Reed’s will launch the below:
● Reed’s Real Ginger Ale and Virgil’s 20 oz Bottles for the Convenience Channel
● Virgil’s Zero Sugar Line Extensions: Dr. Better, Grapefruit, and Ginger Ale
● Reed’s Craft Stormy Mule
Our
Primary Markets
We target a smaller segment of the estimated
$32 billion mainstream carbonated and non-carbonated soft drink markets in the United States. Our brands are generally
considered premium and natural, with upscale packaging. They are loosely defined as the craft specialty bottled carbonated soft
drink category.
We
have an experienced and geographically diverse sales force promoting our products, with senior sales representatives strategically
placed in multiple regions across the country, supported by local Reed’s sales staff. Additionally, we have sales managers
handling national accounts for natural, specialty, grocery, mass, club, drug and convenience channels. Our sales managers are
responsible for all activities related to the sales, distribution, and marketing of our brands to our entire retail partner and
distributor network in North America. The Company not only employs an internal sales force but has partnered with independent
sales brokers and outside representatives to promote our products in specific channels and key targeted accounts.
We
sell to well-known popular natural food and gourmet retailers, large grocery store chains, mass merchants, club stores, convenience
and drug stores, liquor stores, industrial cafeterias (corporate feeders), and to on-premise bars and restaurants nationwide and
in some international markets. We also sell our products and promotional merchandise directly to consumers via the Internet through
our Amazon storefront which can be accessed through our company web site www.drinkreeds.com.
Some
of our representative key customers include:
● Club stores: BJ’s
● Liquor stores: BevMo!, Total Wine & More, Spec’s
● Convenience & drug stores: Circle K, CVS Health, Rite Aid
Our
Distribution Network
Our
products are brought to market through an extremely flexible and fluid hybrid distribution model, which is a mix of direct-store-delivery,
customer warehouse, and distributor networks. The distribution system used depends on customer needs, product characteristics,
and local trade practices.
Our
product reaches the market in the following ways:
Direct
to Natural & Specialty Wholesale Distributors
Our
natural and specialty distributor partners operate a distribution network delivering thousands of SKUs of natural and gourmet
products to thousands of small, independent, natural retail outlets around the U.S., along with national chain customers, both
conventional and natural. This system of distribution allows our brands far reaching access to some of the most remote parts of
North America. During the past year we expanded, and will continue to expand, in this distribution network.
Direct
to Store Distribution (“DSD”) Through Non-Alcoholic Beverage Distributor Network
Our
independent distributor partners operate DSD systems which deliver primarily beverages, foods, and snacks directly to retail stores
where the products are merchandised by their route sales and field sales employees. DSD enables us to merchandise with maximum
visibility and appeal. DSD is especially well-suited to products frequently restocked and responds to in-store promotion and merchandising.
We are primarily focused on expanding our DSD network on a national basis.
Direct
to Store Warehouse Distribution
Some
of our products are delivered from our co-packers and warehouses directly to customer warehouses. Some retailers mandate we deliver
directly to them, as it is more cost effective and allows them to pass savings along to their customers. Other retailers may not
mandate direct delivery, but they recommend and prefer it as they have the capability to self-distribute and can realize significant
savings with direct delivery.
Wholesale
Distribution
Our
Wholesale Distributor network handles the wholesale shipments of our products. These distributors have a warehouse and distribution
center, and ship Reed’s and Virgil’s products directly to the retailer (or to customers who opt for drop shipping).
International
Distribution
We presently export Reed’s and Virgil’s
brands throughout international markets via US based exporters. International markets where our brands are present
are France, UK, South Africa, portions of the Caribbean, Canada, Spain, Philippines, Israel and Australia. In the UK, our Virgil’s
brands can be found at Pizza Hut, Tesco Supermarket and Sainsbury.
International
sales to some areas of the world are cost prohibitive, except for some specialty sales, since our premium sodas were historically
packed in glass, which drives substantial freight costs when shipping overseas. Despite these cost challenges, we believe there
are good opportunities to expand internationally, and we are increasing our marketing focus on these areas by adding freight
friendly packages such as aluminum cans. We are open to exporting and co-packing internationally and expanding our brands into
foreign markets, and we have held preliminary discussions with trading companies and import/export companies for the distribution
of our products throughout Asia, Europe, Australia, and South America. We believe these areas are a natural fit for Reed’s
ginger products because of the popularity and importance of ginger in international markets, especially the Asian market, where
ginger is a significant part of the local diet and nutrition.
We
believe the strength of our brands, innovation, and marketing, coupled with the quality of our products and flexibility of our
distribution network, allows us to compete effectively.
Distribution
Agreements
We
have entered into agreements with some of our distributors that commit us to “termination fees” if we terminate our
agreements early or without cause. These agreements provide for our distributor partners 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 distributor partners.
We constantly review our distribution agreements with our partners across North America.
Some
of our outside distributors are not bound by written agreements with us and may discontinue their relationship with us on short
notice. Most distributors handle a number of competitive products. In addition, our products are sometimes a small part of our
distributors’ businesses.
Manufacturing
Our Products
All
of Reed’s products are produced by our co-pack partners, which assemble our products and charge us a fee, generally by the
case, for the products produced. We have a long-standing relationship with two co-packers in Pennsylvania. Additionally, in conjunction
with the sale of our plant, we entered into a three-year co-packing agreement with CCB, whereby CCB will produce Reed’s
Inc. beverages in glass bottles at prevailing West Coast market rates. In 2019, we entered into a co-packing agreement with Sonoma
Beverage Company on the West Coast. We recently engaged an additional co-packer on the East Coast, Clinton’s Ditch, and
another on the West Coast, Noel Canning. We are in discussions and negotiations with additional co-packers to secure added capability
for future production needs. We periodically review our co-packing relationships to ensure that they are optimal with respect
to quality of production, cost and location.
Warehousing
and Logistics are a significant portion of the Company’s operational costs. In order to drive efficiency and reduce costs,
on February 1, 2019 we entered into a strategic partnership with Veritiv Logistics Solutions to manage all freight movement for
the Company. Veritiv is one of the largest distribution service providers in North America and has expertise that will provide
a competitive advantage in the movement of raw materials and finished goods. This partnership will support planning and execution
of all inventory movement, assessment of storage needs and cost management.
We
follow a “fill as needed” model to the best of our ability and have no significant order backlog.
New
Product Development
While
we have simplified our business and have streamlined a significant number of SKUs in order to further our primary objective of
accelerating the growth of the Reed’s and Virgil’s core product offerings, we believe significant opportunity remains
in the all-natural beverage space.
Healthier
alternatives will be the future for carbonated soft drinks. We will continue to drive product development in the all-natural,
no and low sugar offerings in the “better for you” beverage categories. In addition, we believe there are powerful
consumer trends that will help propel the growth of our brand portfolio including the increased consumption of ginger as a recognized
superfood, the growing use of ginger beer in today’s popular cocktail drinks, and consumers’ increased demand for
higher quality, all-natural handcrafted beverages.
Christopher
J. Reed, the Company’s founder and Chief Innovation Officer continues to support our new product development efforts in
2020. Mr. Reed possesses thirty plus years of product development and innovation experience. Recent innovations include
our compelling line of full flavor, all-natural, zero sugar, zero calorie sodas. Reed’s has also begun to expand and broaden
its product development capabilities by engaging and working with larger, experienced beverage flavor houses and innovative ingredient
research and supply companies.
We
believe our new business model enhances our ability to be nimble and innovative, producing category leading new products in a
short period of time.
Competition
Nonalcoholic
Beverages
The
nonalcoholic beverage segment of the commercial beverage industry is highly competitive, consisting of numerous companies ranging
from small or emerging to very large and well established. The principal areas of competition include 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. Many of these brands have enjoyed broad, well-established national recognition for years, through
well-funded ad and other branding campaigns. Competitors in the ginger beer category include Goslings, Fever Tree, Bundaberg,
Cock ‘n Bull and Q Tonic; in the craft soda category we compete with brands such as Stewart’s, IBC, Zevia, Blue Sky,
Hansen’s, Henry Weinhard’s, Boylan, and Jones Soda; In the Ginger Ale category we compete with Canada Dry, Schweppes,
Seagram’s and Zevia.
Important
factors affecting our ability to compete successfully include the 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 soft drink category
could also cause our products to be unable to gain or even lose market share, or we could experience price erosion.
Despite
our products having a relatively high price for a craft premium beverage product, minimal mass media advertising to date, and
a small but growing presence in the mainstream market compared to many of our competitors, we believe our all-natural innovative
beverage recipes, packaging, use of premium ingredients, and a proprietary ginger processing formula provide us with a competitive
advantage. Our commitments to the highest quality standards and brand innovation are keys to our success.
Shot
Category
Our Reed’s Wellness Ginger Shot
was introduced during 2020. The shot category is very competitive and a few mainstream companies dominate
the category, but there is room for an all-natural alternative. Competition for market share and acceptance of new products is
significant. Main competitors are 5-Hour Energy, Ginger Time, and Rescue Ginger Shots.
Candy
Reed’s Craft Crystallized Ginger
and Reed’s Ginger Chews restaged their product line up in 2020 and we will be working with a new distribution partner
in 2021. The category is small and there is not a significant number of entrants. Key competitors are Chimes
and Gin Gins.
Raw
Materials
Substantially
all of the raw materials used in the preparation, bottling and packaging of our products are purchased by Reed’s or by our
contract packers in accordance with our specifications.
Generally,
the raw materials used in our products are obtained from domestic and foreign suppliers and many of the materials have multiple
reliable suppliers. This provides a level of protection against a major supply constriction or adverse cost or supply impacts.
Since our raw materials are common ingredients and supply is easily accessible, we have few long-term contracts in place with
our suppliers.
Glass
Bottles and Aluminum Cans
A
significant component of our product cost is the purchase of glass bottles and aluminum cans. In December 2017, we entered into
an exclusive strategic partnership with Owens-Illinois (glass), and in February 2018 we entered into a strategic partnership with
Crown Cork & Seal for aluminum cans. Both suppliers provide expertise in emerging package and material innovation that can
be leveraged to further expand marketing and package offerings.
Working
Capital Practices
Historically,
we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible
debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive
action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating
improved vendor contracts and restructuring our selling prices.
Licensing
During 2020 we entered into a licensing agreement
with Full Sail Brewery headquartered in Hood River, Oregon to manufacture and sell our new line of Reed’s Alcoholic Moscow
Mule in 4 pack, 12 pack, and 16 ounce cans. Full Sail manages all aspects of production and distribution.
Seasonality
Sales
of our nonalcoholic beverages are somewhat seasonal with a higher than average volume in the warmer months. The volume of sales
in the beverage business may be affected by weather conditions.
Proprietary
Rights
We
own copyrights, trademarks and trade secrets relating to our products and the processes for their production; the packages used
for our products; and the design and operation of various processes and equipment used in our business. Some of our proprietary
rights are licensed to our co-packers and suppliers and other parties. Reed’s ginger processing and brewing process, finished
beverage products and concentrate formulas are among its most valuable trade secrets.
We
own trademarks in the United States that we consider material to our business. Trademarks in the United States are valid as long
as they are in use and/or their registrations are properly maintained. Pursuant to our manufacturing and bottling agreements,
we authorize our bottlers to use applicable Reed’s trademarks in connection with their manufacture, sale and distribution
of our products. We have registered and intend to obtain additional trademarks in international markets as may become
necessary.
We
use confidentiality and non-disclosure agreements with employees, manufacturers and distributors to protect our proprietary rights.
Mr. Reed is also subject to an intellectual property agreement with Reed’s restricting competition consistent with his fiduciary
obligations to Reed’s.
Regulation
General
The
production, distribution and sale in the United States of many of our products are subject to the Federal Food, Drug, and Cosmetic
Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, competition 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 known as Proposition 65 requires a specific warning to appear on any product containing a component listed by the
state as having been found to cause cancer or birth defects. The state maintains lists of these substances and periodically adds
other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide
warnings on their products in California because it does not provide for any generally applicable quantitative threshold below
which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount
of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not
require a warning if the manufacturer of a product can demonstrate that the use of that product exposes consumers to a daily quantity
of a listed substance that is:
● below a “safe harbor” threshold that may be established;
● naturally occurring;
● the result of necessary cooking; or
● subject to another applicable exemption.
No
Company beverages produced for sale in California are currently required to display warnings under this law. We are unable 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 and other natural occurring substances will be evaluated for listing. Furthermore,
we are also unable to predict when or whether the increasing sensitivity of detection methodology 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 non-refillable, recyclable containers in the United States. 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 deposits or certain taxes or fees be charged for the sale, marketing and use of certain non-refillable
beverage containers. The precise requirements imposed by these measures vary. Other types of beverage container-related deposit,
recycling, tax and/or product stewardship statutes and regulations also apply in various jurisdictions in the United States and
overseas. We anticipate additional, similar legal requirements may be proposed or enacted in the future at local, state and federal
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 pertaining to environmental compliance activity is in recycling fees and 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 or cans
of certain products sold in the state.
Human
Capital Resources
As
of December 31, 2020, we have 34 full-time equivalent employees on our corporate staff. We employ additional people on a part-time
basis as needed. We have never participated in a collective bargaining agreement. We believe relations with our employees are
good.
Available
Information
We
are subject to the reporting requirements of the Exchange Act and, accordingly, we file annual reports, quarterly reports and
other information with the Securities and Exchange Commission, or SEC. Access to copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC, including amendments to such filings, may be
obtained free of charge from our website, http://www.reedsinc.com. These filings are available promptly after we file them with,
or furnish them to, the SEC. We are not incorporating our website or any information from the website into this annual report.
The SEC also maintains a website, http://www.sec.gov, that contains our Annual Reports on Form 10-K, Quarterly Reports on Form
10-Q, Current Report on Form 8-K and other filings with the SEC. Access to these filings is free of charge.
Item
1A. Risk Factors
The
following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented
in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent
those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also harm our business. All forward-looking statements in this document are based on
information available to us as of the date hereof, and we assume no obligations to update any such forward-looking statements.
Summary
of Material Risk Factors
●
We have a history of operating losses. If we continue to suffer losses from operations, our working capital may be insufficient
to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able
to obtain additional financing.
●
We may need additional financing in the future, which may not be available when needed or may be costly and dilutive.
●
Our secured credit facility with Rosenthal and Rosenthal, Inc. contains financial covenants that, if breached, could trigger default.
●
The recent global coronavirus outbreak could harm our business and results of operations.
●
Disruption within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business,
financial condition and results of operations.
●
Increased market spending may not drive volume growth.
●
Increases in costs of packaging, ingredients and contract manufacturing tolling fees may have an adverse impact on our gross margin.
●
If we do not adequately manage our inventory levels, our operating results could be adversely affected.
●
It is difficult to predict the timing and amount of our sales because our distributors are not required to place minimum orders
with us.
Risk
Factors Related to our recently received Paycheck Protection Program Loan
We
may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck
Protection Program Loan could in the future be determined to have been impermissible.
On
April 20, 2020, we were granted a Paycheck Protection Program loan (the “PPP Loan”) under the Coronavirus Aid, Relief,
and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”)
in the aggregate amount of $770,000 pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The
PPP Loan agreement is dated April 20, 2020, matures on April 20, 2022, bears interest at a rate of 1% per annum, with the first
six months of interest deferred, is payable monthly commencing on November 2020, and is unsecured and guaranteed by the U.S. Small
Business Administration. The loan term may be extended to April 20, 2025, if mutually agreed to by the Company and lender. The
PPP Loan may be prepaid at any time prior to maturity with no prepayment penalties. Under the CARES Act, as amended in June 2020,
loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest
and covered utilities during the “Covered Period”, which is 8 weeks or 24 weeks (at the election of the Company) beginning
on the date of the first disbursement of the PPP Loan. We will be required to repay any portion of the outstanding principal that
is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness,
that we will apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. In order to apply
for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request
necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the
maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms
of capital in the current market environment to offset the effects of the COVID-19 pandemic. Following this analysis, we believe
that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad
objectives of the CARES Act. The certification described above is subject to interpretation. On April 23, 2020, the SBA issued
guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be
able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection
Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving
loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loan,
we are later determined to have not been in compliance with these requirements or it is otherwise determined that we were ineligible
to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should
we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the
PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and the incurrence
of additional costs. Any of these events could have a material adverse effect on our business, results of operations and financial
condition.
Risk
Factors Relating to Our Business
We
have a history of operating losses.
For
the year ended December 31, 2020, the Company recorded a net loss of $10,177 and used cash in operations of $9,496. As of December
31, 2020, we had a cash balance of $595 with borrowing capacity of $5,166, stockholders’ equity of $10,404 and a working
capital of $9,528, compared to a cash balance of $913, stockholder’s equity of $1,147 and working capital of $4,885 at December
31, 2019.
During
the years ended December 31, 2020 and 2019, the Company experienced significant financing shortages and engaged in two separate
transactions to raise capital in 2020. Recently, the Company received net proceeds of $5,310 from an underwritten offering of
common stock in April 2020, and $11,254 from an underwritten offering of common stock in November 2020.
If
we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business
operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be
no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available