Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 27
Item 2. Properties 27
Item 3. Legal Proceedings 27
Item 4. Mine Safety Disclosures 27
Item 6. [Reserved] 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 34
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 35
Item 9B. Other Information 35
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 35
PART III 36
Item 10. Directors, Executive Officers and Corporate Governance 36
Item 11. Executive Compensation 39
Item 14. Principal Accountant Fees and Services 46
Item 15. Exhibits, Financial Statement Schedules 48
i
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 9 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:
● The availability and
cost of capital to finance working capital and our operating plans,
● Maintaining the
listing of our common stock on the Nasdaq Capital Market or other national securities exchange. We will be subject to delisting if we
do not meet the Nasdaq bid price rule by August 15, 2022,
●
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,
ii
●
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 may identify in our disclosure controls and procedures and our internal control over financial
reporting in future periods in a timely enough manner to eliminate the risks posed by such material weaknesses,
●
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 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, and
●
Possible recalls of our products.
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.
iii
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, natural beverages that is sold in over 45,000 outlets nationwide. These
outlets include 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, which includes Reed’s
Craft Ginger Beer and Reed’s Real Ginger Ale, and Virgil’s Handcrafted sodas. 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 independent natural full line craft soda and is a leader in the craft soda category.
Historical
Development
Reed’s
Original Ginger Brew, created in 1987 by Christopher J. Reed, our founder, 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.
Going Concern
The Company’s
financial statements as of December 31, 2021 were prepared on a going concern basis. For the year ended December 31, 2021,
the Company recorded a net loss of $16,402 and used cash in operations of $17,589. As of December 31, 2021, we had a cash balance of
$49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its current level of cash
and cash equivalents are not sufficient to fund its operations for the next 12 months.
To alleviate these conditions, management is
currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or
debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we seek additional
sources of financing, there can be no assurance that such financing will be available to us on favorable terms or at all. Our ability
to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions,
our performance and investor sentiment with respect to us and our industry.
Industry
Overview
Reed’s
offers its portfolio of natural hand-crafted beverages in the craft specialty foods industry as natural alternatives to the $25
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 grew 9% during 2021
and the ginger ale segment grew 5% and is now a $1.3 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.
As
a result of the COVID-19 pandemic, 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 natural products has gone mainstream.
● Clean Label: 62% of Americans are avoiding at least one ingredient.
● Plant Based: 39% of consumers actively try to eat more plant based foods.
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 varieties, made with 2,000 mg of fresh
organic ginger. In 2021, we extended our Ginger Ale offerings with Mocktails and we entered the alcohol space with the launch of our
RTD Classic Mule that is 7% ALC and Zero Sugar.
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
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. In 2021, we expanded our Extra Ginger Beer portfolio into cans offerings.
As
of the end of 2021, the Reed’s Craft Ginger Beer line included five major varieties with a mix of bottles and cans:
Reed’s
Original Ginger Beer – Our first to market product uses a Jamaican-inspired recipe that calls for fresh ginger root, lemon,
lime, pineapple juice, honey, raw cane sugar, 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, 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 proprietary
natural sweetening system.
Reed’s
Real Ginger Ale – launched in April 2020 in standard and sleek 12-ounce cans. It is the only mass market ginger
ale made with organic fresh ginger.
Reed’s
Zero Sugar Real Ginger Ale – also launched in April 2020 in standard and slim cans. It uses proprietary sweetening
system to match the great taste of the cane sugar version in a zero-calorie drink.
NEW! Reed’s Mocktails- In 2021
Reed’s line extended its Zero Sugar Ginger Ale, with the launch of Mocktail Flavors. It uses our proprietary sweetening system
to match the great taste of the cane sugar version in a zero-calorie drink. The two flavors are Shirley Tempting and
Transfusion.
Reed’s Ready to Drink
NEW! Reed’s Zero Sugar Classic Mule:
Launched in 2020 and expanded to 37 states in 2021, Reed’s first-ever alcoholic offering is packed with REAL, fresh ginger
root and made through a unique handcrafted brewing and fermentation process. It contains 7% alcohol, and a light-spice flavor profile
with no artificial colors, gluten, GMOs or caffeine. It is the ultimate mule, made with fresh ginger root, to be enjoyed anytime,
anywhere.
Other
New Ginger Beverages under the Reed’s brand
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.
Virgil’s
Handcrafted Sodas
Virgil’s
is a premium handcrafted soda that uses only 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 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 and is certified Keto. This natural line of Zero Sugar
flavors includes Root Beer, Cola, Black Cherry, Vanilla Cream, Orange Cream, Lemon-Lime, Ginger Ale, Grapefruit and
Dr. Better.
.
2022
Product Launches
During
the second quarter of 2021, Reed’s will launch the below:
● Reed’s Hard Ginger Ale in Variety 8 Packs
● Virgil’s Zero Sugar in 12-ounce sleek 4 packs
● Reed’s Zero Sugar Stormy Mule
Our
Primary Markets
We
target a smaller segment of the estimated $25 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: Costco and BJ’s
● Liquor stores: BevMo!, Total Wine & More, Spec’s
● Convenience & drug stores: Circle K, CVS Health, Rite Aid, QuikTrip
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 and 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.
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. They brew, blend, bottle, and package 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
and two in California. During 2020 we entered into co-packing agreements with a co-packer on the East Coast, Clinton’s
Ditch, and 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 natural
beverage space.
Healthier alternatives will be the future for carbonated soft drinks. We
will continue to drive product development in the 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, natural handcrafted beverages.
Christopher
J. Reed, the Company’s founder continues to support our new product development efforts in 2022. Mr. Reed possesses thirty
plus years of product development and innovation experience. Recent innovations include our compelling line of full flavor, 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, 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 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.
Ginger
Shots
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 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
Crystallized Ginger and Reed’s Ginger Chews restaged their product line up in 2020. The category is small and there is not a significant number of entrants. Key competitors are Chimes and Gin Gins.
Ready to Drink:
The RTD category refers to canned cocktails
that offer convenience and quality for cocktail drinkers. RTD sales held strong in 2021 with triple-digit growth. According to
NielsenIQ, year-over-year off-premise dollar sales increased 126 percent for RTD cocktails for the 52-week period ending October 2,
2021. According to IRI, premixed cocktails spirits-based and malt-based seltzers accounted for just over $7 billion in
off-premise sales over the 52 weeks ending November 28, 2021.
The start of Covid-19, when restaurants and bars
closed in March 2020, helped propel the category with consumers bringing the on-premise cocktail occasion to their homes. This was a
major boost for canned, single-serve RTDs. Without the recent quality improvements of RTD cocktails, however, it’s unlikely that
the category would have taken off. Today’s RTD cocktails bring much higher quality versus earlier wine coolers and malt-based hard
lemonades. Premiumization has resulted in a new wave of products that boast less sugar and more transparency. Variety has also
been a key driver, allowing consumers ways to experiment without buying costly ingredients or spirits. Reed’s is poised to
leverage these trends bringing high-quality, crafted Mules made with real fresh ginger to the market.
Top selling brands in the category are High Noon,
Cutwater Spirits, On The Rocks, Jose Cuervo, Skinnygirl, 1800 Tequila, Buzzballz, Bacardi, The Long Drink Company, and Fisher’s
Island. In the Mule segment, the key players include ‘Merican Mule, Cutwater Mule, and Copper Can.
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. During 2021 we entered into an agreement with a packaging broker to supply us with 25 million sleek 12-ounce
cans during 2022. These 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 Classic Mule
in 4 and 12 pack 12-ounce cans, and 12 pack 16-ounce cans. Full Sail manages all aspects of production and distribution. We subsequently
amended that agreement to assume the distribution rights from Full Sail and instead utilize Full Sail as a co-packer of our RTD Classic
Mule line. We now fully control the sales and marketing process, and this change in distribution ownership enables us to recognize gross
revenue as opposed to a royalty fee going forward.
Seasonality
Sales
of our nonalcoholic beverages are somewhat seasonal with 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
Our Company is required to comply, and it
is our policy to comply, with all applicable laws in all jurisdictions in which we do business.
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.
The Safe Drinking Water and Toxic Enforcement
Act of 1986 (“Proposition 65”) of the state of California 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.
Legislation
has been proposed in Congress and by certain state and local governments which would prohibit the sale of soft drink products in non-refillable
bottles and cans or require a mandatory deposit as a means of encouraging the return of such containers, each in an attempt to reduce
solid waste and litter. Similarly, we are aware of proposed legislation that would impose fees or taxes on various types of containers
that are used in our business. We are not currently impacted by the policies in these types of proposed legislation, but it is possible
that similar or more restrictive legal requirements may be proposed or enacted within our distribution territories in the future.
Our
co-packers are subject to various environmental
protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. 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.
We
are also subject to various federal, state and international laws and regulations related to privacy and data protection, including the
California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, and its extension, the California
Privacy Rights Act (“CPRA”), which will take effect on January 1, 2023. The interpretation and application of data privacy,
cross-border data transfers and data protection laws and regulations are often uncertain and are evolving in the United States and internationally.
We monitor pending and proposed legislation and regulatory initiatives to ascertain their relevance to and potential impact on our business
and develop strategies to address regulatory trends and developments, including any required changes to our privacy and data protection
compliance programs and policies.
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.
Employees
As
of December 31, 2021, we had 31 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
The
Company maintains a website at the following address: www.reedsinc.com. The information on the Company’s website is not incorporated
by reference in this report. We make available on or through our website certain reports and amendments to those reports that we file
with or furnish to the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934,
as amended (“Exchange Act”). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q
and our Current Reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable
after we electronically file the information with, or furnish it to, the SEC. In addition, we routinely post on the “Investors”
page of our website news releases, announcements and other statements about our business and results of operations, some of which may
contain information that may be deemed material to investors. Therefore, we encourage investors to monitor the “Investors”
page of our website and review the information we post on that page. The SEC maintains a website that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC at the following address: http://www.sec.gov.
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. Our estimates regarding the sufficiency of our cash resource and capital
requirements and needs for additional financing raises substantial doubt about our ability to continue as a going concern.
●
We require additional financing to support our working capital and execute our operating plans for fiscal 2022, which may not
be available or may be costly and dilutive.
●
The impact of the COVID-19 pandemic could continue to 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, fuel, 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.
● We will be subject
to delisting if we do not meet the Nasdaq bid price rule by August 15, 2022.
Risk
Factors Relating to Our Business
The
COVID-19 pandemic and related ongoing impacts may have a material adverse effect on our results of operations and financial condition.
During
the year ended December 31, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued impact