UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2022
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the transition period from _______ to _______
Commission
File Number: 001-32501
REED’S,
INC.
(Exact
name of registrant as specified in its charter)
(State of incorporation) (I.R.S. Employer Identification No.)
(Address of principal executive offices) (Zip Code)
(800)997-3337
(Registrant’s
telephone number, including area code)
(Former
name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act: none.
Title of each class Trading Symbol(s) Name of each exchange on which registered
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes ☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller
reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The
aggregate market value of the voting and non-voting common equity held by non-affiliates (excluding voting shares held by officers and
directors) as of June 30, 2022 was $14,698,231.
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. There was
a total of 2,602,399 shares of Common Stock outstanding as of March 31, 2023.
TABLE
OF CONTENTS
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 32
Item 2. Properties 32
Item 3. Legal Proceedings 32
Item 4. Mine Safety Disclosures 32
Item 6. [Reserved] 33
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 40
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 41
Item 9B. Other Information 41
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 41
PART III 42
Item 10. Directors, Executive Officers and Corporate Governance 42
Item 11. Executive Compensation 45
Item 14. Principal Accountant Fees and Services 52
Item 15. Exhibits, Financial Statement Schedules 54
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 11 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 impact of logistical issues and delays;
The
foregoing list of important factors and other risks detailed from time to time in our reports filed with the SEC is not exhaustive. See
“Part I, Item 1A – Risk Factors” for a more complete discussion of these risks and uncertainties and for other risks
and uncertainties. Those factors and the other risk factors described therein are not necessarily all of the important factors that could
cause actual results or developments to differ materially from those expressed in any of our forward-looking statements. Other unknown
or unpredictable factors also could harm our results. Consequently, our actual results could be materially different from the results
described or anticipated by our forward-looking statements due to the inherent uncertainty of estimates, forecasts and projections and
may be better or worse than anticipated. Given these uncertainties, you should not rely on forward-looking statements. Forward-looking
statements represent our estimates and assumptions only as of the date that they were made. We expressly disclaim any duty to provide
updates to forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, in order
to reflect changes in circumstances or expectations or the occurrence of unanticipated events except to the extent required by law.
ii
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, liquor
stores, and on-premises locations including bars and restaurants. Reed’s two core brands are Reed’s, which includes Reed’s
Craft Ginger Beer, Reed’s Real Ginger Ale, Reed’s Mules, and Reed’s Hard 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 an 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, 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, as our 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.
Today,
Reed’s has 45 products that are sold throughout the United States, Canada, the United Kingdom, South Africa and the European Union.
It produces its products through a network of nine independent manufacturers and distribution through five independent distribution centers.
Going
Concern
The Company’s financial statements
as of December 31, 2022, were prepared on a going concern basis. For the year ended December 31, 2022, the Company recorded a net
loss of $20,057 and used cash in operations of $15,530, and as of December 31, 2022, the Company had stockholders’ deficit of $8,470,
and negative working capital of $1,563. These conditions raise substantial doubt about the Company’s ability to continue as a going
concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered
public accounting firm, in their report on the Company’s December 31, 2022, audited financial statements, raised substantial doubt
about the Company’s ability to continue as a going concern. As of December 31, 2022, we had a cash balance of $533 with borrowing
capacity of $1,663. The Company believes that its current level of cash and cash equivalents are not sufficient to fund its operations
for the next 12 months.
Our ability to continue as a going concern is dependent upon our ability
to obtain additional financing, drive further operating efficiencies, reduce expenditures, and ultimately, create profitable operations.
We may not be able to obtain additional capital on reasonable terms. Our financial statements do not include adjustments that would result
from the outcome of this uncertainty. 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 $29 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, liquor, and on-premises locations (bars and restaurants).
Carbonated
Soft Drink Industry Overview
The
retail CSD category grew 14% during 2022 and the ginger ale segment grew 13% and is now a $1.5 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 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% alcohol by volume (“ABV”) and Zero Sugar and Hard Ginger
Ale which is 5% ABV 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 pressing 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 2022, 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 50% more fresh ginger than Reed’s Original recipe for extra spice.
Reed’s
Strongest Ginger Beer – Contains 115% 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 a proprietary sweetening system
to match the great taste of the cane sugar version in a zero-calorie drink.
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 Real Cranberry Ginger Ale –
This seasonal product, launch in the fall of 2021 is our Real Ginger Ale with cranberry added. It is a consumer favorite during the holiday
season and is available October through December.
Reed’s
Ready to Drink
Reed’s Zero Sugar Classic Mule – Launched
in 2020 and expanded to 42 states in 2022, 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% ABV, 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.
Reed’s Zero Sugar Stormy Mule – Launched
in 2022, the Stormy is the perfect companion to our Classic Mule, the Stormy Mule is the ultimate rum flavored alcohol and ginger
beer. It contains 7% ABV, and a light-spice flavor profile with no artificial colors, gluten, GMOs or caffeine. It is the ultimate stormy,
made with fresh ginger root, to be enjoyed anytime, anywhere.
Reed’s Zero Sugar Hard Ginger Ale - Launched
in late 2002, our line of light refreshing hard ginger ales are available in four flavors: Mango, Cherry Lime, Strawberry Watermelon and
Pineapple Coconut. They contain 5% ABV, 100 calories and zero carbohydrates and have no added sugar, artificial colors, gluten, GMOs or
caffeine. They are made with fresh ginger root, to be enjoyed anytime, anywhere.
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.
Our
Primary Markets
We
target a smaller segment of the estimated $29 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, liquor, 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-premises 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
● Liquor stores: BevMo!, Total Wine & More, Spec’s
● Convenience & drug stores: 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 have 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
We
utilize a network of five independent distribution and consolidation centers across the United States to store and distribute our products.
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 and also developing manufacturing partnerships in local markets whereby we ship concentrate rather
than finished goods. 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 three 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.
In
some instances, subject to agreement, certain equipment may be purchased exclusively by us and/or jointly with our co-packers and installed
at their facilities to enable them to produce certain of our products. In certain cases, such equipment remains our property and is required
to be returned to us upon termination of the packing arrangements with such co-packers, unless we are reimbursed by the co-packer over
a pre-determined number of cases that are produced at the facilities concerned. For most of our products there are limited co-packing
facilities in our markets with adequate capacity and/or suitable equipment to package our products. We believe a short disruption or
delay in production would not significantly affect our revenues; however, as alternative co-packing facilities in our markets with adequate
long-term capacity may not be available for such products, either at commercially reasonable rates and/or within a reasonably short time
period, if at all, a lengthy disruption or delay in production of any of such products could significantly affect our revenues.
Our
ability to estimate demand for our products is imprecise, particularly with new products, and may be less precise during periods of rapid
growth, including in new markets. If we materially underestimate demand for our products, and/or are unable to secure sufficient ingredients
or raw materials, and/or procure adequate packing arrangements and/or obtain adequate or timely shipment of our products, we might not
be able to satisfy demand on a short-term basis.
We
continue to actively seek alternative and/or additional co-packing facilities with adequate capacity and capability for the production
of our various products to minimize transportation costs and transportation-related damages as well as to mitigate the risk of a disruption.
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 FitzMark to manage all freight movement for the Company. FitzMark 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 supports 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.
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 advertising
and other branding campaigns. Competitors in the ginger beer category include Goslings, Fever Tree, Bundaberg, Cock ‘n Bull and
Q; in the craft soda category we compete with brands such as Stewart’s, IBC, Zevia, Henry Weinhard’s, Boylan, Sprechers,
and Jones Soda; In the Ginger Ale category we compete with Canada Dry, Schweppes, Seagram’s, Vernor’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.
We
are also subject to increasing levels of regulatory issues including the registration and/or taxation of our products in certain new
international markets, which may put us at a competitive disadvantage. (See “Government Regulation” below for additional
information)
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 commitment
to the highest quality standards and brand innovation are keys to our success.
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.
The
start of Covid-19, when restaurants and bars closed in March 2020, helped propel the category with consumers bringing the on-premises
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 by 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, 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. Raw materials are delivered and stored at our various third-party co-packers.
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.
Many
outside factors such as crop yield, weather, agricultural legislation, and the geopolitical climate could impact supply and price; however,
we do source certain ingredients from different regions and suppliers to mitigate some of this risk.
Industry-wide
shortages of certain ingredients could from time to time in the future be encountered, which could interfere with and/or delay production
of certain of our products.
Glass
Bottles and Aluminum Cans
A
significant component of our product cost is the purchase of glass bottles and aluminum cans. We are generally responsible for arranging
for the purchase and delivery to our third-party co-packers of the containers in which our beverage products are packaged. 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 2022 we entered into an agreement with a packaging broker to supply
us with 25 million sleek and standard 12-ounce cans during 2023. 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.
Legislation that would impose an excise tax on sweetened
beverages has been proposed in the U.S. Congress, in some state legislatures and by some local governments, with excise taxes generally
ranging between $0.01 and $0.02 per ounce of sweetened beverage. Berkeley, California became the first jurisdiction to pass such a measure,
and a general tax of $0.01 per ounce on certain sweetened drinks became effective on January 1, 2015. Other U.S. jurisdictions have passed
similar measures, some of which have been challenged in litigation. The imposition of such taxes on our products would increase the cost
of certain of our products or, to the extent levied directly on consumers, make certain of our products less affordable. Excise taxes
on sweetened beverages already are in effect in certain foreign countries, such as France, the United Kingdom, Ireland, South Africa,
Mexico and Colombia. Other countries are considering similar measures.
Alcoholic beverages
are regulated by federal, state and local governments in both the U.S. and abroad whose laws and regulations govern the production, distribution
and sale of alcohol beverages, including licensing, permitting, advertising and marketing. The manufacturing and sale of alcohol products
requires numerous approvals, licenses and permits from governmental agencies, including, but not limited to, the U.S. Department of Treasury,
the Alcohol and Tobacco Tax and Trade Bureau (“TTB”),
the U.S. Department of Agriculture, the FDA, state alcohol regulatory agencies and state and federal environmental agencies. Our third-party manufacturers, in particular, are subject to audits and inspections by TTB and applicable state alcohol regulatory agencies at any