Item 1A. Risk Factors 11
Item 1B. Unresolved Staff Comments 19
Item 1C. Cybersecurity 19
Item 2. Properties 19
Item 3. Legal Proceedings 19
Item 4. Mine Safety Disclosures 19
Item 6. [Reserved] 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 26
Item 8. Financial Statements and Supplementary Data F-1
Item 9A. Controls and Procedures 27
Item 9B. Other Information 27
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 27
PART III 28
Item 10. Directors, Executive Officers and Corporate Governance 28
Item 11. Executive Compensation 30
Item 14. Principal Accountant Fees and Services 35
Item 15. Exhibits and Financial Statement Schedules 37
i
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Annual Report on Form 10-K contains statements
reflecting our views about our future performance that constitute “forward-looking statements”. Statements that constitute
forward-looking statements are generally identified through the inclusion of words such as “aim,” “anticipate,”
“believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,”
“future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,”
“plan,” “position,” “potential,” “project,” “seek,” “should,”
“strategy,” “target,” “will” or similar statements or variations of such words and other similar
expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect
or anticipate will occur in the future, are forward-looking statements. These forward-looking statements are based on currently available
information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could
cause actual results to differ materially from those predicted in any such forward-looking statement. These risks and uncertainties include,
but are not limited to, those described in “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis
of Financial Condition and Results of Operations.” Investors are cautioned not to place undue reliance on any such forward-looking
statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether
as a result of new information, future events or otherwise. The discussion of risks in this report is by no means all-inclusive but is
designed to highlight what we believe are important factors to consider when evaluating our future performance.
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 32,000 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 Classic 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 pineapple flavors, 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 first ginger beer in the US; Virgil’s is an independent natural full line craft soda and is a leader in the craft soda category.
Reed’s
has 50 products that are sold throughout the United States, Canada, the United Kingdom, South Africa the Caribbean and the European Union.
It produces its products through a network of nine independent manufacturers and distribution through five independent distribution centers.
Our
common stock has been quoted on the OTCQX “Best Market” since February 16, 2023. We are a “smaller reporting company”,
meaning that the market value of our stock held by non-affiliates is less than $700.0 million and our annual revenue is less than $100.0
million during the most recently completed fiscal year. Our common stock is currently registered under section 12(g) of the Securities
Exchange Act of 1934, as amended.
Debt
Restructuring and Change of Control
During
2024, the Company experienced a change of control resulting from a series of investments by D&D Source of Life Holding Ltd., a Cayman
Islands entity (“D&D”). D&D is currently the majority stockholder of Reed’s. D&D is currently 100% owned
and controlled by Era Regenerative Medicine Ltd., a BVI company.
On
October 10, 2024, D&D purchased eight secured promissory notes of the company from funds affiliated with Whitebox Advisors, LLC (referred
to herein as “Whitebox”) for a total purchase price of $17,878,248.
On
November 14, 2024, the Company entered into a new secured one-year term loan with a principal amount of $10 million with Whitebox.
The term loan is secured by substantially all of the Company’s assets, including all intellectual property. The Company used part
of the proceeds to pay off and close its then existing ABL revolving line of credit.
On
November 19, 2024, the Company and D&D entered into an exchange agreement, whereby D&D equitized the Notes, in full, for an aggregate
of 22,478,074 shares of common stock of the Company.
Industry
Overview
Reed’s
offers its portfolio of natural hand-crafted beverages in the craft specialty foods industry as natural alternatives to the $45 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 6% during 2024 and the
ginger ale segment grew 9% and is now a $2.1 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, as a result, we believe there is substantial growth in this segment.
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.
The CSD market has been impacted by the emergence
of functional or “modern soda” beverages that are formulated with functional ingredients to enhance hydration and provide
additional benefits such as gut health, cognitive enhancement, immune support, and energy. Brands that have emerged and driving category
growth are Olipop, Poppi, Celsius, Alani Nu, and Culture Pop. These beverages are low in sugar and calories and contain minerals, vitamins,
dietary fibers or adaptogens with an assortment of flavors. The primary consumers are Gen Z and Millennials seeking healthier alternatives
to traditional soda.
Reed’s is set to launch a new
multi-functional soda line. This innovative lineup is formulated with organic ginger, complex adaptogen mushroom extracts, and
prebiotic fiber. Each serving contains only 5 grams of sugar, approximately 30 to 45 calories, 500 mg of adaptogens, and 2,000 to
5,000 mg of organic ginger. The flavor profile includes Berry Bubbly, Strawberry Vanilla, Lemongrass Ginger, and Root Beer. These
beverages cater to the rising demand for health-conscious, functional refreshment options and position us at the forefront of the
evolving beverage market. The debut of this line is set for April 2025 and continuing for the balance of the year. Presently the
Company has secured approximately 8,000 points of distribution.
Consumer
Trends Driving Growth for Our Products
The
following is a list of consumer trends that are accelerating and supporting our brands.
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 entered the alcohol space
with the launch of our RTD Classic Mule that is 7% alcohol by volume (“ABV”) with 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, 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 2024, 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,and lime, juice, honey and pineapple flavors, 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 125% 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
Real Cranberry Ginger Ale – This seasonal product launched in the fall of 2021 and is a delicious holiday
offering available September through December.
Reed’s
Harvest Spiced Apple Cider – This seasonal product launched in the fall of 2022 and is a delicious holiday offering available
September through December.
Reed’s Real Blackberry Ginger Ale -
This seasonal product launched in the fall of 2024 and is a delicious holiday offering available September through December
Reed’s
Ready to Drink
Reed’s
Zero Sugar Classic Mule – Launched in 2020 and currently sold in 14 states, 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, Cola, Vanilla Cream, Black Cherry, and Orange Cream. Beginning in
2023 Virgil’s Handcrafted soda will be offered in both glass and can formats.
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, Vanilla Cream, Black Cherry, and Orange Cream.
Flying Cauldron Soda
Flying Cauldron is a non-alcoholic
butterscotch beer prized for its creamy vanilla and butterscotch flavors. Sought after by beverage aficionados, Flying Cauldron is made
with natural ingredients and no artificial flavors, sweeteners, preservatives, gluten, caffeine, or GMOs. Flying Cauldron is available
in 4-packs, single 12 oz bottles, and 16 oz swing-lid bottles.
Our
Primary Markets
We
target a smaller segment of the estimated $45 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. In November 2023 we relaunched this ecommerce
platform, which includes a reoccurring subscription model.
Changes
to the retail landscape, including increased consolidation of retail ownership, the continued growth of sales through e-commerce websites
and mobile commerce applications, including through subscription services and other direct-to-consumer businesses, the integration of
physical and digital operations among retailers and the current economic environment continue to increase the importance of major customers.
Some
of our representative key customers include:
● Club stores: Costco
● Liquor stores: BevMo!, ABC, and Total Wine and More.
● Convenience & drug stores: Duane Reed.
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 four 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 Germany, France, UK, South Africa, Canada, Spain, Philippines,
Mexico, Vietnam, Australia, and portions of the Caribbean and Central America,
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 aluminium cans and have secured manufacturing partnerships in local markets whereby we ship concentrate rather than
finished goods. We currently have production facilities in the U.K. and will be expanding into the European Union during 2025. We
are open to exporting and co-packing internationally and expanding our brands into foreign markets and believe that our new
partnership with D&D Holdings Ltd (“D&D”) will advance our ability to successfully penetrate the continent of
Asia. We believe this area is a natural fit for Reed’s ginger products because of the popularity and importance of ginger in
international markets, 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
Our
agreements with some of our distributors 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.
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.
We
continually monitor our distribution agreements with our partners across North America to ensure that they are optimal.
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 relationships with two co-packers in Pennsylvania and three in California, one in Washington state, one in Oregon,
one in New York state, and one in North Carolina. We are actively expanding co-packing capacity and building finished goods inventory.
During 2024, we entered into co-packing agreements with a new facility in Southern California, DrinkPak. Our agreement with DrinkPak serves
to expand our production for cans and will allows us to better serve our Southwest and club customers and grow our sales in the region.
We are also in discussions and negotiations with additional co-packers to secure added capability for future production needs.
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. Further, 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 may not be able to satisfy demand on a short-term basis. We have experienced
disruptions and delays in production that have impacted our operations and revenues and there can be no assurances that we will not encounter
such disruptions in the future.
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 Fitz Mark 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 movements, 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 are in the process of formulating new products that leverage fresh organic ginger to create a portfolio of beverages targeting
the “better-for-you” lifestyle category. We look forward to the release of our new line of multi-functional beverages during
2025 with a launch during Q1. This product is formulated with organic ginger, complex adaptogen mushroom extracts, and prebiotic fibre.
Each serving contains only 5 grams of sugar, approximately 30 to 45 calories, 500 mg of adaptogens, and 2,000 to 5,000 mg of organic ginger.
The flavor profile includes Berry Bubbly, Strawberry Vanilla, Lemongrass Ginger, and Root Beer.
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
Non-alcoholic
Beverages
Success
in this competitive environment is dependent on effective promotion of existing products, effective introduction of new products and
reformulations of existing products, increased efficiency in production techniques, effective incorporation of technology and digital
tools across all areas of our business, the effectiveness of our advertising campaigns, marketing programs, product packaging and pricing,
new vending and dispensing equipment and brand and trademark development and protection. We believe that 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.
The
non-alcoholic 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. Our non-alcoholic products compete on the basis of brand recognition and loyalty,
taste, price, value, quality, innovation, distribution, shelf space, advertising, marketing and promotional activity (including digital),
packaging, convenience, service and the ability to anticipate and effectively respond to consumer preferences and trends, including increased
consumer focus on health and wellness and sustainability and the continued acceleration of e-commerce and other methods of distributing
and purchasing products. 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, Barritt’s, 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.
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.
Our
products have a relatively high price, we have minimal mass media advertising to date, and a small but growing presence in the mainstream
market compared to many of our competitors, Our success in this competitive market is dependent on our natural innovative beverage recipes,
brand innovation, packaging, commitment to the highest quality standards, use of premium ingredients, and our proprietary ginger processing
formula.
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. During 2023, the Company licensed its candy business to Rootstock Trading,
a company founded and owned by our former Chief Sales Officer, Neal Cohane. As part of this agreement, Rootstock agreed to pay a royalty
on a percentage of its net sales of licensed products. The royalty fees are 0% for 2023, 2% for 2024, 4% for 2025, and 5% thereafter.
Ready
to Drink:
The
RTD (Ready to Drink) 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 and Hard Ginger Ale 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 industry wide shortages, crop yield, weather, agricultural legislation, and the geopolitical climate impact supply
and price; however, we do source certain ingredients from different regions and suppliers to mitigate some of this risk.
Glass
Bottles and Aluminium Cans
A
significant component of our product cost is the purchase of glass bottles and aluminium 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. We source
glass bottles directly from manufacturers or indirectly through brokers or co-packers, based on their cost and availability regionally.
During 2022 we entered into a three-year agreement with a packaging broker to supply us with sleek and standard 12-ounce cans though
the year 2025. 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 non-alcoholic beverages are somewhat seasonal with higher-than-average volume in the warmer months. The volume of sales in the
beverage business is affected by weather conditions from time to time. Additionally, a portion of our products are only available at certain times of the year.
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
co-packers 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.
Regulation
We
are required to comply, and it is our policy to comply with all applicable laws in all jurisdictions in which we do business.
U.S.
laws and regulations that apply to our business and the production, distribution and sale of our products include, but are not limited
to: the Federal Food, Drug and Cosmetic Act and various state laws governing food safety and food labelling; the Food Safety Modernization
Act; the Occupational Safety and Health Act and various state laws and regulations governing workplace health and safety; various federal,
state and local environmental protection laws, as discussed below; the Federal Motor Carrier Safety Act; the Federal Trade Commission
Act; the Lanham Act and various state law statutory and common law duties regarding false advertising; various federal and state laws
and regulations governing our employment practices, including those related to equal employment opportunity, such as the Equal Employment
Opportunity Act and the National Labor Relations Act and those related to overtime compensation, such as the Fair Labor Standards Act;
various state and federal laws pertaining to sale and distribution of alcohol beverages; data privacy and personal data protection laws
and regulations, including the California Consumer Privacy Act of 2018 (as modified by the California Privacy Rights Act); customs and
foreign trade laws and regulations, including laws regarding the import or export of our products or ingredients used in our products
and tariffs; laws regulating the sale of certain of our products in schools; and laws regulating the ingredients or substances contained
in, or attributes of, our products. We are subject to various state and local statutes and regulations, including state consumer protection
laws such as Proposition 65 in California, which requires that a specific warning appear on any product that contains a substance listed
by the State of California as having been found to cause cancer or birth defects, unless the amount of such substance in the product
is below a safe harbor level.
Certain
jurisdictions have either imposed, or are considering imposing, new or increased taxes on the manufacture, distribution or sale of, ingredients
or substances contained in, or attributes of, our products or commodities used in the production of our products. These taxes vary in
scope and form: some apply to all beverages, including non-caloric beverages, while others apply only to beverages with a caloric sweetener
(e.g., sugar). Similarly, some measures apply a single tax rate per ounce/liter on beverages containing over a certain level of added
sugar (or other sweetener) while others apply a graduated tax rate depending upon the amount of added sugar (or other sweetener) in the
beverages.
Certain
jurisdictions have either imposed or are considering imposing regulations designed to increase recycling rates, encourage waste reduction,
restrict the sale of products utilizing certain packaging or to carry warnings about the environmental impact of plastic packaging. It
is possible that similar or more restrictive requirements may be proposed or enacted in the future.
Certain
jurisdictions have either imposed, or are considering imposing, new or increased taxes on the manufacture, distribution or sale of
our products, ingredients or substances contained in, or attributes of, our products or commodities used in the production of our
products. These taxes vary in scope and form: some apply to all beverages while others apply only to beverages with a caloric
sweetener (e.g., sugar). Similarly, some measures apply a single tax rate per ounce/liter on beverages containing over a certain
level of added sugar (or other sweetener) while others apply a graduated tax rate depending upon the amount of added sugar (or other
sweetener) in the beverage and some apply a flat tax rate on beverages containing a particular substance or ingredient, regardless
of the level of such substance or ingredient.
Co-packers
of our beverage products presently offer and use non-refillable, recyclable containers in the United States. Some of these co-packers
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.
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 time. Our alcohol beverages are also subject
to various taxes, license fees, and the like levied by governmental entities as well as bonds that such entities may deem necessary to
ensure compliance with applicable laws and regulations. Beginning in January 2018, the federal excise taxes imposed on domestic brewers
that produce less than 2 million barrels annually were reduced from $7.00 to $3.50 per barrel on the first 60,000 barrels shipped annually.
State and local excise taxes, on the other hand, vary based on the alcohol content and type of beverage. Federal, state, or local governments
may increase such excise taxes in the future.
Our
co-packers are subject to federal, state and local environmental laws and regulations, including those relating to air emissions, water
discharges, the use of water resources, waste disposal, and recycling. Changes in environmental compliance mandates, and any expenditures
necessary to comply with such requirements, could increase costs. In addition, continuing concern over environmental matters, including
climate change, is expected to continue to result in new or increased legal and regulatory requirements (in and outside of the United
States), including to reduce or mitigate the potential effects of greenhouse gases, to limit or impose additional costs on commercial
water use due to local water scarcity concerns, or to expand mandatory reporting of certain environmental, social and governance metrics.
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 took 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. Various municipalities, states
and foreign countries require that a deposit be charged for certain non-refillable beverage containers. The precise requirements imposed
by these measures vary by jurisdiction. Other deposit, recycling, ecotaxes and/or product stewardship proposals have been, and may in
the future be, introduced and enacted at the federal, state, and local levels, and in foreign countries. In California, we are required
to collect redemption values from our customers and to remit such redemption values to the State of California Department of Resources
Recycling and Recovery based upon the number of cans and bottles of certain carbonated and non-carbonated products sold. In certain other
states and countries where our products are sold, we are also required to collect deposits from our customers and to remit such deposits
to the respective jurisdictions based upon the number of cans and bottles of certain carbonated and non-carbonated products sold in such
states.
In
addition to the discussion in this section, see also “Item 1A. Risk Factors.”
Human Capital
Attracting, developing and retaining talent with
the right skills to drive our business is central to our growth strategy. The strength of our workforce is one of the significant contributors
to our success. Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and
integrating our existing and new employees, advisors and consultants. The principal purposes of our 2024 Inducement Plan was to retain
and reward personnel through the granting of stock-options, in order to increase shareholder value and the success of our Company by
motivating such individuals to perform to the best of their abilities and achieve our objectives.
As
of December 31, 2024, we had 24 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 websites at the following addresses:
www.drinkreeds.com
www.vigils.com
www.flyingcauldron.com
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, including exhibits, proxy and information statements
and amendments to those reports filed or furnished pursuant to Sections 13(a), 14, and 15(d) of the Exchange Act are available through
the “Investors” portion of our website www.drinkreeds.com free of charge as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Information on our websites is not part of
this Annual Report or any of our other securities filings unless specifically incorporated herein by reference. We have included our
website addresses in this Annual Report solely as inactive textual references. Our filings with the SEC may be accessed through the SEC’s
website at www.sec.gov. All statements made in any of our securities filings, including all forward-looking statements or information,
are made as of the date of the document in which the statement is included, and we do not assume or undertake any obligation to update
any of those statements or documents unless we are required to do so by law.
Item
1A. Risk Factors
The
following risks, some of which have occurred and any of which may occur in the future, can have a material adverse effect on our business
or financial performance, which in turn can affect the price of our publicly traded securities. These are not the only risks we face.
There may be other risks we are not currently aware of or that we currently deem not to be material but that may become material in the
future.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Exchange Act. We have designed our disclosure controls and procedures to reasonably
assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management,
and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
However,
any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system will be met. These inherent limitations include the realities
that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the
controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not
be detected.
Global
economic uncertainty and unfavorable global economic conditions caused by political instability, changes in trade agreements and conflicts,
such as the Russia-Ukraine conflict and the conflict in the Middle East, could adversely affect our business, financial condition, results
of operations or prospects.
Our
business, financial condition, results of operations or prospects could be adversely affected by unstable economic and political conditions
within the United States and foreign jurisdictions, including as a result of an economic downturn and geopolitical events, such as changes
in U.S. federal policy that affect the geopolitical landscape. Changes to policy implemented by the U.S. Congress, the Trump administration
or any new administration have impacted and may in the future impact, among other things, the U.S. and global economy, international
trade relations, unemployment, immigration, healthcare, taxation, the U.S. regulatory environment, inflation and other areas. For example,