Item
1. Business
Overview
Reed’s
Inc., a Delaware corporation (“Reed’s”, the “Company,” “we,” or “us” throughout
this report) owns a leading portfolio of handcrafted, all-natural beverages that is sold in over 30,000 outlets nationwide (including
the natural and specialty food channel, grocery stores, mass merchants, drug stores, convenience stores, club stores and on-premise
locations including bars and restaurants). Reed’s two core brands are Reed’s Craft Ginger Beer and Virgil’s
Handcrafted soda. Reed’s Craft Ginger Beers are unique due to the proprietary process of using fresh ginger root combined
with a Jamaican inspired recipe of natural spices, honey and fruit juices. Reed’s uses this same handcrafted approach in
its Virgil’s line of great tasting, bold flavored craft sodas, including its award-winning Virgil’s Root Beer.
Reed’s
is the leading ginger beer in the US; Virgil’s is the leading independent (not aligned with Coca-Cola, Pepsi or Keurig
Dr. Pepper) all-natural full line craft soda and is ranked fourth in the craft soda category.
Industry
Overview
Reed’s
offers its portfolio of natural hand-crafted beverages in the craft specialty foods industry as natural alternatives to the estimated
$90 billion mainstream carbonated soft drinks (“CSD”) market in the United States. Reed’s products are sold
across the country and internationally in the following major channels: natural food, specialty food, grocery, mass merchant,
convenience, club, drug, and on-premise bars and restaurants.
While
Reed’s is a top-seller in natural food store markets, it also sells nationally to major grocery chains. Sales growth of
natural food and beverage products is presently outpacing sales growth for conventional products in every region in the United
States. The trend in grocery stores is to expand offerings of natural products. We believe that as we continue to invest our attention
and resources in driving accelerated growth and building our brands, we will have the ability to scale our business and continue
to build our presence and distribution across all retail channels.
Carbonated
Soft Drink Industry Overview
The
CSD market continues to be a large category in the overall American consumer beverage industry. According to Chicago-based Mintel
in April 2017, carbonated soft drinks enjoyed about a 90% household penetration. However, years of CSD decline (13 years of decline
through 2018 according to Mintel) have resulted in an urgency to innovate within this category. The ginger ale category
has experienced steady CAGR growth of more than 5% over the last 4 years and more than 3% over the latest 52 weeks (based
on SPINS MULO/Natural/Specialty Sales ending 2/23/20. Consumers continue to increasingly embrace ginger ingredients and
ginger products. More consumers are focused on digestive health and are likely opting for the functional and digestive health
benefits of ginger-based beverages. While many consumers clearly still want to indulge in soft drinks, they are turning to ginger
beverages as a way to impart some health benefits.
The
biggest shift seen over the last decade is a redefinition of what it means to eat and drink healthfully. More consumers are opting
for naturally healthful products touting organic and natural appeals. In addition, as the craft and natural soda segment is still
underdeveloped at only 1% of the total CSD market, we believe there is significant growth potential to continue to market and
sell our portfolio of branded products and encourage consumers to switch away from mainstream beverages that contain artificial
colors, flavors, sweeteners and preservatives to great tasting natural alternatives.
Consumer
Trends Driving Growth for Our Products
The
following is a list of consumer trends that act as tailwinds as we sell and market our portfolio of ginger beer and handcrafted
beverages:
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Growing
Consumer Interest in Better-for-You and Healthier Products: According to a recent study, consumers reported that ‘healthy
options,’ followed by ‘natural ingredients’ were the two top factors when considering purchasing new products.
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Reducing
Sugar and Artificial Sweeteners: Consumers are moving away from high sugar beverages and artificially sweetened products.
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Authentic
and Distinct Brands: There is a broad, cross-generational appeal (Millennials and Boomers alike) for brands with an authentic
story, proprietary processes, higher quality ingredients and unique packaging.
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Trading
up to Premium and Craft: The $500 million craft soda and premium mixer industry segments are growing. Consumers are looking
for small batch, handcrafted brands that offer higher quality products and authentic bold flavors.
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The
Craft Soda Category is Underdeveloped: The craft soda segment is underdeveloped relative to other super-premium food and
beverage categories; it is currently less than 1% of the overall CSD category while craft beer accounts for over 20% of the
total beer category.
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Ginger
Use in Beverages is Growing: Ginger is showing up more and more in beverages, and we believe its momentum will continue.
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Growth
in Non-Alcoholic Alternatives (Mocktails) in On-Premise: More consumers are seeking non-alcoholic alternatives with bold
and unique flavors when they go out to bars and restaurants.
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Demand
for Premium Mixed Drinks: Leading the way in demand has been the Moscow Mule and Mule related cocktails, growing 30% year
over year in on-premise sales. They are now in the top five most popular cocktails in the United States according to both
Nielsen and Cheers Magazine.
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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
Our
hand-crafted natural beverages use only premium natural ingredients. Our products are free of genetically modified organisms (“GMOs”)
and are gluten free. Over the years, Reed’s has developed several product offerings. In 2019, we streamlined our
focus to our core product offerings of Reed’s Craft Ginger Beer and Virgil’s Craft Sodas and launched a new line of
Virgil’s Zero Sugar Sodas in twelve ounce cans.
Reed’s
Craft Ginger Beer
Reed’s
Craft Ginger Beer is distinguished from other ginger beers by its proprietary process of brewing fresh ginger root, its exclusive
use of all-natural ingredients, and its authentic Jamaican-inspired recipe. We do not use preservatives, artificial flavors, or
colors, and our 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 two sweetener options: one with cane
sugar, honey and fruit juices and another without sugar (Zero Sugar) made from an innovative blend of natural sweeteners (developed
in 2018 and commercialized in 2019).
As
of the end of 2019, the Reed’s Craft Ginger Beer line included four major varieties in restaged packaging:
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Reed’s
Original Ginger Beer – Our first to market product uses a Jamaican-inspired recipe that calls for fresh ginger root,
lemon, lime, honey, raw cane sugar, pineapple, herbs and spices.
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Reed’s
Extra Ginger Beer – Contains 100% more fresh ginger than Reed’s Original recipe for extra spice.
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Reed’s
Strongest Ginger Beer – Contains 200% more fresh ginger than Reed’s Original for the strongest spice.
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NEW!
Reed’s Zero Sugar Ginger Beer – launched in 2019 in bottles and cans
uses a proprietary natural sweetening system that has no added sugars.
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Virgil’s
Handcrafted Sodas
Virgil’s
is a premium handcrafted soda that uses only all-natural ingredients to create bold renditions of classic flavors. We don’t
use any preservatives, any artificial colors, or any GMO-sourced ingredients, and our Virgil’s line is certified kosher.
The
Virgil’s line includes the following products:
Handcrafted
Line: Virgil’s first Handcrafted soda was launched in 1994. It began as one man’s passion to create the finest
root beer ever produced and has since won numerous awards. Virgil’s difference is using all-natural ingredients to craft
bold, classic soda flavors. Virgil’s Handcrafted line includes Root Beer, Vanilla Cream, Black Cherry, and Orange.
Zero
Sugar Line: Virgil’s launched a new line of Zero Sugar, Zero Calorie craft sodas in 2019. Each Zero Sugar soda
is sweetened with a proprietary blend of natural sweeteners with no added sugars. This all-natural line of Zero Sugar flavors
includes Root Beer, Cola, Black Cherry, Vanilla Cream, Orange and Lemon-Lime. The product has recently been certified Keto compliant.
2020
Product Launches
During
the second quarter of 2020, Reed’s will launch the below:
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Reed’s®
Wellness Ginger Shots (Classic Ginger and Ginger Energize)
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Reed’s
® Real Ginger Ale™ (Classic and Zero Sugar)
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Reed’s
® Craft Ginger Mule. (Classic Zero Sugar)
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Our
Primary Markets
We
target a smaller segment of the estimated $90 billion mainstream carbonated and non-carbonated soft drink markets in the U.S.,
Canada, and international markets. Our brands are generally considered premium and natural, with upscale packaging. They are loosely
defined as the craft specialty bottled carbonated soft drink category.
We
have an experienced and geographically diverse sales force promoting our products, with senior sales representatives strategically
placed in multiple regions across the country, supported by local Reed’s sales staff. Additionally, we have sales managers
handling national accounts for natural, specialty, grocery, mass, club, drug and convenience channels. Our sales managers are
responsible for all activities related to the sales, distribution, and marketing of our brands to our entire retail partner and
distributor network in North America. The Company not only employs an internal sales force but has partnered with independent
sales brokers and outside representatives to promote our products in specific channels and key targeted accounts.
We
sell to well-known popular natural food and gourmet retailers, large grocery store chains, mass merchants, club stores, convenience
and drug stores, liquor stores, industrial cafeterias (corporate feeders), and to on-premise bars and restaurants nationwide and
in some international markets. We also sell our products and promotional merchandise directly to consumers via the Internet through
our Amazon storefront which can be accessed through our company web site www.drinkreeds.com.
Some
of our representative key customers include:
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Natural
stores: Whole Foods Market, Sprouts, Natural Grocers by Vitamin Cottage, Fresh Thyme Farmers Market
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Gourmet
& specialty stores: Trader Joe’s, Bristol Farms, Lazy Acres, The Fresh Market, Central Market
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Grocery
and mass chains: Kroger (and all Kroger banners), Safeway, Albertson’s, Publix, Food Lion, Stop & Shop,
H.E.B., Wegmans, Target and now Walmart
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Club
stores: Costco Wholesale
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Liquor
stores: BevMo!, Total Wine & More, Spec’s
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Convenience
& drug stores: Circle K, CVS Health
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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.
Direct
to Store Distribution (“DSD”) Through Non-Alcoholic Beverage Distributor Network
Our
independent distributor partners operate DSD systems which deliver primarily beverages, foods, and snacks directly to retail stores
where the products are merchandised by their route sales and field sales employees. DSD enables us to merchandise with maximum
visibility and appeal. DSD is especially well-suited to products frequently restocked and responds to in-store promotion and merchandising.
Direct
to Store Warehouse Distribution
Some
of our products are delivered from our co-packers and warehouses directly to customer warehouses. Some retailers mandate we deliver
directly to them, as it is more cost effective and allows them to pass savings along to their customers. Other retailers may not
mandate direct delivery, but they recommend and prefer it as they have the capability to self-distribute and can realize significant
savings with direct delivery.
Wholesale
Distribution
Our
Wholesale Distributor network handles the wholesale shipments of our products. These distributors have a warehouse and distribution
center, and ship Reed’s and Virgil’s products directly to the retailer (or to customers who opt for drop shipping).
International
Distribution
We
presently export Reed’s and Virgil’s brands throughout international markets via US based exporters. Some markets
where you’ll find our brands present are France, UK, South Africa, portions of the Caribbean, Canada, Spain, Philippines,
Israel and Australia. In the UK, our Virgil’s brands can be found at Pizza Hut, Tesco Supermarket and Sainsbury.
International
sales to some areas of the world are cost prohibitive, except for some specialty sales, since our premium sodas were historically
packed in glass, which drives substantial freight costs when shipping overseas. Despite these cost challenges, we believe there
are good opportunities to expand internationally and we are increasing our marketing focus on these areas by adding freight friendly
packages such as aluminum cans. We are open to exporting and co-packing internationally and expanding our brands into foreign
markets, and we have held preliminary discussions with trading companies and import/export companies for the distribution of our
products throughout Asia, Europe, Australia, and South America. We believe these areas are a natural fit for Reed’s ginger
products because of the popularity and importance of ginger in international markets, especially the Asian market, where ginger
is a significant part of the local diet and nutrition.
We
believe the strength of our brands, innovation, and marketing, coupled with the quality of our products and flexibility of our
distribution network, allows us to compete effectively.
Distribution
Agreements
We
have entered into agreements with some of our distributors that commit us to “termination fees” if we terminate our
agreements early or without cause. These agreements provide for our distributor partners to have the right to distribute
our products to a defined type of retailer within a defined geographic region. As is customary in the beverage industry, if we
should terminate the agreement or not automatically renew the agreement, we would be obligated to make certain payments to our
distributor partners. We constantly review our distribution agreements with our partners across North America.
Some
of our outside distributors are not bound by written agreements with us and may discontinue their relationship with us on short
notice. Most distributors handle a number of competitive products. In addition, our products are sometimes a small part
of our distributors’ businesses.
Competition
Nonalcoholic
Beverages
The
nonalcoholic beverage segment of the commercial beverage industry is highly competitive, consisting of numerous companies ranging
from small or emerging to very large and well established. The principal areas of competition include pricing, packaging, development
of new products and flavors, and marketing campaigns. Our products compete with a wide range of drinks produced by a relatively
large number of manufacturers. Many of these brands have enjoyed broad, well-established national recognition for years, through
well-funded ad and other branding campaigns. Competitors in the ginger beer category include Goslings, Fever Tree, Bundaberg,
Cock ‘n Bull and Q Tonic; in the craft soda category we compete with brands such as Stewart’s, IBC, Zevia, Blue Sky,
Hansen’s, Henry Weinhard’s, Boylan, and Jones Soda; In the Ginger Ale category we compete with Canada Dry, Schweppes,
Seagram’s and Zevia.
Important
factors affecting our ability to compete successfully include the taste and flavor of products, trade and consumer promotions,
rapid and effective development of new, unique cutting-edge products, attractive and different packaging, branded product advertising,
and pricing. We also compete for distributors who will concentrate on marketing our products over those of our competitors, provide
stable and reliable distribution, and secure adequate shelf space in retail outlets. Competitive pressures in the soft drink category
could also cause our products to be unable to gain or even lose market share, or we could experience price erosion.
Despite
our products having a relatively high price for a craft premium beverage product, minimal mass media advertising to date, and
a small but growing presence in the mainstream market compared to many of our competitors, we believe our all-natural innovative
beverage recipes, packaging, use of premium ingredients, and a proprietary ginger processing formula provide us with a competitive
advantage. Our commitments to the highest quality standards and brand innovation are keys to our success.
Shot
Category
Our
ready Wellness Ginger Shot will be entering the energy shot category that many companies have already entered. A few mainstream
companies drive the shelf stable category, but there is room for an all-natural alternative. Competition for market share and
acceptance of new products is significant. Main competitors are 5-Hour Energy, Ginger Time, and Rescue Ginger Shots.
Candy
Reed’s
Craft Ginger is at the beginning of its restage. The category is small and there isn’t a significant number of entrants.
Key competition are Chimes and Gin Gins.
Manufacturing
Our Products
Now,
100% of Reed’s product is produced by our co-pack partners, which assemble our products and charge us a fee, generally by
the case, for the products produced. We have a long-standing relationship with a co-packer in Pennsylvania and
recently engaged an additional co-packer on the East Coast. Additionally, in conjunction with the sale of our plant, we entered
into a three-year co-packing agreement with CCB, whereby CCB will produce Reed’s Inc. beverages in glass bottles at prevailing
West Coast market rates. During the first quarter of 2019, we also entered into a one-year co-packing agreement with Sonoma Beverage
Company, also on the West Coast. We are in discussion 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.
Raw
Materials
General
Substantially
all of the raw materials used in the preparation, bottling and packaging of our products are purchased by Reed’s or by our
contract packers in accordance with our specifications.
Generally,
the raw materials used in our products are obtained from domestic and foreign suppliers and many of the materials have multiple
reliable suppliers. This provides a level of protection against a major supply constriction or adverse cost or supply impacts.
Since our raw materials are common ingredients and supply is easily accessible, we have few long-term contracts in place with
our suppliers.
A
significant component of our product cost is the purchase of glass bottles and aluminum cans. In December 2017, we entered into
an exclusive strategic partnership with Owens-Illinois (glass), and in February 2018 we entered into a strategic partnership with
Crown Cork & Seal for aluminum cans. Both suppliers provide expertise in emerging package and material innovation that
can be leveraged to further expand marketing and package offerings.
Production
As
part of our ongoing initiative to simplify and streamline operations, we have identified approximately thirty-five core products
on which to place our strategic focus. These core products consist of Reed’s and Virgil’s branded beverages, which
accounted for approximately 96% of sales in 2019. Product innovation within these two major lines remains a top
priority.
Warehousing
and Distribution
Warehousing
and Logistics are a significant portion of the Company’s operational costs. In order to drive efficiency and reduce costs,
on February 1, 2019 we entered into a strategic partnership with Veritiv Logistics Solutions to manage all freight movement for
the Company. Veritiv is one of the largest distribution service providers in North America and has expertise that will provide
a competitive advantage in the movement of raw materials and finished goods. This partnership will support planning and execution
of all inventory movement, assessment of storage needs and cost management.
We
follow a “fill as needed” model to the best of our ability and have no significant order backlog.
New
Product Development
While
we have simplified our business and have streamlined a significant number of SKUs in order to further our primary objective of
accelerating the growth of the Reed’s and Virgil’s core product offerings, we believe significant opportunity remains
in the all-natural beverage space. Healthier alternatives will be the future for carbonated soft drinks. We will continue to drive
product development in the all-natural, no and low sugar offerings in the “better for you” beverage categories. In
addition, we believe there are powerful consumer trends that will help propel the growth of our brand portfolio including the
increased consumption of ginger as a recognized superfood, the growing use of ginger beer in today’s popular cocktail drinks,
and consumers’ increased demand for higher quality, all-natural handcrafted beverages.
Chris
Reed, the Company’s founder and Chief Innovation Officer continues to support our new product development efforts in 2020.
Mr. Reed possesses thirty years of product development and innovation experience. Recent innovations include our compelling line
of full flavor, all-natural, zero sugar, zero calorie sodas. Reed’s has also begun to expand and broaden its product development
capabilities by engaging and working with larger, experienced beverage flavor houses and innovative ingredient research and supply
companies.
We
believe our new business model enhances our ability to be nimble and innovative, producing category leading new products in a
short period of time.
Licensing
We
have entered into a licensing agreement with Full Sail Brewery headquartered in Hood River, Oregon to manufacture and sell our
new line of Reed’s Alcoholic Moscow Mule in 4 pack cans. Full Sail will manage all aspects of production and distribution.
Seasonality
Sales
of our nonalcoholic beverages are somewhat seasonal with a higher than average volume in the warmer months. The volume of sales
in the beverage business may be affected by weather conditions.
Proprietary
Rights
We
own copyrights, trademarks and trade secrets relating to our products and the processes for their production; the packages used
for our products; and the design and operation of various processes and equipment used in our business. Some of our proprietary
rights are licensed to our co-packers and suppliers and other parties. Reed’s ginger processing and brewing process, finished
beverage products and concentrate formulas are among its most valuable trade secrets.
We
own trademarks in the United States that we consider material to our business. Trademarks in the United States are valid as long
as they are in use and/or their registrations are properly maintained. Pursuant to our manufacturing and bottling agreements,
we authorize our bottlers to use applicable Reed’s trademarks in connection with their manufacture, sale and distribution
of our products. We intend to obtain trademarks in international markets as may become necessary.
We
use confidentiality and non-disclosure agreements with employees, manufacturers and distributors to protect our proprietary rights.
Mr. Reed is also subject to an intellectual property agreement with Reed’s restricting competition consistent with his fiduciary
obligations to Reed’s.
Regulation
General
The
production, distribution and sale in the United States of many of our products are subject to the Federal Food, Drug, and Cosmetic
Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, competition laws, federal, state and local
workplace health and safety laws, various federal, state and local environmental protection laws, and various other federal, state
and local statutes and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients
of such products. Outside the United States, the distribution and sale of our many products and related operations are also subject
to numerous similar and other statutes and regulations.
A
California law known as Proposition 65 requires a specific warning to appear on any product containing a component listed by the
state as having been found to cause cancer or birth defects. The state maintains lists of these substances and periodically adds
other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having to provide
warnings on their products in California because it does not provide for any generally applicable quantitative threshold below
which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount
of a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not
require a warning if the manufacturer of a product can demonstrate that the use of that product exposes consumers to a daily quantity
of a listed substance that is:
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below
a “safe harbor” threshold that may be established;
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naturally
occurring;
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the
result of necessary cooking; or
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subject
to another applicable exemption.
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Company beverages produced for sale in California are currently required to display warnings under this law. We are unable to
predict whether a component found in a Company product might be added to the California list in the future, although the state
has initiated a regulatory process in which caffeine and other natural occurring substances will be evaluated for listing. Furthermore,
we are also unable to predict when or whether the increasing sensitivity of detection methodology may become applicable under
this law and related regulations as they currently exist, or as they may be amended, might result in the detection of an infinitesimal
quantity of a listed substance in a beverage of ours produced for sale in California.
Bottlers
of our beverage products presently offer and use non-refillable, recyclable containers in the United States. Some of these bottlers
also offer and use refillable containers, which are also recyclable. Legal requirements apply in various jurisdictions in the
United States and overseas requiring deposits or certain taxes or fees be charged for the sale, marketing and use of certain non-refillable
beverage containers. The precise requirements imposed by these measures vary. Other types of beverage container-related deposit,
recycling, tax and/or product stewardship statutes and regulations also apply in various jurisdictions in the United States and
overseas. We anticipate additional, similar legal requirements may be proposed or enacted in the future at local, state and federal
levels, both in the United States and elsewhere.
All
of our facilities and other operations in the United States are subject to various environmental protection statutes and regulations,
including those relating to the use of water resources and the discharge of wastewater. Our policy is to comply with all such
legal requirements. Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse
effect on our capital expenditures, net income or competitive position.
Environmental
Matters
Our
primary cost pertaining to environmental compliance activity is in recycling fees and redemption values. We are required to collect
redemption values from our customers and remit those redemption values to the state, based upon the number of bottles or cans
of certain products sold in the state.
Our
Employees
As
of December 31, 2019, we have 28 full-time equivalent employees on our corporate staff.
We
employ additional people on a part-time basis as needed. We have never participated in a collective bargaining agreement. We believe
relations with our employees are good.
Available
Information
We
are subject to the reporting requirements of the Exchange Act and, accordingly, we file annual reports, quarterly
reports and other information with the Securities and Exchange Commission, or SEC. Access to copies of our Annual Reports
on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other filings with the SEC, including
amendments to such filings, may be obtained free of charge from our website, http://www.reedsinc.com. These filings
are available promptly after we file them with, or furnish them to, the SEC. We are not incorporating our website or any information
from the website into this annual report. The SEC also maintains a website, http://www.sec.gov, that contains our Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Report on Form 8-K and other filings with the SEC. Access
to these filings is free of charge.
Item
1A. Risk Factors
The
following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented
in our forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent
those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also harm our business.
All forward-looking statements in this document are based on information available to us as of the date hereof, and we assume
no obligations to update any such forward-looking statements.
Risks
Relating to Our Business
We
have a history of operating losses.
For
the year ended December 31, 2019, the Company recorded a net loss of $16,112 and used cash in operations of $18,161. As
of December 31, 2019, we had a cash balance of $913 with borrowing capacity of $3,235, stockholders’ equity of $1,147 and
a working capital of $4,885, compared to a cash balance of $624, stockholder’s deficit of $6,743 and working capital shortfall
of $3,297 at December 31, 2018.
During
the years ended December 31, 2019 and 2018, the Company experienced significant financing shortages and engaged
in two separate transactions to raise capital in 2019. Recently, the Company received net proceeds of $14,867,257
from an underwritten offering of common stock in February 2019 and $7,474,441 from an underwritten offering of common stock
in October 2019.
If
we continue to suffer losses from operations, our working capital may be insufficient to support our ability to expand our business
operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be
no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available
or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce
our level of operations, including reducing infrastructure, promotions, sales and marketing programs, personnel and other operating
expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are
not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage
of opportunities, develop products or services or otherwise respond to competitive pressures, could be significantly limited.
We
may need additional financing in the future, which may not be available when needed or may be costly and dilutive.
We
may require additional financing to support our working capital needs in the future. The amount of additional capital we may require,
the timing of our capital needs and the availability of financing to fund those needs will depend on a number of factors, including
our strategic initiatives and operating plans, the performance of our business and the market conditions for debt or equity financing.
Additionally, the amount of capital required will depend on our ability to meet our case sales goals and otherwise successfully
execute our operating plan. We believe it is imperative to meet these sales objectives in order to lessen our reliance on external
financing in the future. Although we believe various debt and equity financing alternatives will be available to us to support
our working capital needs, financing arrangements on acceptable terms may not be available to us when needed. Additionally, these
alternatives may require significant cash payments for interest and other costs or could be highly dilutive to our existing shareholders.
Any such financing alternatives may not provide us with sufficient funds to meet our long-term capital requirements. If necessary,
we may explore strategic transactions that we consider to be in the best interest of the Company and our shareholders, which may
include, without limitation, public or private offerings of debt or equity securities, and other strategic alternatives; however,
these options may not ultimately be available or feasible.
Our
indebtedness and liquidity needs could restrict our operations and make us more vulnerable to adverse economic conditions.
Our
existing indebtedness may adversely affect our operations and limit our growth, and we may have difficulty making debt service
payments on such indebtedness as payments become due. We may also experience the occurrence of events of default or breach of
financial covenants. If market or other economic conditions deteriorate, our ability to comply with these covenants may be impaired.
If we violate any of the restrictions or covenants, a significant portion of our indebtedness may become immediately due and payable,
our lenders’ commitment to make further loans to us may terminate. We might not have, or be able to obtain, sufficient funds
to make these accelerated payments.
Our
secured credit facility with Rosenthal and Rosenthal, Inc. contains financial covenants that, if breached, could trigger default.
Pursuant
to our Financing Agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) dated October 4, 2018 for our secured
credit facility, we are required to maintain at the end of each of our fiscal quarters, tangible net worth in an amount not less
than negative $1,500,000 and working capital of not less than negative $2,500,000. We did not meet these requirements for the
fiscal quarter ended December 31, 2018, and Rosenthal waived compliance with these covenants for this period for a $5,000 fee.
We have been in compliance since. Any breach that is not waived by Rosenthal could trigger default.
The
recent global coronavirus outbreak could harm our business and results of operations.
In
March 2020 the World Health Organization declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which
has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies,
and financial markets globally, potentially leading to an economic downturn. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Disruption
within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial
condition and results of operations.
Our
ability, through our suppliers, business partners, contract manufacturers, independent distributors and retailers, to produce,
transport, distribute and sell products is critical to our success.
Damage
or disruption to our suppliers or to manufacturing or distribution capabilities due to weather, natural disaster, fire or explosion,
terrorism, pandemics such as COVD-19 and influenza, labor strikes or other reasons, could impair the manufacture, distribution
and sale of our products. Many of these events are outside of our control. Failure to take adequate steps to protect against or
mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, could adversely
affect our business, financial condition and results of operations.
Our
reliance on distributors, retailers and brokers could affect our ability to efficiently and profitably distribute and market our
products, maintain our existing markets and expand our business into other geographic markets.
Our
ability to maintain and expand our existing markets for our products, and to establish markets in new geographic distribution
areas, is dependent on our ability to establish and maintain successful relationships with reliable distributors, retailers and
brokers strategically positioned to serve those areas. Most of our distributors, retailers and brokers sell and distribute competing
products and our products may represent a small portion of their businesses. The success of this network will depend on the performance
of the distributors, retailers and brokers of this network. There is a risk that the mentioned entities may not adequately perform
their functions within the network by, without limitation, failing to distribute to sufficient retailers or positioning our products
in localities that may not be receptive to our product. Our ability to incentivize and motivate distributors to manage and sell
our products is affected by competition from other beverage companies who have greater resources than we do. To the extent that
our distributors, retailers and brokers are distracted from selling our products or do not employ sufficient efforts in managing
and selling our products, including re-stocking the retail shelves with our products, our sales and results of operations could
be adversely affected. Furthermore, such third-parties’ financial position or market share may deteriorate, which could
adversely affect our distribution, marketing and sales activities.
Our
ability to maintain and expand our distribution network and attract additional distributors, retailers and brokers will depend
on a number of factors, some of which are outside our control. Some of these factors include:
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the
level of demand for our brands and products in a particular distribution area;
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our
ability to price our products at levels competitive with those of competing products; and
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our
ability to deliver products in the quantity and at the time ordered by distributors, retailers and brokers.
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We
may not be able to successfully manage all or any of these factors in any of our current or prospective geographic areas of distribution.
Our inability to achieve success with regards to any of these factors in a geographic distribution area will have a material adverse
effect on our relationships in that particular geographic area, thus limiting our ability to maintain or expand our market, which
will likely adversely affect our revenues and financial results.
We
incur significant time and expense in attracting and maintaining key distributors.
Our
marketing and sales strategy depends in large part on the availability and performance of our independent distributors. We currently
do not have, nor do we anticipate in the future that we will be able to establish, long-term contractual commitments from some
of our distributors. We may not be able to maintain our current distribution relationships or establish and maintain successful
relationships with distributors in new geographic distribution areas. Moreover, there is the additional possibility that we may
have to incur additional expenditures to attract and maintain key distributors in one or more of our geographic distribution areas
in order to profitably exploit our geographic markets.
If
we lose any of our key distributors or national retail accounts, our financial condition and results of operations could be adversely
affected.
We
depend in large part on distributors to distribute our beverages and other products. Some of our outside distributors are not
bound by written agreements with us and may discontinue their relationship with us on short notice. Some distributors handle a
number of competitive products. In addition, our products are a small part of our distributors’ businesses.
We
continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other
direct store delivery distributors having established sales, marketing and distribution organizations. Many of our distributors
are affiliated with and manufacture and/or distribute other soda and non-carbonated brands and other beverage products. In many
cases, such products compete directly with our products.
The
marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing
distributors and/or if we fail to attract additional distributors, and/or our distributors do not market and promote our products
above the products of our competitors, our business, financial condition and results of operations could be adversely affected.
It
is difficult to predict the timing and amount of our sales because our distributors are not required to place minimum orders with
us.
Our
independent distributors and national accounts are not required to place minimum monthly or annual orders for our products. In
order to reduce their inventory costs, independent distributors typically order products from us on a “just in time”
basis in quantities and at such times based on the demand for the products in a particular distribution area. Accordingly, we
cannot predict the timing or quantity of purchases by any of our independent distributors or whether any of our distributors will
continue to purchase products from us in the same frequencies and volumes as they may have done in the past. Additionally, our
larger distributors and partners may make orders that are larger than we have historically been required to fill. Shortages in
inventory levels, supply of raw materials or other key supplies could negatively affect us.
If
we do not adequately manage our inventory levels, our operating results could be adversely affected.
We
need to maintain adequate inventory levels to be able to deliver products to distributors on a timely basis. Our inventory supply
depends on our ability to correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise,
particularly for new products, seasonal promotions and new markets. If we materially underestimate demand for our products or
are unable to maintain sufficient inventory of raw materials, we might not be able to satisfy demand on a short-term basis. If
we overestimate distributor or retailer demand for our products, we may end up with too much inventory, resulting in higher storage
costs, increased trade spending and the risk of inventory spoilage. If we fail to manage our inventory to meet demand, we could
damage our relationships with our distributors and retailers and could delay or lose sales opportunities, which would unfavorably
impact our future sales and adversely affect our operating results. In addition, if the inventory of our products held by our
distributors and retailers is too high, they will not place orders for additional products, which would also unfavorably impact
our sales and adversely affect our operating results.
Our
dependence on independent contract manufacturers could make management of our manufacturing and distribution efforts inefficient
or unprofitable.
We
are expected to arrange for our contract manufacturing needs sufficiently in advance of anticipated requirements, which is customary
in the contract manufacturing industry for comparably sized companies. Based on the cost structure and forecasted demand for the
particular geographic area where our contract manufacturers are located, we continually evaluate which of our contract manufacturers
to use. To the extent demand for our products exceeds available inventory or the production capacity of our contract manufacturing
arrangements, or orders are not submitted on a timely basis, we will be unable to fulfill distributor orders on demand. Conversely,
we may produce more product inventory than warranted by the actual demand for it, resulting in higher storage costs and the potential
risk of inventory spoilage. Our failure to accurately predict and manage our contract manufacturing requirements and our inventory
levels may impair relationships with our independent distributors and key accounts, which, in turn, would likely have a material
adverse effect on our ability to maintain effective relationships with those distributors and key accounts.
Increases
in costs of packaging, ingredients and contract manufacturing tolling fees may have an adverse impact on our gross margin.
Over
the past few years, costs of organic and natural ingredients have increased due to increased demand and required the Company to
obtain these ingredients from a wider population of qualified vendors. Packaging costs such as paper and aluminum cans have experienced
industry wide price increases in the past and there is always the risk that the company’s co-packers increase their toll
rates based on increases in their fixed and variable costs. If the Company is unable to pass on these costs, the gross margin
will be significantly impacted.
Increased
market spending may not drive volume growth
The
Company’s marketing efforts in the past have been limited. The current increase in marketing spending may not generate an
increase in sales volume resulting in a net decrease in gross revenue.
Increases
in costs of energy and freight may have an adverse impact on our gross and operating margins.
Over
the past few years, volatility in the global oil markets has resulted in high fuel prices, which many shipping companies have
passed on to their customers by way of higher base pricing and increased fuel surcharges. With recent declines in fuel prices,
some companies have been slow to pass on decreases in their fuel surcharges. If fuel prices increase again, we expect to experience
higher shipping rates and fuel surcharges, as well as energy surcharges on our raw materials. It is hard to predict what will
happen in the fuel markets in 2020. Due to the price sensitivity of our products, we may not be able to pass such increases
on to our customers.
If
we are unable to attract and retain key personnel, our efficiency and operations would be adversely affected.
Our
success depends on our ability to attract and retain highly qualified employees in such areas as sales, marketing, product development,
supply chain, finance and accounting. In general, we compete to hire new employees, and, in some cases, must train them and develop
their skills and competencies. Our operating results could be adversely affected by increased costs due to increased competition
for employees, higher employee turnover or increased employee benefit costs. Any unplanned turnover, particularly involving our
key personnel, could negatively impact our operations, financial condition and employee morale.
If
we fail to protect our trademarks and trade secrets, we may be unable to successfully market our products and compete effectively.
We
rely on a combination of trademark and trade secrecy laws, confidentiality procedures and contractual provisions to protect our
intellectual property rights. Failure to protect our intellectual property could harm our brand and our reputation, and adversely
affect our ability to compete effectively. Further, enforcing or defending our intellectual property rights, including our trademarks,
copyrights, licenses and trade secrets, could result in the expenditure of significant financial and managerial resources. We
regard our intellectual property, particularly our trademarks and trade secrets, to be of considerable value and importance to
our business and our success, and we actively pursue the registration of our trademarks in the United States and internationally.
However, the steps taken by us to protect these proprietary rights may not be adequate and may not prevent third parties from
infringing or misappropriating our trademarks, trade secrets or similar proprietary rights. In addition, other parties may seek
to assert infringement claims against us, and we may have to pursue litigation against other parties to assert our rights. Any
such claim or litigation could be costly. In addition, any event that would jeopardize our proprietary rights or any claims of
infringement by third parties could have a material adverse effect on our ability to market or sell our brands, profitably exploit
our products or recoup our associated research and development costs.
Litigation
or legal proceedings could expose us to significant liabilities and damage our reputation.
We
may become party to litigation claims and legal proceedings. Litigation involves significant risks, uncertainties and costs, including
distraction of management attention away from our business operations. We evaluate litigation claims and legal proceedings to
assess the likelihood of unfavorable outcomes and to estimate, if possible, the amount of potential losses. Based on these assessments
and estimates, we establish reserves and disclose the relevant litigation claims or legal proceedings, as appropriate. These assessments
and estimates are based on the information available to management at the time and involve a significant amount of management
judgment. Actual outcomes or losses may differ materially from those envisioned by our current assessments and estimates. Our
policies and procedures require strict compliance by our employees and agents with all U.S. and local laws and regulations applicable
to our business operations, including those prohibiting improper payments to government officials. Nonetheless, our policies and
procedures may not ensure full compliance by our employees and agents with all applicable legal requirements. Improper conduct
by our employees or agents could damage our reputation or lead to litigation or legal proceedings that could result in civil or
criminal penalties, including substantial monetary fines, as well as disgorgement of profits.
We
are subject to risks inherent in sales of products in international markets.
Our
operations outside of the United States contribute to our revenue and profitability, and we believe that developing and emerging
markets present important future growth opportunities for us. However, there can be no assurance that existing or new products
that we manufacture, distribute or sell will be accepted or be successful in any particular foreign market, due to local or global
competition, product price, cultural differences, consumer preferences or otherwise. Here are many factors that could adversely
affect demand for our products in foreign markets, including our inability to attract and maintain key distributors in these markets;
volatility in the economic growth of certain of these markets; changes in economic, political or social conditions, imposition
of new or increased labeling, product or production requirements, or other legal restrictions; restrictions on the import or export
of our products or ingredients or substances used in our products; inflationary currency, devaluation or fluctuation; increased
costs of doing business due to compliance with complex foreign and U.S. laws and regulations. If we are unable to effectively
operate or manage the risks associated with operating in international markets, our business, financial condition or results of
operations could be adversely affected.
Changes
in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters
could significantly affect our financial results.
The
United States generally accepted accounting principles and related pronouncements, implementation guidelines and interpretations
with regard to a wide variety of matters that are relevant to our business, such as, but not limited to, stock-based compensation,
trade spend and promotions, and income taxes are highly complex and involve many subjective assumptions, estimates and judgments
by our management. Changes to these rules or their interpretation or changes in underlying assumptions, estimates or judgments
by our management could significantly change our reported results.
We
have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If
not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial
reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial
obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common
stock.
Maintaining
effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce
reliable financial statements. As discussed in Item 9A – “Controls and Procedures” of this Form 10-K, we have
re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they
were not effective as of December 31, 2019.
A
material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis. The material weaknesses we identified are (1) ineffective controls over outsourced IT
systems and business processes and (2) inadequate segregation of duties within accounting processes.
The
Company is committed to remediating its material weaknesses as promptly as possible. Implementation of the Company’s remediation
plans has commenced and is being overseen by the audit committee. However, there can be no assurance as to when these material
weaknesses will be remediated or that additional material weaknesses will not arise in the future. Even effective internal control
can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. Any failure
to remediate the material weaknesses, or the development of new material weaknesses in our internal control over financial reporting,
could result in material misstatements in our financial statements, which in turn could
have a material adverse effect on our financial condition and the trading price of our common stock and we could fail to
meet our financial reporting obligations.
If
we are unable to build and sustain proper information technology infrastructure, our business could suffer.
We
depend on information technology as an enabler to improve the effectiveness of our operations and to interface with our customers,
as well as to maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary
to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies,
the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breaches.
We
could be subject to cybersecurity attacks.
Cybersecurity
attacks are evolving and include malicious software, attempts to gain unauthorized access to data, and other electronic security
breaches that could lead to disruptions in business processes, unauthorized release of confidential or otherwise protected information
and corruption of data. Such unauthorized access could subject us to operational interruption, damage to our brand image and private
data exposure, and harm our business.
Risks
Factors Relating to Our Industry
The
current aluminum can shortage could harm our ability to meet consumer demand.
As
a craft beverage company, we do not meet volume requirements to have a contract in place with our aluminum can supplier. Craft
beverage companies such as us are facing an aluminum can shortage for certain sizes. While standard 12 ounce can supply is not
in short supply, we will continue to see supply issues with non-standard cans such as slim cans in 8, 10, and 12 ounces. This
aluminum can shortage could harm our ability to timely produce enough product to meet consumer demand.
We
may experience a reduced demand for some of our products due to health concerns (including obesity) and legislative initiatives
against sweetened beverages.
Consumers
are concerned about health and wellness; public health officials and government officials are increasingly vocal about obesity
and its consequences. There has been a trend among some public health advocates and dietary guidelines to recommend a reduction
in sweetened beverages, as well as increased public scrutiny, potential new taxes on sugar-sweetened beverages, and additional
governmental regulations concerning the marketing and labeling/packing of the beverage industry. Additional or revised regulatory
requirements, whether labeling, tax or otherwise, could have a material adverse effect on our financial condition and results
of operations. Further, increasing public concern with respect to sweetened beverages could reduce demand for our beverages and
increase desire for more low-calorie soft drinks, water, enhanced water, coffee-flavored beverages, tea, and beverages with natural
sweeteners. We are continuously working to launch new products that round out our diversified portfolio.
Legislative
or regulatory changes that affect our products could reduce demand for products or increase our costs.
Taxes
imposed on the sale of certain of our products by federal, state and local governments in the United States, Canada or other countries
in which we operate could cause consumers to shift away from purchasing our beverages. Several municipalities in the United States
have implemented or are considering implementing taxes on the sale of certain “sugared” beverages, including non-diet
soft drinks, fruit drinks, teas and flavored waters to help fund various initiatives. These taxes could materially affect our
business and financial results.
Additional
taxes levied on us could harm our financial results.
Recent
legislative proposals to reform U.S. taxation of non-U.S. earnings could have a material adverse effect on our financial results
by subjecting a significant portion of our non-U.S. earnings to incremental U.S. taxation and/or by delaying or permanently deferring
certain deductions otherwise allowed in calculating our U.S. tax liabilities.
We
compete in an industry that is brand-conscious, so brand name recognition and acceptance of our products are critical to our success.
Our
business is substantially dependent upon awareness and market acceptance of our products and brands by our targeted consumers.
In addition, our business depends on acceptance by our independent distributors of our brands as beverage brands that have the
potential to provide incremental sales growth rather than reduce distributors’ existing beverage sales. Although we believe
that we have been relatively successful towards establishing our brands as recognizable brands in the all-natural “better
for you” beverage industry, it may be too early in the product life cycle of these brands to determine whether our products
and brands will achieve and maintain satisfactory levels of acceptance by independent distributors, retail customers and consumers.
We believe that the success of our brands will also be substantially dependent upon acceptance of our product name brands. Accordingly,
any failure of our brands to maintain or increase acceptance or market penetration would likely have a material adverse effect
on our revenues and financial results.
Competition
from traditional non-alcoholic beverage manufacturers may adversely affect our distribution relationships and may hinder development
of our existing markets, as well as prevent us from expanding our markets.
We
target a niche in the estimated $90 billion carbonated and non-carbonated soft drink markets in the US, Canada and international
markets. Our brands are generally regarded as premium and natural, with upscale packaging and are loosely defined as the artisanal
(craft), premium bottled carbonated soft drink category. The soft drink industry is highly fragmented, and the craft soft drink
category consists of such competitors as IBC, Stewart’s, Zevia, Henry Weinhard’s, Hansen’s, Izze, Boylan and
Jones Soda, to name a few. These brands have the advantage of being seen widely in the national market and being commonly known
for years through well-funded ad campaigns. Our products have a relatively high price for an artisanal premium beverage product,
minimal mass media advertising to date and a small but growing presence in the mainstream market compared to some of our larger
competitors.
The
beverage industry is highly competitive. We compete with other beverage companies not only for consumer acceptance but also for
shelf space in retail outlets and for marketing focus by our distributors, all of which also distribute other beverage brands.
Our products compete with a wide range of drinks produced by a relatively large number of manufacturers, most of which have substantially
greater financial, marketing and distribution resources than ours. Some of these competitors are placing pressure on independent
distributors not to carry competitive sparkling brands such as ours. We also compete with regional beverage producers and “private
label” soft drink suppliers.
Increased
competitor consolidations, market-place competition, particularly among branded beverage products, and competitive product and
pricing pressures could impact our earnings, market share and volume growth. If, due to such pressure or other competitive threats,
we are unable to sufficiently maintain or develop our distribution channels, we may be unable to achieve our current revenue and
financial targets. As a means of maintaining and expanding our distribution network, we intend to introduce new, innovative products
and packages. We may not be successful in doing this and other companies may be more successful in this regard over the long term.
Competition, particularly from companies with greater financial and marketing resources than ours, could have a material adverse
effect on our existing markets, as well as on our ability to expand the market for our products.
We
compete in an industry characterized by rapid changes in consumer preferences and public perception, so our ability to continue
developing new products to satisfy our consumers’ changing preferences will determine our long-term success.
Failure
to introduce new products or product extensions into the marketplace as current ones mature and to meet our consumers’ changing
preferences could prevent us from gaining market share and achieving long-term profitability. Product lifecycles can vary, and
consumers’ preferences and loyalties change over time. Although we try to anticipate these shifts and innovate new products
to introduce to our consumers, we may not succeed. Customer preferences also are affected by factors other than taste, such as
health and nutrition considerations and obesity concerns, shifting consumer needs, changes in consumer lifestyles, increased consumer
information and competitive product and pricing pressures. Sales of our products may be adversely affected by the negative publicity
associated with these issues. If we do not adequately anticipate or adjust to respond to these and other changes in customer preferences,
we may not be able to maintain and grow our brand image and our sales may be adversely affected.
Global
economic conditions may continue to adversely impact our business and results of operations.
The
beverage industry, and particularly those companies selling premium beverages, can be affected by macro-economic factors, including
changes in national, regional, and local economic conditions, unemployment levels and consumer spending patterns, which together
may impact the willingness of consumers to purchase our products as they adjust their discretionary spending. Adverse economic
conditions may negatively impact the ability of our distributors to obtain the credit necessary to fund their working capital
needs, which could negatively impact their ability or desire to continue to purchase products from us in the same frequencies
and volumes as they have done in the past. If we experience adverse economic conditions in the future, sales of our products could
be adversely affected, collectability of accounts receivable may be compromised, and we may face obsolescence issues with our
inventory, any of which could have a material adverse impact on our operating results and financial condition.
If
we encounter product recalls or other product quality issues, our business may suffer.
Product
quality issues, real or imagined, or allegations of product contamination, even when false or unfounded, could tarnish our image
and could cause consumers to choose other products. In addition, because of changing government regulations or implementation
thereof, or allegations of product contamination, we may be required from time to time to recall products entirely or from specific
markets. Product recalls could affect our profitability and could negatively affect brand image.
We
could be exposed to product liability claims.
Although
we have product liability and basic recall insurance, insurance coverage may not be sufficient to cover all product liability
claims that may arise. To the extent our product liability coverage is insufficient, a product liability claim would likely have
a material adverse effect upon our financial condition. In addition, any product liability claim brought against us may materially
damage the reputation and brand image of our products and business.
Our
business is subject to many regulations and noncompliance is costly.
The
production, marketing and sale of our beverages, including contents, labels, caps and containers, are subject to the rules and
regulations of various federal, provincial, state and local health agencies. If a regulatory authority finds that a current or
future product or production run is not in compliance with any of these regulations, we may be fined, or production may be stopped,
which would adversely affect our financial condition and results of operations. Similarly, any adverse publicity associated with
any noncompliance may damage our reputation and our ability to successfully market our products. Furthermore, the rules and regulations
are subject to change from time to time and while we closely monitor developments in this area, we cannot anticipate whether changes
in these rules and regulations will impact our business adversely. Additional or revised regulatory requirements, whether labeling,
environmental, tax or otherwise, could have a material adverse effect on our financial condition and results of operations.
Significant
additional labeling or warning requirements may inhibit sales of affected products.
Various
jurisdictions may seek to adopt significant additional product labeling or warning requirements relating to the chemical content
or perceived adverse health consequences of certain of our products. These types of requirements, if they become applicable to
one or more of our products under current or future environmental or health laws or regulations, may inhibit sales of such products.
In California, a law requires that a specific warning appear on any product that contains a component listed by the state as having
been found to cause cancer or birth defects. This law recognizes no generally applicable quantitative thresholds below which a
warning is not required. If a component found in one of our products is added to the list, or if the increasing sensitivity of
detection methodology that may become available under this law and related regulations as they currently exist, or as they may
be amended, results in the detection of an infinitesimal quantity of a listed substance in one of our beverages produced for sale
in California, the resulting warning requirements or adverse publicity could affect our sales.
We
may not be able to develop successful new beverage products, which are important to our growth.
An
important part of our strategy is to increase our sales through the development of new beverage products. We cannot provide assurance
that we will be able to continue to develop, market and distribute future beverage products that will enjoy market acceptance.
The failure to continue to develop new beverage products that gain market acceptance could have an adverse impact on our growth
and materially adversely affect our financial condition. We may have higher obsolescent product expense if new products fail to
perform as expected due to the need to write off excess inventory of the new products.
Our
results of operations may be impacted in various ways by the introduction of new products, even if they are successful, including
the following:
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sales
of new products could adversely impact sales of existing products;
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we
may incur higher cost of goods sold and selling, general and administrative expenses in the periods when we introduce new
products due to increased costs associated with the introduction and marketing of new products, most of which are expensed
as incurred; and
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when
we introduce new platforms and package sizes, we may experience increased freight and logistics costs as our co-packers adjust
their facilities for the new products.
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The
growth of our revenues is dependent on acceptance of our products by mainstream consumers.
We
have dedicated significant resources to introduce our products to the mainstream consumer. As such, we have increased our sales
force and executed agreements with distributors who, in turn, distribute to mainstream consumers at grocery stores and other retailers.
If our products are not accepted by the mainstream consumer, our business could suffer.
Our
failure to accurately estimate demand for our products could adversely affect our business and financial results.
We
may not correctly estimate demand for our products. Our ability to estimate demand for our products is imprecise, particularly
with new products, and may be less precise during periods of rapid growth, particularly in new markets. If we materially underestimate
demand for our products or are unable to secure sufficient ingredients or raw materials including, but not limited to, glass,
cans, cartons, labels, flavors or packing arrangements, we might not be able to satisfy demand on a short-term basis. Furthermore,
industry-wide shortages of certain juice concentrates and sweeteners have been and could, from time to time in the future, be
experienced, which could interfere with and/or delay production of certain of our products and could have a material adverse effect
on our business and financial results. We do not use hedging agreements or alternative instruments to manage this risk.
The
loss of our largest customers would substantially reduce revenues.
Our
customers are material to our success. If we are unable to maintain good relationships with our existing customers, our business
could suffer.
During
the year ended December 31, 2019, the Company had two broker/distributors that accounted for approximately 12% and
11% of its sales, respectively; and during the year ended December 31, 2018, the Company had two broker/distributors
that accounted for 24% and 17% of its sales, respectively. These two broker/distributors serve hundreds if not thousands
of various retail chains and end customers.
No
other customer exceeded 10% of sales for either period.
The
loss of our largest vendors would substantially reduce revenues.
Our
vendors are important to our success. If we are unable to maintain good relationships with our existing vendors, our business
could suffer.
During
the year ended December 31, 2019, the Company’s largest three vendors accounted for approximately 12%,
11%, and 10% of its purchases, respectively. During the year ended December 31, 2018, the Company’s
largest two vendors accounted for 16% and 13% of its purchases, respectively.
As
of December 31, 2019, the Company’s largest three vendors accounted for 19%, 15% and 14% of the total accounts payable,
respectively. As of December 31, 2018, one vendor accounted for 24% of total accounts payable.
No
other account was more than 10% of the balance of accounts payable in either period.
The
loss of our third-party distributors could impair our operations and substantially reduce our financial results.
We
depend in large part on distributors to distribute our beverages and other products. Some of our outside distributors are not
bound by written agreements with the Company and may discontinue their relationship with us on short notice. Some distributors
handle a number of competitive products. In addition, our products are a small part of our distributors’ businesses.
We
continually seek to expand distribution of our products by entering into distribution arrangements with regional bottlers or other
direct store delivery distributors having established sales, marketing and distribution organizations. Many of our distributors
are affiliated with and manufacture and/or distribute other soda and non-carbonated brands and other beverage products. In many
cases, such products compete directly with our products.
The
marketing efforts of our distributors are important for our success. If our brands prove to be less attractive to our existing
distributors and/or if we fail to attract additional distributors, and/or our distributors do not market and promote our products
above the products of our competitors, our business, financial condition and results of operations could be adversely affected.
Price
fluctuations in, and unavailability of, raw materials and packaging that we use could adversely affect us.
We
do not enter into hedging arrangements for raw materials. Although the prices of raw materials that we use have not increased
significantly in recent years, our results of operations would be adversely affected if the price of these raw materials were
to rise and we were unable to pass these costs on to our customers.
We
depend upon an uninterrupted supply of the ingredients for our products, a significant portion of which we obtain overseas, principally
from Peru, Fiji and Indonesia. We do not have agreements guaranteeing supply of our ingredients. Any decrease in the supply of
these ingredients or increase in the prices of these ingredients as a result of any adverse weather conditions, pests, crop disease,
interruptions of shipment or political considerations, among other reasons, could substantially increase our costs and adversely
affect our financial performance.
We
also depend upon an uninterrupted supply of packaging materials, such as glass, cans and paper items. We obtain bottles both domestically
and internationally. Any decrease in supply of these materials or increase in the prices of the materials, as a result of decreased
supply or increased demand, could substantially increase our costs and adversely affect our financial performance.
The
loss of any of our co-packers could impair our operations and substantially reduce our financial results.
We
rely on third parties, called co-packers in our industry, to produce our beverages.
During
the years ended December 31, 2019 and 2018, the Company had utilized four and three, respectively, separate
US based co-packers for most its production needs. Although there are other packers that could produce the Company’s beverages,
a change in packers may cause a delay in the production process, which could ultimately affect operating results.
Our
co-packing arrangements with other companies are on a short-term basis and such co-packers may discontinue their relationship
with us on short notice. Our co-packing arrangements expose us to various risks, including:
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if
any of those co-packers were to terminate our co-packing arrangement or have difficulties in producing beverages for us, our
ability to produce our beverages would be adversely affected until we were able to make alternative arrangements; and
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our
business reputation would be adversely affected if any of the co-packers were to produce inferior quality.
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We
believe that we have substantially reduced this risk by reducing our reliance upon any single co-packer. We are in discussion
and negotiation with additional co-packers to ensure added capability for future production needs.
We
compete in an industry characterized by rapid changes in consumer preferences and public perception, so our ability to continue
to market our existing products and develop new products to satisfy our consumers’ changing preferences will determine our
long-term success.
Consumers
are seeking greater variety in their beverages. Our future success will depend, in part, upon our continued ability to develop
and introduce different and innovative beverages. In order to retain and expand our market share, we must continue to develop
and introduce different and innovative beverages and be competitive in the areas of quality and health, although there can be
no assurance of our ability to do so. There is no assurance that consumers will continue to purchase our products in the future.
Additionally, many of our products are considered premium products and to maintain market share during recessionary periods, we
may have to reduce profit margins, which would adversely affect our results of operations. In addition, there is increasing awareness
and concern for the health consequences of obesity. This may reduce demand for our non-diet beverages, which could affect our
profitability. Product lifecycles for some beverage brands and/or products and/or packages may be limited to a few years before
consumers’ preferences change. The beverages we currently market are in varying stages of their lifecycles and there can
be no assurance that such beverages will become or remain profitable for us. The beverage industry is subject to changing consumer
preferences and shifts in consumer preferences may adversely affect us if we misjudge such preferences. We may be unable to achieve
volume growth through product and packaging initiatives. We also may be unable to penetrate new markets. If our revenues decline,
our business, financial condition and results of operations will be materially and adversely affected.
Our
quarterly operating results may fluctuate because of the seasonality of our business.
Our
highest revenues occur during the summer and fall, the third and fourth quarters of each fiscal year. These seasonality issues
may cause our financial performance to fluctuate. In addition, beverage sales can be adversely affected by sustained periods of
bad weather.
Our
manufacturing process is not patented.
None
of the manufacturing processes used in producing our products are subject to a patent or similar intellectual property protection.
Our only protection against a third party using our recipes and processes is confidentiality agreements with the companies that
produce our beverages and with our employees who have knowledge of such processes. If our competitors develop substantially equivalent
proprietary information or otherwise obtain access to our knowledge, we will have greater difficulty in competing with them for
business, and our market share could decline.
If
we are not able to retain the full-time services of our management team, it will be more difficult for us to manage our operations
and our operating performance could suffer.
Our
business is dependent, to a large extent, upon the services of our management team. We do have a written employment agreement
with two of five members of our management team. In addition, we do not maintain key person life insurance on any of our management
team. Therefore, in the event of the loss or unavailability of any member of the management team to us, there can be no assurance
that we would be able to locate in a timely manner or employ qualified personnel to replace him or her. The loss of the services
of any member of our management team or our failure to attract and retain other key personnel over time would jeopardize our ability
to execute our business plan and could have a material adverse effect on our business, results of operations and financial condition.
The
price of our common stock may be volatile, and a shareholder’s investment in our common stock could suffer a decline in
value.
There
has been significant volatility in the volume and market price of our common stock, and this volatility may continue in the future.
In addition, factors such as quarterly variations in our operating results, litigation involving us, general trends relating to
the beverage industry, actions by governmental agencies, national economic and stock market considerations as well as other events
and circumstances beyond our control could have a significant impact on the future market price of our common stock and the relative
volatility of such market price.
A
prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction
in our ability to raise capital. If we are unable to raise the funds required for all of our planned operations and key initiatives,
we may be forced to allocate funds from other planned uses, which may negatively impact our business and operations, including
our ability to develop new products and continue our current operations.
Many
factors that are beyond our control may significantly affect the market price of our shares. These factors include:
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price
and volume fluctuations in the stock markets;
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changes
in our revenues and earnings or other variations in operating results;
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any
shortfall in revenue or increase in losses from levels expected by us or securities analysts;
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changes
in regulatory policies or law;
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operating
performance of companies comparable to us; and
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general
economic trends and other external factors.
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Even
if an active market for our common stock is established, stockholders may have to sell their shares at prices substantially lower
than the price they paid for them or might otherwise receive than if a broad public market existed.
There
has been a very limited public trading market for our securities and the market for our securities may continue to be limited,
and be sporadic and highly volatile.
There
is currently a limited public market for our common stock. Holders of our common stock may, therefore, have difficulty selling
their shares, should they decide to do so. In addition, there can be no assurances that such markets will continue or that any
shares which may be purchased, may be sold without incurring a loss. Any such market price of our shares may not necessarily bear
any relationship to our book value, assets, past operating results, financial condition or any other established criteria of value,
and may not be indicative of the market price for the shares in the future.
Future
financings could adversely affect common stock ownership interest and rights in comparison with those of other security holders.
Our
board of directors has the power to issue additional shares of common or preferred stock up to the amounts authorized in our certificate
of incorporation without stockholder approval, subject to restrictive covenants contained in the Company’s contracts. If
additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our existing
stockholders will be reduced, and these newly issued securities may have rights, preferences or privileges senior to those of
existing stockholders. If we issue any additional common stock or securities convertible into common stock, such issuance will
reduce the proportionate ownership and voting power of each other stockholder. In addition, such stock issuances might result
in a reduction of the book value of our common stock. Any increase of the number of authorized shares of common stock or preferred
stock would require board and shareholder approval and subsequent amendment to our certificate of incorporation.
Alcohol
Risk Factors
Demand
for our products may be adversely affected by many factors, including changes in consumer preferences and trends.
Consumer
preferences may shift due to a variety of factors including changes in demographic and social trends, public health initiatives,
product innovations, changes in vacation or leisure activity patterns and a downturn in economic conditions, which may reduce
consumers’ willingness to purchase distilled spirits or cause a shift in consumer preferences away from ginger beer based
cocktails toward beer, wine or non-alcoholic beverages. Our success depends in part on fulfilling available opportunities to meet
consumer needs and anticipating changes in consumer preferences with successful new products and product innovations. The competitive
position of our brands could also be affected adversely by any failure to achieve consistent, reliable quality in the product
or in service levels to customers.
We
face substantial competition in our industry and many factors may prevent us from competing successfully.
We
compete based on product taste and quality, brand image, price, service and ability to innovate in response to consumer preferences.
The global spirits industry is highly competitive and is dominated by several large, well-funded international companies. It is
possible that our competitors may either respond to industry conditions or consumer trends more rapidly or effectively or resort
to price competition to sustain market share, which could adversely affect our sales and profitability.
Adverse
public opinion about alcohol could reduce demand for our products.
Anti-alcohol
groups have, in the past, advocated successfully for more stringent labeling requirements, higher taxes and other regulations
designed to discourage alcohol consumption. More restrictive regulations, negative publicity regarding alcohol consumption and/or
changes in consumer perceptions of the relative healthfulness or safety of beverage alcohol could decrease sales and consumption
of alcohol and thus the demand for our products. This could, in turn, significantly decrease both our revenues and our revenue
growth, causing a decline in our results of operations.
Class
action or other litigation relating to alcohol abuse or the misuse of alcohol could adversely affect our business.
Companies
in the beverage alcohol industry are, from time to time, exposed to class action or other litigation relating to alcohol advertising,
product liability, alcohol abuse problems or health consequences from the misuse of alcohol. It is also possible that governments
could assert that the use of alcohol has significantly increased government funded health care costs. Litigation or assertions
of this type have adversely affected companies in the tobacco industry, and it is possible that we, as well as our suppliers,
could be named in litigation of this type.
Also,
lawsuits have been brought in a number of states alleging that beverage alcohol manufacturers and marketers have improperly targeted
underage consumers in their advertising. Plaintiffs in these cases allege that the defendants’ advertisements, marketing
and promotions violate the consumer protection or deceptive trade practices statutes in each of these states and seek repayment
of the family funds expended by the underage consumers. While we have not been named in these lawsuits, we could be named in similar
lawsuits in the future. Any class action or other litigation asserted against us could be expensive and time-consuming to defend
against, depleting our cash and diverting our personnel resources and, if the plaintiffs in such actions were to prevail, our
business could be harmed significantly.
Regulatory
decisions and legal, regulatory and tax changes could limit our business activities, increase our operating costs and reduce our
margins.
Our
business is subject to extensive regulation in all of the countries in which we operate. This may include regulations regarding
production, distribution, marketing, advertising and labeling of beverage alcohol products. We are required to comply with these
regulations and to maintain various permits and licenses. We are also required to conduct business only with holders of licenses
to import, warehouse, transport, distribute and sell beverage alcohol products. We cannot assure you that these and other governmental
regulations applicable to our industry will not change or become more stringent. Moreover, because these laws and regulations
are subject to interpretation, we may not be able to predict when and to what extent liability may arise. Additionally, due to
increasing public concern over alcohol-related societal problems, including driving while intoxicated, underage drinking, alcoholism
and health consequences from the abuse of alcohol, various levels of government may seek to impose additional restrictions or
limits on advertising or other marketing activities promoting beverage alcohol products. Failure to comply with any of the current
or future regulations and requirements relating to our industry and products could result in monetary penalties, suspension or
even revocation of our licenses and permits. Costs of compliance with changes in regulations could be significant and could harm
our business, as we could find it necessary to raise our prices to maintain profit margins, which could lower the demand for our
products and reduce our sales and profit potential.
Also,
the distribution of beverage alcohol products is subject to extensive taxation both in the U.S. and internationally (and, in the
U.S., at both the federal and state government levels), and beverage alcohol products themselves are the subject of national import
and excise duties in most countries around the world. An increase in taxation or in import or excise duties could also significantly
harm our sales revenue and margins, both through the reduction of overall consumption and by encouraging consumers to switch to
lower-taxed categories of beverage alcohol.
CBD/Hemp
Extract Risk Factors
Our
CBD initiative may not materialize or develop as planned due to business and regulatory factors.
Our
CBD initiative may not materialize or develop as planned due a myriad of business and regulatory factors. For example,
many companies are entering the CBD space and competition for market share and acceptance of new products will be significant.
Negative
press from having a hemp or cannabis-related line of business could have a material adverse effect on our business, financial
condition, and results of operations.
There
is a misconception that hemp and marijuana, which both belong to the cannabis family, are the same thing, but industrial hemp
is roughly defined as a cannabis plant with not more than 0.3 percent THC content on a dry-weight basis. Any hemp oil or hemp
derivative we use will comport with this definition of less than 0.3% THC. Despite this, we may still receive negative attention
from regulatory bodies, the press, business clients, or partners, grounded in these broad misconceptions, and this in turn can
materially adversely affect our business.
Possible
yet unanticipated changes in federal law could cause our products which include cannabis/industrial hemp CBD extracts to be illegal,
or could otherwise prohibit, limit or restrict our business and products, forcing us to abandon our business activities or reduce
our financial prospects.
The
move toward ending hemp prohibition and the reemergence of a hemp economy began with the 2014 Farm Bill, which provided states
with opportunities to create pilot programs for hemp research. The Agricultural Improvement Act of 2018 (“2018 Bill”)
was signed into law at the end of December 2018 and expands on the 2014 Farm Bill. The 2018 Bill removes “hemp” from
the definition of “Marihuana” in the Controlled Substances Act, decriminalizes the plant and its components, and as
a result, transfers oversight of the cultivation and sale of the crop from the Drug Enforcement Administration to the Department
of Agriculture. The net result of the 2018 Bill’s passage is that farmers and entrepreneurs gain several significant benefits,
in addition to ending the uncertainty of criminal exposure for growing, processing or selling hemp:
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Federal
licensing for farmers wishing to grow hemp in states that don’t have a pilot program
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Clarification
that interstate commerce in hemp is permitted
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Placing
oversight of hemp with the USDA
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Including
hemp in the Federal Crop Insurance Act.
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These
provisions will go a long way toward helping the industry by clarifying existing gray areas of law, creating certainty around
transport and interstate sale, and normalizing hemp as an industrial crop. However, there can be no assurance that Federal laws
ending hemp prohibition will not be modified or repealed. In the event of either repeal of Federal regulations, or of amendments
thereto which are adverse to our business and products, we may be required to cease operations or restrict or limit our products
or the distribution thereof, which could be expected to have adverse consequences to our business, operations, revenues and profitability.
Sources
of our key ingredient, CBD extracts from cannabis/industrial hemp plants, depend upon legality of cultivation, processing, marketing
and sales of products derived from those plants.
Our
key ingredient is broad spectrum CBD extracts derived from cannabis/industrial hemp plants. CBD may be legally produced in states
which have laws and regulations that qualify under 7 US Code §5940 for implementation of “agricultural pilot programs
to study the growth, cultivation or marketing of industrial hemp”, apart from state laws legalizing and regulating medical
and recreational cannabis or marijuana which remains illegal under federal law. In addition, Federal licensing for farmers wishing
to grow hemp in states that don’t have a pilot program is now available as a result of the 2018 Bill. If we were to be unsuccessful
in arranging new sources of supply of our raw ingredients, or if our raw ingredients were to become legally unavailable, our business
and operations could be limited, restricted or entirely prohibited, which could be expected to have adverse consequences to our
business, operations, revenues and profitability.
We
may have difficulty accessing the service of banks which may make it difficult for us to operate.
Many
banks have not historically accepted deposits from and credit card processors will not clear transactions for businesses involved
with the broadly defined cannabis industry, notwithstanding the legality of cannabis/industrial hemp derived products. While the
2018 Bill is expected to alleviate this hindrance, we may still have difficulty finding a bank and credit card processor willing
to accept our business. The inability to open or maintain bank accounts or accept credit card payments from customers could be
expected to cause us difficulty processing transactions in the ordinary course of business, including paying suppliers, employees
and landlords, which could have a significant negative effect on our operations and your investment in our common stock.
Risk
Factors Related to Our Common Stock
If
we are not able to achieve our objectives for our business, the value of an investment in our Company could be negatively affected.
In
order to be successful, we believe that we must, among other things:
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increase
the volume for our products
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continue
to find savings in our cost of goods (co-packer fees, packaging and ingredients);
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expand
the number of co-packers for our core and innovation products;
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continue
to recruit and retain top talent;
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drive
increased awareness through our brand pull campaigns, and trial and repeat purchase of our core brands;
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drive
increased SKU placement on shelf, and open new outlets of retail distribution through our investment in sales resources, partnerships
and trade marketing support;
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manage
our operating expenses to sufficiently support operating activities and
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avoid
significant increases in variable costs relating to production, marketing and distribution.
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We
may not be able to meet these objectives, which could have a material adverse effect on our results of operations. We have incurred
significant operating expenses in the past and may do so again in the future and, as a result, will need to increase revenues
in order to improve our results of operations. Our ability to increase sales volume will depend primarily on success in marketing
initiatives with industry brokers, improving our distribution base with DSD companies, introducing new no sugar brands, and focusing
on the existing core brands in the market. Our ability to successfully enter new distribution areas and obtain national accounts
will, in turn, depend on various factors, many of which are beyond our control, including, but not limited to, the continued demand
for our brands and products in target markets, the ability to price our products at competitive levels, the ability to establish
and maintain relationships with distributors in each geographic area of distribution and the ability in the future to create,
develop and successfully introduce one or more new brands, products, and product extensions.
Anti-takeover
provisions in our charter documents and under Delaware law could make an acquisition of us more difficult, limit attempts by our
stockholders to replace or remove our current management and limit the market price of our common stock.
Provisions
in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in
our management. Our amended and restated certificate of incorporation and amended and restated bylaws include provisions that:
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authorize
our board of directors to issue, without further action by the stockholders, shares of undesignated preferred stock;
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specify
that special meetings of our stockholders can be called only upon the request of a majority of our board of directors or our
Chief Executive Officer;
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establish
an advance notice procedure for stockholder proposals to be brought before an annual meeting, including proposed nominations
of persons for election to our board of directors; and
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prohibit
cumulative voting in the election of directors.
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These
provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it
more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members
of our management, and may discourage, delay or prevent a transaction involving a change of control of our Company that is in
the best interest of our minority stockholders. Even in the absence of a takeover attempt, the existence of these provisions may
adversely affect the prevailing market price of our common stock if they are viewed as discouraging future takeover attempts.
Furthermore,
we are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for
a three-year period following the time that this stockholder becomes an interested stockholder, unless the business combination
is approved in a prescribed manner. A “business combination” includes, among other things, a merger, asset or stock
sale or other transaction resulting in a financial benefit to the interested stockholder. An “interested stockholder”
is a person who, together with affiliates and associates, owns, or did own within three years prior to the determination of interested
stockholder status, 15% or more of the corporation’s voting stock. Under Section 203, a business combination between a corporation
and an interested stockholder is prohibited unless it satisfies one of the following conditions:
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before
the stockholder became interested, the board of directors approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
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upon
consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for
purposes of determining the voting stock outstanding, shares owned by persons who are directors and also officers, and employee
stock plans, in some instances; or
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at
or after the time the stockholder became interested, the business combination was approved by the board of directors of the
corporation and authorized at an annual or special meeting of the stockholders by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the interested stockholder.
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The
existence of this provision may have an anti-takeover effect with respect to transactions the Company’s board of directors
does not approve in advance. Section 203 may also discourage attempts that might result in a premium over the market price for
the shares of Common Stock held by stockholders.
These
provisions of Delaware law and the Certificate of Incorporation could have the effect of discouraging others from attempting hostile
takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of the Company’s common
stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing
changes in the Company’s management. It is possible that these provisions could make it more difficult to accomplish transactions
that stockholders may otherwise deem to be in their best interests.
Raptor/
Harbor Reeds SPV LLC (“Raptor), our largest shareholder, holds approximately 5% of our outstanding common stock and
beneficially owns approximately 15% of our common stock and may greatly influence the outcome of all matters on which stockholders
vote.
Because
Raptor holds approximately 5% of our outstanding common stock and beneficially owns approximately 15% of our common
stock, it may greatly influence the outcome of all matters on which stockholders vote. Daniel J. Doherty III, a principal and
shareholder of Raptor also serves as a director of Reed’s. Raptor is a secured creditor of Reed’s and its interests
may not always coincide with the interests of other holders of our common stock. (Beneficial ownership is calculated pursuant
to Section 13d-3 of the Securities Exchange Act of 1934, as amended, and includes shares underlying derivative securities which
may be exercised or converted within 60 days.)
Collectively,
members of our board of directors and our executive officers hold approximately 17% of the Company’s outstanding
common stock, beneficially own approximately 26% of our common stock and may greatly influence the outcome of all matters
on which stockholders vote.
Collectively,
members of our board of directors and our executive officers hold approximately 17% of our outstanding common stock and
beneficially own approximately 26% of our common stock. Of these percentages, Daniel J. Doherty III, a director of Reed’s,
as principal and shareholder of Raptor beneficially owns approximately 15% of our common stock. Members of our board of
directors and our executive officers may influence the outcome of certain matters on which stockholders vote. (Beneficial ownership
is calculated pursuant to Section 13d-3 of the Securities Exchange Act of 1934, as amended, and includes shares underlying derivative
securities which may be exercised or converted within 60 days.)
Raptor’s
interests may not always coincide with the interests of other holders of our common stock.
Raptor
is a secured creditor of Reed’s, holding a subordinated note with a principal balance of $3,400,000 and additional reserved
principal amount of $4,000,000 to cover the permitted over-advance under Rosenthal’s $13,000,0000 credit facility. Raptor’s
security interest is subordinate to Rosenthal’s first priority security interest. The $4,000,000 permitted over-advance
is guaranteed by Daniel J. Doherty III and Daniel J. Doherty III 2002 Family Trust through the issuance of an irrevocable stand-by-letter
of credit in favor of Rosenthal, in amount not less than $1,500,000. The permitted over-advance is secured by all of Reed’s
intellectual property collateral. In the event of default under Reed’s financing agreement with Rosenthal, Raptor has a
put option to purchase the entire aggregate amount of the outstanding permitted over-advance of up to $4,000,000 at par plus accrued
interest (without regard to any prepayment penalty or premium) from Rosenthal, prior to Rosenthal declaring a default under the
financing agreement. If Raptor exercises the option, Rosenthal will release its first priority security interest on all intellectual
property collateral of the Company to Raptor and terminate the letter of credit. As such, Raptor’s interests may not always
coincide with the interests of other holders of Reed’s common stock.
If
securities analysts or industry analysts downgrade our shares, publish negative research or reports, or do not publish reports
about our business, our share price and trading volume could decline.
The
trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish
about us, our business and our industry. If one or more analysts adversely change their recommendation regarding our shares or
our competitors’ stock, our share price would likely decline. If one or more analysts cease coverage of us or fail to regularly
publish reports on us, we could lose visibility in the financial markets, which in turn could cause our share price or trading
volume to decline. As a result, the market price for our common stock may decline.
We
have the ability to issue additional shares of our common stock and shares of preferred stock without asking for stockholder approval,
which could cause your investment to be diluted.
Our
Articles of Incorporation authorize the Board of Directors to issue up to 100,000,000 shares of common stock and up to
500,000 shares of preferred stock. The power of the Board of Directors to issue shares of common stock, preferred stock or warrants
or options to purchase shares of common stock or preferred stock is generally not subject to stockholder approval. Accordingly,
any additional issuance of our common stock, or preferred stock that may be convertible into common stock, may have the effect
of diluting your investment, and the new securities may have rights, preferences and privileges senior to those of our common
stock.
Substantial
sales of our stock may impact the market price of our common stock.
Future
sales of substantial amounts of our common stock, including shares that we may issue upon exercise of options and warrants, could
adversely affect the market price of our common stock. Further, if we raise additional funds through the issuance of common stock
or securities convertible into or exercisable for common stock, the percentage ownership of our stockholders will be reduced,
and the price of our common stock may fall.
Our
common stock is thinly traded, and investors may be unable to sell some or all of their shares at the price they would like, or
at all, and sales of large blocks of shares may depress the price of our common stock.
Our
common stock has historically been sporadically or “thinly-traded,” meaning that the number of persons interested
in purchasing shares of our common stock at prevailing prices at any given time may be relatively small or nonexistent. As a consequence,
there may be periods of several days or more when trading activity in shares of our common stock is minimal or non-existent, as
compared to a seasoned issuer that has a large and steady volume of trading activity that will generally support continuous sales
without an adverse effect on share price. This could lead to wide fluctuations in our share price. Investors may be unable to
sell their common stock at or above their purchase price, which may result in substantial losses. Also, as a consequence of this
lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the
price of shares of our common stock in either direction. The price of shares of our common stock could, for example, decline precipitously
in the event a large number of shares of our common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer that could better absorb those sales without adverse impact on its share price.
We
do not intend to pay any cash dividends on our shares of common stock in the near future, so our shareholders will not be able
to receive a return on their shares unless they sell their shares.
We
intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any
cash dividends on our common stock in the foreseeable future. There is no assurance that future dividends will be paid, and if
dividends are paid, there is no assurance with respect to the amount of any such dividend. Unless we pay dividends, our shareholders
will not be able to receive a return on their shares unless they sell such shares.