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1. Business
Overview
Reed’s,
Inc,, a Delaware corporation (“Reed’s”, the “Company,” “we,” or “us” throughout
this report) owns a leading portfolio of handcrafted, natural beverages that is sold in over 45,000 outlets nationwide. These
outlets include the natural and specialty food channel, grocery stores, mass merchants, drug stores, convenience stores, club stores
and on-premise locations including bars and restaurants. Reed’s two core brands are Reed’s, which includes Reed’s
Craft Ginger Beer and Reed’s Real Ginger Ale, and Virgil’s Handcrafted sodas. Reed’s Craft Ginger
Beers are unique due to the proprietary process of using fresh ginger root combined with a Jamaican inspired recipe of natural spices,
honey and fruit juices. Reed’s uses this same handcrafted approach in its Reed’s Real Ginger Ale and Virgil’s line
of great tasting, bold flavored craft sodas, including its award-winning Virgil’s Root Beer.
Reed’s is the leading ginger beer in the
US; Virgil’s is the independent natural full line craft soda and is a leader in the craft soda category.
Historical
Development
Reed’s
Original Ginger Brew, created in 1987 by Christopher J. Reed, our founder, was introduced to the
market in Southern California stores in 1989. By 1990, we began marketing our products through United Natural Foods Inc. (“UNFI”)
and other natural food distributors and moved our production to a larger facility in Boulder, Colorado.
In
1991, we incorporated our business operations in the state of Florida under the name of Original Beverage Corporation and moved all production
to a co-pack facility in Pennsylvania. Throughout the 1990’s, we continued to develop and launch new Ginger Brew varieties. Reed’s
Ginger Brews reached broad placement in natural and gourmet foods stores nationwide through UNFI and other major specialty, natural/gourmet
and mainstream food and beverage distributors.
In
1997, we began licensing the products of China Cola and eventually acquired the rights to that product in 2000. In 1999, we purchased
the Virgil’s Root Beer brand from the Crowley Beverage Company. In 2000, we moved into an 18,000-square foot warehouse property,
the Brewery, in Los Angeles, California, to headquarters. In 2001, pursuant to a reincorporation merger, we changed our state of incorporation
to Delaware and also changed our name to “Reed’s, Inc.”
In
September 2018, we completed the relocation of its headquarters to Norwalk, Connecticut. In December 2018, after a lengthy marketing
and bidding process, we sold the Brewery to a company owned by Christopher J. Reed, our founder. The sale of the Brewery marked a fundamental
shift in the nature of our operations and effectively eliminated our costs associated with excess manufacturing capacity.
Going Concern
The Company’s
financial statements as of December 31, 2021 were prepared on a going concern basis. For the year ended December 31, 2021,
the Company recorded a net loss of $16,402 and used cash in operations of $17,589. As of December 31, 2021, we had a cash balance of
$49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981. These conditions raise
substantial doubt about the Company’s ability to continue as a going concern. The Company believes that its current level of cash
and cash equivalents are not sufficient to fund its operations for the next 12 months.
To alleviate these conditions, management is
currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or
debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we seek additional
sources of financing, there can be no assurance that such financing will be available to us on favorable terms or at all. Our ability
to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions,
our performance and investor sentiment with respect to us and our industry.
Industry
Overview
Reed’s
offers its portfolio of natural hand-crafted beverages in the craft specialty foods industry as natural alternatives to the $25
billion mainstream carbonated soft drinks (“CSD”) market in the United States as measured by IRI Multi Outlet scan data.
Reed’s products are sold across the country and internationally in the following major channels: natural food, specialty food,
grocery, mass merchant, convenience, club, drug, and on-premise locations (bars and restaurants).
Even
after a year of the pandemic, overall sales growth of natural food and beverage products continues to outpace sales growth for conventional
products across all retail channels. We see ample opportunity to scale our natural beverage business and grow our distribution in these
channels.
Carbonated
Soft Drink Industry Overview
The retail CSD category grew 9% during 2021
and the ginger ale segment grew 5% and is now a $1.3 billion dollar market. Ginger ale growth, we believe, is driven primarily
by a consumer perception of ginger ale as a healthier alternative to other sodas. Our new line of ginger ales made with real ginger
deliver on this perception and are poised to breakout in the segment.
As
a result of the COVID-19 pandemic, consumers
are shifting consumption to better-for-you products. We believe there is significant growth potential from consumers switching away from
mainstream beverages that contain artificial ingredients and preservatives towards great-tasting, natural alternatives.
Consumer
Trends Driving Growth for Our Products
The
following is a list of consumer trends that are accelerating as we exit the pandemic, and which support our brands.
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Natural:
Interest in natural products has gone mainstream. |
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Clean
Label: 62% of Americans are avoiding at least one ingredient. |
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Reduced
Sugar: A favorable trend for our zero-sugar beverages, 67% of consumers prefer low or no sugar soft drinks. say they are
reducing their sugar intake. |
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Plant
Based: 39% of consumers actively try to eat more plant based foods. |
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Craft:
Appeal continues to grow of higher-quality, independent, and more authentic brands. |
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Premiumization:
A trend towards embracing quality has accelerated during the pandemic with consumers splurging on premium beverages at retail,
including premium mixers. |
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Better-for-you
Mocktails: More consumers are seeking non-alcoholic alternatives with bold and unique flavors. |
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Ready-to-Drink
Cocktails (RTD): The RTD category grew 126% in 2021 is exploding alongside hard seltzer as people seek novelty and
variety. |
Our
strategies will remain responsive to these macro consumer trends as we concentrate our efforts on developing the Company’s sales
and marketing functions.
Our
Products
We
make our hand-crafted beverages with only premium, natural ingredients. Our products are free of genetically modified organisms
(“GMOs”) and artificial preservatives. Over the years, Reed’s has developed several product offerings. In 2019, we
streamlined our focus to our core categories of Reed’s Ginger Beverages and Virgil’s Craft Sodas. In April 2020, we
launched our new line of Reed’s Real Ginger Ales, in both Full Sugar and Zero Sugar varieties, made with 2,000 mg of fresh
organic ginger. In 2021, we extended our Ginger Ale offerings with Mocktails and we entered the alcohol space with the launch of our
RTD Classic Mule that is 7% ALC and Zero Sugar.
Reed’s
Craft Ginger Beer
Reed’s
Craft Ginger Beer is set apart from other ginger beers by its proprietary process of brewing fresh ginger root, its exclusive use of
natural ingredients, and its authentic Jamaican-inspired recipe. We do not use artificial preservatives, artificial flavors, or colors,
and Reed’s Ginger Beer is certified kosher. We offer different levels of fresh ginger content, ranging from our lightest-spiced
Original, to our medium-spiced Extra, and finally to our spiciest Strongest. We also offer three sweetener options: one with cane sugar,
honey and fruit juices; one with honey and pineapple juice; and another without sugar (Zero Sugar) made from an innovative blend of natural
sweeteners. In 2021, we expanded our Extra Ginger Beer portfolio into cans offerings.
As
of the end of 2021, the Reed’s Craft Ginger Beer line included five major varieties with a mix of bottles and cans:
Reed’s
Original Ginger Beer – Our first to market product uses a Jamaican-inspired recipe that calls for fresh ginger root, lemon,
lime, pineapple juice, honey, raw cane sugar, herbs and spices.
Reed’s
Premium Ginger Beer – Our Original Ginger Beer sweetened with honey and pineapple juice. (No cane sugar added.)
Reed’s
Extra Ginger Beer – Contains 100% more fresh ginger than Reed’s Original recipe for extra spice.
Reed’s
Strongest Ginger Beer – Contains 200% more fresh ginger than Reed’s Original for the strongest spice.
Reed’s
Zero Sugar Extra Ginger Beer – launched in 2019, it uses a proprietary natural sweetening system for a
zero-calorie version of our Reed’s Extra Ginger Beer.
Reed’s
Real Ginger Ale
Reed’s Real Ginger Ale is unique for the
category because it combines real fresh ginger with the classic, refreshing taste that consumers love. It contains nothing
artificial and is Non-GMO project verified. We offer two sweetener options: one with cane sugar and the other with our zero-calorie proprietary
natural sweetening system.
Reed’s
Real Ginger Ale – launched in April 2020 in standard and sleek 12-ounce cans. It is the only mass market ginger
ale made with organic fresh ginger.
Reed’s
Zero Sugar Real Ginger Ale – also launched in April 2020 in standard and slim cans. It uses proprietary sweetening
system to match the great taste of the cane sugar version in a zero-calorie drink.
NEW! Reed’s Mocktails- In 2021
Reed’s line extended its Zero Sugar Ginger Ale, with the launch of Mocktail Flavors. It uses our proprietary sweetening system
to match the great taste of the cane sugar version in a zero-calorie drink. The two flavors are Shirley Tempting and
Transfusion.
Reed’s Ready to Drink
NEW! Reed’s Zero Sugar Classic Mule:
Launched in 2020 and expanded to 37 states in 2021, Reed’s first-ever alcoholic offering is packed with REAL, fresh ginger
root and made through a unique handcrafted brewing and fermentation process. It contains 7% alcohol, and a light-spice flavor profile
with no artificial colors, gluten, GMOs or caffeine. It is the ultimate mule, made with fresh ginger root, to be enjoyed anytime,
anywhere.
Other
New Ginger Beverages under the Reed’s brand
Reed’s
Wellness Ginger Shots – launched in February 2020 offered in two varieties: Daily Ginger and Ginger Energize. These convenient,
shelf-stable shots provide a ginger boost on the go.
Virgil’s
Handcrafted Sodas
Virgil’s
is a premium handcrafted soda that uses only natural ingredients to create bold renditions of classic flavors. We don’t use
any artificial preservatives, any artificial colors, or any GMO-sourced ingredients, and our Virgil’s line is certified kosher.
The
Virgil’s line includes the following products:
Handcrafted
Line: Virgil’s first Handcrafted soda was launched in 1994. It began as one man’s passion to create the finest root beer
ever produced and has since won numerous awards. Virgil’s difference is using natural ingredients to craft bold, classic soda
flavors. Virgil’s Handcrafted line includes Root Beer, Vanilla Cream, Black Cherry, and Orange Cream.
Zero
Sugar Line: Virgil’s launched a new line of Zero Sugar, Zero Calorie craft sodas in 2019. Each Zero Sugar soda is sweetened
with a proprietary blend of natural sweeteners with no added sugars and is certified Keto. This natural line of Zero Sugar
flavors includes Root Beer, Cola, Black Cherry, Vanilla Cream, Orange Cream, Lemon-Lime, Ginger Ale, Grapefruit and
Dr. Better.
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2022
Product Launches
During
the second quarter of 2021, Reed’s will launch the below:
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Reed’s
Hard Ginger Ale in Variety 8 Packs |
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Virgil’s
Zero Sugar in 12-ounce sleek 4 packs |
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Reed’s
Zero Sugar Stormy Mule |
Our
Primary Markets
We
target a smaller segment of the estimated $25 billion mainstream carbonated and non-carbonated soft drink markets in the United
States. Our brands are generally considered premium and natural, with upscale packaging. They are loosely defined as the craft specialty
bottled carbonated soft drink category.
We
have an experienced and geographically diverse sales force promoting our products, with senior sales representatives strategically placed
in multiple regions across the country, supported by local Reed’s sales staff. Additionally, we have sales managers handling national
accounts for natural, specialty, grocery, mass, club, drug and convenience channels. Our sales managers are responsible for all activities
related to the sales, distribution, and marketing of our brands to our entire retail partner and distributor network in North America.
The Company not only employs an internal sales force but has partnered with independent sales brokers and outside representatives to
promote our products in specific channels and key targeted accounts.
We
sell to well-known popular natural food and gourmet retailers, large grocery store chains, mass merchants, club stores, convenience and
drug stores, liquor stores, industrial cafeterias (corporate feeders), and to on-premise bars and restaurants nationwide and in some
international markets. We also sell our products and promotional merchandise directly to consumers via the Internet through our Amazon
storefront which can be accessed through our company web site www.drinkreeds.com.
Some
of our representative key customers include:
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Natural
stores: Whole Foods Market, Sprouts, Natural Grocers by Vitamin Cottage, Fresh Thyme Farmers Market, Mother’s |
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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), Albertson’s/Safeway, Publix, Food Lion, Stop & Shop, H.E.B.,
Wegmans, Target, Walmart |
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Club
stores: Costco and BJ’s |
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Liquor
stores: BevMo!, Total Wine & More, Spec’s |
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Convenience
& drug stores: Circle K, CVS Health, Rite Aid, QuikTrip |
Our
Distribution Network
Our
products are brought to market through an extremely flexible and fluid hybrid distribution model, which is a mix of direct-store-delivery,
customer warehouse, and distributor networks. The distribution system used depends on customer needs, product characteristics, and local
trade practices.
Our
product reaches the market in the following ways:
Direct
to Natural & Specialty Wholesale Distributors
Our
natural and specialty distributor partners operate a distribution network delivering thousands of SKUs of natural and gourmet products
to thousands of small, independent, natural retail outlets around the U.S., along with national chain customers, both conventional and
natural. This system of distribution allows our brands far reaching access to some of the most remote parts of North America. During
the past year we expanded, and will continue to expand, in this distribution network.
Direct
to Store Distribution (“DSD”) Through Non-Alcoholic and Alcoholic Beverage Distributor Network
Our
independent distributor partners operate DSD systems which deliver primarily beverages, foods, and snacks directly to retail stores where
the products are merchandised by their route sales and field sales employees. DSD enables us to merchandise with maximum visibility and
appeal. DSD is especially well-suited to products frequently restocked and responds to in-store promotion and merchandising. We are primarily
focused on expanding our DSD network on a national basis.
Direct
to Store Warehouse Distribution
Some
of our products are delivered from our co-packers and warehouses directly to customer warehouses. Some retailers mandate we deliver directly
to them, as it is more cost effective and allows them to pass savings along to their customers. Other retailers may not mandate direct
delivery, but they recommend and prefer it as they have the capability to self-distribute and can realize significant savings with direct
delivery.
Wholesale
Distribution
Our
Wholesale Distributor network handles the wholesale shipments of our products. These distributors have a warehouse and distribution center,
and ship Reed’s and Virgil’s products directly to the retailer (or to customers who opt for drop shipping).
International
Distribution
We
presently export Reed’s and Virgil’s brands throughout international markets via US based exporters. International markets
where our brands are present are France, UK, South Africa, portions of the Caribbean, Canada, Spain, Philippines, Israel and Australia.
International
sales to some areas of the world are cost prohibitive, except for some specialty sales, since our premium sodas were historically packed
in glass, which drives substantial freight costs when shipping overseas. Despite these cost challenges, we believe there are good opportunities
to expand internationally, and we are increasing our marketing focus on these areas by adding freight friendly packages such as aluminum
cans. We are open to exporting and co-packing internationally and expanding our brands into foreign markets, and we have held preliminary
discussions with trading companies and import/export companies for the distribution of our products throughout Asia, Europe, Australia,
and South America. We believe these areas are a natural fit for Reed’s ginger products because of the popularity and importance
of ginger in international markets, especially the Asian market, where ginger is a significant part of the local diet and nutrition.
We
believe the strength of our brands, innovation, and marketing, coupled with the quality of our products and flexibility of our distribution
network, allows us to compete effectively.
Distribution
Agreements
We
have entered into agreements with some of our distributors that commit us to “termination fees” if we terminate our agreements
early or without cause. These agreements provide for our distributor partners to have the right to distribute our products to a defined
type of retailer within a defined geographic region. As is customary in the beverage industry, if we should terminate the agreement or
not automatically renew the agreement, we would be obligated to make certain payments to our distributor partners. We constantly review
our distribution agreements with our partners across North America.
Some
of our outside distributors are not bound by written agreements with us and may discontinue their relationship with us on short notice.
Most distributors handle a number of competitive products. In addition, our products are sometimes a small part of our distributors’
businesses.
Manufacturing
Our Products
All
of Reed’s products are produced by our co-pack partners. They brew, blend, bottle, and package our products and charge
us a fee, generally by the case, for the products produced. We have a long-standing relationship with two co-packers in Pennsylvania
and two in California. During 2020 we entered into co-packing agreements with a co-packer on the East Coast, Clinton’s
Ditch, and on the West Coast, Noel Canning. We are in discussions and negotiations with additional co-packers to secure added
capability for future production needs. We periodically review our co-packing relationships to ensure that they are optimal with respect
to quality of production, cost and location.
Warehousing
and Logistics are a significant portion of the Company’s operational costs. In order to drive efficiency and reduce costs, on February
1, 2019 we entered into a strategic partnership with Veritiv Logistics Solutions to manage all freight movement for the Company. Veritiv
is one of the largest distribution service providers in North America and has expertise that will provide a competitive advantage in
the movement of raw materials and finished goods. This partnership will support planning and execution of all inventory movement, assessment
of storage needs and cost management.
We
follow a “fill as needed” model to the best of our ability and have no significant order backlog.
New
Product Development
While
we have simplified our business and have streamlined a significant number of SKUs in order to further our primary objective of accelerating
the growth of the Reed’s and Virgil’s core product offerings, we believe significant opportunity remains in the natural
beverage space.
Healthier alternatives will be the future for carbonated soft drinks. We
will continue to drive product development in the natural, no and low sugar offerings in the “better for you” beverage categories.
In addition, we believe there are powerful consumer trends that will help propel the growth of our brand portfolio including the increased
consumption of ginger as a recognized superfood, the growing use of ginger beer in today’s popular cocktail drinks, and consumers’
increased demand for higher quality, natural handcrafted beverages.
Christopher
J. Reed, the Company’s founder continues to support our new product development efforts in 2022. Mr. Reed possesses thirty
plus years of product development and innovation experience. Recent innovations include our compelling line of full flavor, natural,
zero sugar, zero calorie sodas. Reed’s has also begun to expand and broaden its product development capabilities by engaging and
working with larger, experienced beverage flavor houses and innovative ingredient research and supply companies.
We
believe our new business model enhances our ability to be nimble and innovative, producing category leading new products in a short period
of time.
Competition
Nonalcoholic
Beverages
The
nonalcoholic beverage segment of the commercial beverage industry is highly competitive, consisting of numerous companies ranging from
small or emerging to very large and well established. The principal areas of competition include pricing, packaging, development of new
products and flavors, and marketing campaigns. Our products compete with a wide range of drinks produced by a relatively large number
of manufacturers. Many of these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and
other branding campaigns. Competitors in the ginger beer category include Goslings, Fever Tree, Bundaberg, Cock ‘n Bull and Q Tonic;
in the craft soda category we compete with brands such as Stewart’s, IBC, Zevia, Henry Weinhard’s,
Boylan, and Jones Soda; In the Ginger Ale category we compete with Canada Dry, Schweppes, Seagram’s and Zevia.
Important
factors affecting our ability to compete successfully include the taste and flavor of products, trade and consumer promotions, rapid
and effective development of new, unique cutting-edge products, attractive and different packaging, branded product advertising, and
pricing. We also compete for distributors who will concentrate on marketing our products over those of our competitors, provide stable
and reliable distribution, and secure adequate shelf space in retail outlets. Competitive pressures in the soft drink category could
also cause our products to be unable to gain or even lose market share, or we could experience price erosion.
Despite
our products having a relatively high price for a craft premium beverage product, minimal mass media advertising to date, and a small
but growing presence in the mainstream market compared to many of our competitors, we believe our natural innovative beverage recipes,
packaging, use of premium ingredients, and a proprietary ginger processing formula provide us with a competitive advantage. Our commitments
to the highest quality standards and brand innovation are keys to our success.
Ginger
Shots
Our
Reed’s Wellness Ginger Shot was introduced during 2020. The shot category is very competitive, and a few mainstream companies dominate
the category, but there is room for an natural alternative. Competition for market share and acceptance of new products is significant.
Main competitors are 5-Hour Energy, Ginger Time, and Rescue Ginger Shots.
Candy
Reed’s
Crystallized Ginger and Reed’s Ginger Chews restaged their product line up in 2020. The category is small and there is not a significant number of entrants. Key competitors are Chimes and Gin Gins.
Ready to Drink:
The RTD category refers to canned cocktails
that offer convenience and quality for cocktail drinkers. RTD sales held strong in 2021 with triple-digit growth. According to
NielsenIQ, year-over-year off-premise dollar sales increased 126 percent for RTD cocktails for the 52-week period ending October 2,
2021. According to IRI, premixed cocktails spirits-based and malt-based seltzers accounted for just over $7 billion in
off-premise sales over the 52 weeks ending November 28, 2021.
The start of Covid-19, when restaurants and bars
closed in March 2020, helped propel the category with consumers bringing the on-premise cocktail occasion to their homes. This was a
major boost for canned, single-serve RTDs. Without the recent quality improvements of RTD cocktails, however, it’s unlikely that
the category would have taken off. Today’s RTD cocktails bring much higher quality versus earlier wine coolers and malt-based hard
lemonades. Premiumization has resulted in a new wave of products that boast less sugar and more transparency. Variety has also
been a key driver, allowing consumers ways to experiment without buying costly ingredients or spirits. Reed’s is poised to
leverage these trends bringing high-quality, crafted Mules made with real fresh ginger to the market.
Top selling brands in the category are High Noon,
Cutwater Spirits, On The Rocks, Jose Cuervo, Skinnygirl, 1800 Tequila, Buzzballz, Bacardi, The Long Drink Company, and Fisher’s
Island. In the Mule segment, the key players include ‘Merican Mule, Cutwater Mule, and Copper Can.
Raw
Materials
Substantially
all of the raw materials used in the preparation, bottling and packaging of our products are purchased by Reed’s or by our contract
packers in accordance with our specifications.
Generally,
the raw materials used in our products are obtained from domestic and foreign suppliers and many of the materials have multiple reliable
suppliers. This provides a level of protection against a major supply constriction or adverse cost or supply impacts. Since our raw materials
are common ingredients and supply is easily accessible, we have few long-term contracts in place with our suppliers.
Glass
Bottles and Aluminum Cans
A
significant component of our product cost is the purchase of glass bottles and aluminum cans. In December 2017, we entered into an exclusive
strategic partnership with Owens-Illinois (glass), and in February 2018 we entered into a strategic partnership with Crown Cork &
Seal for aluminum cans. During 2021 we entered into an agreement with a packaging broker to supply us with 25 million sleek 12-ounce
cans during 2022. These suppliers provide expertise in emerging package and material innovation that can be leveraged to further
expand marketing and package offerings.
Working
Capital Practices
Historically,
we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible
debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive
action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating
improved vendor contracts and restructuring our selling prices.
Licensing
During 2020 we entered into a licensing agreement
with Full Sail Brewery headquartered in Hood River, Oregon to manufacture and sell our new line of Reed’s Alcoholic Classic Mule
in 4 and 12 pack 12-ounce cans, and 12 pack 16-ounce cans. Full Sail manages all aspects of production and distribution. We subsequently
amended that agreement to assume the distribution rights from Full Sail and instead utilize Full Sail as a co-packer of our RTD Classic
Mule line. We now fully control the sales and marketing process, and this change in distribution ownership enables us to recognize gross
revenue as opposed to a royalty fee going forward.
Seasonality
Sales
of our nonalcoholic beverages are somewhat seasonal with higher than average volume in the warmer months. The volume of sales in the
beverage business may be affected by weather conditions.
Proprietary
Rights
We
own copyrights, trademarks and trade secrets relating to our products and the processes for their production; the packages used for our
products; and the design and operation of various processes and equipment used in our business. Some of our proprietary rights are licensed
to our co-packers and suppliers and other parties. Reed’s ginger processing and brewing process finished beverage products
and concentrate formulas are among its most valuable trade secrets.
We
own trademarks in the United States that we consider material to our business. Trademarks in the United States are valid as long as they
are in use and/or their registrations are properly maintained. Pursuant to our manufacturing and bottling agreements, we authorize our
bottlers to use applicable Reed’s trademarks in connection with their manufacture, sale and distribution of our products. We have
registered and intend to obtain additional trademarks in international markets as may become necessary.
We
use confidentiality and non-disclosure agreements with employees, manufacturers and distributors to protect our proprietary rights. Mr.
Reed is also subject to an intellectual property agreement with Reed’s restricting competition consistent with his fiduciary obligations
to Reed’s.
Regulation
Our Company is required to comply, and it
is our policy to comply, with all applicable laws in all jurisdictions in which we do business.
The
production, distribution and sale in the United States of many of our products are subject to the Federal Food, Drug, and Cosmetic Act,
the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, competition laws, federal, state and local workplace
health and safety laws, various federal, state and local environmental protection laws, and various other federal, state and local statutes
and regulations applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products. Outside
the United States, the distribution and sale of our many products and related operations are also subject to numerous similar and other
statutes and regulations.
The Safe Drinking Water and Toxic Enforcement
Act of 1986 (“Proposition 65”) of the state of California requires a specific warning to appear on any product containing
a component listed by the state as having been found to cause cancer or birth defects. The state maintains lists of these substances
and periodically adds other substances to these lists. Proposition 65 exposes all food and beverage producers to the possibility of having
to provide warnings on their products in California because it does not provide for any generally applicable quantitative threshold below
which the presence of a listed substance is exempt from the warning requirement. Consequently, the detection of even a trace amount of
a listed substance can subject an affected product to the requirement of a warning label. However, Proposition 65 does not require a
warning if the manufacturer of a product can demonstrate that the use of that product exposes consumers to a daily quantity of a listed
substance that is:
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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. |
No
Company beverages produced for sale in California are currently required to display warnings under this law. We are unable to predict
whether a component found in a Company product might be added to the California list in the future, although the state has initiated
a regulatory process in which caffeine and other natural occurring substances will be evaluated for listing. Furthermore, we are also
unable to predict when or whether the increasing sensitivity of detection methodology may become applicable under this law and related
regulations as they currently exist, or as they may be amended, might result in the detection of an infinitesimal quantity of a listed
substance in a beverage of ours produced for sale in California.
Bottlers
of our beverage products presently offer and use non-refillable, recyclable containers in the United States. Some of these bottlers also
offer and use refillable containers, which are also recyclable. Legal requirements apply in various jurisdictions in the United States
and overseas requiring deposits or certain taxes or fees be charged for the sale, marketing and use of certain non-refillable beverage
containers. The precise requirements imposed by these measures vary. Other types of beverage container-related deposit, recycling, tax
and/or product stewardship statutes and regulations also apply in various jurisdictions in the United States and overseas. We anticipate
additional, similar legal requirements may be proposed or enacted in the future at local, state and federal levels, both in the United
States and elsewhere.
Legislation
has been proposed in Congress and by certain state and local governments which would prohibit the sale of soft drink products in non-refillable
bottles and cans or require a mandatory deposit as a means of encouraging the return of such containers, each in an attempt to reduce
solid waste and litter. Similarly, we are aware of proposed legislation that would impose fees or taxes on various types of containers
that are used in our business. We are not currently impacted by the policies in these types of proposed legislation, but it is possible
that similar or more restrictive legal requirements may be proposed or enacted within our distribution territories in the future.
Our
co-packers are subject to various environmental
protection statutes and regulations, including those relating to the use of water resources and the discharge of wastewater. Compliance
with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our capital expenditures,
net income or competitive position.
We
are also subject to various federal, state and international laws and regulations related to privacy and data protection, including the
California Consumer Privacy Act of 2018 (“CCPA”), which became effective on January 1, 2020, and its extension, the California
Privacy Rights Act (“CPRA”), which will take effect on January 1, 2023. The interpretation and application of data privacy,
cross-border data transfers and data protection laws and regulations are often uncertain and are evolving in the United States and internationally.
We monitor pending and proposed legislation and regulatory initiatives to ascertain their relevance to and potential impact on our business
and develop strategies to address regulatory trends and developments, including any required changes to our privacy and data protection
compliance programs and policies.
Our
primary cost pertaining to environmental compliance activity is in recycling fees and redemption values. We are required to collect redemption
values from our customers and remit those redemption values to the state, based upon the number of bottles or cans of certain products
sold in the state.
Employees
As
of December 31, 2021, we had 31 full-time equivalent employees on our corporate staff. We employ additional people on a
part-time basis as needed. We have never participated in a collective bargaining agreement. We believe relations with our employees
are good.
Available
Information
The
Company maintains a website at the following address: www.reedsinc.com. The information on the Company’s website is not incorporated
by reference in this report. We make available on or through our website certain reports and amendments to those reports that we file
with or furnish to the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934,
as amended (“Exchange Act”). These include our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q
and our Current Reports on Form 8-K. We make this information available on our website free of charge as soon as reasonably practicable
after we electronically file the information with, or furnish it to, the SEC. In addition, we routinely post on the “Investors”
page of our website news releases, announcements and other statements about our business and results of operations, some of which may
contain information that may be deemed material to investors. Therefore, we encourage investors to monitor the “Investors”
page of our website and review the information we post on that page. The SEC maintains a website that contains reports, proxy and
information statements, and other information regarding issuers that file electronically with the SEC at the following address: http://www.sec.gov.
Item
1A. Risk Factors
The
following are some of the risks and uncertainties that could cause our actual results to differ materially from those presented in our
forward-looking statements. The risks and uncertainties described below are not the only ones we face but do represent those risks and
uncertainties that we believe are material to us. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also harm our business. All forward-looking statements in this document are based on information available to us as of
the date hereof, and we assume no obligations to update any such forward-looking statements.
Summary
of Material Risk Factors
●
We have a history of operating losses. Our estimates regarding the sufficiency of our cash resource and capital
requirements and needs for additional financing raises substantial doubt about our ability to continue as a going concern.
●
We require additional financing to support our working capital and execute our operating plans for fiscal 2022, which may not
be available or may be costly and dilutive.
●
The impact of the COVID-19 pandemic could continue to harm our business and results of operations.
●
Disruption within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial
condition and results of operations.
●
Increased market spending may not drive volume growth.
●
Increases in costs of packaging, ingredients, fuel, and contract manufacturing tolling fees may have an adverse impact on our
gross margin.
●
If we do not adequately manage our inventory levels, our operating results could be adversely affected.
●
It is difficult to predict the timing and amount of our sales because our distributors are not required to place minimum orders with
us.
● We will be subject
to delisting if we do not meet the Nasdaq bid price rule by August 15, 2022.
Risk
Factors Relating to Our Business
The
COVID-19 pandemic and related ongoing impacts may have a material adverse effect on our results of operations and financial condition.
During
the year ended December 31, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued impact
for the balance of the year. In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic results
in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase
in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Through
December 31, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up with
demand. The Company believes that costs will continue to increase throughout the year. In addition, the Company experienced increases
in the pricing of several of its raw materials and delays in procuring several of these items. However, mitigation plans are being implemented
to manage this risk. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to benefit from
strong demand for and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation,
logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company
anticipates a continued impact throughout 2022.
Our
ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our
ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and
health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through December 31, 2021, we maintained
the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating
with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers.
However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for
example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our
operations.
In
addition, the COVID-19 pandemic may exacerbate other risks related to our business, including risks related to changes in the retail
landscape, fluctuations in input costs, inflation rates, and foreign currency exchange rates; and the ability of third-party service
providers and business partners to fulfill their respective commitments and responsibilities to us in a timely manner and in accordance
with the agreed-upon terms. The continuing evolution of the pandemic may also present risks not currently known to us.
There is Substantial doubt about our ability
to continue as a going concern.
Our financial statements as of December 31,
2021 were prepared under the assumption that we will continue as a going concern for the next twelve months from the date of
issuance of these financial statements. In addition the Company’s independent registered public accounting firm, in their
report on the Company’s December 31, 2021, audited financial statements, raised substantial doubt about the Company’s
ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain
additional financing, drive further operating efficiencies, reduce expenditures and ultimately, create profitable operations. We may
not be able to obtain additional capital on reasonable terms. Our financial statements do not include adjustments that would result
from the outcome of this uncertainty.
We have significant obligations under payables
and debt obligations. Our ability to operate as a going concern are contingent upon successfully obtaining additional financing. Failure
to do so would adversely affect our ability to continue operations.
If capital is not available, we may then need
to scale back or freeze our organic growth plans, sell our business under unfavorable terms, abd reduce expenses to manage our liquidity
and capital resources. We may not be able extend or repay our current obligations, which could impact our ability to continue to operate
as a going concern.
We
have a history of operating losses, which raises substantial doubt about our ability to continue as a going concern.
The
accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern for the next 12 months. Such
assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the year
ended December 31, 2021, the Company recorded a net loss of $16,402 and used cash in operations of $17,589. As of December 31, 2021,
we had a cash balance of $49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
During
the year ended December 31, 2021 the Company engaged in one transaction to raise capital in 2021 receiving net proceeds of $7,327
from an underwritten offering of common stock.
On March 11, 2022, the Company raised gross proceeds,
before deducting placement agent fees and other offering expenses, are approximately $5.4 million, in a private placement of common stock
and warrants.
In the event that management proceeds with
sale assets rather than continuing to hold and operate all its assets long term, management’s assessment of the fair value, and
ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant
noncash charges and cash exit costs in future periods.
In the event that additional working capital is
not available, we may be forced to scale back or freeze our growth plans, sell assets on less than favorable terms, reduce expenses,
and/or curtail future plans to manage our liquidity and capital resources. In the event that management elects to proceed with asset
sales in the future rather than continue to hold and operate all its assets long term, management’s assessment of the fair value,
and ultimate recoverability, of goodwill, intangibles, and other long-lived assets would be impacted and the Company could incur significant
noncash charges and cash exit costs in future periods.
We may not be able to extend or repay our
indebtedness owed to our secured lenders, which would have a material adverse effect on our financial condition and ability to continue
as a going concern.
If we are unable to service or repay these obligations
at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we would be in default. We cannot
provide any assurances that we will be able to raise the necessary amount of capital to service these obligations. Upon a default, our
secured lenders would have the right to exercise their rights and remedies to collect, which would include foreclosing on our assets.
Accordingly, a default would have a material adverse effect on our business, and we would likely be forced to seek bankruptcy protection.
We
are not in compliance with Nasdaq Listing Rule 5550(a)(2), the bid price rule. If we are unable to cure the failure within the prescribed
time period, our common stock will be subject to delisting. A delisting would materially reduce the liquidity of our common stock
and have an adverse effect on our market price.
On
August 16, 2021, the Nasdaq Listing Qualifications Department notified us that, based on the previous 30 consecutive business days, the
Company’s common stock no longer met the minimum $1 bid price per share requirement. Therefore, in accordance with the Nasdaq Listing
Rules (the “Rules”), the Company was provided 180 calendar days, or until February 14, 2022, to regain compliance. The common
stock did not regain compliance with the minimum $1 bid price per share requirement during this initial compliance period. However,
the Nasdaq Listing Qualifications Department determined that the Company is eligible for an additional 180 calendar day period, or until
August 15, 2022, to regain compliance. Their determination is based on the Company meeting the continued listing requirement for market
value of publicly held shares and all other applicable requirements for initial listing on the Capital Market with the exception of the
bid price requirement, and the Company’s written notice of its intention to cure the deficiency during the second compliance period
by effecting a reverse stock split, if necessary. If at any time during this additional time period the closing bid price of the Company’s
security is at least $1 per share for a minimum of 10 consecutive business days, we will provide written confirmation of compliance and
this matter will be closed. If we choose to implement a reverse stock split, it must complete the split no later than ten business days
prior to the expiration date in order to timely regain compliance. Our board and stockholders authorized an up to one for five reverse
split of our common stock to be implemented at the board’s discretion. There can be no assurance a one for five reverse split would
cause our common stock to meet the bid price requirement.
A
delisting would materially reduce the liquidity of our common stock and have an adverse effect on our market price. A delisting would
also likely make it more difficult for us to obtain financing through the sale of our equity. Any such sale of equity would likely be
more dilutive to our current stockholders than would be the case if our shares were listed.
We require
additional financing to support our working capital and execute our operating plans for 2022, which may not be available or may
be costly and dilutive.
We
require additional financing to support our working capital needs and fund our operating plans for fiscal 2022. To alleviate
these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the
issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from
financial institutions. As we seek additional sources of financing, there can be no assurance that such financing
would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital
markets is subject to several factors, including market and economic conditions, our performance and investor.
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.
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.
The
COVID-19 pandemic and mitigation measures has had an adverse impact on global economic conditions, including disruption of stock markets
and may impact on our ability to obtain financing on terms acceptable to us, if at all.
In
February and March 2020, the financial markets significantly declined as the reality of the COVID-19 pandemic came into focus. The extent
to which the COVID-19 pandemic continues to impact our results will depend on future developments that are highly uncertain and cannot
be predicted at this time, including new information that may emerge concerning the severity of the virus and its variants and the actions
to contain its impact. Disruption of stock markets had an impact on the cost of capital in 2020 and may, in the future, impact on our
ability to obtain financing on terms acceptable to us, if at all.
Disruption
within our supply chain, contract manufacturing or distribution channels could have an adverse effect on our business, financial condition
and results of operations.
The
prices of ingredients, other raw materials, packaging materials, aluminum cans and other containers fluctuate depending on market conditions,
governmental actions, climate change and other factors beyond our control, including the COVID-19 pandemic. Substantial increases in
the prices of our or ingredients, other raw materials, packaging materials, aluminum cans and other containers, to the extent they cannot
be recouped through increases in the prices of finished beverage products, could increase our and our bottling partners’ operating
costs and reduce our profitability. Increases in the prices of our finished products resulting from a higher cost of ingredients, other
raw materials, packaging materials, aluminum cans and other containers could affect affordability in some markets and reduce our or our
bottling partners’ sales. In addition, some of our ingredients as well as some packaging containers, such as aluminum cans, are
available from a limited number of suppliers. We and our bottling partners may not be able to maintain favorable arrangements and relationships
with these suppliers, and our contingency plans may not be effective in preventing disruptions that may arise from shortages of any ingredients
that are available from a limited number of suppliers. Adverse weather conditions may affect the supply of other agricultural commodities
from which key ingredients for our products are derived. An increase in the cost, a sustained interruption in the supply, or a shortage
of some of these ingredients, other raw materials, packaging materials, aluminum cans and other containers that may be caused by changes
in or the enactment of new laws and regulations; a deterioration of our or our bottling partners’ relationships with suppliers;
supplier quality and reliability issues; trade disruptions; changes in supply chain; and increases in tariffs; or events such as natural
disasters, widespread outbreaks of infectious diseases (such as the COVID-19 pandemic), power outages, labor strikes, political uncertainties
or governmental instability, or the like could negatively impact our net operating revenues and profits.
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. |
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.
An
increase in the price, disruption of supply or shortage of fuel and other energy sources in markets where our bottlers operate, which
may be caused by increasing demand, by events such as natural disasters, power outages and extreme weather, or by government regulations,
taxes, policies or programs designed to reduce greenhouse gas emissions to address climate change, could increase our operating costs
and negatively impact our profitability. An increase in the price, disruption of supply or shortage of fuel and other energy sources
in any of the markets in which our independent bottling partners operate could increase the affected independent bottling partners’
operating costs and thus could indirectly negatively impact our results of operations.
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 2021. 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.
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 shortage can 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. We anticipate we will continue to see supply issues with all sizes of aluminum
cans. 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 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 $25 billion carbonated soft drink market 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, 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. |
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, 2021, the Company had two broker/distributors that accounted for approximately 19% and 11% of its sales,
respectively; and during the year ended December 31, 2020, the Company had two broker/distributors that accounted for 25% and 12% 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, 2021, the Company’s largest two vendors accounted for approximately 13%, and 10% of its purchases,
respectively. During the year ended December 31, 2020, the Company’s largest two vendors accounted for approximately 12%, and 11%
of its purchases, respectively.
As
of December 31, 2021, no Company vendor accounted for more than 10% of the total accounts payable. As of December 31, 2020, the Company’s
largest two vendors accounted for 12% and 10% of the total accounts payable, respectively.
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. 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. 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, 2021 and 2020, the Company had utilized six 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. |
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. |
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.
Risk
Factors Related to Distribution of Alcoholic Beverages
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.
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. |
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. |
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. |
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.
Collectively,
members of our board of directors and our executive officers hold approximately 11.2% of the Company’s outstanding common
stock, beneficially own approximately 26.7% 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 11.2% of our outstanding common stock and beneficially
own approximately 26.7% 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.)
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 180,000,000 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.
Risk Factors Related to Environmental and Social Factors
Water
scarcity and poor quality could negatively impact our costs and capacity.
Water
is a main ingredient in substantially all of our products, is vital to the production of the agricultural ingredients on which our business
relies and is needed in our manufacturing process. It also is critical to the prosperity of the communities we serve and the ecosystems
in which we operate. Water is a limited resource in many parts of the world, facing unprecedented challenges from overexploitation, increasing
demand for food and other consumer and industrial products whose manufacturing processes require water, increasing pollution and emerging
awareness of potential contaminants, poor management, lack of physical or financial access to water, sociopolitical tensions due to lack
of public infrastructure in certain areas of the world and the effects of climate change. As the demand for water continues to increase
around the world, and as water becomes scarcer and the quality of available water deteriorates, we may incur higher costs or face capacity
constraints, which could adversely affect our profitability.
Increased
demand for food products and decreased agricultural productivity may negatively affect our business.
As
part of the manufacture of our beverage products, we and our bottling partners use a number of key ingredients that are derived from
agricultural commodities; decreased agricultural productivity in certain regions of the world as a result of changing weather patterns;
increased agricultural regulations; and other factors have in the past, and may in the future, limit the availability and/or increase
the cost of such agricultural commodities and could impact the food security of communities around the world.
Climate
change and legal or regulatory responses thereto may have a long-term adverse impact on our business and results of operations.
There
is increasing concern that a gradual increase in global average temperatures due to increased concentration of carbon dioxide and other
greenhouse gases in the atmosphere will cause significant changes in weather patterns around the globe and an increase in the frequency
and severity of natural disasters. Decreased agricultural productivity in certain regions of the world as a result of changing weather
patterns may limit the availability or increase the cost of key agricultural commodities, which are important sources of ingredients
for our products, and could impact the food security of communities around the world. Climate change may also exacerbate water scarcity
and cause a further deterioration of water quality in affected regions, which could limit water availability for our independent bottlers.
Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or
impact demand for our products. Increasing concern over climate change also may result in additional legal or regulatory requirements
designed to reduce or mitigate the effects of carbon dioxide and other greenhouse gas emissions on the environment. Increased energy
or compliance costs and expenses due to increased legal or regulatory requirements may cause disruptions in, or an increase in the costs
associated with, the manufacturing and distribution of our beverage products. The effects of climate change and legal or regulatory initiatives
to address climate change could have a long-term adverse impact on our business and results of operations.
.
Adverse
weather conditions could reduce the demand for our products.
The
sales of our products are influenced to some extent by weather conditions in the markets in which we operate. Unusually cold or rainy
weather during the summer months may have a temporary effect on the demand for our products and contribute to lower sales, which could
have an adverse effect on our results of operations for such periods.