UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2013
Commission File Number 000-32501
REED’S, INC.
(Exact name of registrant as specified in its charter)
Delaware
State or other jurisdiction of
incorporation or organization
13000 South Spring Street
Los Angeles, California
Address of principal executive offices
35-2177773
I.R.S. Employer
Identification Number
90061
Zip Code
(310) 217-9400
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of Class
Common Stock, $.0001 par value per share
Name of each exchange where registered
NYSE MKT
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by non-affiliates (excluding voting shares held by officers and
directors) as of June 30, 2013 was $50,556,000.
13,037,952 common shares, $.001 par value, were outstanding on March 18, 2014.
TABLE OF CONTENTS
PART I
Item 1.
Item 2.
Item 3.
Item 4.
Business
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
PART II
Item 5.
Item 6.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits, Financial Statement Schedules
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Annual Report on Form 10-K (“Annual Report”), the other reports, statements, and information that we have previously filed or that we
may subsequently file with the Securities and Exchange Commission (“SEC”) and public announcements that we have previously made or may
subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be
forward-looking statements. The forward-looking statements included or incorporated by reference in this Annual Report and those reports,
statements, information and announcements address activities, events or developments that Reed’s, Inc. (hereinafter referred to as “we,” “us,”
“our” or “Reed’s”) expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often,
but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely
result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook” and similar
expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially
from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this
document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this
document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking
statements.
The risk factors referred to in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any
forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking
statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or
statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.
New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control,
involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made,
including, but not limited to, the following risk factors.
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Our ability to generate sufficient cash flow to support capital expansion plans and general operating activities,
Decreased demand for our products resulting from changes in consumer preferences,
Competitive products and pricing pressures and our ability to gain or maintain its share of sales in the marketplace,
The introduction of new products,
Our being subject to a broad range of evolving federal, state and local laws and regulations including those regarding the labeling and
safety of food products, establishing ingredient designations and standards of identity for certain foods, environmental protections, as
well as worker health and safety. Changes in these laws and regulations could have a material effect on the way in which we produce
and market our products and could result in increased costs,
Changes in the cost and availability of raw materials and the ability to maintain our supply arrangements and relationships and procure
timely and/or adequate production of all or any of our products,
Our ability to penetrate new markets and maintain or expand existing markets,
Maintaining existing relationships and expanding the distributor network of our products,
The marketing efforts of distributors of our products, most of whom also distribute products that are competitive with our products,
Decisions by distributors, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of
our products that they are carrying at any time,
The availability and cost of capital to finance our working capital needs and growth plans,
The effectiveness of our advertising, marketing and promotional programs,
Changes in product category consumption,
Economic and political changes,
Consumer acceptance of new products, including taste test comparisons,
Possible recalls of our products, and
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Our ability to make suitable arrangements for the co-packing of any of our products.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance, or achievements.
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Item 1. Business
Background
PART I
We develop, manufacture, market and sell natural non-alcoholic carbonated soft drinks, kombucha, candies and ice creams. We currently
manufacture, market and sell seven unique product lines:
● Reed’s Ginger Brews,
● Virgil’s Root Beer, Cream Sodas, Dr. Better and Real Cola, including ZERO diet sodas,
● Culture Club Kombucha,
● China Colas,
● Reed’s Ginger Chews,
● Reed’s Ginger Ice Creams, and
● Sonoma Sparkler Sparkling Juices.
In addition, we have a growing private label business.
We sell most of our products in specialty gourmet and natural food stores (estimated at approximately 4,000 smaller or specialty stores and
approximately 3,000 supermarket format stores), supermarket chains (estimated at approximately 7,000 stores), retail stores and restaurants in
the United States and, to a lesser degree, in Canada. We primarily sell our products through a network of natural, gourmet and independent
distributors. We also maintain an organization of in-house sales managers who work mainly in the stores serviced by our natural, gourmet and
mainstream distributors and with our distributors.
We produce and co-pack our beverage products in part at our facility in Los Angeles, California, known as the Brewery, and with the majority
produced at a contracted co-packing facility in Pennsylvania. The co-pack facility in Pennsylvania supplies us with soda products for the eastern
half of the United States and nationally for soda products that we do not produce at The Brewery.
Key elements of our business strategy include:
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increase our relationship with and sales to the approximately 13,000 supermarkets that carry our products in natural and
mainstream,
expand our distribution network by adding regional direct store delivery (DSD’s) and additional direct accounts,
stimulate consumer demand and awareness for our existing brands and products through promotions and advertising,
● develop additional product flavors under our brands (brand extensions) and other new products, including specialty packaging
and alternative uses for our products,
● develop and produce private-label products for select customers,
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lower our cost of sales for our products by gaining economies of scale in our purchasing, and
● optimize the size and focus of our sales force to manage our relationships with distributors and retail outlets.
Our current sales effort is focused on building our business in our approximately 13,000 natural and mainstream supermarket accounts in the
U.S. and Canada.
We create consumer demand for our products by:
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supporting in-store sampling programs of our products,
● generating free press through public relations,
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advertising in store publications,
● maintaining a company website ( www.reedsgingerbrew.com ),
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active social media campaigns on facebook.com, twitter.com and youtube.com, and
● participating in large public events as sponsors.
Our principal executive offices are located at 13000 South Spring Street, Los Angeles, California 90061. Our telephone number is (310) 217-
9400. Our Internet address is (www.reedsgingerbrew.com). Information contained on our website or that is accessible through our website
should not be considered to be part of this Annual Report.
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Historical Development
Reed’s Original Ginger Brew was created in 1987 by Christopher J. Reed, our founder and Chief Executive Officer, and 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 of our
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 house our west coast production and warehouse facility. The Brewery also serves as our principal
executive offices. In 2001, pursuant to a reincorporation merger, we changed our state of incorporation to Delaware and also changed our name
to “Reed’s, Inc.”
On December 12, 2006, we completed the sale of 2,000,000 shares of our common stock at an offering price of $4.00 per share in our initial
public offering. The public offering resulted in gross proceeds of $8,000,000. Following the public offering, we expanded sales and operations
dramatically, initially using a direct store delivery strategy in Southern California, along with other regional independent direct store distributors
(DSD). The relationships with DSD’s were supported by our sales staff. In 2007 we raised a net of $7,600,000 in a private placement. We re-
focused our sales strategy to eliminate company direct store delivery sales and to expand sales to DSD’s and natural food distributors on a
national level. We also started selling directly to supermarket grocery stores, which has become a significant portion of our business today.
We continually introduce new products and line extensions, such as our Virgil’s diet line of ZERO beverages introduced in 2010 and Dr. Better
and Light 55 Calories Extra Ginger Brew in 2011. We commenced offering private label products in 2010 and have increased that business
significantly in 2012 and 2013. In 2012, we launched four flavors of our Culture Club Kombucha line that in 2013 was increased to eight
flavors.
Industry Overview
We offer natural premium carbonated soft drinks (CSD), which are a growing segment of the $10 billion CSD market nationwide. Within natural
food store markets, we are among the top-selling natural soft drinks. This market is steady and growing. We also sell in major grocery chains
nationally. The trend in grocery stores is to expand offerings of natural products and we have the scale and capability to develop these direct
customer relationships.
Our Products
We currently manufacture and sell 24 beverages, four candies and three ice creams. We make all of our products using premium all-natural
ingredients and our beverage line is GMO free. Our primary brands are our Reed’s ginger brew line, our Virgil’s line of root beer and our
Culture Club kombucha. Our candy products that include Reed’s Crystallized Ginger Candy and Reed’s Chews represent a lesser portion of
revenues, however, the products are popular and sales are expanding. We also sell ginger ice cream.
Reed’s Ginger Brews
Ginger ale is the oldest known soft drink. Before modern soft drink technology existed, non-alcoholic beverages were brewed at home directly
from herbs, roots, spices, and fruits. These handcrafted brews were then aged like wine and highly prized for their taste and their tonic, health-
giving properties. Reed’s Ginger Brews are a revival of this home brewing art and we make them with care and attention to wholesomeness and
quality, using the finest fresh herbs, roots, spices, and fruits. Our expert brew masters brew each batch with fresh ginger.
We believe that Reed’s Ginger Brews are unique in their kettle-brewed origin among all mass-marketed soft drinks. Reed’s Ginger Brews
contain between 8 and 26 grams of fresh ginger in every 12-ounce bottle. We use pure cane sugar as the sweetener. Our products differ from
commercial soft drinks in three particular characteristics: sweetening, carbonation and coloring for greater adult appeal. Instead of using
injected-based carbonation, we produce our carbonation naturally, through slower, beer-oriented techniques. This process produces smaller,
longer lasting bubbles that do not dissipate rapidly when the bottle is opened. We do not add coloring. The color of our products comes naturally
from herbs, fruits, spices, roots and juices and our beverages are GMO free.
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In addition, since Reed’s Ginger Brews are pasteurized, they do not require or contain any preservatives. In contrast, modern commercial soft
drinks generally are produced using natural and artificial flavor concentrates prepared by flavor laboratories, tap water, and highly refined
sweeteners. Typically, manufacturers make a centrally processed concentrate that will lend itself to a wide variety of situations, waters and
filling systems. The final product is generally cold-filled and requires preservatives for stability. Colors are added that are either natural,
although highly processed, or artificial.
Our Reed’s line contains the following products:
● Reed’s Original Ginger Brew was our first creation and is a Jamaican recipe for homemade ginger ale using 17 grams of fresh
ginger root, lemon, lime, honey, raw cane sugar, pineapple, herbs and spices. Reed’s Original Ginger Brew is 20% fruit juice.
● Reed’s Extra Ginger Brew is the same approximate recipe, with 26 grams of fresh ginger root for a stronger bite. Reed’s Extra
Ginger Brew is 20% fruit juice.
● Reed’s Premium Ginger Brew is sweetened only with honey and pineapple juice. Reed’s Premium Ginger Brew is 20% fruit
juice and contains 17 grams of fresh ginger root.
● Reed’s Raspberry Ginger Brew is brewed from 17 grams of fresh ginger root, raspberry juice and lime. Reed’s Raspberry
Ginger Brew is 20% raspberry juice.
● Reed’s Spiced Apple Brew uses 8 grams of fresh ginger root, the finest tart German apple juice and such apple pie spices as
cinnamon, cloves and allspice. Reed’s Spiced Apple Brew is 50% apple juice.
● Reed’s Cherry Ginger Brew is naturally brewed from 17 grams of fresh ginger root, cherry juice from concentrate and spices.
● Reed’s Light 55 Calories Extra Ginger Brew is a reduced calorie version of our top selling Reed’s Extra Ginger Brew that was
made possible by using Stevia. We use the same recipe of 26 grams of fresh ginger root, honey, pineapple, lemon and lime
juices and exotic spices.
● Reed’s Natural Energy Elixir is an energy drink infused with all natural ingredients designed to provide consumers with a
healthy and natural boost to energy levels
● Reed’s Nausea Relief is based on our Ginger Brews with added B vitamins. Both ginger and B vitamins have been studied for
their effectiveness in combating nausea.
Virgil’s Root Beer
Virgil’s is a premium root beer. We use all-natural ingredients, including filtered water, unbleached cane sugar, anise from Spain, licorice from
France, bourbon vanilla from Madagascar, cinnamon from Sri Lanka, clove from Indonesia, wintergreen from China, sweet birch and molasses
from the southern United States, nutmeg from Indonesia, pimento berry oil from Jamaica, balsam oil from Peru and cassia oil from China. We
collect these ingredients worldwide and gather them together at the brewing and bottling facilities. We combine these ingredients under strict
specifications and finally heat-pasteurize Virgil’s Root Beer, to ensure quality. We sell Virgil’s Root Beer in three packaging styles: 12-ounce
bottles in a four-pack, a special swing-lid style pint bottle and a 5-liter self-tapping party keg. The Virgil’s soda line is GMO free.
In addition to our Virgil’s Root Beer, we also offer the following products under our Virgil’s brand:
● Virgil’s Cream Soda,
● Virgil’s Orange Cream Soda,
● Virgil’s Black Cherry Cream Soda,
● Virgil’s Real Cola,
● Virgil’s Dr. Better,
● Virgil’s ZERO line, including Root Beer, Cream Soda, Real Cola, Dr. Better and Black Cherry Cream Soda. (Our ZERO line
is naturally sweetened with Stevia), and
● Virgil’s juice beverages, including Clementine, Peach Lemonade and Pomegranate
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Reed’s Culture Club Kombucha
We introduced our Culture Club Kombucha in 2012. Kombucha is a fermented tea that dates its origin back thousands of years. Among
consumers, kombucha is believed to have healing and cleansing characteristics. Sweetened tea is introduced to a “starter” culture and lightly
fermented to produce an acetic drink. We make the finest kombucha possible, using a combination of Oolong and Yerba Mate teas. Initially, we
produced four flavors, Goji Ginger, Hibiscus Ginger Grapefruit, Lemon Ginger Raspberry and Cranberry. We introduced four additional flavors
in 2013.
Other Beverage Brands
We have other popular brands that currently have limited distribution, including China Cola, Sonoma Sparkler and Flying Cauldron Butterscotch
Beer. We are continually developing new brands and products.
Private Label Products
We design and manufacture drinks for private label customers in our Los Angeles Brewery. We are experts in flavor development and in
matching existing products in the market. We develop the recipe and may design the label and/or the bottle style. We do not private label any of
our own branded product recipes. Private label manufacturing is different than copacking, as we build the products and purchase the ingredients.
The customer is purchasing a finished product, not a copacking service.
Our private label products have been primarily sparkling juices, waters and teas. We develop the sources for glass and ingredients. We have a
variety of packaging options, including swing-lid bottles, foil capsules and various label types.
New Product Development
We are always working on ideas and products to continue expanding our Reed’s Ginger Brews, Virgil’s product line, Reed’s Ginger Ice Cream,
and Reed’s Ginger Candy product lines and packaging styles. Among the advantages of our self-operated Brewery are the flexibility to try
innovative packaging and the capability to experiment with new product flavors at less cost to our operations or capital.
Our private label products require continual product development. We are able to be nimble and innovative, producing new products in a short
amount of time.
Manufacture of Our Products
We produce our carbonated beverages at two facilities:
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a facility in Los Angeles, California, known as The Brewery, at which we currently produce kombucha, certain soda products and
our private label products, and
a packing, or co-pack, facility in Pennsylvania which supplies us with product we do not produce at The Brewery. The co-packer
assembles our products and charges us a fee, generally by the case, for the products they produce.
We follow a “fill as needed” manufacturing model to the best of our ability and we have no significant backlog of orders. Substantially all of the
raw materials used in the preparation, bottling and packaging of our products are purchased by us or by our contract packers in accordance with
our specifications. Reed’s Crystallized Ginger is made to our specifications in Fiji. Reed’s Ginger Candy Chews are made and packed to our
specifications in Indonesia.
Generally, we obtain the ingredients used in our products from domestic suppliers and each ingredient has several reliable suppliers. We have no
major supply contracts with any of our suppliers. As a general policy, we pick ingredients in the development of our products that have multiple
suppliers and are common ingredients. This provides a level of protection against a major supply constriction or calamity.
We believe that as we continue to grow, we will be able to keep up with increased production demands. We believe that the Brewery has ample
capacity to handle increased West Coast business. To the extent that any significant increase in business requires us to supplement or substitute
our current co-packers, we believe that there are readily available alternatives, so that there would not be a significant delay or interruption in
fulfilling orders and delivery of our products. In addition, we do not believe that growth will result in any significant difficulty or delay in
obtaining raw materials, ingredients or finished product that is repackaged at the Brewery.
Our Primary Markets
We target a niche in the estimated $60 billion carbonated and non-carbonated soft drink markets in the US, Canada and International markets.
Our brands are generally regarded as premium and natural, with upscale packaging and are loosely defined as the artisanal (craft), premium
bottled carbonated soft drink category.
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The soft drink industry is highly fragmented and the craft soft drink category consists of such competitors as, Henry Weinhards, Thomas
Kemper, Hansen’s, Izze, Boylans 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. Despite our products having a relatively high price for an artisanal
premium beverage product, no mass media advertising and a relatively small but growing presence in the mainstream market compared to many
of our competitors, we believe that results to date demonstrate that Reed’s Ginger Brews and Virgil’s sodas are making strong inroads and
market share gains against some of the larger brands in the market.
Kombucha is the largest growth segment of the functional beverage category of drinks and foods, including coconut water, yogurt and fresh
juices. Among this broader category, the refrigerated juices and functional beverages segment grew by approximately $200 million in 2012 to an
estimated market of approximately $600 million (50% growth), according to SPINS data. Kombucha comprises the overwhelming majority
share of this explosive growth and comprises most of the segment. It is generally believed that the segment will continue to expand at a strong
rate over the next few years. Other functional drinks in this category are also expanding sales at healthy rates, primarily coconut water and fresh
pressed juices. Consumer awareness and demand for functional drinks is increasing and we feel that kombucha and other cultured drinks will be
in the forefront of this expanding market category.
We sell the majority of our products in the natural food store, mainstream supermarket chains and foodservice locations, primarily in the United
States and, to a lesser degree, in Canada and Europe.
Natural Food Stores
Our primary and historical marketing and distribution source of our products has been natural food and gourmet stores throughout the US. These
stores include Whole Foods Market, Trader Joe’s, Sprouts, Sunflowers, Earth Fare, and New Seasons, just to name a few. Our brands are also
sold in gourmet restaurants and deli’s nationwide. With the advent of large natural food store chains and specialty merchants, the natural foods
segment continues to grow each year, helping fuel the continued growth of our brands.
Mainstream Supermarkets and Retailers
We also sell our products to direct store delivery distributors (DSD) who specialize in distributing and selling our products directly to
mainstream retail channels, natural foods, and specialty retail stores. Our brands are further sold directly to some retailers who require that we
sell directly to their distribution centers since they have developed their own logistics capabilities. Examples of chains that fall into the “direct”
category are retailers such as, Costco, Trader Joe’s, some Whole Foods Market Regions and Kroger.
Supermarkets, particularly supermarket chains and prominent local/regional chains, often impose slotting fees in order to gain shelf presence
within their stores. These fees can be structured to be paid one-time only or in installments. We utilize selective slotting in supermarket chains
throughout the US and to a lesser degree, in Canada. However, our local and national sales team has been able to place our products without
having to pay significant slotting fees. Slotting fees for new item placements on average have cost anywhere between $10 to $150 per store, per
new item.
Food Service Placement
We also market our beverages to industrial cafeterias (corporate feeders), and to on premise bars and restaurants. As our business continues to
mature, we intend to place our beverages in stadiums, sport arenas, concert halls, theatres, and other cultural centers as long-term marketing and
pouring relationships are developed within this business segment.
International Sales
We have developed a limited market for our products in Canada, Europe and Asia. Sales outside of North America currently represent less than
1% of our total sales. Sales in Canada represent about 1.3% of our total sales. We believe that there are good opportunities for expansion of sales
in Canada and we are increasing our marketing focus on that market. Other international sales become cost prohibitive, except in specialty sales
circumstances, since our premium sodas are packed in glass, which involves substantial freight to move overseas. We are open to opportunities
to export and to copack internationally and expand our brands into foreign markets, and we are holding preliminary discussions with trading
companies and import/export companies for the distribution of our products throughout Asia, Europe and South America. We believe that these
areas are a natural fit for Reed’s ginger products, because of the importance of ginger in international markets, especially the Asian market
where ginger is a significant part of diet and nutrition.
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Distribution, Sales and Marketing
We currently have a national network of mainstream, natural and specialty food distributors in the United States and Canada. We sell directly to
our distributors, who in turn sell to retail stores. We also use our own internal sales force and independent sales representatives to promote our
products for our distributors and direct sales to our retail customers. One of the main goals of our sales and marketing efforts is to increase sales
and grow our brands. Our sales force consists of senior sales representatives in five geographic regions across the country. Additionally, we
employ a staff of internal telemarketing sales representatives. Generally, our sales managers are responsible for all activities related to the sales,
distribution and marketing of our brands to our entire distributor and retail partner network in North America. We distribute our products
primarily through several national natural foods distributors and an increasing number of regional mainstream DSD distributors. 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 call for our customer 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 customers. We have no plans to terminate or not renew any agreement with any of our customers. We
also offer our products and promotional merchandise directly to consumers via the Internet through our website, www.reedsgingerbrew.com.
Marketing to Distributors
We market to distributors using a number of marketing strategies, including direct solicitation, telemarketing, trade advertising and trade show
exhibition. These distributors include natural food, gourmet food and mainstream distributors. Our distributors sell our products directly to
natural food, gourmet food and mainstream supermarkets for sale to the public. We maintain direct contact with our distributor partners through
our in-house sales managers. From time to time and in very limited markets, when use of our own sales force is not cost effective, we will utilize
independent sales brokers and outside representatives.
Marketing to Retail Stores
The primary focus of our sales efforts is supermarket sales. We have a small highly trained sales force that is directly contacting supermarket
chains and setting up promotional calendars. In addition, we market to retail stores by utilizing trade shows, trade advertising, telemarketing,
direct mail pieces and direct contact with the store. Our sales managers and representatives visit these retail stores to sell directly in many
regions. Sales to retail stores are coordinated through our distribution network and our regional warehouses.
Competition
The beverage industry is highly competitive. The principal areas of competition are 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. Most of
these brands have enjoyed broad, well-established national recognition for years, through well-funded ad and other branding campaigns. In
addition, the companies manufacturing these products generally have greater financial, marketing and distribution resources than we do.
Important factors affecting our ability to compete successfully include 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 cause our products to be
unable to gain or to lose market share or we could experience price erosion. We believe that our innovative beverage recipes and packaging and
use of premium ingredients and a trade secret brewing process provide us with a competitive advantage and that our commitments to the highest
quality standards and brand innovation are keys to our success.
The kombucha market is dominated by one producer who sells their products nationally. The remainder of the producers is comprised of mostly
fragmented regional or local companies. There are companies that gain market share in certain regions; however, most do not have the scale and
capability to effectively sell and distribute on a national basis. We believe that Reed’s is now the #2 national producer of kombucha, an
accomplishment achieved in a relatively short period of time, by leveraging our existing distribution channels and customer relationships to
expand our sales volume quickly. We also have in-house production capabilities that can be scaled up as needed to make this a primary brand for
Reed’s. We believe that our existing infrastructure creates a competitive advantage, including product design, manufacturing & production and a
network of sales & distribution.
9
Proprietary Rights
We own trademarks that we consider material to our business. Three of our material trademarks are registered trademarks in the U.S. Patent and
Trademark Office: Virgil’s ®, Reed’s Original Ginger Brew All-Natural Jamaican Style Ginger Ale ® and China Cola ®. Registrations for
trademarks in the United States will last indefinitely as long as we continue to use and police the trademarks and renew filings with the
applicable governmental offices. We have not been challenged in our right to use any of our material trademarks in the United States. We intend
to obtain international registration of certain trademarks in foreign jurisdictions.
In addition, we consider our finished product and concentrate formulae, which are not the subject of any patents, to be trade secrets. Our brewing
process is a trade secret. This process can be used to brew flavors of beverages other than ginger ale and ginger beer, such as root beer, cream
soda, cola and other spice and fruit beverages. We have not sought any patents on our brewing processes because we would be required to
disclose our brewing process in patent applications.
We generally use non-disclosure agreements with employees and distributors to protect our proprietary rights.
Government Regulation
The production, distribution and sale in the United States of many of our Company’s products are subject to the Federal Food, Drug, and
Cosmetic Act, the Federal Trade Commission Act, the Lanham Act, state consumer protection laws, federal, state and local workplace health and
safety laws, various federal, state and local environmental protection laws and various other federal, state and local statutes and regulations
applicable to the production, transportation, sale, safety, advertising, labeling and ingredients of such products. Outside the United States, the
distribution and sale of our many products and related operations are also subject to numerous similar and other statutes and regulations.
A California law 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. The law exposes all food and beverage producers to the possibility of having to provide warnings on their products.
This is because the law recognizes no generally applicable quantitative thresholds below which a warning is not required. Consequently, even
trace amounts of listed components can expose affected products to the prospect of warning labels. Products containing listed substances that
occur naturally or that are contributed to such products solely by a municipal water supply are generally exempt from the warning requirement.
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 will be evaluated for listing. Furthermore, we are also unable to predict when or whether the increasing sensitivity of
detection methodology that 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 nonrefillable, recyclable containers in the United States and various other markets
around the world. 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 that deposits or certain ecotaxes or fees be charged for the sale, marketing and use of
certain nonrefillable beverage containers. The precise requirements imposed by these measures vary. Other types of beverage container-related
deposit, recycling, ecotax and/or product stewardship statutes and regulations also apply in various jurisdictions in the United States and
overseas. We anticipate that additional, similar legal requirements may be proposed or enacted in the future at local, state and federal levels, both
in the United States and elsewhere.
All of our facilities and other operations in the United States are subject to various environmental protection statutes and regulations, including
those relating to the use of water resources and the discharge of wastewater. Our policy is to comply with all such legal requirements.
Compliance with these provisions has not had, and we do not expect such compliance to have, any material adverse effect on our capital
expenditures, net income or competitive position.
Environmental Matters
Our primary cost 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 of certain products sold in that state.
Employees
We have 28 full-time employees on our corporate staff, as follows: 3 in general management, 16 in sales and marketing support, and 9 in
accounting, administration and operations. We also have 33 production employees that work both full and part time. We employ additional
people on a part-time basis as needed. We have never participated in a collective bargaining agreement. We believe that the relationship with our
employees is good.
10
Item 2. Property
We lease a facility of approximately 76,000 square feet, which serves as our principal executive offices, our West Coast Brewery and bottling
plant and our Southern California warehouse facility. Approximately 30,000 square feet of the total space is leased under a long-term lease
expiring in 2024. We also lease a warehouse of approximately 18,000 square feet under a lease expiring in 2017, a warehouse of approximately
13,000 square feet under a lease expiring in 2014, and a warehouse of 15,000 square feet on a month-to-month basis.
Item 3. Legal Proceedings
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our
exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of
the loss is estimable and the loss is probable.
From August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common stock in connection with our initial public offering. These
securities represented all of the shares issued in connection with the initial public offering prior to October 11, 2006. These shares issued in
connection with the initial public offering may have been issued in violation of either Federal or State securities laws, or both, and may be
subject to rescission.
On August 12, 2006, we made a rescission offer to all holders of the outstanding shares that we believe are subject to rescission, pursuant to
which we offered to repurchase these shares then outstanding from the holders. At the expiration of the rescission offer on September 18, 2006,
the rescission offer was accepted by 32 of the offerees to the extent of 28,420 shares for an aggregate of $119,000, including statutory interest.
The shares that were tendered for rescission were purchased by third parties and not from our funds.
Federal securities laws do not provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as
required or was not otherwise exempt from such registration requirements. With respect to the offerees who rejected the rescission offer, we may
continue to be liable under federal and state securities laws for up to an amount equal to the value of all shares of common stock issued in
connection with the initial public offering plus any statutory interest we may be required to pay. If it is determined that we offered securities
without properly registering them under federal or state law, or securing an exemption from registration, regulators could impose monetary fines
or other sanctions as provided under these laws. However, we believe the rescission offer provides us with additional meritorious defenses
against any future claims relating to these shares.
Except as set forth above, we believe that there are no material litigation matters at the current time. Although the results of such litigation
matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material
adverse impact on our financial position, liquidity or results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
11
Item 5. Market for Common Equity and Related Stockholder Matters
PART II
Our common stock is listed for trading on the NYSE MKT trading under the symbol “REED”. Prior to December 31, 2012, our company traded
on the NASDAQ exchange. The following is a summary of the high and low bid prices of our common stock on the NASDAQ and NYSE MKT
Capital Markets for the periods presented:
Year Ending December 31, 2012
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ending December 31, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
Sales Price
High
Low
1.90 $
4.48
7.19
8.82
Sales Price
High
Low
6.50 $
5.40
6.65
8.12
1.10
1.70
3.28
4.94
3.85
3.80
4.65
5.05
As of December 31, 2013, there were approximately 178 stockholders of record of the common stock (not including the number of persons or
entities holding stock in nominee or street name through various brokerage firms) and approximately 12,922,832 outstanding shares of common
stock.
Unregistered Sales of Equity Securities
During the fiscal year ended December 31, 2013, we issued the following equity securities that were unregistered under the Securities Act:
● We issued 1,250 shares of common stock in exchange for consulting services. The value of the stock was based on the closing price of
the stock on the issuance or agreed upon date. The total value of shares issued for services was $5,000. The shares were issued pursuant
to exemption from registration under Section 4(2) of the Securities Act.
Dividend Policy
We have never declared or paid dividends on our common stock. We currently intend to retain future earnings, if any, for use in our business,
and, therefore, we do not anticipate declaring or paying any dividends in the foreseeable future. Payments of future dividends, if any, will be at
the discretion of our board of directors after taking into account various factors, including the terms of our credit facility and our financial
condition, operating results, current and anticipated cash needs and plans for expansion.
We are obligated to pay a non-cumulative 5% dividend from lawfully available assets to the holders of our Series A preferred stock and $0.13
per share per quarter on our Series B preferred stock in either cash or additional shares of common stock at our discretion. In 2013 and 2012, we
paid dividends on our Series A preferred stock in an aggregate of 1,064 and 4,760 shares of common stock in each such year, respectively and
anticipate that we will be obligated to issue at least this many shares annually to the holders of the Series A preferred stock so long as such
shares are issued and outstanding. In 2013, we no longer accrued dividends on our outstanding Series B shares and paid $74,000 of dividends by
issuing 3,394 shares of our common stock. In 2012, we accrued $29,000 of dividends on our outstanding Series B shares and paid $37,000 of
dividends by issuing 47,890 shares of our common stock.
12
Securities Authorized for Issuance Under Equity Compensation Plans
2001 Stock Option Plan and 2007 Stock Option Plan
We are authorized to issue options to purchase up to 500,000 shares of common stock under our 2001 Stock Option Plan, and we are authorized
to issue options to purchase up to 1,500,000 shares of common stock under our 2007 Stock Option Plan. On August 28, 2001, our board of
directors adopted the 2001 Stock Option Plan, and the plan was approved by our stockholders. On October 8, 2007, our board of directors
adopted the 2007 Stock Option Plan, and the plan was approved by our stockholders on November 19, 2007.
The plans permit the grant of options to our employees, directors and consultants. The options may constitute either “incentive stock options”
within the meaning of Section 422 of the Internal Revenue Code or “non-qualified stock options”. The primary difference between “incentive
stock options” and “non-qualified stock options” is that once an option is exercised, the stock received under an “incentive stock option” has the
potential of being taxed at the more favorable long-term capital gains rate, while stock received by exercising a “non-qualified stock option” is
taxed according to the ordinary income tax rate schedule.
The plans are currently administered by the board of directors. The plan administrator has full and final authority to select the individuals to
receive options and to grant such options as well as a wide degree of flexibility in determining the terms and conditions of options, including
vesting provisions.
The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date
of the grant of the option. The exercise price of an incentive stock option granted to a person owning more than 10% of the total combined
voting power of the common stock must be at least 110% of the fair market value per share of common stock on the date of the grant. Options
may not be granted under the plan on or after the tenth anniversary of the adoption of the plan. Incentive stock options granted to a person
owning more than 10% of the combined voting power of the common stock cannot be exercisable for more than five years.
When an option is exercised, the purchase price of the underlying stock will be paid in cash, except that the plan administrator may permit the
exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise
determined by the plan administrator.
If an optionee ceases to be an employee, director, or consultant with us, other than by reason of death, disability or retirement, all vested options
must be exercised within three months following such event. However, if an optionee’s employment or consulting relationship with us
terminates for cause, or if a director of ours is removed for cause, all unexercised options will terminate immediately. If an optionee ceases to be
an employee or director of, or a consultant to us, by reason of death, disability, or retirement, all vested options may be exercised within one year
following such event or such shorter period as is otherwise provided in the related agreement.
When a stock award expires or is terminated before it is exercised, the shares set aside for that award are returned to the pool of shares available
for future awards.
No option can be granted under the plan after ten years following the earlier of the date the plan was adopted by the board of directors or the date
the plan was approved by our stockholders.
2010 Incentive Stock Plan and 2010-2 Incentive Stock Plan
We are authorized to issue up to an aggregate of 75,000 shares of common stock to employees, officers, directors, consultants, independent
contractors, advisors or other service providers to Reed’s under our 2010 Incentive Stock Plan and 2010-2 Incentive Stock Plan (collectively, the
“2010 Plans”). The 2010 Incentive Stock Plan was adopted by our board of directors on March 31, 2010; the 2010-2 Incentive Stock Option Plan
was adopted on May 5, 2010. The 2010 Plans are administered by a committee of the board of directors. The plan committee may from time to
time, and subject to the provisions of the plan and such other terms and conditions as the plan committee may prescribe, grant to any eligible
person one or more shares of common stock of Reed’s (“Award Shares”). The grant of Award Shares or grant of the right to receive Award
Shares shall be evidenced by either a written consulting agreement or a separate written agreement confirming such grant, executed by Reed’s
and the recipient, stating the number of Award Shares granted and stating all terms and conditions of such grant. During 2013, no shares of
common stock were issued under the 2010 Plans, and in 2012 there were 14,965 shares of common stock issued under the 2010 Plans.
13
Equity Compensation Plan Information
The following table provides information, as of December 31, 2013, with respect to equity securities authorized for issuance under compensation
plans:
Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(b)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (excluding securities
reflected in Column
(a))(c)
639,334 $
101,963 $
741,297 $
3.18
2.30
3.06
439,001
-
439,001
Plan Category
Equity compensation plans approved by security
holders
Equity compensation plans not approved by security
holders
TOTAL
Item 6. Selected Financial Data
As a smaller reporting company, Reed’s is not required to provide the information required by this Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial
statements and the related notes appearing elsewhere in this Annual Report. This discussion and analysis may contain forward-looking
statements based on assumptions about our future business. Our actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors” and elsewhere in this Annual
Report.
Results of Operations
The following table sets forth key statistics for the years ended December 31, 2013 and 2012, respectively.
Gross sales, net of discounts & returns (a)
Less: Promotional and other allowances (b)
Net sales
Cost of tangible goods sold (c)
As a percentage of:
Gross sales
Net sales
Cost of goods sold – idle capacity (d)
As a percentage of net sales
Gross profit
Gross profit margin as a percentage of net sales
Year Ended
December 31,
$
2013
42,242,000
4,961,000
37,281,000
23,691,000
2012
32,946,000
2,939,000
30,007,000
18,943,000
56 %
64 %
57 %
63 %
2,796,000
1,920,000
10,794,000
7 %
$
29 %
6 %
9,144,000
30 %
$
$
Pct.
Change
28 %
69 %
24 %
25 %
46 %
18 %
14
(a) Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of
particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows
evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe
that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized
under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used
alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled
measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be
realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.
(b) Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure
thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be
comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the
Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors
for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing
products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional
activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to
the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products.
The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the
spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing
activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate
agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and
are of varying durations, ranging from one week to one year.
(c) Cost of tangible goods sold consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees,
repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of tangible goods sold is used
internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of tangible goods sold is not a
measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance
with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
(d) Cost of goods sold – idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production.
Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead
allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Plant costs in excess of
production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Cost goods sold – idle
capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is
determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
Year ended December 31, 2013 Compared to Year ended December 31, 2012
Gross Sales
Gross sales of $42,242,000 for the year ended December 31, 2013 represented an increase of 28% from $32,946,000 in the prior year. Sales
growth was driven primarily by increased sales of our branded products of approximately $6,260,000, or 25%. Kombucha sales began in the
2012 third quarter and have increased to become approximately 10% of our total net revenues.
Promotional and other allowances
Promotions and allowances increased 69% to $4,961,000 for the year ended December 31, 2013 from $2,939,000 in the prior year. This
increase is primarily attributable to launching our Kombucha product line and incentives given to consumers and retailers to increase market
share of our entire product line.
Net Sales
Sales of $37,281,000 for the year ended December 31, 2013 represented an increase $7,274,000, or 24%, from $30,007,000 in the prior year.
Cost of Goods Sold
Cost of goods sold consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees,
in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods sold also consists of direct production
costs in excess of charges allocated to our finished goods in production. Plant costs include labor costs, production supplies, and repairs and
maintenance. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our
actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished
goods produced.
Our cost of goods sold increased to $26,487,000 in the year ended December 31, 2013, an increase of approximately $5,624,000 or 27% from
2012. The increase was primarily due to net revenue increases of 24%. Additionally, a one-time loss on a private label contract in the amount of
$412,000 was recorded during the second fiscal quarter.
15
Gross Profit
Our gross profit of $10,794,000 in the year ended December 31, 2013 represents an increase of $1,650,000, or 18% from 2012. As a percentage
of sales, our gross profit decreased to 29% in 2013 as compared to 30% in 2012. As discussed above, our gross profit was negatively impacted
by a loss of $412,000 on a private label contract. The gross profit percentage decrease is also impacted by an increase in promotional discount
costs. Since such costs are a deduction from sales, the gross margin percentage is negatively impacted by increased promotional costs. We have
been granting substantial discounts on our kombucha, as we expand this product line into new distribution channels and customers, and we have
also increased our promotional programs for other branded products. We believe that our promotional investments are effective and are
accelerating sales growth.
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehouse costs incurred for handling our finished goods after
production. Delivery and handling costs increased by 51% to $3,977,000 in the year ended December 31, 2013 compared to 2012. The
$1,343,000 increase is primarily due to freight cost increases of $1,176,000 and warehouse cost increases of approximately $167,000. The
freight cost increases are primarily due to a higher portion of our branded products being manufactured at our copacker in Pennsylvania for west
coast customers, requiring additional freight costs for delivery. Also, we have offered delivered terms to several new significant customers. The
Warehouse cost increases are primarily due to increased volume and the addition of several new cold-storage facilities for our kombucha.
Selling and marketing expenses
Selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and
trade shows. Selling and marketing costs increased overall to $4,180,000 (or 11.2% of net sales) in the year ended December 31, 2013 from
$3,145,000 (or 10.5% of net sales) in 2012. The $1,035,000 increase is primarily due to increased compensation and travel costs of $323,000,
increased advertising costs of $288,000, increased brokerage commissions of $160,000, and increased stock option expense of $109,000. Our
sales staff increased to 18 members at December 31, 2013, from 15 at December 31, 2012.
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional
fees. General and administrative expenses increased to $3,506,000 (or 9.4% of net sales) during the year ended December 31, 2013 from
$3,229,000 (or 10.8% of net sales) in 2012. This decrease in spend rate indicates a trend in spending that is attributable to increased efficiencies
due to scale. Compensation costs increased by $108,000, professional, legal and consulting costs increased by $121,000, and stock option
expense increased by $109,000.
(Loss) Income from Operations
Loss from operations was $869,000 in the year ended December 31, 2013, as compared to income of $136,000 in 2012. The decrease is
primarily due to increased promotional spending and increased plant costs in excess of absorbed costs through production.
Interest Expense
Interest expense decreased to $651,000 in the year ended December 31, 2013, compared to interest expense of $660,000 in the same period of
2012.
Modified EBITDA
The Company defines modified EBITDA (a non-GAAP measurement) as net loss before interest, taxes, depreciation and amortization, and non-
cash share-based compensation expense. Other companies may calculate modified EBITDA differently. Management believes that the
presentation of modified EBITDA provides a measure of performance that approximates cash flow before interest expense, and is meaningful to
investors.
16
MODIFIED EBITDA SCHEDULE
Net loss
Modified EBITDA adjustments:
Depreciation and amortization
Interest expense
Stock option and warrant compensation
Other stock compensation for services and finance fees
Total EBITDA adjustments
Year ended December 31,
2013
(unaudited)
2012
(unaudited)
$
(1,520,000 ) $
(524,000 )
550,000
651,000
327,000
5,000
1,533,000
738,000
660,000
107,000
23,000
1,528,000
Modified EBITDA income from operations
$
13,000 $
1,004,000
Liquidity and Capital Resources
As of December 31, 2013, we had stockholders equity of $3,387,000 and we had working capital of $1,347,000, compared to stockholders
equity of $4,098,000 and working capital of $2,298,000 at December 31, 2012. The decrease in our working capital of $951,000 was primarily a
result of net losses and pay downs on our long-term debt.
Our decrease in cash and cash equivalents to $1,104,000 at December 31, 2013 compared to $1,163,000 at December 31, 2012, a decrease of
$59,000, was primarily a result of cash used by operating activities of $1,193,000, costs of plant improvements of $602,000, and principal
payments on debt of $385,000; which was offset primarily by net drawdown on our revolving line of credit of $1,501,000, an increased advance
on our term loan of $217,000, and proceeds from the exercise of stock options and warrants of $403,000.
Our Loan and Security Agreement with PMC Financial Services Group, LLC provides a $4.5 million revolving line of credit and a $750,000
term loan. The revolving line of credit is based on 85% of eligible accounts receivable and 50% of eligible inventory. The interest rate on the
revolving line of credit is at the prime rate plus 3.75% (7% at December 31, 2013). The term loan is for $750,000 and bears interest at the prime
rate plus 11.6%, which shall not be below 14.85%, is secured by all of the unencumbered assets of the Company, and is to be repaid in 48 equal
installments of principal and interest of $21,000.
On September 20, 2013, the revolving line of credit was increased to $4,800,000 and granted an over-advance of $500,000, both for the six
month period September 1, 2013 to February 28, 2014. On February 28, 2014, the $4,800,000 and $500,000 amounts were extended to May 31,
2014, after which the revolving line of credit will be $4,500,000 and the over-advance will be $200,000. The revolving line of credit matures on
November 8, 2014. On May 1, 2013 the term loan maturity date was extended to April 20, 2017. At December 31, 2013, the balance of the term
loan was $647,000 .
The revolving line of credit agreement includes a financial covenant (debt service coverage ratio) that is effective only if the credit availability
under the revolving line of credit falls below $100,000 and another financial covenant (capital expenditures) that the Company will not make
capital expenditures in excess of $500,000 in any fiscal year. At December 31, 2013, the credit availability on the revolving line of credit fell
below $100,000 and, during 2013, the Company expended more than $500,000 for capital expenditures. Accordingly, these two events caused
the Company to be in default under the loan agreement on December 31, 2013. These defaults were waived on March 19, 2014.
We believe that the Company currently has the necessary working capital to support existing operations for at least the next 12 months. Our
primary capital source will be positive cash flow from operations. If our sales goals do not materialize as planned, we believe that the Company
can reduce its operating costs and can be managed to maintain positive cash flow from operations. Historically, we have financed our operations
primarily through private sales of common stock, preferred stock, convertible debt, a line of credit from a financial institution and cash generated
from operations.
We may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable
operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to
conduct them or to fund our expansion and marketing and product development plans. In addition, our losses may increase in the future as we
expand our manufacturing capabilities and fund our marketing plans and product development. These losses, among other things, have had and
may continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the
market value of our common stock would decline and there would be a material adverse effect on our financial condition.
If we suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as
we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain
such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to
pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel
and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds
are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of
opportunities, develop products or services or otherwise respond to competitive pressures could be significantly limited.
17
Critical Accounting Policies and Estimates
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements including various allowances
and reserves for accounts receivable and inventories, the estimated lives of long-lived assets and trademarks and trademark licenses, as well as
claims and contingencies arising out of litigation or other transactions that occur in the normal course of business. The following summarize our
most significant accounting and reporting policies and practices:
Revenue Recognition . Revenue is recognized on the sale of a product when the risk of loss transfers to our customers, and collection of the
receivable is reasonably assured, which generally occurs when the product is shipped. A product is not shipped without an order from the
customer and credit acceptance procedures performed. The allowance for returns is regularly reviewed and adjusted by management based on
historical trends of returned items. Amounts paid by customers for shipping and handling costs are included in sales. The Company reimburses
its wholesalers and retailers for promotional discounts, samples and certain advertising and promotional activities used in the promotion of the
Company’s products. The accounting treatment for the reimbursements for samples and discounts to wholesalers results in a reduction in the net
revenue line item. Reimbursements to wholesalers and retailers for certain advertising activities are included in selling and marketing expenses.
Cost of Tangible Goods Sold - Cost of tangible goods sold consists of the costs of raw materials utilized in the manufacture of products, co-
packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs. Raw materials account for the largest portion of
the cost of sales. Raw materials include cans, bottles, other containers, ingredients and packaging materials.
Cost of goods sold – Idle Capacity - Cost of goods sold – idle capacity consists of direct production costs in excess of charges allocated to
finished goods. Our charges for labor and overhead allocated to our finished goods are determined on a cost basis. Plant costs include labor
costs, production supplies, and repairs and maintenance. Plant costs in excess of production allocations are expensed in the period incurred.
Long-Lived Assets . Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate
that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows
expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an
impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2013 and 2012, the Company
did not recognize any impairments for its property and equipment.
Intangible assets are comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that
these brand names will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized, but are
assessed for impairment annually and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment
test, we first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If
further testing is necessary, we compare the estimated fair value of our indefinite-lived intangible asset with its book value. If the carrying
amount of the indefinite-lived intangible asset exceeds its fair value, as determined by its discounted cash flows, an impairment loss is
recognized in an amount equal to that excess. For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment
charges for its indefinite-lived intangible assets.
Management believes that the accounting estimate related to impairment of our long lived assets, including our trademark license and
trademarks, is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires
management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an
impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about
cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and we expect they
will continue to do so.
In estimating future revenues, we use internal budgets. Internal budgets are developed based on recent revenue data for existing product lines and
planned timing of future introductions of new products and their impact on our future cash flows.
Accounts Receivable . We evaluate the collectability of our trade accounts receivable based on a number of factors. In circumstances where we
become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded
which reduces the recognized receivable to the estimated amount our management believes will ultimately be collected. In addition to specific
customer identification of potential bad debts, bad debt charges are recorded based on our historical losses and an overall assessment of past due
trade accounts receivable outstanding.
Inventories . Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the
inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our
estimated forecast of product demand and/or our ability to sell the product(s) concerned and production requirements. Demand for our products
can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general
market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers.
Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated
provision required for excess and obsolete inventory.
18
Stock-Based Compensation. The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising
transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees
based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured
on the date of grant and recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to
non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the
measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary
performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the
vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option
grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which
uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual
experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in
future periods.
We believe there have been no significant changes, during the year ended December 31, 2013, to the items disclosed as critical accounting
policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2012.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-04. This update clarifies
how entities measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at
the reporting date. This guidance is effective for fiscal years beginning after December 15, 2013 and interim reporting periods thereafter. This
update is not expected to have an impact on the Company’s financial position or results of operations
In April 2013, the FASB issued ASU 2013-07 to clarify when it is appropriate to apply the liquidation basis of accounting. Additionally, the
update provides guidance for recognition and measurement of assets and liabilities and requirements for financial statements prepared using the
liquidation basis of accounting. Under the amendment, entities are required to prepare their financial statements under the liquidation basis of
accounting when a liquidation becomes imminent. This guidance is effective for annual reporting periods beginning after December 15, 2013,
and interim reporting periods thereafter. This update is not expected to have an impact on the Company’s financial position or results of
operations.
In July 2013, the FASB issued ASU 2013-11 which provides guidance relating to the financial statement presentation of unrecognized tax
benefits. The update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a
net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the
uncertain tax position is disallowed. This update does not require any new recurring disclosures and is effective for public entities for fiscal years
beginning after December 15, 2013, and interim reporting periods thereafter. This update is not expected to have an impact on the Company’s
financial position or results of operations.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the
Company’s present or future consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, Reed’s is not required to provide the information required by this Item 7A.
19
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm
Financial Statements:
Balance Sheets as of December 31, 2013 and December 31, 2012
Statements of Operations for the years ended December 31, 2013 and 2012
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013 and 2012
Statements of Cash Flows for the years ended December 31, 2013 and 2012
Notes to Financial Statements for the years ended December 31, 2013 and 2012
20
F-1
F-2
F-3
F-4
F-5
F-6
To the Board of Directors and Stockholders
Reed’s, Inc.
Report of Independent Registered Public Accounting Firm
We have audited the accompanying balance sheets of Reed’s, Inc. as of December 31, 2013 and 2012, and the related statements of operations,
changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly in all material respects, the financial position of Reed’s, Inc. as of
December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/ Weinberg & Company, P.A.
Los Angeles, California
March 25, 2014
F- 1
REED’S, INC.
BALANCE SHEETS
December 31, 2013
December 31, 2012
ASSETS
Current assets:
Cash
Inventory
Trade accounts receivable, net of allowance for doubtful accounts and returns and
discounts of $324,000 and $399,000, respectively
Prepaid inventory
Prepaid and other current assets
Total Current Assets
Property and equipment, net of accumulated depreciation of $2,796,000 and
$2,351,000, respectively
Brand names
Deferred financing fees, net of amortization of $40,000 and $26,000, respectively
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
Dividends payable
Line of credit
Current portion of long term financing obligation
Current portion of capital leases payable
Current portion of term loan
Total current liabilities
Long term financing obligation, less current portion, net of discount of $526,000 and
$576,000, respectively
Capital leases payable, less current portion
Term loan, less current portion
Total Liabilities
Commitments and contingencies
Stockholders’ equity:
$
1,104,000 $
6,293,000
$
$
2,143,000
256,000
178,000
9,974,000
3,686,000
1,029,000
60,000
14,749,000 $
3,612,000 $
136,000
-
4,524,000
111,000
79,000
165,000
8,627,000
2,147,000
106,000
482,000
11,362,000
1,163,000
5,794,000
1,961,000
201,000
212,000
9,331,000
3,422,000
1,029,000
54,000
13,836,000
3,368,000
233,000
74,000
3,023,000
90,000
69,000
176,000
7,033,000
2,208,000
98,000
399,000
9,738,000
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized,
9,411 and 10,411 shares issued and outstanding, respectively
Series B Convertible Preferred stock, $10 par value, 500,000 shares authorized, no
shares issued and outstanding at December 31, 2013, 45,602 shares issued and
outstanding, at December 31, 2012
Common stock, $.0001 par value, 19,500,000 shares authorized, 12,922,832 and
12,084,673 shares issued and outstanding, respectively
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
94,000
104,000
-
456,000
1,000
25,276,000
(21,984,000 )
3,387,000
14,749,000 $
1,000
23,996,000
(20,459,000 )
4,098,000
13,836,000
The accompanying notes are an integral part of these financial statements
F- 2
REED’S, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2013 and 2012
2013
2012
Sales, net
Cost of goods sold
Gross profit
Operating expenses:
Delivery and handling expenses
Selling and marketing expenses
General and administrative expenses
Total operating expenses
Income (loss) from operations
Interest expense
Net loss
Preferred stock dividend
$
37,281,000 $
26,487,000
10,794,000
3,977,000
4,180,000
3,506,000
11,663,000
(869,000 )
(651,000 )
(1,520,000 )
(5,000 )
Net loss attributable to common stockholders
Loss per share attributable to common stockholders - basic and diluted
Weighted average number of shares outstanding - basic and diluted
$
$
(1,525,000 ) $
(0.12 ) $
12,541,074
The accompanying notes are an integral part of these financial statements
F- 3
30,007,000
20,863,000
9,144,000
2,634,000
3,145,000
3,229,000
9,008,000
136,000
(660,000 )
(524,000 )
(45,000 )
(569,000 )
(0.05 )
11,361,053
REED’S, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2013 and 2012
Common Stock
Shares
Additional
Paid-In
Amount Shares Amount Shares Amount Capital
Series A
Preferred Stock
Series B
Preferred Stock
Accumulated
Deficit
Total
Stockholders’
Equity
Balance, January 1, 2012
10,885,833 $ 1,000 46,621 $ 466,000 80,415 $ 804,000 $ 22,924,000 $ (19,890,000 ) $ 4,305,000
Fair Value of Common Stock issued for bonuses and services
Common stock issued upon conversion of Series A preferred
stock
Common stock issued upon conversion of Series B preferred
stock
Exercise of stock options
Exercise of warrants
Fair value vesting of options issued to employees
Series A and Series B preferred stock dividend
Common stock paid for Series A and Series B dividend
Net Loss
Balance, December 31, 2012
Fair Value of common stock issued for services
Common stock issued upon conversion of Series A preferred
stock
Common stock issued upon conversion of Series B preferred
stock
Exercise of stock options
Exercise of warrants
Fair value vesting of options issued to employees
Series A preferred stock dividend
Common stock paid for Series A Series B dividend
Net Loss
Balance, December 31, 2013
14,965
-
-
-
144,840
- (36,210 ) (362,000 )
-
-
-
23,000
-
362,000
-
-
23,000
-
243,691
347,223
416,048
-
-
32,073
-
-
-
-
(45,000 )
-
(524,000 )
12,084,673 1,000 10,411 104,000 45,602 456,000 23,996,000 (20,459,000 )
- (34,813 ) (348,000 )
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
348,000
30,000
147,000
107,000
-
55,000
-
-
-
-
-
-
-
-
-
-
-
-
-
30,000
147,000
107,000
(45,000 )
55,000
(524,000 )
4,098,000
1,250
-
-
-
4,000
- (1,000 ) (10,000 )
-
-
-
5,000
-
10,000
-
-
5,000
-
319,214
276,106
188,635
-
1,064
47,890
-
-
-
- (45,602 ) (456,000 )
-
30,000
-
-
-
-
-
373,000
-
-
-
-
-
327,000
-
-
-
-
-
-
(5,000 )
-
-
-
-
74,000
-
-
-
-
-
-
-
(1,520,000 )
(1,520,000 )
-
-
- $ 25,276,000 $ (21,984,000 ) $ 3,387,000
- $
12,922,832 $ 1,000 9,411 $ 94,000
456,000
30,000
373,000
327,000
5,000
74,000
-
-
-
-
-
-
-
The accompanying notes are an integral part of these financial statements
F- 4
REED’S, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2013 and 2012
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
$
(1,520,000 ) $
(524,000 )
2013
2012
Depreciation and amortization
Fair value vesting of stock options issued to employees
Fair value of common stock issued for services
(Decrease) increase in allowance for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and inventory and other current assets
Accounts payable
Accrued expenses
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Purchase of property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from stock option and warrant exercises
Payments for deferred financing fees
Increased borrowings on note payable
Principal repayments on note payable
Principal repayments on long term financing obligation
Principal repayments on capital lease obligation
Net borrowings (repayments) on existing line of credit
Net cash provided by (used in) financing activities
Net (decrease) increase in cash
Cash at beginning of year
Cash at end of year
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest
Taxes
Non Cash Investing and Financing Activities
Series A preferred stock converted to common stock
Series B preferred stock converted to common stock
Common Stock issued in settlement of Series A and Series B preferred
Series B preferred stock dividend payable in common stock
Property and equipment acquired through capital lease obligation
550,000
327,000
5,000
(75,000 )
(107,000 )
(499,000 )
(21,000 )
244,000
(97,000 )
(1,193,000 )
(602,000 )
(602,000 )
403,000
(61,000 )
217,000
(145,000 )
(90,000 )
(89,000 )
1,501,000
1,736,000
(59,000 )
1,163,000
1,104,000 $
712,000 $
- $
10,000 $
456,000 $
5,000 $
74,000 $
107,000 $
738,000
107,000
23,000
264,000
(599,000 )
305,000
(122,000 )
1,058,000
(73,000 )
1,177,000
(507,000 )
(507,000 )
177,000
(44,000 )
-
(153,000 )
(71,000 )
(57,000 )
(72,000 )
(220,000 )
450,000
713,000
1,163,000
668,000
-
362,000
348,000
55,000
74,000
15,000
$
$
$
$
$
$
$
$
The accompanying notes are an integral part of these financial statements
F- 5
REED’S, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012
(1) Operations and Summary of Significant Accounting Policies
A) Nature of Operations
Reed’s, Inc. (the “Company”) was organized under the laws of the state of Florida in January 1991. In 2001, the Company changed its name
from Original Beverage Corporation to Reed’s, Inc. and changed its state of incorporation from Florida to Delaware. The Company is engaged
primarily in the business of developing, manufacturing and marketing natural non-alcoholic beverages, as well as candies and ice creams. We
currently manufacture, market and sell seven unique product lines:
● Reed’s Ginger Brews,
● Virgil’s Root Beer, Cream Sodas, Dr. Better and Real Cola, including ZERO diet sodas,
● Culture Club Kombucha,
● China Colas,
● Reed’s Ginger Chews,
● Reed’s Ginger Ice Creams,
● Sonoma Sparkler Sparkling Juices
The Company sells its products primarily in natural food stores, supermarket chains, and upscale gourmet stores in the United States and
Canada.
B) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property
and equipment, analysis of impairments of recorded intangibles, accruals for potential liabilities and assumptions made in valuing stock
instruments issued for services.
C) Accounts Receivable
The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company
becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated
and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to
specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall
assessment of past due trade accounts receivable outstanding.
The allowance for doubtful accounts and returns and discounts is established through a provision reducing the carrying value of receivables. At
December 31, 2013 and 2012, the allowance for doubtful accounts and returns and discounts was approximately $324,000 and $399,000,
respectively.
D) Property and Equipment and Related Depreciation
Property and equipment is stated at cost. Expenditures for major renewals and improvements that extend the useful lives of property and
equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred.
Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows:
Property and Equipment Type
Building
Machinery and equipment
Vehicles
Office equipment
Years of Depreciation
39 years
5-12 years
5 years
5-7 years
F- 6
Management assess the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the
use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to
write down the asset to its estimated fair value. For the years ended December 31, 2013 and 2012, the Company did not recognize any
impairments for its property and equipment.
E) Intangible Assets and Impairment Policy
Intangible assets are comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that
these brand names will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized, but are
assessed for impairment annually and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment
test, we first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If
further testing is necessary, we compare the estimated fair value of our indefinite-lived intangible asset with its book value. If the carrying
amount of the indefinite-lived intangible asset exceeds its fair value, as determined by its discounted cash flows, an impairment loss is
recognized in an amount equal to that excess. For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment
charges for its indefinite-lived intangible assets.
F) Concentrations
The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000 at December
31, 2013. The Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the insurance limit. In assessing the
risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company had cash balances in excess of the
guarantee during the years ended December 31, 2013 and 2012.
During the year ended December 31, 2013, the Company had two customers who accounted for approximately 32% and 10% of its sales,
respectively; and during the year ended December 31, 2012, the Company had two customers who accounted for approximately 30% and 10% of
its sales, respectively. No other customer accounted for more than 10% of sales in either year. As of December 31, 2013 the Company had
accounts receivable due from two customers who comprised $571,000 (23%) and $424,000 (17%) of its total accounts receivable; and as of
December 31, 2012 the Company had accounts receivable due from two customers who comprised $580,000 (25%) and $340,000 (14%),
respectively, of its total accounts receivable.
The Company currently relies on a single contract packer for a majority of its production and bottling of beverage products. The Company has
different packers available for their production of products. Although there are other packers and the Company has outfitted their own brewery
and bottling plant, a change in packers may cause a delay in the production process, which could ultimately affect operating results.
During the years ended December 31, 2013 and 2012, the Company had one vendor which accounted for approximately 29% and 24%,
respectively of all purchases. At December 31, 2013 and 2012, the Company had accounts payable due to a vendor who comprised 21% and
27% of its total accounts payable, respectively. No other account was in excess of 10% of the balance of accounts payable as of December 31,
2013 and December 31, 2012.
G) Fair Value of Financial Instruments
The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets
recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value.
Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the
inputs to fair valuation of these financial assets:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts
payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values
of long-term loans approximate their fair values due to the fact that the interest rates on these loans are reset each year based on prevailing
market interest rates.
H) Cost of sales
Cost of goods sold is comprised of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking
fees, in-bound freight charges, as well as certain internal transfer costs. Additionally, cost of goods sold consists of direct production costs in
excess of charges allocated to finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and
inventory write-off. Charges for labor and overhead allocated to finished goods are determined on a market cost basis, which may be lower than
the actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of
finished goods produced. Expenses not related to the production of our products are classified as operating expenses.
F- 7
I) Delivery and Handling Expenses
Shipping and handling costs are comprised of purchasing and receiving costs, inspection costs, warehousing costs, transfer freight costs, and
other costs associated with product distribution after manufacture and are included as part of operating expenses.
J)
Income Taxes
The Company uses an asset and liability approach for financial accounting and reporting for income taxes that allows recognition and
measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach,
deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The
Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
K) Revenue Recognition
Revenue is recognized on the sale of a product when the risk of loss transfers to our customers, and collection of the receivable is reasonably
assured, which generally occurs when the product is shipped. A product is not shipped without an order from the customer and credit acceptance
procedures performed. The allowance for returns is regularly reviewed and adjusted by management based on historical trends of returned items.
Amounts paid by customers for shipping and handling costs are included in sales.
The Company accounts for certain sales incentives for customers, including slotting fees, as a reduction of gross sales. These sales incentives for
the years ended December 31, 2013 and 2012 approximated $3,804,000 and $2,345,000, respectively.
L) Net Loss Per Share
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average
number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss)
applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common
shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential
common shares are excluded from the computation if their effect is antidilutive.
For the years ended December 31, 2013 and 2012, the calculations of basic and diluted loss per share are the same because potential dilutive
securities would have an anti-dilutive effect. The potentially dilutive securities consisted of the following as of:
Warrants
Series A Preferred Stock
Series B Preferred Stock
Options
Total
M) Advertising Costs
December 31,
2013
2012
101,963
37,644
-
639,334
778,941
317,253
41,644
319,214
607,000
1,285,111
Advertising costs are expensed as incurred and are included in selling expense in the amount of $120,000 and $111,000, for the years ended
December 31, 2013 and 2012, respectively.
F- 8
N) Stock Compensation Expense
The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services
and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board (FASB) whereas the value of the award is measured on the date of grant and
recognized over the vesting period. The Company accounts for stock option and warrant grants issued and vesting to non-employees in
accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as
determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the
equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-
line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately
vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of the Company’s stock option and warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which
uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or warrants, and future
dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes Option Pricing model, and based on actual
experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in
future periods.
O) Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-04. This update clarifies
how entities measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at
the reporting date. This guidance is effective for fiscal years beginning after December 15, 2013 and interim reporting periods thereafter. This
update is not expected to have an impact on the Company’s financial position or results of operations
In April 2013, the FASB issued ASU 2013-07 to clarify when it is appropriate to apply the liquidation basis of accounting. Additionally, the
update provides guidance for recognition and measurement of assets and liabilities and requirements for financial statements prepared using the
liquidation basis of accounting. Under the amendment, entities are required to prepare their financial statements under the liquidation basis of
accounting when a liquidation becomes imminent. This guidance is effective for annual reporting periods beginning after December 15, 2013,
and interim reporting periods thereafter. This update is not expected to have an impact on the Company’s financial position or results of
operations.
In July 2013, the FASB issued ASU 2013-11 which provides guidance relating to the financial statement presentation of unrecognized tax
benefits. The update provides that a liability related to an unrecognized tax benefit would be presented as a reduction of a deferred tax asset for a
net operating loss carryforward, a similar tax loss or a tax credit carryforward, if such settlement is required or expected in the event the
uncertain tax position is disallowed. This update does not require any new recurring disclosures and is effective for public entities for fiscal years
beginning after December 15, 2013, and interim reporting periods thereafter. This update is not expected to have an impact on the Company’s
financial position or results of operations.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the
Company’s present or future consolidated financial statements.
(2) Inventory
Inventory is valued at the lower of cost (first-in, first-out) or market, and is comprised of the following as of:
Raw Materials and Packaging
Finished Goods
F- 9
December 31, 2013 December 31, 2012
3,524,000
$
2,270,000
5,794,000
3,118,000 $
3,175,000
6,293,000 $
$
(3) Property and Equipment
Property and equipment is comprised of the following as of:
Land
Building
Vehicles
Machinery and equipment
Office equipment
Accumulated depreciation
December 31, 2013 December 31, 2012
1,108,000
$
1,737,000
320,000
2,174,000
434,000
5,773,000
(2,351,000 )
3,422,000
1,108,000 $
1,829,000
338,000
2,763,000
444,000
6,482,000
(2,796,000 )
3,686,000 $
$
Depreciation expense for the years ended December 31, 2013 and 2012 was $445,000 and $612,000, respectively.
Machinery and equipment at December 31, 2013 and 2012 includes equipment held under capital leases of $415,000 and $309,000, respectively
(see Note 8). Accumulated depreciation on equipment held under leases was $231,000 and $149,000 as of December 31, 2013 and 2012,
respectively.
(4) Intangible Assets
Brand Names
Brand names consist of the following three trademarks for natural beverage as of December 31, 2013 and 2012:
Virgil’s
China Cola
Sonoma Sparkler
$
$
576,000
224,000
229,000
1,029,000
Virgil’s, China Cola, and Sonoma Sparkler brand names are deemed to have indefinite lives and are not amortized, but are reviewed for
impairment annually. For the years ended December 31, 2013 and 2012, the Company did not recognize any impairment charges for its
indefinite-lived intangible assets.
Deferred Financing Fees
Deferred financing fees are comprised of the following as of:
Loan fees relating to financing
Accumulated amortization
December 31, 2013 December 31, 2012
80,000
$
(26,000 )
54,000
100,000 $
(40,000 )
60,000 $
$
Amortization expense for the years ended December 31, 2013 and 2012 was approximately $55,000 and $75,000 respectively.
Amortization of deferred financing fees is as follows for the years ending December 31:
Year
2014
2015
2016
Total
(5) Line of Credit
Amount
54,000
3,000
3,000
60,000
$
On November 9, 2011, the Company entered into a Loan and Security Agreement with PMC Financial Services Group, LLC (PMC) which
provides a $4,500,000 revolving line of credit and a $750,000 term loan (see Note 7). On September 20, 2013, the line of credit was increased to
$4,800,000 effective September 1, 2013 to May 31, 2014, after which it will be $4,500,000. At December 31, 2013 and December 31, 2012, the
aggregate amount outstanding under the line of credit was $4,524,000 and $3,023,000 respectively. The line of credit is based on 85% of eligible
accounts receivable and 50% of eligible inventory, expires on November 7, 2014, and is secured by substantially all of the Company’s assets.
The interest rate is at the prime rate plus 3.75% (7% at December 31, 2013). There is an early termination fee of 1% of the maximum revolver
amount during 2014. Also on September 20, 2013, the Company was granted an over-advance on its revolving line of credit calculation of
$500,000 effective September 1, 2013 to May 31, 2014, after which it will be $200,000.
The revolving line of credit agreement includes a financial covenant debt service coverage ratio that is effective only if the credit availability
under the revolving line of credit falls below $100,000 and a financial covenant that the Company will not make capital expenditures in excess
of $500,000 in any fiscal year. At December 31, 2013, the credit availability under the revolving line of credit was below $100,000, and during
2013 the Company expended more than $500,000 for capital expenditures. Accordingly at December 31, 2013, the Company was in default
under the loan agreement with PMC. The defaults were waived by PMC on March 19, 2014. This revolving line of credit matures on November
8, 2014.
F- 10
(6) Long Term Financing Obligation
Long term financing obligation is comprised of the following as of:
Financing obligation
Valuation discount
Less current portion
Long term financing obligation
December 31,
2013
2012
$
$
2,784,000 $
(526,000 )
2,258,000
(111,000 )
2,147,000 $
2,874,000
(576,000 )
2,298,000
(90,000 )
2,208,000
On June 15, 2009, the Company closed escrow on the sale of its two buildings and its brewery equipment and concurrently entered into a long-
term lease agreement for the same property and equipment. In connection with the lease the Company has the option to repurchase the buildings
and brewery equipment from 12 months after the commencement date to the end of the lease term at the greater of the fair market value or an
agreed upon amount. Since the lease contains a buyback provision and other related terms, the Company determined it had continuing
involvement that did not warrant the recognition of a sale; therefore, the transaction has been accounted for as a long-term financing. The
proceeds from the sale, net of transaction costs, have been recorded as a financing obligation in the amount of $3,056,000. Monthly payments
under the financing agreement are recorded as interest expense and a reduction in the financing obligation at an implicit rate of 9.9%. The
financing obligation is personally guaranteed up to a limit of $150,000 by the principal shareholder and Chief Executive Officer, Christopher J.
Reed.
In connection with the financing obligation, the Company issued an aggregate of 400,000 warrants to purchase its common stock at $1.20 per
share for five years. The 400,000 warrants were valued at $752,000 and reflected as a debt discount, using the Black Scholes option pricing
model. The following assumptions were utilized in valuing the 400,000 warrants: strike price of $2.10 to $2.25; term of 5 years; volatility of
91.36% to 110.9%; expected dividends 0%; and discount rate of 2.15% to 2.20%. The 400,000 warrants were recorded as valuation discount and
are being amortized over 15 years, the term of the purchase option. Amortization of valuation discount was $50,000 during both of the years
ended December 31, 2013 and 2012.
The aggregate amount due under the financing obligation at December 31, 2013 and 2012 was $2,784,000 and $2,874,000, respectively.
Aggregate future obligations under the financing obligation are as follows:
Year
2014
2015
2016
2017
2018
Thereafter
Total
(7) Term Loan
$
$
111,000
135,000
160,000
190,000
222,000
1,966,000
2,784,000
In connection with the Loan and Security Agreement with PMC Financial Services Group, LLC (see Note 5), the Company entered into a Term
Loan. The loan is for $750,000, bears interest at the prime rate plus 11.6%, not to be below 14.85% (14.85% at December 31, 2013), is secured
by all of the unencumbered assets of the Company, and is to be repaid in 48 equal installments of principal and interest of $21,000. This loan
matures on April 20, 2017.
Term loan
Less current portion
Long term debt
Aggregate future obligations under the term loan are as follows:
Year
2014
2015
Total
(8) Obligations Under Capital Leases
December 31,
2013
2012
$
$
647,000 $
(165,000 )
482,000 $
575,000
(176,000 )
399,000
$
$
165,000
482,000
647,000
The Company leases equipment for its brewery operations with an aggregate value of $415,000 under 12 non-cancelable capital leases. Most of
the leases are personally guaranteed by the Company’s chief executive officer. Monthly payments range from $189 to $1,680 per month,
including interest, at interest rates ranging from 6.51% to 17.32% per annum. At December 31, 2013, monthly payments under these leases
aggregated $10,000. The leases expire at various dates through 2018.
Future minimum lease payments under capital leases are as follows:
Years Ending December 31,
2014
2015
2016
2017
2018
Total payments
Less: Amount representing interest
Present value of net minimum lease payments
Less: Current portion
Non-current portion
100,000
57,000
40,000
24,000
12,000
233,000
(48,000 )
185,000
79,000
106,000
F- 11
$
(9) Stockholders’ Equity
Preferred Stock
Series A
Series A Preferred stock consists of 500,000 shares $10.00 par value, 5% non-cumulative, participating, preferred stock. As of December 31,
2013 and 2012, there were 9,411 and 10,411 shares outstanding, respectively, with a liquidation preference of $10.00 per share.
The Series A Preferred shares have a 5% pro-rata annual non-cumulative dividend. The dividend can be paid in cash or, in the sole and absolute
discretion of our board of directors, in shares of common stock based on its then fair market value. We cannot declare or pay any dividend on
shares of our securities ranking junior to the preferred stock until the holders of our preferred stock have received the full non-cumulative
dividend to which they are entitled. In addition, the holders of our preferred stock are entitled to receive pro rata distributions of dividends on an
“as converted” basis with the holders of our common stock. During the year ended December 31, 2013 the Company accrued and paid a $5,000
dividend payable to the preferred shareholders, which the board of directors elected to pay through the issuance of 1,064 shares of its common
stock. During the year ended December 31, 2012 the Company accrued and paid a $16,000 dividend payable to the preferred shareholders,
which the board of directors elected to pay through the issuance of 4,760 shares of its common stock.
In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event, then, subject to the rights of
the holders of our more senior securities, if any, the holders of our Series A preferred stock are entitled to receive, prior to the holders of any of
our junior securities, $10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets shall be distributed pro rata among
all of our security holders. Since June 30, 2008, we have the right, but not the obligation, to redeem all or any portion of the Series A preferred
stock by paying the holders thereof the sum of the original purchase price per share, which was $10.00, plus all accrued and unpaid dividends.
The Series A preferred stock may be converted, at the option of the holder, at any time after issuance and prior to the date such stock is
redeemed, into four shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends,
recapitalization, reclassification and similar transactions. We are obligated to reserve out of our authorized but unissued shares of common stock
a sufficient number of such shares to effect the conversion of all outstanding shares of Series A preferred stock. During 2013, 1,000 shares of
Series A preferred stock were converted into 4,000 shares of common stock and during 2012, 36,210 shares of Series A preferred stock were
converted into 144,840 shares of common stock.
Except as provided by law, the holders of our Series A preferred stock do not have the right to vote on any matters, including, without limitation,
the election of directors. However, so long as any shares of Series A preferred stock are outstanding, we shall not, without first obtaining the
approval of at least a majority of the holders of the Series A preferred stock, authorize or issue any equity security having a preference over the
Series A preferred stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable
for any equity security other than any senior preferred stock.
Series B
Series B Preferred stock consists of 500,000 shares $10.00 par value, 5% non-cumulative, participating, preferred stock. On February 5, 2012,
the Company completed a standby offering of 12,780 shares of its Series B Convertible Preferred Stock at $10.00 per share, for gross proceeds
of $127,800. In connection with the offering, the Company also issued warrants to purchase 3,575 shares of common stock at $1.79 per share for
five years. The Company paid legal and broker fees of approximately $11,000 in connection with the offering, resulting in net proceeds to the
Company of $117,000.
At December 31, 2013 there were no shares of Series B Preferred stock outstanding. At December 31, 2012 there were 45,602 shares of Series B
Preferred stock outstanding.
The Series B Preferred shares have a 5% pro-rata annual non-cumulative dividend payable quarterly for a period of three years. The dividend can
be paid in cash or, in the sole and absolute discretion of our board of directors, in shares of common stock based on its then fair market value.
We cannot declare or pay any dividend on shares of our securities ranking junior to the preferred stock until the holders of our preferred stock
have received the full non-cumulative dividend to which they are entitled. During the year ended December 31, 2012, $29,000 in dividends were
accrued and $38,000 of dividends were paid by the issuance of 27,313 shares of common stock. During the year ended December 31, 2013, the
balance of 45,602 shares of Series B Convertible Preferred Stock were converted to 319,214 shares of common stock and accrued dividends of
$74,000 were paid by issuing 47,890 shares of common stock.
Common Stock
Common stock consists of $.0001 par value, 19,500,000 shares authorized, 12,922,832 shares issued and outstanding as of December 31, 2013
and 12,084,673 shares issued and outstanding as of December 31, 2012.
During the year ended December 31, 2013, the Company issued 1,250 shares of common stock for services at $4.00 per share with a value of
$5,000. During the year ended December 31, 2012, the Company issued 14,965 shares of common stock for services rendered at prices ranging
from $1.13 to $2.17 per share with a value of $23,000.
F- 12
(10) Stock Options and Warrants
A) Stock Options
In 2001, the Company adopted the Original Beverage Corporation 2001 Stock Option Plan and, in 2007, the Company adopted the Reed’s Inc.
2007 Stock Option Plan (the “Plans”). The options under both plans shall be granted from time to time by the Compensation Committee.
Individuals eligible to receive options include employees of the Company, consultants to the Company and directors of the Company. The
options shall have a fixed price, which will not be less than 100% of the fair market value per share on the grant date. The total number of
options authorized is 500,000 and 1,500,000, respectively for the Original Beverage Corporation 2001 Stock Option Plan and the Reed’s Inc.
2007 Stock Option Plan.
During the years ended December 31, 2013 and 2012, the Company granted 414,000 and 10,000 options, respectively, to purchase the
Company’s common stock at a weighted exercise price of $3.99 and $1.85, respectively, to employees under the Plans. The aggregate value of
the options vesting, net of forfeitures, during the years ended December 31, 2013 and 2012 was $327,000 and $107,000, respectively, and has
been reflected as compensation cost. As of December 31, 2013, the aggregate value of unvested options was $532,000, which will be amortized
as compensation cost as the options vest, over 2 - 3 years.
On April 9, 2012, the Company repriced 20,000 employee options to an exercise price of $1.83, which were previously $2.43 per share and
$2.06 per share. The total increase in stock compensation expense, as a result of the repricing was $3,000. On December 23, 2012, the Company
repriced 20,000 employee options to an exercise price of $1.14, which were previously $2.06 per share; and extended the termination date of
420,000 employee options until December 22, 2016. Such options previously were to expire on dates that were between 8 months and 48 months
from the extension date. The total increase in stock compensation expense, as a result of the repricing and extensions, was $53,000; of which
$48,000 was recognized in the year ended December 31, 2012 and $5,000 in the year ended December 31, 2013. During the year ended
December 31, 2013 there were 348,332 options exercised at an average price of $1.14. Most of such exercises were cash-less, however, the
Company did receive proceeds from certain exercises aggregating $30,000. During the year ended December 31, 2012 there were 408,334 stock
options exercised at a price of $1.05 per share. Most of such exercises were cash-less, however, the Company did receive proceeds from certain
exercises aggregating $30,000.
The weighted-average grant date fair value of options granted during 2013 and 2012 was $1.97 and $0.40, respectively. The fair value of each
option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following
table. For purposes of determining the expected life of the option, an average of the estimated holding period is used. The risk-free rate for
periods within the contractual life of the options is based on the U. S. Treasury yield in effect at the time of the grant.
Expected volatility
Expected dividends
Expected average term (in years)
Risk free rate - average
Forfeiture rate
Year ended December 31,
2013
2012
71 %
—
3.0
0.8 %
0 %
48 %
—
3.0
0.9 %
0 %
A summary of option activity as of December 31, 2013 and changes during the two years then ended is presented below:
Outstanding at January 1, 2012
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2012
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Weighted-
Average
Exercise Price
1.55
1.85
1.05
4.46
1.27
3.99
1.14
3.71
3.18
1.84
Shares
1,172,000 $
10,000 $
(408,334 ) $
(166,666 ) $
607,000 $
414,000 $
(348,332 ) $
(33,334 ) $
639,334 $
269,083 $
Weighted-
Average
Remaining
Contractual
Terms (Years)
Aggregate
Intrinsic
Value
3.7 $
3.0 $
3,070,000
1,637,000
As of December 31, 2013, the aggregate intrinsic values of $3,070,000 and $1,637,000 were calculated as the difference between the market
price and the exercise price of the Company’s stock, which was $7.98 as of December 31, 2013.
F- 13
A summary of the status of the Company’s nonvested shares granted under the Company’s stock option plan as of December 31, 2013 and
changes during the year then ended is presented below:
Nonvested at December 31, 2012
Granted
Vested
Forfeited
Nonvested at December 31, 2013
Weighted-
Average
Grant Date
Fair Value
0.65
1.96
0.86
1.74
1.89
Shares
195,836 $
414,000 $
(206,251 ) $
(33,334 ) $
370,251 $
Additional information regarding options outstanding as of December 31, 2013 is as follows:
Options Outstanding at December 31, 2013
Weighted
Average
Remaining
Contractual
Life (years)
Number of
Shares
Outstanding
Weighted
Average
Exercise Price
Options Exercisable at
December 31, 2013
Number of
Shares
Exercisable
Weighted
Average
Exercise Price
190,334
429,000
20,000
639,334
2.9 $
3.9 $
4.8 $
1.34
3.84
6.70
166,999 $
102,084 $
-
269,083
1.27
2.78
-
Range of Exercise Price
$0.01 - $1.99
$2.00 - $4.99
$5.00 - $6.99
B) Warrants
During the years ended December 31, 2013 and 2012 there were no warrants granted. During the year ended December 31, 2013 there were
215,290 warrants exercised at prices between $2.10 per share and $2.77 per share (an average price of $2.45), resulting in proceeds to the
Company of $373,000 and 188,635 shares of common stock issued.
The following table summarizes warrant activity for the two years ended December 31, 2013:
Outstanding at December 31, 2011
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2012
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Exercisable at December 31, 2013
Weighted-
Average
Exercise Price
4.32
-
1.61
6.26
2.40
-
2.45
-
2.30
2.30
Shares
2,006,870 $
(574,622 ) $
(1,114,995 ) $
317,253 $
-
-
-
(215,290 ) $
101,963 $
101,963 $
Weighted-
Average
Remaining
Contractual
Terms (Years)
Aggregate
Intrinsic
Value
1.9 $
1.9 $
579,000
579,000
As of December 31, 2013, the aggregate intrinsic value of $579,000 was calculated as the difference between the market price and the exercise
price of the Company’s stock, which was $7.98 as of December 31, 2013.
The fair value of each warrant is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatility is based on the
historical volatility of the Company. For purposes of determining the expected life of the warrant, the full contract life of the warrant is used. The
risk-free rate for periods within the contractual life of the warrants is based on the U. S. Treasury yield in effect at the time of the grant.
F- 14
The following table summarizes the outstanding warrants to purchase Common Stock at December 31, 2013:
Number
Exercise Price
20,803 $
64,899 $
16,261 $
101,963
2.10
2.25
2.77
Expiration Dates
February 2015
April 2015
February 2016
(11) Income Taxes
At December 31, 2013 and 2012, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income.
The amounts available were approximately $17.8 million and $16.5 million for Federal purposes, respectively, and $13.3 million and $12.5
million for state purposes respectively. The Federal carryforward expires in 2033 and the state carryforward expires in 2018. Given the
Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to
realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit.
Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to
be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on
the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the
largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on
derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date
of adoption, and as of December 31, 2013 and 2012, the Company did not have a liability for unrecognized tax benefits, and no adjustment was
required at adoption.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2013 and 2012,
the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2007 through 2013 remain open to
examination by the major taxing jurisdictions to which the Company is subject.
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the
use of the carryforwards and will recognize a deferred tax asset at that time.
Significant components of the Company’s deferred income tax assets are as follows as of:
Deferred income tax asset:
Net operating loss carryforward
Valuation allowance
Net deferred income tax asset
December 31, 2013 December 31, 2012
$
$
6,400,000 $
(6,400,000 )
— $
6,000,000
(6,000,000 )
—
Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows:
Federal Statutory tax rate
State tax, net of federal benefit
Valuation allowance
Effective tax rate
Year Ended December 31,
2013
2012
(34 )%
(5 )%
(39 )%
39 %
-%
(34 )%
(5 )%
(39 )%
39 %
-%
F- 15
(12) Commitments and Contingencies
Lease Commitments
The Company leases warehouse space under non-cancelable operating leases. Rental expense under these and other operating leases for the years
ended December 31, 2013 and 2012 was $196,000 and $237,000, respectively.
Future payments under these leases as of December 31, 2013 are as follows:
Year ending December 31,
2014
2015
2016
2017
Total
Other Commitments
Amount
186,000
92,000
95,000
89,000
462,000
$
$
The Company has entered into contracts with customers with clauses that commit the Company to pay fees if the Company terminates the
agreement early or without cause. The contracts call for the customer to have the right to distribute the Company’s products to a defined type of
retailer within a defined geographic region. If the Company should terminate the contract or not automatically renew the agreements without
cause, amounts would be due to the customer. As of December 31, 2013 and 2012, the Company has no plans to terminate or not renew any
agreement with any of their customers; therefore, no such fees have been accrued in the accompanying financial statements.
(13) Legal Proceedings
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our
exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of
the loss is estimable and the loss is probable.
From August 3, 2005 through April 7, 2006, we issued 333,156 shares of our common stock in connection with our initial public offering. These
securities represented all of the shares issued in connection with the initial public offering prior to October 11, 2006. These shares issued in
connection with the initial public offering may have been issued in violation of either federal or state securities laws, or both, and may be subject
to rescission.
On August 12, 2006, we made a rescission offer to all holders of the outstanding shares that we believe are subject to rescission, pursuant to
which we offered to repurchase these shares then outstanding from the holders. At the expiration of the rescission offer on September 18, 2006,
the rescission offer was accepted by 32 of the offerees to the extent of 28,420 shares for an aggregate of $119,000, including statutory interest.
The shares that were tendered for rescission were purchased by third parties and not from our funds.
Federal securities laws do not provide that a rescission offer will terminate a purchaser’s right to rescind a sale of stock that was not registered as
required or was not otherwise exempt from such registration requirements. With respect to the offerees who rejected the rescission offer, we may
continue to be liable under Federal and state securities laws for up to an amount equal to the value of all shares of common stock issued in
connection with the initial public offering plus any statutory interest we may be required to pay. If it is determined that we offered securities
without properly registering them under federal or state law, or securing an exemption from registration, regulators could impose monetary fines
or other sanctions as provided under these laws. However, we believe the rescission offer provides us with additional meritorious defenses
against any future claims relating to these shares.
Except as set forth above, we believe that there are no material litigation matters at the current time. Although the results of such litigation
matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material
adverse impact on our financial position, liquidity, or results of operations.
F- 16
(14) Related Party Activity
During the year ended December 31, 2008, the Company entered into an agreement for the distribution of its products internationally. The
agreement is between the Company and a company controlled by two brothers of Christopher Reed, Chief Executive Officer of the Company.
The agreement remains in effect until terminated by either party and requires the Company to pay 10% of the defined sales of the previous
month. During the years ended December 31, 2013 and 2012, the Company paid commissions of $1,000, and during the year ended December
31, 2012, the Company paid commissions of $15,000.
(15) Subsequent Events
During the first quarter of 2014, Company employees exercised options to purchase 173,700 shares of the Company’s common stock on a cash-
less basis at prices between $1.14 and $4.00 per share. The Company issued 115,120 shares of common stock for such cash-less exercises of
options.
On January 30, 2014 and February 4, 2014, respectively, the Company’s former CFO and former COO resigned from the Company. At the time
of their separation from the Company, the former officers held unvested options issued in 2013 to purchase an aggregate of 37,500 shares of the
Company’s common stock which were due to vest through March 2016. The Company agreed to accelerate vesting of these options so they were
100% vested as of February 17, 2014. Employee stock options which are subject to accelerated vesting at termination are treated as a
modification. As such, the Company will recognize an expense related to the accelerated vesting in the amount of $151,000 during the first
quarter of 2014, which is the fair value of the options determined using the Black-Scholes option pricing model with the following assumptions:
risk-free interest rate of 0.75%; dividend yield of 0%; volatility of 59%; and an expected life of 3 years.
On February 17, 2014, the Company granted options to employees to purchase 165,500 shares of the Company’s common stock with an exercise
price of $7.07 per share. The fair value of the options on the date granted was determined to be approximately $466,000 using the Black-Scholes
option pricing model with the following assumptions: risk-free interest rate of 0.75%; dividend yield of 0%; volatility of 59%; and an expected
life of 3 years, and will be amortized ratably over the vesting period of 3 years.
F- 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Management’s Annual Report on Internal Control over Financial Reporting
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial
Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of
1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Interim Chief Financial Officer concluded that the
Company’s disclosure controls and procedures were effective as of December 31, 2013.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the fourth quarter of 2013 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2013. In making this assessment, we used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework . Based on our assessment we
concluded that, as of December 31, 2013, the Company’s internal control over financial reporting was effective.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm, pursuant to
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit us to provide only management’s report in this
Annual Report on Form 10-K.
This report shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section,
and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general
incorporation language in such filing.
Item 9B. Other Information
None.
21
Item 10. Directors, Executive Officers , Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the
Exchange Act
PART III
General
Our directors currently have terms which will end at our next annual meeting of the stockholders or until their successors are elected and qualify,
subject to their death, resignation or removal. Officers serve at the discretion of the board of directors. Our board members are encouraged to
attend meetings of the board of directors and the annual meeting of stockholders. The board of directors held nine meetings in 2013. The
following table sets forth certain information with respect to our current directors and executive officers:
Name
Position
Christopher J. Reed
David J. Williams
Judy Holloway Reed
Mark Harris
Daniel S.J. Muffoletto
Michael Fischman
President, Chief Executive Officer and Chairman of the Board
Interim Chief Financial Officer
Secretary and Director
Director
Director
Director
Business Experience of Directors and Executive Officers
Age
55
53
54
58
59
58
Christopher J. Reed founded our company in 1987. Mr. Reed has served as our Chairman, President and Chief Executive Officer since our
incorporation in 1991. Mr. Reed also served as Chief Financial Officer during fiscal year 2007 until October 1, 2007 and again from April 17,
2008 to January 19, 2010. Mr. Reed has been responsible for our design and products, including the original product recipes, the proprietary
brewing process and the packaging and marketing strategies. Mr. Reed received a B.S. in Chemical Engineering in 1980 from Rennselaer
Polytechnic Institute in Troy, New York.
David J. Williams was appointed to serve as its Interim Chief Financial Officer on February 7, 2014. Mr. Williams is a Certified Public
Accountant, Certified Management Accountant and holds a Juris Doctor. Mr. Williams has extensive experience as a chief financial officer,
controller, and auditor, providing expertise to public, private and non-profit companies and has worked most recently through ValueDriven CFO
since October 2010. Mr. Williams served as Chief Financial Officer and Legal Mediator to National Promotions and Advertising, Inc., a provider
of advertising and printing services, from 2008 to 2010. From 2006 to 2008 he served as Chief Financial Officer and In-House Counsel of Fluid
Media Networks, Inc. (currently Mood Media Corporation, (TSX: MM) (LSE AIM: MM)), an e-commerce start-up. From 2000 to 2005 he
served as Chief Financial Officer and In-House Counsel to Professionals Online Network, Inc., a private company developing online career
services. From 1997 to 2000 he served as Chief Financial Officer to Networks Telephony Corporation, a developer of business class VoIP. Mr.
Williams received a bachelor degree from Northern Illinois University in 1984 and a Juris Doctor from Southwestern School of Law in 1997.
Judy Holloway Reed has been with us since 1992 and, as we have grown, has run the accounting, purchasing and shipping and receiving
departments at various times since the 1990s. Ms. Reed has been one of our directors since June 2004, and our Secretary since October 1996. In
the 1980s, Ms. Reed managed media tracking for a Los Angeles Infomercial Media Buying Group and was an account manager with a Beverly
Hills, California stock portfolio management company. She earned a Business Degree from MIU in 1981. Ms. Reed is the wife of Christopher J.
Reed, our Chairman, President and Chief Executive Officer.
Mark Harris has been a member of our board of directors since April 2005. Mr. Harris is an independent venture capitalist and has been retired
from the work force since 2002. In late 2003, Mr. Harris joined a group of Amgen colleagues in funding NeoStem, Inc., a company involved in
stem-cell storage, archiving, and research to which he is a founding investor. From 1991 to 2002, Mr. Harris worked at Amgen, Inc. (Nasdaq:
AMGN), a preeminent biotech company, managing much of Amgen’s media production for internal use and public relations. Mr. Harris spent
the decade prior working in the aerospace industry at Northrop with similar responsibilities.
Daniel S.J. Muffoletto, N.D. has been a member of our board of directors from April 2005 to December 2006 and from January 2007 to the
present. Dr. Muffoletto has practiced as a Naturopathic Physician since 1986. He has served as chief executive officer of Its Your Earth, a natural
products marketing company since June 2004. From 2003 to 2005, Dr. Muffoletto worked as Sales and Marketing Director for Worthington,
Moore & Jacobs, a Commercial Law League member firm serving FedEx, UPS, DHL and Kodak, among others. From 2001 to 2003, he was the
owner-operator of the David St. Michel Art Gallery in Montreal, Québec. From 1991 to 2001, Dr. Muffoletto was the owner/operator of a
Naturopathic Apothecary, Herbal Alter*Natives of Seattle, Washington and Ellicott City, Maryland. The apothecary housed Dr. Muffoletto’s
Naturopathic practice. Dr. Muffoletto received a Bachelors of Arts degree in Government and Communications from the University of Baltimore
in 1977, and conducted postgraduate work in the schools of Public Administration and Publication Design at the University of Baltimore from
1978 to 1979. In 1986, he received his Doctorate of Naturopathic Medicine from the Santa Fe Academy of Healing, Santa Fe, New Mexico.
22
Michael Fischman has been a member of our board of directors since April 2005. Since 1998, Mr. Fischman has been President and chief
executive officer of the APEX course, the corporate training division of the International Association of Human Values. In addition, Mr.
Fischman is a founding member and the director of training for USA at the Art of Living Foundation, a global non-profit educational and
humanitarian organization at which he has coordinated over 200 personal development instructors since 1997.
Family Relationships
Other than the relationship of Christopher J. Reed, and Judy Holloway Reed, Christopher Reed’s wife and a board member, none of our directors
or executive officers are related to one another.
Legal Proceedings
To the best of our knowledge, none of our executive officers or directors are parties to any material proceedings adverse to Reed’s, have any
material interest adverse to Reed’s or have, during the past ten years:
● been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor
offenses);
● had any bankruptcy petition filed by or against him/her or any business of which he/she was a general partner or executive officer,
either at the time of the bankruptcy or within two years prior to that time;
● been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his/her involvement in any type of business, securities,
futures, commodities or banking activities;
● been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed,
suspended, or vacated;
● been subject to, or party to, any judicial or administrative order, judgment, decree , or finding, not subsequently reversed, suspended or
vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation, (ii) any law or regulation
respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of
disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order or
(iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or been the subject of, or a
party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in
Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over
its members or persons associated with a member.
Corporate Governance
We are committed to having sound corporate governance principles. We believe that such principles are essential to running our business
efficiently and to maintaining our integrity in the marketplace. There have been no changes to the procedures by which stockholders may
recommend nominees to our board of directors.
Director Qualifications
We believe that our directors should have the highest professional and personal ethics and values, consistent with our longstanding values and
standards. They should have broad experience at the policy-making level in business or banking. They should be committed to enhancing
stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience.
Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to
perform responsibly all director duties for us. Each director must represent the interests of all stockholders. When considering potential director
candidates, the board of directors also considers the candidate’s character, judgment, diversity, age and skills, including financial literacy and
experience in the context of our needs and the needs of the board of directors.
Director Independence
The board of directors has determined that three members of our board of directors, Mr. Harris, Dr. Muffoletto and Mr. Fischman, are
independent under the New York Stock Exchange Listed Company Manual. We intend to maintain at least three independent directors on our
board of directors in the future.
23
Code of Ethics
Our Chief Executive Officer and all senior financial officers, including the Chief Financial Officer, are bound by a Code of Ethics that complies
with Item 406 of Regulation S-B of the Exchange Act. Our Code of Ethics is posted on our website at www.reedsinc.com.
Board Structure and Committee Composition
As of the date of this Annual Report, our board of directors has five directors and the following three standing committees: an Audit Committee,
a Compensation Committee and a Nominations and Governance Committee. These committees were formed in January 2007.
Audit Committee. Our Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial
controls, relationships with independent auditors and audits of financial statements. Specific responsibilities include the following:
●
●
●
●
selecting, hiring and terminating our independent auditors;
evaluating the qualifications, independence and performance of our independent auditors;
approving the audit and non-audit services to be performed by our independent auditors;
reviewing the design, implementation, adequacy and effectiveness of our internal controls and critical accounting policies;
● overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they
relate to financial statements or accounting matters;
●
reviewing with management and our independent auditors, any earnings announcements and other public announcements regarding our
results of operations; and
● preparing the audit committee report that the SEC requires in our annual proxy statement.
Our Audit Committee is comprised of Dr. Muffoletto, Mr. Harris and Mr. Fischman. Dr. Muffoletto serves as Chairman of the Audit Committee.
The board of directors has determined that the three members of the Audit Committee are independent under the rules of the SEC and the New
York Stock Exchange Listed Company Manual and that Dr. Muffoletto qualifies as an “audit committee financial expert,” as defined by the rules
of the SEC. Our board of directors has adopted a written charter for the Audit Committee meeting applicable standards of the SEC and the New
York Stock Exchange.
Compensation Committee. Our Compensation Committee assists our board of directors in determining and developing plans for the
compensation of our officers, directors and employees. Specific responsibilities include the following:
●
●
●
approving the compensation and benefits of our executive officers;
reviewing the performance objectives and actual performance of our officers; and
administering our stock option and other equity compensation plans.
Our Compensation Committee is comprised of Dr. Muffoletto, Mr. Harris and Mr. Fischman. The board of directors has determined that all of
the members of the Compensation Committee are independent under New York Stock Exchange Listed Company Manual Section 303A.02. In
affirmatively determining the independence of a director who will serve on the compensation committee, the Company’s board considered all
factors specifically relevant to whether the director has a relationship to the Company which is material to the director’s ability to be independent
from management in connection with the duties of a committee member, including, without limitation: (1) the source of compensation of the
director, including any consulting, advisory or other compensatory fee paid by the Company; and (2) whether the director is affiliated with the
Company, or an affiliate of the Company.
24
Our board of directors has adopted a written charter for the Compensation Committee.
Nominations and Governance Committee. Our Nominations and Governance Committee assists the board of directors by identifying and
recommending individuals qualified to become members of our board of directors, reviewing correspondence from our stockholders, and
establishing, evaluating and overseeing our corporate governance guidelines. Specific responsibilities include the following:
●
●
●
evaluating the composition, size and governance of our board of directors and its committees and making recommendations regarding
future planning and the appointment of directors to our committees;
establishing a policy for considering stockholder nominees for election to our board of directors; and
evaluating and recommending candidates for election to our board of directors.
Our Nominations and Governance Committee is comprised of Dr. Muffoletto and Mr. Fischman. The board of directors has determined that all
of the members of the Nominations and Governance Committee are independent under the rules of the New York Stock Exchange Listed
Company Manual. Our board of directors has adopted a written charter for the Nominations and Corporate Governance Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) requires our directors and executive officers and
beneficial holders of more than 10% of our common stock to file with the SEC initial reports of ownership and reports of changes in ownership
of our equity securities.
To our knowledge, based solely upon a review of Forms 3 and 4 and amendments thereto furnished to Reed’s under 17 CFR 240.16a-3(e) during
our most recent fiscal year and Forms 5 and amendments thereto furnished to Reed’s with respect to our most recent fiscal year or written
representations from the reporting persons, we believe that during the year ended December 31, 2013 our directors, executive officers and
persons who own more than 10% of our common stock complied with all Section 16(a) filing requirements.
Item 11. Executive Compensation
The following table summarizes all compensation for fiscal years 2013 and 2012 received by our principal executive officer, former principal
financial officer and former chief operating officer, who were the only executive officers of the Company in fiscal year 2013, our “Named
Executive Officers”.
Name and
Principal Position
Year Salary Bonus
Stock
Awards
Option
Awards
($)(1)
Non- Equity
Incentive Plan
Compensation
Non-
Qualified
Deferred
Compensation
Earnings
All Other
Compensation Total
Christopher J. Reed, Chief
Executive Officer (Principal Executive Officer)
2013 $ 217,000 $ 29,000
2012 $ 217,000 $ 4,000
James Linesch, former Chief Financial Officer
(Principal Financial Officer) (3)
2013 $ 175,000 $ 14,000
2012 $ 181,009 $ 29,000
- $
- $
- $
- $
-
-
-
-
-
-
-
-
Thierry Foucaut, former Chief Operating Officer (4)
2013 $ 180,000 $ 14,000
-
2012 $ 184,154 $
- $
- $
-
-
- $
- $
5,000( 2) $ 251,000
5,000( 2) $ 226,000
-
-
- $ 189,000
- $ 210,009
$ 194,000
$ 184,154
(1) The amounts represent the fair value for all share-based payment awards, calculated on the date of grant in accordance with Financial
Accounting Standards, excluding any impact of assumed forfeiture rates.
(2) Represents value of automobile provided to Christopher J. Reed.
(3) James Linesch resigned from his position as Chief Financial Officer effective January 30, 2014.
(4) Thierry Foucaut resigned from his position as Chief Operating Officer effective February 4, 2014.
25
Employment Agreements
There are no employment agreements with our executive officers. Mr. Reed is currently paid an annual Salary of $217,000; Mr. Linesch was
paid an annual salary of $175,000 through the date of his resignation; and Mr. Foucaut was paid an annual salary of $180,000 through the date of
his resignation. Mr. Williams, as Interim Chief Financial Officer, is paid consulting fees equivalent to an annual salary of $180,000. Any
bonuses are discretionary.
Outstanding Equity Awards At Fiscal Year-End
The following table sets forth information regarding unexercised options and equity incentive plan awards for each Named Executive Officer
outstanding as of December 31, 2013.
Name and Position
Christopher J. Reed, Chief Executive Officer
James Linesch, former Chief Financial Officer
Thierry Foucaut, former Chief Operating Officer
Number of
Number of Securities
Securities
Underlying
Underlying Unexercised
Unexercised Options
Options (#)
Exercisable Unexercisable Unearned Options
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
(#)
Option
Exercise
Price
Option
Expiration
Date
50,000
25,000
6,667
20,000
25,000
12,500
25,000
-
18,750 (1)
-
-
18,750 (2)
-
18,750 (2)
- $
$
- $
- $
- $
- $
$
1.14 12/22/16
4.00 03/03/18
1.14 12/22/16
1.14 12/22/16
4.00 03/03/18
1.14 12/22/16
4.00 03/03/18
Vesting of Options:
(1) vest ¼ per year
(2) These options vested as part each director’s severance package.
Director Compensation
The following table summarizes the compensation paid to our directors for the fiscal year ended December 31, 2013:
Name
Judy Holloway Reed
Mark Harris
Daniel S.J. Muffoletto
Michael Fischman
Fees
Earned or
Paid in
Cash
Stock
Awards
Option
Awards
Non-Equity
Incentive Plan All Other
Compensation Compensation
$
$
$
$
1,650
-
11,946 (1)
900
$
$
$
$
Total
1,650
-
11,946
900
(1) Since November 2007, Dr. Muffoletto receives $833 per month to serve as the Chairman of the Audit Committee.
Item 12. Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters
The following table reflects, as of March 13, 2014, the beneficial common stock ownership of: (a) each of our directors, (b) each of our current
named executive officers, (c) each person known by us to be a beneficial holder of 5% or more of our common stock, and (d) all of our executive
officers and directors as a group.
Except as otherwise indicated below, the persons named in the table have sole voting and investment power with respect to all shares of common
stock held by them. Unless otherwise indicated, the principal address of each listed executive officer and director is 13000 South Spring Street,
Los Angeles, California 90061.
26
Named Beneficial Owner
Directors and Named Executive Officers
Christopher J. Reed (2)
Judy Holloway Reed (2)
Mark Harris (3)
Daniel S.J. Muffoletto, N.D.
Michael Fischman
David J. Williams
Directors and executive officers as a group (6 persons)
5% or greater stockholders
Robert Reed (4)
* Less than 1%.
Number of Shares
Beneficially Owned
Percentage
of Shares
Beneficially
Owned (1)
2,425,475
2,425,475
9,363
0
0
0
2,434,838
800,000
18.6
18.6
*
*
*
*
20.7
6.4
(1) Beneficial ownership is determined in accordance with the rules of the SEC. Shares of common stock subject to options or warrants
currently exercisable or exercisable within 60 days of March 18, 2014 are deemed outstanding for computing the percentage ownership of
the stockholder holding the options or warrants but are not deemed outstanding for computing the percentage ownership of any other
stockholder. Unless otherwise indicated in the footnotes to this table, we believe stockholders named in the table have sole voting and sole
investment power with respect to the shares set forth opposite such stockholder’s name. Percentage of ownership is based on approximately
13,037,952 shares of common stock outstanding as of March 18, 2014.
(2) Christopher J. Reed and Judy Holloway Reed are husband and wife. The same number of shares of common stock is shown for each of
them, as they may each be deemed to be the beneficial owner of all of such shares. Consists of 2,384,225 shares of common stock and
options to purchase 41,250 shares of common stock. Does not include options to purchase up to 63,750 shares of common stock, which
vest over three years.
(3) The address for Mr. Harris is 160 Barranca Road, Newbury Park, California 91320.
(4) Robert Reed is the trustee of the Reed Family Irrevocable Trust One and the Reed Family Irrevocable Trust Two. Each trust owns 400,000
shares of common stock. As sole Trustee, Robert Reed holds voting and dispositive power over all of these shares.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Our board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship between Reed’s
and one of our executive officers, directors, director nominees or 5% or greater stockholders (or their immediate family members), each of
whom we refer to as a “related person,” in which such related person has a direct or indirect material interest.
If a related person proposes to enter into such a transaction, arrangement or relationship, defined as a “related party transaction,” the related party
must report the proposed related party transaction to our Chief Financial Officer. The policy calls for the proposed related party transaction to be
reviewed and, if deemed appropriate, approved by the Nominations and Governance Committee. Our Nominations and Governance Committee
is comprised of Dr. Muffoletto and Mr. Fischman. The board of directors has determined that all of the members of the Nominations and
Governance Committee are independent under the rules of the New York Stock Exchange Listed Company Manual. If practicable, the reporting,
review and approval will occur prior to entry into the transaction. If advance review and approval is not practicable, the Nominations and
Governance Committee will review, and, in its discretion, may ratify the related party transaction. Any related party transactions that are
ongoing in nature will be reviewed annually at a minimum. The related party transactions listed below were reviewed by the full board of
directors. Prior to August 2005, we did not have independent directors on our board to review and approve related party transactions. The
Nominations and Governance Committee shall review future related party transactions.
During the years December 31, 2013 and 2012, we have participated in the following transactions in which a related person had or will have a
direct or indirect material interest:
Judy Holloway Reed, our Secretary and director, is Christopher J. Reed’s spouse.
27
During the year ended December 31, 2008, the Company entered into an agreement for the distribution of its products internationally. The
agreement is between the Company and a company controlled by two brothers of Christopher Reed, Chief Executive Officer of the Company.
The agreement remains in effect until terminated by either party and requires the Company to pay 10% of the defined sales of the previous
month. During the year ended December 31, 2013, the Company paid commissions on sales of $15,000, and during the year ended December 31,
2012, the Company paid commissions on sales of $66,000.
Item 14. Principal Accounting Fees and Services
Weinberg & Company, P.A. (“Weinberg”) was our independent registered public accounting firm for the years ended December 31, 2013 and
2012.
The following table shows the fees paid or accrued by us for the audit and other services provided by Weinberg for the years ended December
31, 2013 and 2012.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2013
2012
$
$
87,000 $
0
9,000
0
96,000 $
57,000
0
5,000
0
62,000
As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual
financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and
related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and
are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax
advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services
reported under “audit fees,” “audit-related fees,” and “tax fees.”
Audit Fees
Services provided to us by Weinberg with respect to such periods consisted of the audits of our financial statements and limited reviews of the
financial statements included in Quarterly Reports on Form 10-Q. Weinberg also provided services with respect to the filing of our registration
statements in 2013 and 2012.
Audit Related Fees
Weinberg did not provide any professional services to us with which would relate to “audit related fees.”
Tax Fees
Weinberg prepared our 2013 and 2012 Federal and state income taxes.
All Other Fees
Weinberg did not provide any professional services to us with which would relate to “other fees.”
Audit Committee Pre-Approval Policies and Procedures
Under the SEC’s rules, the Audit Committee is required to pre-approve the audit and non-audit services performed by the independent registered
public accounting firm in order to ensure that they do not impair the auditors’ independence. The Commission’s rules specify the types of non-
audit services that an independent auditor may not provide to its audit client and establish the Audit Committee’s responsibility for
administration of the engagement of the independent registered public accounting firm.
Consistent with the SEC’s rules, the Audit Committee Charter requires that the Audit Committee review and pre-approve all audit services and
permitted non-audit services provided by the independent registered public accounting firm to us or any of our subsidiaries. The Audit
Committee may delegate pre-approval authority to a member of the Audit Committee and if it does, the decisions of that member must be
presented to the full Audit Committee at its next scheduled meeting. Accordingly, 100% of audit services and non-audit services described in
this Item 14 were pre-approved by the Audit Committee.
There were no hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal
year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
28
Item 15. Exhibits and Financial Statements
(a) 1. Financial Statements
PART IV
See Index to Financial Statements in Item 8 of this Annual Report on Form 10-K, which is incorporated herein by reference.
2. Financial Statement Schedules
All other financial statement schedules have been omitted because they are either not applicable or the required information is shown in
the financial statements or notes thereto.
3. Exhibits
See the Exhibit Index, which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by
reference.
(b) Exhibits
See Item 15(a) (3) above.
(c) Financial Statement Schedules
See Item 15(a) (2) above.
29
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SIGNATURES
Date: March 25, 2014
REED’S, INC.
a Delaware corporation
By:
/s/ Christopher J. Reed
Christopher J. Reed
Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
/s/ CHRISTOPHER J. REED
Christopher J. Reed
/s/ DAVID J. WILLIAMS
David J. Williams
/s/ JUDY HOLLOWAY REED
Judy Holloway Reed
/s/ MARK HARRIS
Mark Harris
/s/ DANIEL S.J. MUFFOLETTO
Daniel S.J. Muffoletto
/s/ MICHAEL FISCHMAN
Michael Fischman
Chief Executive Officer, President and Chairman of
the Board of Directors
(Principal Executive Officer)
Interim Chief Financial Officer
(Principal Financial Officer)
Director
Director
Director
Director
30
Date
March 25, 2014
March 25, 2014
March 25, 2014
March 25, 2014
March 25, 2014
March 25, 2014
EXHIBIT INDEX
3.1
3.2
3.3
3.4
3.5
3.6
3.7
4.1
4.2
10.1
10.2*
10.3
10.4*
10.5*
10.6*
10.7*
10.8
14.1
21.
23.1
31.1
31.2
32.1
32.2
Certificate of Incorporation of Reed’s, Inc. as filed September 7, 2001 (Incorporated by reference to Exhibit 3.1 to Reed’s, Inc.’s
Registration Statement on Form SB-2 (File No. 333-120451))
Certificate of Amendment of Certificate of Incorporation of Reed’s, Inc. as filed September 27, 2004 (Incorporated by reference to
Exhibit 3.2 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
Certificate of Amendment of Certificate of Incorporation of Reed’s, Inc. as filed December 18, 2007 (Incorporated by reference to
Exhibit 3.3 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Reed’s, Inc. as filed October 12, 2004
(Incorporated by reference to Exhibit 3.3 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
Certificate of Correction to Certificate of Designations as filed November 10, 2004 (Incorporated by reference to Exhibit 3.4 to
Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-120451))
Amended Certificate of Designation of Series B Convertible Preferred Stock, filed December 4, 2009 (filed herewith)
Bylaws of Reed’s Inc., as amended (Incorporated by reference to Exhibit 3.1 to Reed’s, Inc.’s Current Report on Form 8-K filed
December 19, 2012)
Form of common stock certificate (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form SB-2
(File No. 333-120451))
Form of Series A preferred stock certificate (Incorporated by reference to Exhibit 4.2 to Reed’s, Inc.’s Registration Statement on
Form SB-2 (File No. 333-120451))
Waiver to Loan and Security Agreement dated January 5, 2009 (Incorporated by reference to Exhibit 10.19 to Reed’s, Inc.’s
Registration Statement on Form S-1 (File No. 333-156908))
2001 Stock Option Plan (Incorporated by reference to Exhibit 4.3 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No.
333-120451)
Reed’s Inc. Master Brokerage Agreement between Reed’s, Inc. and Reed’s Brokerage, Inc. dated May 1, 2008 (Incorporated by
reference to Exhibit 10.21 to Reed’s, Inc.’s Registration Statement on Form S-1 (File No. 333-156908))
2007 Stock Option Plan (Incorporated by reference to Exhibit 10.22 to Reed’s, Inc.’s Form 10K filed March 27, 2009)
2009 Consultant Stock Plan (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form S-8 (File No.
333-157359 ))
2010 Incentive Stock Plan (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form S-8 (File No.
333-165906 ))
2010-2 Incentive Stock Plan (Incorporated by reference to Exhibit 4.1 to Reed’s, Inc.’s Registration Statement on Form S-8 (File No.
Loan and Security Agreement between PMC Financial Services Group, LLC and Reed’s, Inc. dated November 8, 2011 (Incorporated
by reference to Exhibit 10.15 to Reed’s, Inc.’s Form 10Q as filed November 14, 2011)
Code of Ethics (Incorporated by reference to Exhibit 14.1 to Reed’s, Inc.’s Registration Statement on Form SB-2 (File No. 333-
157359 ))
Subsidiaries of Reed’s, Inc., filed herewith.
Consent of Weinberg & Co., P.A., filed herewith.
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 .
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Indicates a management contract or compensatory plan or arrangement.
In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.
Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement
or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
31
REED’S, INC.
SUBSIDIARIES
NONE
EXHIBIT 21
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
EXHIBIT 23.1
To the Board of Directors of
Reeds, Inc.
We hereby consent to the incorporation by reference in the previously filed Registration Statement of Reed’s, Inc. on Form S-8 (SEC File
Number 333-178623) which was filed with the Securities and Exchange Commission on December 20, 2011, of our report dated March 25,
2014, relating to the financial statements of Reeds, Inc, appearing in the annual report on Form 10-K of Reeds, Inc, for the years ended
December 31, 2013 and 2012.
/s/ Weinberg & Company, P.A.
WEINBERG & COMPANY, P.A.
Los Angeles, California
March 25, 2014
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Christopher J. Reed, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Reed’s Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principals;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 25, 2014
/s/ Christopher J. Reed
Christopher J. Reed
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, David J. Williams, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Reed’s Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principals;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: March 25, 2014
/s/ David J. Williams
David J. Williams
Interim Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K of Reed’s, Inc., a Delaware corporation (the “Company”) for the year ended December 31,
2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Christopher J. Reed, Chief Executive Officer of
the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of
his knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 25, 2014
REED’S, INC.
By: /s/ Christopher J. Reed
Christopher J. Reed
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
In connection with the Annual Report on Form 10-K of Reed’s, Inc., a Delaware corporation (the “Company”) for the year ended December 31,
2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), James Linesch, Chief Financial Officer of the
Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of his
knowledge and belief, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of
the Company.
Date: March 25, 2014
REED’S, INC.
By: /s/ David J. Williams
David J. Williams
Interim Chief Financial Officer
(Principal Financial Officer)