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, 2014
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, 2014 was $51,620,000.
13,068,058 common shares, $.001 par value, were outstanding on March 20, 2015.
TABLE OF CONTENTS
PART I
Item 1. Business
Item 2.
Item 3.
Item 4. Mine Safety Disclosures.
Properties
Legal Proceedings
Selected Financial Data
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Financial Statements
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. 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.
● 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,
● Our ability to make suitable arrangements for the co-packing of any of our products, and
● Our ability to find alternative copacking and production facilities for our Kombucha and Private Label products if our Los Angeles
production facility is damaged by a disaster.
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.
We also have a private label business.
We sell our products throughout the US and in select international markets. We started in specialty gourmet and natural food stores and have
moved more into mainstream over time. We estimate that our products are in approximately 40,000 accounts in the US with approximately
12,000 of those being mainstream, supermarkets. We sell our products through a network of natural, gourmet and beer distributors and direct to
certain large national retailers.
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 15,000 supermarkets that carry our products in natural and
mainstream and capture more of the 35,000 supermarkets nationwide
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.
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.reedsinc.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, and
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in 2014 we developed our first television commercial that aired nationally on cable television networks
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.reedsinc.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. In 2014, we launched Culture Club Coffee Kombucha.
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 31 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 highly prized for their taste and their tonic, health-giving properties. Reed’s
Ginger Brews are a revival of this lost art of home brewing sodas. We make them with care and attention to wholesomeness and quality, using
the finest fresh herbs, roots, spices, and fruits.
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:
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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 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 craft 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
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, spring water
and a combination of ginger, organic juices and flavors Initially, we produced four flavors, Goji Ginger, Hibiscus Ginger Grapefruit, Lemon
Ginger Raspberry and Cranberry Ginger. We introduced four additional flavors in 2013, Pomegranate Ginger, Coconut Water Lime, Cabernet
Grape, and Passion Mango Ginger. In 2014, we added the first Coffee Kombucha.
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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.
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. Our Los Angeles facility is certified as SQF level
2 compliant.
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 Candy and
Reed’s Ginger Ice Cream 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.
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, Boylan and Jones Soda, to name a few. These brands have the advantage of being seen widely in the national market
and being commonly known for years through well-funded ad campaigns. 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.
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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.
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.
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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 all natural innovative beverage recipes,
packaging, 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.
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: Reed’s Original Ginger Brew All-Natural Jamaican Style Ginger Ale ®, Virgil’s ®, 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.
9
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 taxes 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, tax 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 32 full-time employees on our corporate staff, as follows: 2 in general management, 20 in sales and marketing support, and 10 in
accounting, administration and operations. We also have 50 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.
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 2017, 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.
10
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, 2013
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ending December 31, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$
$
Sales Price
High
Low
6.50
5.40
6.65
8.12
Sales Price
High
Low
8.57 $
5.71
6.47
7.53
3.85
3.80
4.65
5.05
5.69
4.29
5.00
5.63
As of December 31, 2014, there were approximately 157 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 13,068,058 outstanding shares of common stock.
Unregistered Sales of Equity Securities
During the fiscal year ended December 31, 2014, we issued the following equity securities that were unregistered under the Securities Act:
● We issued 2,808 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 $13,000 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 2014 and 2013, we
paid dividends on our Series A preferred stock in an aggregate of 1,057 and 1,064 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
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.
12
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, 2014, with respect to equity securities authorized for issuance under compensation
plans:
Plan Category
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)
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
TOTAL
705,333 $
301,963 $
1,007,296 $
3.96
4.49
4.16
189,834
-
189,834
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, 2014 and 2013, 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,
$
2014
48,061,000
4,639,000
43,422,000
28,141,000
2013
42,242,000
4,961,000
37,281,000
23,691,000
58 %
65 %
56 %
64 %
2,275,000
2,796,000
13,006,000
5 %
$
30 %
7 %
10,794,000
29 %
$
$
Pct.
Change
14 %
-7 %
16 %
18 %
-19 %
20 %
(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 Generally Accepted Accounting Principles “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.
14
(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, 2014 Compared to Year ended December 31, 2013
Gross Sales
Gross sales of $48,061,000 for the year ended December 31, 2014 represented an increase of 14% from $42,242,000 in the prior year due to
strong same store sales and new accounts. Sales growth was driven primarily by increased sales of our branded products of approximately
$5,161,000, or 18%. Kombucha sales began in the 2012 third quarter and have increased to become approximately 12% of our total net
revenues.
Promotional and other allowances
Promotions and allowances decreased 6% to $4,639,000 (9% of gross sales) for the year ended December 31, 2014 from $4,961,000 (12% of
gross sales) in the prior year. This decrease is primarily attributable to a decline in the promotional programs and discounts offered on our
branded products.
Net Sales
Sales of $43,422,000 for the year ended December 31, 2014 represented an increase $6,141,000, or 16%, from $37,281,000 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 $30,416,000 in the year ended December 31, 2014, an increase of approximately $3,929,000 or 15% from
2013. The increase was primarily due to net revenue increases of 16%, an increase in copacking fees per case which was not passed on to our
customers and temporary commodities price increases in the third and fourth quarters.
Gross Profit
Our gross profit of $13,006,000 in the year ended December 31, 2014 represents an increase of $2,212,000, or 20% from 2013. As a percentage
of sales, our gross profit increased to 30% in 2014 as compared to 29% in 2013. The gross profit percentage increase is also impacted by a
decrease in promotional discount costs. Since such costs are a deduction from sales, the gross margin percentage is positively impacted by
decreased promotional costs.
15
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 to $4,478,000 in the year ended December 31, 2014 compared to $3,977,000 in 2013. The
$501,000 (13%) increase is less than the 14% gross sales increase primarily due to decreased warehouse costs as inventory levels declined for
most of the year .
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 $4,838,000 (or 11.1% of net sales) in the year ended December 31, 2014 from
$4,180,000 (or 11.2% of net sales) in 2013. The $658,000 increase is primarily due to increased advertising costs of $696,000 including
$431,000 for a national cable television advertising campaign in the summer and $289,000 in additional magazine advertising. Our sales staff
increased to 19 members at December 31, 2014, from 18 at December 31, 2013.
General and Administrative Expenses
General and administrative expenses include executive, administrative, and finance personnel costs as well as professional fees. General and
administrative expenses increased $143,000 to $3,649,000 (or 8.4% of net sales) during the year ended December 31, 2014 from $3,506,000 (or
9.4% of net sales) in 2013. This decrease in the spending rate is attributable to increased efficiencies due to scale. Salaries and wages decreased
by $27,000, bank audit fees declined $102,000 while professional, legal and public relations consulting costs increased by $157,000.
Income (Loss) from Operations
Income from operations was $41,000 in the year ended December 31, 2014, as compared to a loss from operations of $869,000 in 2013. The
decrease in the operating loss is due to increased net sales, decreased promotional spending, improved production resulting in decreased Idle
Capacity Costs and decreases in Freight Costs, Selling and Marketing Costs and General and Administrative costs as a percentage of net sales.
Interest Expense
Interest expense increased to $793,000 in the year ended December 31, 2014, compared to interest expense of $651,000 in the same period of
2013. The company paid $40,000 in loan fees while negotiating new loan options and incurred additional interest for new leases and loan
balances. However the new PMC loans have substantially lower interest rates (9% vs. 13% effective rate). The new leases and loans were
obtained in order to obtain new machinery and equipment to improve plant operations.
Modified EBITDA
The Company defines modified EBITDA (a non-GAAP measurement) as net income (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.
MODIFIED EBITDA SCHEDULE
Net loss
Modified EBITDA adjustments:
Depreciation and amortization
Interest expense
Stock option and warrant compensation
Stock compensation for services
Taxes
Total EBITDA adjustments
Year ended December 31,
2014
2013
(unaudited) (unaudited)
(1,520,000 )
$
(754,000 ) $
755,000
793,000
396,000
13,000
2,000
1,959,000
550,000
651,000
327,000
5,000
-
1,533,000
Modified EBITDA income from operations
$
1,205,000 $
13,000
16
Liquidity and Capital Resources
As of December 31, 2014, we had stockholders equity of $3,652,000 and working capital of $2,207,000, compared to stockholders equity of
$3,387,000 and working capital of $1,347,000 at December 31, 2013. The increase in our working capital of $860,000 was primarily a result of
cash flow from operations.
Our decrease in cash and cash equivalents to $959,000 at December 31, 2014 compared to $1,163,000 at December 31, 2013, a decrease of
$145,000, was primarily a result of cash generated by operating activities of $1,016,000, costs of plant improvements of $330,000, and net
financing activities of $831,000 primarily due to increased borrowing for plant expansion less pay downs on the revolving line of credit.
Effective December 5, 2014, the Company renewed and extended its Loan and Security Agreement with PMC Financial Services Group, LLC,
(PMC) originally dated November 9, 2011 (as amended, the “Amended Agreement”). The Amended Agreement extends and amends the
Revolving Loan and Term Loan and adds a new Capital Expansion Loan (the “Capex Loan”).
The loans have been extended to December 5, 2016 and are subject to a 1% prepayment penalty for prepayment prior to the first anniversary of
the effective date. As of the effective date of the Amended Agreement, all three loans have an effective interest rate of 9%.
The Revolving Loan’s maximum revolver amount has been increased to $6,000,000 and the borrowing is based on 85% of Accounts Receivable
and 60% of eligible inventory and is secured by substantially all of the Company’s assets. The interest rate on the Revolving Loan is the prime
rate plus .35%. The previous interest rate was the prime rate plus 3.75%. The amended monthly management fee is .45% of the average monthly
loan balance; the previous fee was .5% of the average monthly loan balance. Therefore, the effective interest rate was lowered from 13% to 9%.
The over advance of $500,000 on the revolving line of credit calculation was removed. As of December 31, 2014, the total Revolving Loan
outstanding balance was $3,009,000 and the borrowing availability was $1,042,000.
The Term Loan’s outstanding principal balance was increased to $1,500,000 and the annual interest rate has been revised to prime plus 5.75%
(currently 9%). The outstanding principal loan balance at the time of the amendment was $496,572 and the previous interest rate was the prime
rate plus 11.6% but not less than 14.85%. The monthly Term Loan payments will be interest only payments over the 2 year life of the loan.
The new Capex Loan will finance up to $3,000,000 in new asset purchases for modernization and improvement of the beverage bottling
equipment in Los Angeles plant. The Company will pay a 1.5% fee on new asset purchases and the annual interest rate is equal to the prime rate
plus 5.75%. At December 31, 2014, the Capex loan balance was $672,000.
The new loan and security agreement documents were signed December 10, 2014.
The revolving line of credit agreement included 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 2014; 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. On December 5,
2014, the Company and PMC executed an amendment to the loan that removed substantially all loan covenants.
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.
17
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.
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.
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, 2014 and 2013, 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, 2014 and 2013, 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.
18
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.
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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue
from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S.
GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize
revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about
the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and
changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods
beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a
cumulative-effect adjustment as of the date of adoption. Management is currently assessing the impact the adoption of ASU 2014-09 and has not
determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going
Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt
about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial
statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events,
considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date
that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).
Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the
financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an
entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable
that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or
available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted. The Company is currently evaluating the impact the adoption of ASU 2014-15 on the
Company’s financial statement presentation and disclosures.
In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) - Income Statement - Extraordinary and
Unusual Items. ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be required to
segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income statement, net of
tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an extraordinary item.
However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and occur infrequently.
ASU 2015-01 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected to have a material effect
on the Company’s consolidated financial statements. Early adoption is permitted.
In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the
Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to evaluate
whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures
(collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is effective for
periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the Company’s
consolidated financial statements. Early adoption is permitted.
Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities
Exchange Commission (the “SEC”), however such pronouncements are not believed by management to have a material impact on the
Company’s present or future 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, 2014 and December 31, 2013
Statements of Operations for the years ended December 31, 2014 and 2013
Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014 and 2013
Statements of Cash Flows for the years ended December 31, 2014 and 2013
Notes to Financial Statements for the years ended December 31, 2014 and 2013
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, 2014 and 2013, 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, 2014 and 2013, 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 26, 2015
F- 1
REED’S, INC.
BALANCE SHEETS
December 31, 2014 December 31, 2013
ASSETS
Current assets:
Cash
Inventory
Trade accounts receivable, net of allowance for doubtful accounts and returns and
discounts of $253,000 and $324,000, respectively
Prepaid inventory
Prepaid and other current assets
Total Current Assets
Property and equipment, net of accumulated depreciation of $3,405,000 and $2,796,000,
respectively
Brand names
Deferred financing fees, net of amortization of $107,000 and $40,000, respectively
$
959,000 $
6,306,000
2,500,000
1,287,000
447,000
11,499,000
4,572,000
1,029,000
-
Total assets
$
17,100,000 $
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable
Accrued expenses
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 $1,031,000 and
$526,000, respectively
Capital leases payable, less current portion
Capital Expansion Loan
Term loan, less current portion
Total Liabilities
Commitments and contingencies
Stockholders’ equity:
$
5,894,000 $
130,000
3,009,000
134,000
125,000
-
9,292,000
1,508,000
476,000
672,000
1,500,000
13,448,000
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
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411
and 9,411 shares issued and outstanding, respectively
Common stock, $.0001 par value, 19,500,000 shares authorized, 13,068,058 and
12,922,832 shares issued and outstanding, respectively
Additional paid in capital
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
94,000
94,000
1,000
26,300,000
(22,743,000 )
3,652,000
17,100,000 $
1,000
25,276,000
(21,984,000 )
3,387,000
14,749,000
The accompanying notes are an integral part of these financial statements
F- 2
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
Loss before provision for income taxes
Income taxes
Net loss
Preferred stock dividend
REED’S, INC.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2014 and 2013
2014
2013
$
43,422,000 $
30,416,000
13,006,000
4,478,000
4,838,000
3,649,000
12,965,000
41,000
(793,000 )
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 )
(752,000 )
(1,520,000 )
(2,000 )
0
(754,000 )
(1,520,000 )
(5,000 )
(5,000 )
(759,000 ) $
(1,525,000 )
(0.06 ) $
13,043,927
(0.12 )
12,541,074
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
$
$
The accompanying notes are an integral part of these financial statements
F- 3
REED’S, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2014 and 2013
Balance, January 1, 2013
12,084,673 $ 1,000 10,411 $ 104,000 45,602 $ 456,000 $ 23,996,000 $ (20,459,000 ) $ 4,098,000
Common Stock
Shares
Additional
Paid-In
Amount Shares Amount Shares Amount Capital
Series A
Preferred Stock
Series B
Preferred Stock
Total
Stockholders’
Accumulated
Deficit
Equity
1,250
-
-
-
-
-
5,000
-
5,000
4,000
- (1,000 ) (10,000 )
-
-
10,000
- (45,602 ) (456,000 )
-
-
-
-
-
-
456,000
30,000
373,000
-
-
-
-
-
-
30,000
373,000
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 preferred stock dividend
Common stock paid for Series A and
Series B dividend
Net Loss
Balance, December 31, 2013
319,214
276,106
188,635
-
1,064
47,890
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
12,922,832 1,000 9,411 94,000
Fair Value of common stock issued
for services
Exercise of stock options
Fair value of warrants granted as
valuation discount
Fair value vesting of options issued to
employees
Series A preferred stock dividend
2,807
141,362
-
1,057
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Net Loss
Balance, December 31, 2014
-
-
13,068,058 $ 1,000 9,411 $ 94,000
-
-
-
-
-
-
-
-
-
-
-
-
- $
-
-
327,000
5,000
-
(5,000 )
327,000
-
-
74,000
-
(1,520,000 )
- 25,276,000 (21,984,000 )
74,000
(1,520,000 )
3,387,000
-
-
13,000
26,000
-
584,000
-
-
-
13,000
26,000
584,000
-
-
396,000
5,000
-
(5,000 )
396,000
-
-
(754,000 )
- $ 26,300,000 $ (22,743,000 ) $ 3,652,000
(754,000 )
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, 2014 and 2013
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities:
2014
2013
$
(754,000 ) $
(1,520,000 )
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 inventory
Prepaid expenses and other current assets
Accounts payable
Accrued expenses
Net cash 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
Principal repayments on note term loan
Borrowing on term loan
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) 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 stock dividend $
$
Series B preferred stock dividend payable in common stock
$
Property and equipment acquired through capital lease obligation
$
Fair value of warrants granted as valuation discount
$
Property and Equipment acquired through Capital Expansion loan
755,000
396,000
13,000
71,000
(428,000 )
(13,000 )
(1,031,000 )
(269,000 )
2,282,000
(6,000 )
1,016,000
(330,000 )
(330,000 )
26,000
(7,000 )
(150,000 )
1,003,000
(111,000 )
(77,000 )
(1,515,000 )
(831,000 )
(145,000 )
1,104,000
959,000 $
693,000 $
2,000 $
0 $
0 $
0 $
5,000 $
493,000 $
584,000 $
672,000 $
550,000
327,000
5,000
(75,000 )
(107,000 )
(499,000 )
(55,000 )
34,000
244,000
(97,000 )
1,193,000
(602,000 )
(602,000 )
403,000
(61,000 )
(145,000 )
217,000
(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
0
0
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, 2014 AND 2013
(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, 2014 and 2013, the allowance for doubtful accounts and returns and discounts was approximately $253,000 and $324,000,
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
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, 2014 and 2013, the Company did not
recognize any impairment for its property and equipment.
F- 7
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 perpetual 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, 2014 and 2013, 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, 2014. 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, 2014 and 2013.
During the year ended December 31, 2014, the Company had two customers who accounted for approximately 33% and 14% of its sales,
respectively; and during the year ended December 31, 2013, the Company had two customers who accounted for approximately 33% and
12% of its sales, respectively. No other customer accounted for more than 10% of sales in either year. As of December 31, 2014 the
Company had accounts receivable due from two customers who comprised $630,000 (25%) and $255,000 (10%) of its total accounts
receivable; and as of December 31, 2013 the Company had accounts receivable due from two customers who comprised $584,000 (27%)
and $440,000 (21%), 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, 2014 and 2013, the Company had one vendor which accounted for approximately 27% and 29%,
respectively of purchases. At December 31, 2014 and 2013, the Company had accounts payable due to a vendor who comprised 32% and
21% of its total accounts payable, respectively. No other account was in excess of 10% of the balance of accounts payable as of December
31, 2014 and December 31, 2013.
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 capital lease obligations and long-term financing obligations approximate their fair values due to the fact that the interest
rates on these obligations are 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- 8
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, 2014 and 2013 approximated $4,199,000 and $4,961,000, 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, 2014 and 2013, 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
Options
Total
M)
Advertising Costs
December 31,
2014
2013
301,963
37,644
705,333
1,044,940
101,963
37,644
639,334
778,941
Advertising costs are expensed as incurred and are included in selling expense in the amount of $649,000 and $120,000, for the years ended
December 31, 2014 and 2013, respectively. The company spent $431,000 in 2014 for national cable television advertising.
F- 9
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-Merton 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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09),
Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance
under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require
that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will
require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU
2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to
the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management is currently assessing the
impact the adoption of ASU 2014-09 and has not determined the effect of the standard on our ongoing financial reporting.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going
Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial
doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing
financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or
events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after
the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when
applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the
date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable).
Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the
aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date
that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15,
2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company is currently evaluating the impact
the adoption of ASU 2014-15 on the Company’s financial statement presentation and disclosures.
In January 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-01 (Subtopic 225-20) - Income Statement - Extraordinary
and Unusual Items. ASU 2015-01 eliminates the concept of an extraordinary item from GAAP. As a result, an entity will no longer be
required to segregate extraordinary items from the results of ordinary operations, to separately present an extraordinary item on its income
statement, net of tax, after income from continuing operations or to disclose income taxes and earnings-per-share data applicable to an
extraordinary item. However, ASU 2015-01 will still retain the presentation and disclosure guidance for items that are unusual in nature and
occur infrequently. ASU 2015-01 is effective for periods beginning after December 15, 2015. The adoption of ASU 2015-01 is not expected
to have a material effect on the Company’s consolidated financial statements. Early adoption is permitted.
In February, 2015, the FASB issued Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the
Consolidation Analysis. ASU 2015-02 provides guidance on the consolidation evaluation for reporting organizations that are required to
evaluate whether they should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization
structures (collateralized debt obligations, collateralized loan obligations, and mortgage-backed security transactions). ASU 2015-02 is
effective for periods beginning after December 15, 2015. The adoption of ASU 2015-02 is not expected to have a material effect on the
Company’s consolidated financial statements. Early adoption is permitted.
Other recent accounting pronouncements were issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the
Securities Exchange Commission (the “SEC”), however such pronouncements are not believed by management to have a material impact on
the Company’s present or future financial statements.
F- 10
(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
(3)
Property and Equipment
Property and equipment is comprised of the following as of:
Land
Building
Vehicles
Machinery and equipment
Equipment under capital leases
Office equipment
Accumulated depreciation
December 31, 2014 December 31, 2013
3,118,000
$
3,175,000
6,293,000
3,395,000 $
2,911,000
6,306,000 $
$
December 31, 2014 December 31, 2013
1,108,000
$
1,829,000
338,000
2,348,000
415,000
444,000
6,482,000
(2,796,000 )
3,686,000
1,108,000 $
1,868,000
338,000
3,312,000
903,000
448,000
7,977,000
(3,405,000 )
4,572,000 $
$
Depreciation expense for the years ended December 31, 2014 and 2013 was $609,000 and $445,000, respectively.
Accumulated depreciation on equipment held under capital leases was $326,000 and $231,000 as of December 31, 2014 and 2013,
respectively. (See note 8).
(4)
Intangible Assets
Brand Names
Brand names consist of the following three trademarks for natural beverage as of December 31, 2014 and 2013:
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 tested for
impairment annually. For the years ended December 31, 2014 and 2013, 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 related to financing
Accumulated amortization
December 31, 2014 December 31, 2013
100,000
$
(40,000 )
60,000
107,000 $
(107,000 )
- $
$
Amortization expense for the years ended December 31, 2014 and 2013 was approximately $67,000 and $55,000 respectively.
F- 11
(5)
Line of Credit
On November 9, 2011, the Company entered into a Loan and Security Agreement with PMC Financial Services Group, LLC (PMC), which
was amended and extended for 2 years on December 5, 2014, provides a $6,000,000 revolving line of credit. The Amended Agreement
extends and amends the Revolving Loan and Term Loan (see Note 7) and adds a new Capital Expansion Loan (the “Capex Loan”) (see Note
9). At December 31, 2014 and December 31, 2013, the aggregate amount outstanding under the line of credit was $3,009,000 and
$4,524,000 respectively.
The loans mature on December 5, 2016 and are subject to a 1% prepayment penalty for prepayment prior to the first anniversary of the
effective date. As of the effective date of the Amended Agreement, all three loans have an effective interest rate of 9%.
The revolving line of credit agreement included 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 2014; 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. On December 5, 2014, the Company and PMC executed an amendment to the loan that removed substantially all loan
covenants.
The revolving line of credit is based on 85% of accounts receivable and 60% of eligible inventory and is secured by substantially all of the
Company’s assets. The interest rate on the Revolving Loan is the prime rate plus .35% (9% at December 31, 2014). The amended monthly
management fee is .45% of the average monthly loan balance. As of December 31, 2014, the Company had borrowing availability of
$1,042,000 under the line of credit agreement.
F- 12
(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,
2014
2013
$
$
2,673,000 $
(1,031,000 )
1,642,000
(134,000 )
1,508,000 $
2,784,000
(526,000 )
2,258,000
(111,000 )
2,147,000
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 was 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 Merton
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, 2014 and 2013.
Effective October 1, 2014, the Company executed Amendment #1 to the Long-term Financing Obligation. In exchange for a release from
the $150,000 personal guarantee by the principal shareholder and Chief Executive Office, and a release of the brewery equipment which was
collateral for the lease agreement, the Company issued 200,000 warrants to purchase its common stock for $5.60 per share for five years.
The 200,000 warrants were valued at $584,000 using the Black Scholes Merton option pricing model. The following assumptions were
made in valuing the 200,000 warrants; term of 5 years, volatility of 59.53%, expected dividends 0% and discount rate of 1.25%. The
warrants value of $584,000 will be amortized over the remaining term of the purchase option.
The aggregate amount due under the financing obligation at December 31, 2014 and 2013 was $2,673,000 and $2,784,000, respectively.
Aggregate future obligations under the financing obligation are as follows:
Year
2015
2016
2017
2018
2019
Thereafter
Total
(7)
Term Loan
$
$
134,000
160,000
190,000
222,000
259,000
1,708,000
2,673,000
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 was $750,000 and the interest rate was prime plus 11.6%, not to be below 14.85% (14.85% at December 31, 2013),
and was secured by all of the unencumbered assets of the Company.
Effective December 5, 2014 the Term Loan’s outstanding principal balance was increased to $1,500,000 and the annual interest rate was
revised to prime plus 5.75% (currently 9%). The outstanding principal loan balance at the time of the amendment was $496,572. Monthly
term loan payments are interest only until the December 16, 2016 maturity date when the principal balance is due.
Term loan
Less current portion
Long term debt
December 31,
2014
2013
$
$
1,500,000 $
-
1,500,000 $
647,000
(165,000 )
482,000
F- 13
Aggregate future obligations under the term loan are as follows:
Total
(8)
Obligations Under Capital Leases
Year
2015
2016
$
$
-
1,500,000
1,500,000
The Company leases equipment for its brewery operations with an aggregate value of $903,000 under 9 non-cancelable capital leases. Most
of the leases are personally guaranteed by the Company’s chief executive officer. Monthly payments range from $189 to $10,441 per month,
including interest, at interest rates ranging from 6.51% to 17.31% per annum. At December 31, 2014, monthly payments under these leases
aggregated $16,000. The leases expire at various dates through 2019.
Future minimum lease payments under capital leases are as follows:
Years Ending December 31,
2015
2016
2017
2018
2019
Total payments
Less: Amount representing interest
Present value of net minimum lease payments
Less: Current portion
Non-current portion
(9)
Capital Expansion (“CAPEX”) Loan
179,000
164,000
149,000
166,000
104,000
762,000
(161,000 )
601,000
(125,000 )
476,000
$
In connection with the loan and security agreement with PMC, the Company entered into a CAPEX loan in the aggregate outstanding
amount not to exceed $3,000,000. The CAPEX loan will finance new asset purchases for modernization and improvement of the beverage
bottling equipment in the Los Angeles plant. Interest only on the CAPEX loan shall be paid from time to time until the end of each fiscal
quarter, at which time the principal amounts of each outstanding CAPEX loan will be aggregated and repaid in 48 equal monthly
installments of principal plus accrued but unpaid interest. The interest rate on the CAPEX loan is the prime rate plus 5.75% (9% at
December 31, 2014). At December 31, 2014, balance on the CAPEX loan balance was $672,000 and as of December 31, 2014, the
Company had future borrowing availability of $2,328,000.
2014
2013
$
672,000 $
-
(10)
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, 2014 and 2013, there were 9,411 and 9,411 shares outstanding, respectively, with a liquidation preference of $10.00 per share. Each
share of Series A Preferred stock can be converted into four shares of Reed’s common stock.
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, 2014 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 1,057 shares of its common stock. During the year ended December 31, 2013 the Company paid a $5,000 dividend payable to the
preferred shareholders through the issuance of 1,064 shares of its common stock.
F- 14
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.
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.
Common Stock
Common stock consists of $.0001 par value, 19,500,000 shares authorized, 13,268,058 shares issued and 13,068,058 outstanding as of
December 31, 2014 and 12,922,832 shares issued and outstanding as of December 31, 2013.
During the year ended December 31, 2014, the Company issued 2,807 shares of common stock for consulting services valued at an
aggregate value of $13,000 for services rendered. 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.
(11)
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, 2014 and 2013, the Company granted 477,500 and 414,000 options, respectively, to purchase the
Company’s common stock at a weighted exercise price of $4.73 and $3.99, respectively, to employees under the Plans. The aggregate value
of the options vesting, net of forfeitures, during the years ended December 31, 2014 and 2013 was $396,000 and $327,000, respectively, and
has been reflected as compensation cost. As of December 31, 2014, the aggregate value of unvested options was $798,000, which will be
amortized as compensation cost as the options vest, over 2 to 4 years.
On June 5, 2014, the Company repriced 323,000 employee options to an exercise price of $4.60 per share, which were previously $4.74-
$6.70 per share. The total increase in stock compensation expense, as a result of the repricing was approximately $4,000.
F- 15
There were 216,134 stock options exercised in the year ended December 31, 2014 at exercise prices between $1.14 and $5.70 per share. The
Company received $25,700 for 10,000 of such exercises and allowed cash-less exercise of 206,134 of such options, issuing 131,362 shares
of common stock for a total of 141,362 shares issued relative to stock options during the year ended December 31, 2014.
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.
The weighted-average grant date fair value of options granted during 2014 and 2013 was $2.03 and $1.97, respectively. The fair value of
each option award is estimated on the date of grant using the Black-Scholes-Merton 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,
2014
2013
59 - 66 %
—
3.5 - 4.5
0.7 %
0 %
71 %
—
3.0
0.8 %
0 %
A summary of option activity as of December 31, 2014 and changes during the two years then ended is presented below:
Outstanding at January 1, 2013
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2014
Exercisable at December 31, 2014
Weighted-
Average
Exercise Price
Shares
607,000 $
414,000 $
(348,332 ) $
(33,334 ) $
639,334 $
477,500 $
(216,134 ) $
(195,367 ) $
705,333 $
204,757 $
1.27
3.99
1.14
3.71
3.18
4.73
2.26
4.33
3.96
3.68
Weighted-
Average
Remaining
Contractual
Terms
(Years)
Aggregate
Intrinsic
Value
3.6 $
3.5 $
1,362,000
720,000
As of December 31, 2014, the aggregate intrinsic values of $1,362,000 and $720,000 were calculated as the difference between the market
price and the exercise price of the Company’s stock, which was $5.91 as of December 31, 2014.
A summary of the status of the Company’s nonvested shares granted under the Company’s stock option plan as of December 31, 2014 and
changes during the year then ended is presented below:
Nonvested at December 31, 2013
Granted
Vested
Forfeited
Nonvested at December 31, 2014
F- 16
Weighted-
Average
Grant Date
Fair Value
1.89
4.73
2.56
4.33
4.50
Shares
370,251 $
477,500 $
(166,751 ) $
(180,424 ) $
500,576 $
Additional information regarding options outstanding as of December 31, 2014 is as follows:
Options Outstanding at December 31, 2014
Weighted Average
Remaining
Contractual Life
(years)
Weighted
Average
Exercise
Price
Number of
Shares
Outstanding
Options Exercisable at
December 31, 2014
Number of
Shares
Exercisable
Weighted
Average
Exercise Price
107,333
478,000
120,000
705,333
1.9 $
3.7 $
4.6 $
1.27
4.28
5.13
102,334 $
99,090 $
3,333
204,757
1.47
3.52
5.70
Range of Exercise
Price
$0.01 - $1.99
$2.00 - $4.99
$5.00 - $6.99
B)
Warrants
Effective October 1, 2014, the Company executed Amendment #1 to the Long-term Financing Obligation (see Note 6). In exchange for a
release from the $150,000 personal guarantee by the principal shareholder and Chief Executive Office, and a release of the brewery
equipment which was collateral for the lease agreement, the Company issued 200,000 warrants to purchase its common stock for $5.60 per
share for five years. The 200,000 warrants were valued at $584,000 using the Black Scholes Merton option pricing model. The following
assumptions were made in valuing the 200,000 warrants; term of 5 years, volatility of 59.53%, expected dividends 0% and discount rate of
1.25%. The warrants will be amortized over 5 years.
During the year ended December 31, 2013 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, 2014:
Weighted-
Average
Exercise Price
Shares
Weighted-
Average
Remaining
Contractual
Terms (Years)
Aggregate
Intrinsic
Value
Outstanding at December 31,2012
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2013
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2014
Exercisable at December 31, 2014
317,253 $
-
(215,290 )
-
101,963 $
200,000
-
-
301,963 $
301,963 $
2.30
-
2.45
-
2.30
5.60
-
-
4.49
4.49
3.3 $
3.3 $
430,000
430,000
As of December 31, 2014, the aggregate intrinsic value of $430,000 was calculated as the difference between the market price and the
exercise price of the Company’s stock, which was $5.91 as of December 31, 2014.
The fair value of each warrant is estimated on the date of grant using the Black-Scholes-Merton 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.
The following table summarizes the outstanding warrants to purchase Common Stock at December 31, 2014:
Number
20,803
64,899
16,261
200,000
301,963
$
$
$
$
F- 17
Exercise
Price
2.10
2.25
2.77
5.60
Expiration Dates
February 2015
April 2015
February 2016
September 2019
(12)
Income Taxes
At December 31, 2014 and 2013, 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, 2014 and 2013, 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, 2014 and
2013, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2007 through 2014 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 the appropriate 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, 2014 December 31, 2013
$
$
7,600,000 $
(7,600,000 )
— $
6,400,000
(6,400,000 )
—
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
(13)
Commitments and Contingencies
Lease Commitments
Year Ended
December 31,
2014
2013
(34 )%
(5 )%
(39 )%
39 %
-%
(34 )%
(5 )%
(39 )%
39 %
-%
The Company leases warehouse space under non-cancelable operating leases. Rental expense under these and other operating leases for the
years ended December 31, 2014 and 2013 was $203,000 and $196,000, respectively.
Future payments under these leases as of December 31, 2014 are as follows:
Year ending December 31,
2015
2016
2017
Total
$
$
Amount
155,000
155,000
137,000
447,000
F- 18
Other Commitments
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, 2014 and 2013, 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.
(14)
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.
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.
(15)
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 year ended December 31, 2014, the Company paid commissions of $1,000, and during the year ended
December 31, 2013, the Company paid commissions of $15,000.
(16)
Subsequent Events
On January 16, 2015, the Company granted options to employees to purchase 238,000 shares of the Company’s common stock with an
exercise price of $5.39 per share. The fair value of the options on the date granted was determined to be approximately $658,000 using the
Black-Scholes-Merton option pricing model with the following assumptions: risk-free interest rate of 1.64%; dividend yield of 0%; volatility
of 62.71%; with an expected life of 4.5 years and will be amortized ratably over the vesting period of 4 years.
On March 9, 2015, Mark Beaton was hired as Chief Operating Officer of Reed’s Inc. He will be paid a base annual salary of $175,000 and
was granted 70,000 stock options priced at $6.46. The fair value of the options on the date granted was determined to be approximately
$224,000 using the Black-Scholes-Merton option pricing model with the following assumptions: risk-free interest rate of 1.64%; dividend
yield of 0%; volatility of 60.12%; with an expected life of 4.5 years and will be amortized ratably over the vesting period of 4 years.
F- 19
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, 2014.
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 2014 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, 2014. 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, 2014, 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 2014. The
following table sets forth certain information with respect to our current directors and executive officers:
Name
Position
Christopher J. Reed
Lawrence W. Tomsic
Mark B. Beaton
Judy Holloway Reed
Mark Harris
Daniel S.J. Muffoletto
Michael Fischman
President, Chief Executive Officer and Chairman of the Board
Interim Chief Financial Officer
Chief Operating Officer
Secretary and Director
Director
Director
Director
Business Experience of Directors and Executive Officers
Age
56
62
51
55
59
60
59
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.
Lawrence W. Tomsic is a Certified Public Accountant and has extensive experience as a chief financial officer, controller, and auditor, providing
expertise to public, private and non-profit companies. Mr. Tomsic has worked most recently as a consulting CFO for small companies from May
2012 to May 2014. Mr. Tomsic served as Chief Financial Officer of LiveDeal, Inc. (LIVE) which is a NASDAQ Listed SEC company, a
provider of internet based website development, web hosting and advertising services from November 2009 to May 2012. He worked as a
consulting CFO partner with B2BCFO in 2009, as Controller with Alliance Residential in 2008, and as a consulting CFO from 2006 – 2008.
From 1997 to 2006, he served as Chief Financial Officer for John R. Wood, Inc. a luxury real estate broker. Mr. Tomsic received a BS degree in
Accounting from the University of Delaware in 1975 and an MBA from the University of Denver in 1976.
Mark B. Beaton was hired as Chief Operating Officer March 9, 2015 and brings over 17 years of experience directing high-volume, multi-site
operations for major Fortune 500 CPG companies including Dr. Pepper/Snapple Group, Pepsi Bottling Group and United Parcel Service. Prior to
joining Reed’s, Mark worked as Vice President of Operations at the Dr. Pepper/Snapple Group from June 2007 through September 2014 where
he drove operational efficiencies and was responsible for leading and directing functions that focused on warehouse and distribution operations,
inventory management, environmental health and safety and a corporate real estate portfolio. While at Dr. Pepper, Mark was responsible for
leadership across the packaged beverage network of 160 distribution facilities that delivered 290 million cases and more than $5 billion of annual
sales. He worked as a beverage manufacturing and distribution consultant from October 2014 – February 2015. Additional positions throughout
Mark’s career include the Director of Supply Chain Technology and Warehousing at Cadbury Schweppes Bottling Group where he was
responsible for developing and managing strategies for delivering productivity and process improvement across 166 distribution centers in North
America. Mark also served in Production, Maintenance and Product Availability Manager Roles with the Pepsi Bottling Group. Mark began his
career as a Hub Operations Supervisor at UPS and is a Certified Lean Six Sigma Green Belt who also served in the United States Army.
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 Bachelor’s 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.
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.
24
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 2014 and 2013 received by our principal executive officer, former principal
financial officers and former chief operating officer, who were our “Named Executive Officers”.
Option
Awards
($)(1)
Non- Equity
Incentive
Plan
Compensation
Stock
Awards
Non-
Qualified
Deferred
Compensation
Earnings
Year Salary Bonus
All Other
Compensation
Total
Name and Principal Position
Christopher J. Reed,
Chief Executive Officer
(Principal Executive Officer)
Lawrence W. Tomsic
Chief Financial Officer
(Principal Financial Officer)
David J Williams
former Chief Financial Officer
(Principal Financial Officer) (3)
2014 $ 217,000 $ 30,000 56,400 $
2013 $ 217,000 $ 29,000 46,750 $
2014 $ 105,000 $ 4,000
2014 $ 78,367
$ 10,000
James Linesch,
former Chief Financial Officer
(Principal Financial Officer) (4)
2014
$ 19,432
$
-
2013 $ 175,000 $ 14,000
Thierry Foucaut,
$
former Chief Operating Officer (5) 2013 $ 180,000 $ 14,000 $
2014 $ 21,837 $
-
$
- $
$
$
-
-
-
-
-
-
-
-
-
-
- $
- $
5,000 (2) $ 308,400
5,000 (2) $ 297,750
$ 109,000
$ 88,367
-
$ 19,432
-
$ 189,000
$ 21,837
$ 194,000
-
-
(1)
(2)
(3)
(4)
(5)
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.
Represents value of automobile provided to Christopher J. Reed.
Reed’s and David J. Williams agreed to a mutual separation on May 22, 2014.
James Linesch resigned from his position as Chief Financial Officer effective January 30, 2014.
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 $227,000. Mr. Tomsic is
currently paid an annual salary of $180,000. Mr. Williams, as Interim Chief Financial Officer, was paid consulting fees equivalent to an annual
salary of $180,000. 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. 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, 2014
Number of
Number of Securities
Securities
Underlying
Underlying Unexercised
Unexercised Options
Options (#)
Exercisable Unexercisable
50,000
12,500 (1)
7,500 (2)
100,000 (3)
50,000
25,000
30,000
(#)
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned Options
Option
Exercise
Option
Expiration
Price
1.14
4.00
4.60
4.60
Date
12/22/16
03/03/18
4/9/19
5/26/18
- $
$
- $
- $
Name and Position
Christopher J. Reed, Chief Executive Officer
Lawrence W. Tomsic, Chief Financial Officer
Vesting of Options:
(1)
(2)
(3)
Options vest 25% immediately and 25% per year.
These options vest 33% per year.
These options vest 25% per year.
Director Compensation
The following table summarizes the compensation paid to our directors for the fiscal year ended December 31, 2014
Fees
Earned or
Name
Judy Holloway Reed
Mark Harris
Daniel S.J. Muffoletto
Michael Fischman
$
$
$
$
Paid in
Cash
Stock
Awards
Option
Awards
1,350
-
$
2,700
13,529 (1)
1,500
Non-Equity
Incentive Plan All Other
Compensation Compensation
$
$
$
$
Total
1,350
2,700
13,529
1,500
(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 20, 2015, 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
Lawrence W. Tomsic
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)
2,371,890
2,371,890
509
0
0
0
2,372,399
800,000
18.2
18.2
*
*
*
*
18.2
6.1
(1)
(2)
(3)
(4)
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 20, 2015 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
13,068,058 shares of common stock outstanding as of March 20, 2015.
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 2,371,890 shares of common stock and
options to purchase 62,500 shares of common stock. Does not include options to purchase up to 42,500 shares of common stock, which
vest over three years.
The address for Mr. Harris is 160 Barranca Road, Newbury Park, California 91320.
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, 2014 and 2013, 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.
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, 2014, the Company paid commissions on sales of $15,000, and during the year ended December 31,
2013, 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, 2014 and
2013.
27
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, 2014 and 2013.
Audit Fees
Audit-Related Fees
Tax Fees
All Other Fees
Total
2014
2013
$
$
134,000 $
0
18,000
0
156,000 $
87,000
0
9,000
0
96,000
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 2014 and 2013.
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 2014 and 2013 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 26, 2015
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
Date
/s/ CHRISTOPHER J. REED
Christopher J. Reed
Chief Executive Officer, President and
Chairman of the Board of Directors
(Principal Executive Officer)
/s/ LAWRENCE W. TOMSIC
Lawrence W. Tomsic
Interim Chief Financial Officer
(Principal Financial Officer)
/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
Director
Director
Director
Director
30
March 26, 2015
March 26, 2015
March 26, 2015
March 26, 2015
March 26, 2015
March 26, 2015
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
EXHIBIT INDEX
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 10-K 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 10-Q 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 , filed herewith.
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 , filed herewith.
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.
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
EXHIBIT 21
REED’S, INC.
SUBSIDIARIES
NONE
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Christopher J. Reed, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Reed’s Inc.;
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;
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;
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.
b.
c.
d.
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;
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 principles;
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
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.
b.
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
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 26, 2015
/s/ Christopher J. Reed
Christopher J. Reed
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Lawrence W. Tomsic, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Reed’s Inc.;
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;
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;
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.
b.
c.
d.
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;
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 principles;
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
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.
b.
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
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 26, 2015
/s/ Lawrence W. Tomsic
Lawrence W. Tomsic
Interim Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
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
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,
2014, 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 26, 2015
REED’S, INC.
By: /s/ Christopher J. Reed
Christopher J. Reed
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 32.2
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
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,
2014, 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 26, 2015
REED’S, INC.
By: /s/ Lawrence W. Tomsic
Lawrence W. Tomsic
Interim Chief Financial Officer
(Principal Financial Officer)