Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 8-K (Current Report)
Date of Report: October 11, 2019 (Event Date); October 15, 2019 (Signature Date)
Context: The filing announces the entry into a strategic partnership with Full Sail Brewing Company (B C Marketing Concepts Inc.) to develop, market, and distribute ready-to-drink Reed's Craft Ginger Mules.
Key Financial Metrics and Agreement Terms
This filing details a Material Definitive Agreement rather than periodic financial results. Key financial terms of the agreement include:
- Agreement Term: Five-year initial term with automatic renewal for up to three additional two-year terms.
- Royalty Structure (Net Sales Revenue):
- First 500,000 cases/year: Greater of 8% of net sales or $1.76 per case.
- Excess over 500,000 cases/year: Greater of 6% of net sales or $1.32 per case.
- Costco San Diego (First 12 months): 12% of net sales revenue.
- Minimum Royalty Obligations:
- Effective Date through Dec 31, 2020: $250,000
- Jan 1, 2021 through Mar 30, 2022: $800,000
- Apr 1, 2022 through Mar 30, 2023: $1,200,000
- Subsequent years: 5% increase over the prior year's minimum.
- Cost Allocation: Full Sail bears all product development costs, except for Reed's personnel and contractor expenses.
Note: The filing does not provide current revenue, profit, cash flow, debt, or liquidity metrics for REED's, INC.
Material Changes and Strategic Developments
The primary material change is the execution of two agreements effective October 11, 2019:
- Manufacturing and Distribution Agreement: Grants Full Sail an exclusive license to the Reed's Ginger Beer brand for co-developed products in the U.S. and Canada. Includes post-termination co-packing rights for Full Sail (up to 24 months) and inventory reimbursement obligations for Reed's (up to 60 days of supplies) if termination occurs without breach.
- Recipe Development Agreement: Establishes a joint Development Committee to create ready-to-drink mule and hard ginger seltzer recipes. Reed's retains ownership of the final products.
Guidance, Outlook, and Risks
Management Commentary: The company views this partnership as advantageous for expanding its product line into the ready-to-drink market. Full Sail has the discretion to make up any minimum royalty shortage in the first two years via lump sum cash payments.
Risks and Contingencies:
- Termination Rights: Reed's may terminate the agreement if Full Sail fails to meet minimum royalty requirements in the first two years or any subsequent year.
- Forward-Looking Statements: The filing contains projections regarding the advantages of the agreement. Actual results may differ due to market risks and uncertainties.
- Regulatory Status: Information under Item 7.01 is furnished, not filed, and is not subject to Section 18 liabilities of the Exchange Act.
Investor Verification Checklist
- Verify the full text of the Manufacturing and Distribution Agreement and Recipe Development Agreement when filed in the Form 10-Q for the period ending September 30, 2019.
- Monitor Full Sail's ability to meet the escalating minimum royalty thresholds ($250k, $800k, $1.2M) to avoid potential termination.
- Assess the impact of the 12% royalty rate for Costco San Diego sales during the first 12 months on overall margin expectations.
- Review the press release (Exhibit 99.1) for additional marketing and distribution strategy details.