Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 8-K (Current Report)
Date of Report: December 31, 2018 (Signed January 3, 2019)
Event: Disposition of assets and entry into a material definitive agreement involving the sale of the company's beverage manufacturing equipment and private label beverage business.
Key Financial Metrics and Transaction Details
- Asset Sale Proceeds: $1.25 million purchase price for beverage manufacturing equipment and private label business.
- Buyer Financing: The buyer, California Custom Beverage, LLC (owned by founder Chris Reed), secured $1.05 million in debt financing from PMC Financial Services, LLC.
- Related Party Share Transaction: A group of current shareholders (including Chairman John Bello and institutional investors) purchased 350,000 shares from Chris Reed at $2.00 per share ($700,000 total) in a private transaction.
- Future Revenue Streams:
- 5% royalty on private label sales to existing customers for 3 years.
- 5% referral fee on private label sales to referred customers for 3 years.
- Co-packing contract for glass bottle production at prevailing West Coast market rates for 3 years.
- Liability Relief: Full release from building lease obligations for the LA plant (contingent on documentation completion).
Material Changes Versus Prior Period
This filing reports a significant structural change to the company's operations rather than a standard period-over-period financial comparison. The company has divested its beverage manufacturing equipment and private label beverage business, transitioning from an owner-operator model for these assets to a royalty and co-packing arrangement. The filing does not provide comparative revenue, profit, or cash flow data for the prior period.
Outlook, Risks, and Management Commentary
- Transaction Approval: The related party transaction was reviewed and approved by the company's audit committee following an extensive sales process led by Gordon Brothers.
- Valuation Methodology: The share purchase price was based on the higher of $2.00 per share or a 10% discount to the 5-day VWAP ending December 28, 2018.
- Regulatory Obligations: Reed's agreed to file a resale registration statement for the restricted shares purchased by the shareholder group within 20 days.
- Risks and Contingencies:
- The release from the LA plant lease is contingent upon the completion of specific documentation between Chris Reed and the landlord.
- Equipment was sold on an "as-is, where is" basis.
- Transitional Support: Reed's will provide transitional services to the purchaser for 30 days.
Investor Verification Checklist
- Verify the completion of the lease release documentation for the LA plant to confirm the liability relief.
- Review the upcoming Form 10-K for the full text of the asset purchase agreement and co-packing contract terms.
- Confirm the filing of the resale registration statement for the 350,000 shares sold to the shareholder group.
- Assess the impact of the divestiture on future revenue streams, specifically the 5% royalty and referral fees.
- Monitor the relationship with the new entity, California Custom Beverage, LLC, given the ownership by founder Chris Reed.