NOTES
TO CONDENSED FINANCIAL STATEMENTS
Three
and Nine months Ended September 30, 2019 and 2018 (Unaudited)
(In
thousands, except share and per share amounts)
1.
Basis of Presentation and Liquidity
The
accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”,
or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments,
necessary to present fairly our financial position at September 30, 2019 and the results of operations and cash flows for the
three and nine months ended September 30, 2019 and 2018. The balance sheet as of December 31, 2018 is derived from the Company’s
audited financial statements.
Certain
information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in
these condensed financial statements are adequate to make the information presented herein not misleading. For further information,
refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 1, 2019.
The
results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations
to be expected for the full fiscal year ending December 31, 2019.
Liquidity
The
accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such
assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
For
the nine months ended September 30, 2019, the Company recorded a net loss of $12,289 and used cash in operations of $14,628.
As of September 30, 2019, we had a cash balance of $1,016 with borrowing capacity of $1,019, a stockholders’ deficit
of $2,208 and a working capital of $1,394 compared to a cash balance of $624, stockholders’ deficit of $6,743 and working
capital shortfall of $3,297 at December 31, 2018. On February 20, 2019, the Company conducted a public offering of 7,733,750 shares
of its common stock at $2.10 per share resulting in net proceeds to the Company of $14,867. In October 2019, the Company conducted
a public offering of 13,416,667 shares of its common stock at $0.60 per share resulting in net proceeds to the Company of $7,536.
Historically,
we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible
debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive
action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating
improved vendor contracts and restructuring our selling prices.
2.
Significant Accounting Policies
Revenue
Recognition
The
Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”).
The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount
expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms
of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations
in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance
obligations, and (5) recognizing revenue as each performance obligation is satisfied.
The
Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers
contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities
are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised
service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which
generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time.
All
of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required
post-shipment for customers to derive the expected value from them.
The
Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns
have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance
obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance
for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Loss
per Common 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 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 when their effect is antidilutive.
For
the periods ended September 30, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential
dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Convertible note to a related party
|
|
|
2,266,667
|
|
|
|
2,266,667
|
|
Warrants
|
|
|
6,413,782
|
|
|
|
6,951,173
|
|
Common stock equivalent of Series A Convertible Preferred Stock
|
|
|
37,644
|
|
|
|
37,644
|
|
Unvested restricted common stock
|
|
|
610,609
|
|
|
|
616,017
|
|
Options
|
|
|
4,373,566
|
|
|
|
3,440,904
|
|
Total
|
|
|
13,702,268
|
|
|
|
13,312,405
|
|
The
Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4.
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, 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 long-term tangible and intangible
assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments
issued for services.
Recent
Accounting Pronouncements
In
September 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718); Improvements to Non-Employee
Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 generally aligns the measurement and classification
of share-based awards to non-employees with that of share-based awards to employees. Non-employee equity awards will be measured
at the fair value of the equity instruments to be issued, as of the grant date, and the resulting amount will be recognized as
expense over the expected or contractual term of the award. The ASU applies to all share-based payments to nonemployees in exchange
for goods or services used or consumed in an entity’s own operations. It does not apply to instruments issued to a lender
or investor in a financing transaction, or to instruments granted when selling goods or services to customers. ASU 2018-07 is
effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted
the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The adoption of ASU 2018-07 did not have any impact on
the Company’s financial statement presentation or disclosures.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 amends certain disclosure requirements pertaining to fair
value measurement, and is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s financial position, results
of operations, and cash flows.
Other
recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
Concentrations
Gross
sales. During the three months ended September 30, 2019, the Company’s largest two customers accounted for 15% and 12%
of gross sales, respectively. During the nine months ended September 30, 2019, these customers accounted for 23% and 13% of gross
sales, respectively. During the three months ended September 30, 2018, the two largest customers accounted for 22% and 18% of
gross sales, respectively. During the nine months ended September 30, 2018, the two largest customers accounted for 24% and 13%
of gross sales, respectively.
Accounts
receivable. As of September 30, 2019, the Company had accounts receivable from one customer which comprised 14% of its gross
accounts receivable. As of December 31, 2018, accounts receivable from two customers comprised 36% and 19% of total accounts receivable,
respectively.
Purchases
from vendors. During the three months ended September 30, 2019, the Company’s largest three vendors accounted for approximately
13%, 11% and 10% of all purchases, respectively. During the nine months ended September 30, 2019, two vendors accounted for 12%
and 10% of all purchases, respectively. During the three months ended September 30, 2018, the Company’s largest vendor accounted
for approximately 10% of all purchases. During the nine months ended September 30, 2018, 15% of all purchases were made from this
vendor.
Accounts
payable. As of September 30, 2019, the Company’s largest three vendors accounted for 23%, 18% and 14% of the total accounts
payable, respectively. As of September 30, 2018, a single vendor accounted for 15% of the Company’s total accounts payable.
As of December 31, 2018, one vendor accounted for 24% of total accounts payable.
Fair
Value of Financial Instruments
The
Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on
a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs
used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated
with the inputs:
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
because interest rates on these obligations are based on prevailing market interest rates.
As
of September 30, 2019, and December 31, 2018, the Company’s balance sheets included warrant liabilities aggregating $15
and $38 respectively, measured at fair value based on Level 3 inputs.
3.
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following
(in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Raw Materials and Packaging
|
|
$
|
5,962
|
|
|
$
|
3,053
|
|
Finished Goods
|
|
|
3,613
|
|
|
|
4,327
|
|
Total
|
|
$
|
9,575
|
|
|
$
|
7,380
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at September 30, 2019 and December
31, 2018 was $522 and $197, respectively.
4.
Property and Equipment
Property
and equipment is comprised of the following (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Right-of-use assets under operating leases
|
|
$
|
730
|
|
|
$
|
730
|
|
Right-of-use assets under finance leases
|
|
|
179
|
|
|
|
204
|
|
Computer hardware and software
|
|
|
582
|
|
|
|
304
|
|
Total cost
|
|
|
1,491
|
|
|
|
1,238
|
|
Accumulated depreciation and amortization
|
|
|
(438
|
)
|
|
|
(342
|
)
|
Net book value
|
|
$
|
1,053
|
|
|
$
|
896
|
|
Depreciation
expense for the three months ended September 30, 2019 and 2018 was $8 and $155 respectively. Depreciation expense for the
nine months then ended was $12 and $492, respectively.
5.
Intangible Assets
Intangible
assets are comprised of brand names acquired, specifically Virgil’s. They have been assigned an indefinite life, as we currently
anticipate that they 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 remains appropriate.
We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If further testing
is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds
its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized
in an amount equal to that excess. Based on management’s measurement, there were no indications of impairment at September
30, 2019.
6.
Receivable from a Related Party
As
of December 31, 2018, the Company had outstanding receivable from California Custom Beverage (CCB), an entity owned by Christopher
J. Reed, founder, chief innovation officer and board member of Reed’s. The receivable consisted of certain costs such as
sales tax and prepayments arising from the sale of the Los Angeles plant on December 31, 2018 to CCB. Such amount was collected
from CCB during the nine months ended September 30, 2019. Amount was outstanding was $0 and $195, as of September 30, 2019 and
December 31, 2018, respectively.
7.
Line of Credit
Amounts
outstanding under the Company’s credit facilities are as follows (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Line of Credit
|
|
$
|
7,661
|
|
|
$
|
7,657
|
|
Capitalized finance costs
|
|
|
(582
|
)
|
|
|
(677
|
)
|
Net balance
|
|
$
|
7,079
|
|
|
$
|
6,980
|
|
On
October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The Company incurred $882
of direct costs in conjunction with the transaction, consisting primarily of broker, bank and legal fees, and $161 cost
of warrant modification. The Company annually incurs an additional $130 of fees from the bank, which is equal to 1% of the $13,000
borrowing limit. These costs have been capitalized and recorded as a debt discount and are being amortized over the 2.5 year life
of the Rosenthal agreement. Amortization of debt discount was $225 for the nine months ended September 30, 2019. The line
of credit matures on April 20, 2021 and has $1,019 of unused borrowing capacity under the financing agreement as of September
30, 2019.
The
line of credit is secured by substantially all of the assets of the Company. Additionally, the over-advance is guaranteed by an
irrevocable stand-by letter of credit in the amount of $1,500, issued by Daniel J. Doherty III and the Daniel J. Doherty, III
2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV LLC (“Raptor”). Raptor beneficially owns 20.1% of the Company’s
outstanding common stock as of September 30, 2019. Mr. Doherty is a member of the Company’s Board of Directors. In the event
of a default under the financing agreement, Raptor has a put option to purchase from Rosenthal the entire amount of any outstanding
over-advance plus accrued interest, prior to Rosenthal declaring an event of default under the financing agreement.
As
part of the transaction, the Company issued an amended and restated subordinated convertible non-redeemable secured note to Raptor,
to provide for additional advances of up to $4,000 in the event that Raptor exercises its put option described above. Consequently,
the exercise price of 750,000 of Raptor’s outstanding warrants to purchase the Company’s common stock was reduced
from $1.50 to $1.10, resulting in an increase in the fair value of the warrants of $161. This amount has been reflected as a capitalized
finance cost and is being amortized over the life of the financing agreement.
The
financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions,
including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement
contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of
the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of September 30, 2019.
Interest
Rates
Borrowings
under the Rosenthal financing agreement bear interest at the greater of prime or 4.75%, plus an additional 2% to 3.5% depending
upon whether the borrowing is based upon receivables, inventory or is an Over-Advance. The effective interest rate as of September
30, 2019 on outstanding borrowings was 8.2%. Additionally, the line of credit is subject to monthly facility and administration
fees, and aggregate minimum monthly fees (including interest) of $4.
8.
Leases Payable
The
Company adopted ASU 2016-02, Leases, effective October 1, 2018. The standard requires a lessee to record a right-of-use asset
and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments.
As a result, we recorded right-of-use assets aggregating $862 as of October 1, 2018, utilizing a discount rate of 12.60%. That
amount consists of new leases on the Company’s Norwalk office and certain office equipment of $730, and existing capitalized
leases reclassified to right of use assets of $132.
ASU
2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is
allocated over the lease term, generally on a straight-line basis. During the nine months ended September 30, 2019, the Company
reflected amortization of right of use asset of $96 related to these leases, resulting in a net asset balance of $730
as of September 30, 2019.
In
accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.
As
of December 31, 2018, liabilities recorded under finance leases and operating leases were $133 and $719, respectively. During
the nine months ended September 30, 2019, the Company made payments of $38 towards finance lease liability and $18
towards operating lease liability. As of September 30, 2019, liability under finance lease amounted to $97 and liability
under operating lease amounted to $701, of which $24 and $27 were reflected as current due, under finance leases and operating
leases, respectively.
As
of September 30, 2019, the weighted average remaining lease terms for operating lease and finance lease are 5.26 years and 1.25
years, respectively. The weighted average discount rate for operating lease is 12.60% and 6.93% for finance lease.
9.
Convertible Note to a Related Party
The
Convertible Note to a Related Party consists of the following (in thousands):
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
12% Convertible Note Payable
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
Accrued Interest
|
|
|
1,151
|
|
|
|
761
|
|
Total obligation
|
|
$
|
4,551
|
|
|
$
|
4,161
|
|
On
April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable
note in the principal amount of $3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock.
The purchaser, Raptor/Harbor Reeds SPV LLC (“Raptor”), beneficially owned approximately 20.1% and 27.1% of the Company’s
common stock at September 30, 2019 and December 31, 2018, respectively.
The
note bears interest at a rate of 12% per annum, compounded monthly. It is secured by the Company’s assets, subordinate to
the first priority security interest of Rosenthal & Rosenthal. The note may not be prepaid and matures on April 21, 2021.
It may be converted, at any time and from time to time, into shares of common stock of the Company, at a revised conversion price
of $1.50.
The
warrant will expire on April 21, 2022 and has an adjusted exercise price of $1.50 per share. The note and warrant contain customary
anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have
been registered on Form S-3. The investor was also granted the right to participate in future financing transactions of the Company
for a term of two years.
On
October 4, 2018, in connection with the execution of the Rosenthal financing agreement, the Company issued an amended and restated
subordinated convertible non-redeemable secured note to Raptor, to provide for additional advances of up to $4,000. In consideration
therefore, the exercise price of 750,000 of Raptor’s outstanding warrants was reduced from $1.50 to $1.10, resulting in
an increase in the fair value of the warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of
$161. This amount was recorded as a debt discount to the Rosenthal line of credit and is being amortized as interest expense over
the life of the financing agreement (See Note 7).
10.
Warrant Liability
Certain
of the Company’s outstanding warrants require the Company to pay cash to the warrant holders, in the event of a fundamental
transaction as defined. Such warrants are accounted for as liabilities in accordance with ASC 480. These liabilities are measured
at fair value each reporting period and the change in the fair value is recognized in earnings in the accompanying Statements
of Operations.
The
fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at September 30, 2019 and
December 31, 2018, using the following assumptions:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Stock Price
|
|
$
|
1.30
|
|
|
$
|
2.07
|
|
Risk free interest rate
|
|
|
2.26
|
%
|
|
|
2.69
|
%
|
Expected volatility
|
|
|
69.95
|
%
|
|
|
50.07
|
%
|
Expected life in years
|
|
|
1.67
|
|
|
|
2.42
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
Fair Value - Warrants
|
|
$
|
15
|
|
|
$
|
38
|
|
The
risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual
life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and
does not expect to do so in the foreseeable future.
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
Beginning Balance
|
|
$
|
38
|
|
|
$
|
36
|
|
Change in fair value
|
|
|
(23
|
)
|
|
|
97
|
|
Ending balance
|
|
$
|
15
|
|
|
$
|
133
|
|
11.
Stock Based Activity
Common
stock issuance
In
February 2019, the Company conducted a public offering 7,733,750 shares of its common shares including 1,008,750 shares sold pursuant
to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering
price of $2.10 per share. The net proceeds to the Company from this offering are $14,867, after deducting underwriting discounts
and commissions and other offering expenses. Proceeds from the offering will provide capital to fund the growth of our business,
new products, sales and marketing efforts, working capital, and for general corporate purposes.
Restricted
common stock
The
following table summarizes restricted stock activity during the nine months ended September 30, 2019:
|
|
Unvested Shares
|
|
|
Fair Value
|
|
|
Weighted Average
Grant Date Fair
Value
|
|
Balance, December 31, 2018
|
|
|
598,370
|
|
|
$
|
592
|
|
|
|
1.63
|
|
Granted
|
|
|
46,035
|
|
|
$
|
132
|
|
|
|
2.87
|
|
Vested
|
|
|
(33,796
|
)
|
|
$
|
(477
|
)
|
|
|
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Balance, September 30, 2019
|
|
|
610,609
|
|
|
$
|
246
|
|
|
|
1.13
|
|
Prior
to January 1, 2019, the Company issued 854,592 shares of restricted common stock to the Company’s Chief Executive Officer
and members of the board valued at $1,413, of which 256,222 shares have vested, and $820 has been recognized as
an expense.
During
the nine months ended September 30, 2019, the Company issued an additional 17,652 shares of restricted stock to members of the
board of directors. These shares vested immediately upon issuance during February 2019. The aggregate fair value of the stock
awards was $44 based on the market price of our common stock at $2.49 per share on the date of grant, which were amortized in
full during February 2019.
During
the nine months ended September 30, 2019, the Company issued an additional 24,216 shares of restricted stock to members of the
board of directors. These shares vest through November 2019 over 3 equal periods, and remain subject to forfeiture if vesting
conditions are not met. The aggregate fair value of the stock awards was $76 based on the market price of our common stock at
$3.14 per share on the date of grant, which will be amortized through November 2019.
During
the nine months ended September 30, 2019, the Company issued an additional 4,167 shares of restricted stock to a member of the
board of directors. These shares vest in November 2019 and remain subject to forfeiture if vesting conditions are not met. The
aggregate fair value of the stock awards was $12 based on the market price of our common stock at $3.00 per share on the
date of grant, which will be amortized through November 2019.
On
October 31, 2019, the Company and the Chief Executive Officer entered into a separation agreement extending the vesting of the
392,002 shares that were scheduled to vest on June 29, 2019 to October 31, 2019.
The total fair value of restricted common stock
vesting during the nine months ended September 30, 2019 was $477 and is included in general and administrative expenses in the
accompanying statements of operations. As of September 30, 2019, the amount of unvested compensation related to issuances of restricted
common stock was $246, which will be recognized as an expense in future periods as the shares vest.
Stock
options
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Terms
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
3,674,236
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,404,840
|
|
|
$
|
2.52
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Unvested Forfeited or expired
|
|
|
(610,510
|
)
|
|
$
|
2.64
|
|
|
|
|
|
|
|
|
|
Vested Forfeited or expired
|
|
|
(95,000
|
)
|
|
$
|
4.75
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
4,373,566
|
|
|
$
|
2.15
|
|
|
|
8.25
|
|
|
$
|
-
|
|
Exercisable at September 30, 2019
|
|
|
1,404,537
|
|
|
$
|
2.33
|
|
|
|
6.78
|
|
|
$
|
-
|
|
During
the nine months ended September 30, 2019, the Company approved options to be issued pursuant to Reed’s 2017 Incentive Compensation
Plan to certain current employees totaling 1,231,000 shares. One half of these options vest annually over a four-year vesting
period; the other half of these options will vest based on performance criteria to be established by the board. In addition, during
the nine months ended September 30, 2019, the Company granted options to purchase 113,330 shares of common stock to new board
members. Options granted to consultants, former employees, and board members vest at various periods. On September 11, 2019, the
Company granted options to purchase 60,510 shares of common stock to certain consultants, which were forfeited on the same day
resulting in net $0 of compensation expense.
The
stock options are exercisable at a price ranging from $2.33 to $3.37 per share and expire in ten years. Total fair value of these
options at grant date was approximately $989, which was determined using the Black-Scholes-Merton option pricing model with the
following average assumption: stock price ranging from $2.33 to $3.37 per share, expected term of seven years, volatility of 61%,
dividend rate of 0% and risk-free interest rate ranging from 1.39% to 2.60%. The risk-free interest rate is based on the U.S.
Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the
expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving
consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical
volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the Company has not
paid dividends in the past and does not expect to pay dividends in the future.
The
Company determined that the options had a fair value of $989 which will be amortized in future periods through September 30, 2023.
During the nine months ended September 30, 2019, the Company recognized $1,077 of compensation expense relating to vested
stock options. As of September 30, 2019, the amount of unvested compensation related to stock options was approximately $2,672
which will be recorded as an expense in future periods as the options vest.
The
aggregate intrinsic value was calculated as the difference between the closing market price as of September 30, 2019, which was
$1.30, and the exercise price of the outstanding stock options.
Common
stock purchase warrants
The
following table summarizes warrant activity for the nine months ended September 30, 2019:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Terms
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2018
|
|
|
6,897,277
|
|
|
$
|
2.06
|
|
|
|
2.42
|
|
|
$
|
1,447
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(283,495
|
)
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(200,000
|
)
|
|
$
|
5.60
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2019
|
|
|
6,413,782
|
|
|
$
|
2.06
|
|
|
|
1.72
|
|
|
$
|
150
|
|
Exercisable at September 30, 2019
|
|
|
6,413,782
|
|
|
$
|
2.06
|
|
|
|
1.72
|
|
|
$
|
150
|
|
During
the nine months ended September 30, 2019, warrants to acquire 283,495 shares of common stock were exercised, including 87,485
warrants that were exercised on a cashless basis, resulting in the issuance of 223,037 shares of common stock. Aggregate proceeds
to the Company were $365. In addition, during the nine months ended September 30, 2019, warrants to acquire 200,000 shares of
common stock expired.
The
intrinsic value was calculated as the difference between the closing market price as of September 30, 2019, which was $1.30, and
the exercise price of the Company’s warrants to purchase common stock.
12.
Contingencies
On December 31, 2018, the Company completed
the sale of its Los Angeles manufacturing facility to California Custom Beverage, LLC (“CCB”) an entity owned by Chris
Reed, founder, Chief Innovation Officer, and board member. The sale included substantially all machinery, equipment, furniture
and fixtures of the facility. By the terms of the sale CCB assumed the monthly payments on our lease obligation effective immediately
upon closing of the sale. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $1.2
million of security with the lessor no later than December 31, 2019. In the three months period ending in March 31, 2019, Mr.
Reed sold 246,000 shares valued at approximately $656 that was deposited to the escrow account. In the three months period ending
in June 30, 2019, Mr. Reed sold an additional 191,600 shares valued at approximately $613. Mr. Reed currently has $650 deposited
to the escrow account with the remainder expected to be deposited by December 31, 2019 fully satisfying the security requirements.
Mr. Reed has zero shares remaining in escrow as of September 30, 2019.
13.
Subsequent Events
In
October 2019, the Company conducted a public offering of 13,416,667 shares of its common shares including 1,750,000 shares sold
pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a
public offering price of $0.60 per share. The net proceeds to the Company from this offering are $7,536, after deducting underwriting
discounts and commissions and other offering expenses. Proceeds from the offering will provide capital to fund the growth of our
business, new products, sales and marketing efforts, working capital, and for general corporate purposes.
On October 18, 2019, the Company issued
4,254 preferred shares to its preferred shareholders as a result of its annual preferred stock dividend.
On
October 30, 2019, Iris Snyder notified the Company of her intent to resign from her positions as Chief Financial Officer and Secretary,
effective on November 22, 2019. On November 1, 2019, Reed’s appointed Joann Tinnelly to serve as Interim Chief Financial
Officer effective November 22, 2019.
On
October 31, 2019, the Company entered into a Separation, Settlement and Release of Claims Agreement (the “Agreement”)
with Valentin Stalowir, its former Chief Executive Officer in connection with Mr. Stalowir’s resignation from his position
as Chief Executive Officer and the subsequent termination of his employment on October 31, 2019. As part of the Agreement,
the Company issued Mr. Stalowir 392,002 shares of its common shares on October 31, 2019, as well as an additional 50,000 shares
of its common shares on November 8, 2019.
On November 1, 2019, the Company issued a total of 12,239 shares of its common shares
to the members of the board of directors.
On November 12, 2019, the Nasdaq
Listing Qualifications Department (“Staff”) notified the Company that the bid price of its
common stock had closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, did not
comply with Listing Rule 5550(a)(2). Therefore, in accordance with Listing Rule 5810(c)(3)(A), the Company is being provided
180 calendar days, or until May 11, 2020, to regain compliance with the Rule. If, at any time before May 11, 2020 the bid
price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days,
Nasdaq staff will provide written notification that it has achieved compliance with the Bid Price Rule.
If the Company fails to regain compliance
with the Bid Price Rule before May 11, 2020 but meets all of the other applicable standards for initial listing on the Nasdaq
Capital Market with the exception of the minimum bid price, the Company may be eligible for additional time. To qualify, the Company
will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing
standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice
of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.