UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
[ ]☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission file number: 001-32501
REED’S, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 35-2177773 | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
13000 South Spring St. Los Angeles, Ca. 90061201 Merritt 7, Norwalk, CT. 06851
(Address of principal executive offices) (Zip Code)
(310) 217-9400(800)997-3337
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
(Former name, former address and former fiscal year, if changed since last report)
| Title of Each Class | Trading Symbol | Names of each exchange on which registered | ||
| Common Stock | REED | NASDAQ |
There was a total of shares of Common Stock outstanding as of November 7, 2022.
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer |
| Smaller Reporting Company | Emerging Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]☐
Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] ☐ No [X] ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were a total of 15,286,258 shares of Common Stock outstanding as of November 1, 2017.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.
In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.
TABLE OF CONTENTS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Quarterly Report on Form 10-Q (“Quarterly 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 Quarterly Report and those reports, statements, information and announcements address activities, events or developments that Reed’s, Inc. (hereinafter referred to as “we,” “us,” “our,” the “Company” 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, macroeconomic issues, 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 Quarterly Report beginning on page 10 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:
● The availability and cost of capital to finance working capital and our operating plans,
● Our ability to service our substantial debt obligations,
● Maintaining the listing of our common stock on the Nasdaq Capital Market or other national securities exchange. We will be subject to delisting if we do not meet the Bid Price Rule or the Minimum Stockholders Equity Rule.
● Our ability to generate sufficient cash flow to support marketing and product development plans and general operating activities,
● Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace,
● 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,
● Shipping costs,
● Our ability to penetrate new markets and maintain or expand existing markets,
● Decline in global financial markets, economic downturn and inflation
● Continuing adverse business impacts of COVID-19,
● The marketing efforts of distributors of our products, most of whom also distribute products that are competitive with our products,
● Changes in product category consumption,
● Economic impacts of the war in Ukraine,
● Consumer acceptance of new products, and
● Possible recalls of our products.
| ii |
Part I – FINANCIAL INFORMATION
REED’S, INC.
| September 30, 2017 | December 31, 2016 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 348,000 | $ | 451,000 | ||||
| Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $378,000 and $256,000, respectively | 3,188,000 | 2,485,000 | ||||||
| Inventory, net of reserve for obsolescence of $290,000 and $115,000, respectively | 7,815,000 | 6,885,000 | ||||||
| Prepaid and other current assets | 301,000 | 500,000 | ||||||
| Total Current Assets | 11,652,000 | 10,321,000 | ||||||
| Property and equipment, net of accumulated depreciation of $5,280,000 and $4,863,000, respectively | 4,089,000 | 7,726,000 | ||||||
| Equipment held for sale, net of reserve of $2,000,000 | 2,465,000 | - | ||||||
| Brand names | 805,000 | 805,000 | ||||||
| Total assets | $ | 19,011,000 | $ | 18,852,000 | ||||
| LIABILITIES AND STOCKHOLDER'S DEFICIENCY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 6,992,000 | $ | 5,959,000 | ||||
| Accrued expenses | 181,000 | 215,000 | ||||||
| Advances from officers | 277,000 | - | ||||||
| Line of credit | 5,153,000 | 4,384,000 | ||||||
| Current portion of long term financing obligations | 214,000 | 190,000 | ||||||
| Current portion of capital leases payable | 194,000 | 183,000 | ||||||
| Current portion of bank notes | 953,000 | 953,000 | ||||||
| Total current liabilities | 13,964,000 | 11,884,000 | ||||||
| Other long term liabilities | ||||||||
| Long term financing obligation, less current portion, net of discount of $742,000 and $825,000, respectively | 1,283,000 | 1,363,000 | ||||||
| Capital leases payable, less current portion | 286,000 | 438,000 | ||||||
| Bank notes, net of discount $0 and $78,000, respectively | 6,182,000 | 5,919,000 | ||||||
| Convertible note, net of discount $2,833,000 and $0, respectively | 748,000 | - | ||||||
| Warrant liability | 74,000 | 775,000 | ||||||
| Other long term liabilities | 117,000 | 130,000 | ||||||
| Total Liabilities | 22,654,000 | 20,509,000 | ||||||
| Stockholders' Deficiency | ||||||||
| Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding | 94,000 | 94,000 | ||||||
| Common stock, $.0001 par value, 40,000,000 shares authorized, 15,286,258 and 13,982,230 shares outstanding | 1,000 | 1,000 | ||||||
| Additional paid in capital | 35,447,000 | 29,971,000 | ||||||
| Accumulated deficit | (39,185,000 | ) | (31,723,000 | ) | ||||
| Total stockholders' deficiency | (3,643,000 | ) | (1,657,000 | ) | ||||
| Total liabilities and stockholders' deficiency | $ | 19,011,000 | $ | 18,852,000 | ||||
(Amounts in thousands, except share amounts)
September 30, 2022 | December 31, 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 25 | $ | 49 | ||||
| Accounts receivable, net of allowance of $63 and $215, respectively | 6,008 | 5,183 | ||||||
| Inventory | 19,916 | 17,049 | ||||||
| Receivable from related party | 1,502 | 933 | ||||||
| Prepaid expenses and other current assets | 1,394 | 1,491 | ||||||
| Total current assets | 28,845 | 24,705 | ||||||
| Property and equipment, net of accumulated depreciation of $727 and $561, respectively | 826 | 992 | ||||||
| Intangible assets | 626 | 624 | ||||||
| Total assets | $ | 30,297 | $ | 26,321 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 9,575 | $ | 10,434 | ||||
| Accrued expenses | 228 | 286 | ||||||
| Revolving line of credit, net of capitalized financing costs of $403 and $0, respectively | 9,103 | 10,229 | ||||||
| Payable to related party | 1,811 | 614 | ||||||
| Current portion of convertible notes payable, net of debt discount of $492 and $0, respectively | 4,414 | - | ||||||
| Current portion of lease liabilities | 180 | 161 | ||||||
| Total current liabilities | 25,311 | 21,724 | ||||||
| Convertible note payable, net of debt discount of $666 and $0, respectively, less current portion | 8,165 | |||||||
| Lease liabilities, less current portion | 257 | 394 | ||||||
| Total liabilities | 33,733 | 22,118 | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Series A Convertible Preferred stock, $ par value, shares authorized, shares issued and outstanding | 94 | 94 | ||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively | 11 | 9 | ||||||
| Additional paid in capital | 112,889 | 107,237 | ||||||
| Accumulated deficit | (116,430 | ) | (103,137 | ) | ||||
| Total stockholders’ equity (deficit) | (3,436 | ) | 4,203 | |||||
| Total liabilities and stockholders’ equity (deficit) | $ | 30,297 | $ | 26,321 | ||||
The accompanying notes are an integral part of these condensed financial statementsstatements.
| F-1 |
REED’S, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)For the Three and Nine Months Ended September 30, 2022 and 2021
| Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Net Sales | $ | 10,887,000 | $ | 12,329,000 | $ | 28,046,000 | $ | 33,326,000 | ||||||||
| Cost of goods sold | 8,825,000 | 9,443,000 | 23,216,000 | 25,945,000 | ||||||||||||
| Gross profit | 2,062,000 | 2,886,000 | 4,830,000 | 7,381,000 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Delivery and handling expenses | 1,119,000 | 901,000 | 2,731,000 | 2,815,000 | ||||||||||||
| Selling and marketing expense | 828,000 | 918,000 | 2,344,000 | 2,911,000 | ||||||||||||
| General and administrative expense | 1,105,000 | 871,000 | 3,402,000 | 3,007,000 | ||||||||||||
| Impairment of assets | 2,000,000 | - | 2,000,000 | - | ||||||||||||
| Total operating expenses | 5,052,000 | 2,690,000 | 10,477,000 | 8,733,000 | ||||||||||||
| Income/(loss) from operations | (2,990,000 | ) | 196,000 | (5,647,000 | ) | (1,352,000 | ) | |||||||||
| Interest expense | (757,000 | ) | (415,000 | ) | (2,270,000 | ) | (1,239,000 | ) | ||||||||
| Financing costs and warrant modification | (1,798,000 | ) | - | (2,776,000 | ) | - | ||||||||||
| Change in fair value of warrant liability | (72,000 | ) | - | 3,236,000 | - | |||||||||||
| Net loss | (5,617,000 | ) | (219,000 | ) | (7,457,000 | ) | (2,591,000 | ) | ||||||||
| Preferred Stock Dividends | - | - | (5,000 | ) | (5,000 | ) | ||||||||||
| Net loss attributable to common stockholders | $ | (5,617,000 | ) | $ | (219,000 | ) | $ | (7,462,000 | ) | $ | (2,596,000 | ) | ||||
| Weighted average number of shares outstanding – basic and diluted | 15,033,083 | 13,908,247 | 14,336,375 | 13,504,223 | ||||||||||||
Loss per share– basic and diluted | $ | (0.37 | ) | $ | (0.02 | ) | $ | (0.52 | ) | $ | (0.19 | ) | ||||
(Unaudited)
(Amounts in thousands, except share and per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Net Sales | $ | 12,094 | $ | 13,402 | $ | 38,001 | $ | 36,818 | ||||||||
| Cost of goods sold | 9,659 | 9,530 | 29,335 | 25,824 | ||||||||||||
| Gross profit | 2,435 | 3,872 | 8,666 | 10,994 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Delivery and handling expense | 2,249 | 3,093 | 8,893 | 8,888 | ||||||||||||
| Selling and marketing expense | 1,220 | 2,644 | 5,623 | 7,493 | ||||||||||||
| General and administrative expense | 1,420 | 1,788 | 5,319 | 6,227 | ||||||||||||
| Total operating expenses | 4,889 | 7,525 | 19,835 | 22,608 | ||||||||||||
| Loss from operations | (2,454 | ) | (3,653 | ) | (11,169 | ) | (11,614 | ) | ||||||||
| Interest expense | (777 | ) | (234 | ) | (2,119 | ) | (692 | ) | ||||||||
| Gain on extinguishment of PPP note payable | - | - | - | 770 | ||||||||||||
| Net loss | (3,231 | ) | (3,887 | ) | (13,288 | ) | (11,536 | ) | ||||||||
| Dividends on Series A Convertible Preferred Stock | - | - | (5 | ) | (5 | ) | ||||||||||
| Net Loss Attributable to Common Stockholders | $ | (3,231 | ) | $ | (3,887 | ) | $ | (13,293 | ) | $ | (11,541 | ) | ||||
| Loss per share – basic and diluted | $ | (0.03 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | (0.13 | ) | ||||
| Weighted average number of shares outstanding – basic and diluted | 112,717,818 | �� | 93,644,935 | 101,525,154 | 90,400,832 | |||||||||||
The accompanying notes are an integral part of these condensed financial statementsstatements.
| F-2 |
REED’S, INC.
CONDENSED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCYEQUITY
For the Three and Nine months endedMonths Ended September 30, 20172022 and 2021
(Unaudited)
(Unaudited)(Amounts in thousands except share amounts)
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Shareholders | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficiency | ||||||||||||||||||||||
| Balance, December 31, 2016 | 13,982,230 | $ | 1,000 | 9,411 | $ | 94,000 | $ | 29,971,000 | $ | (31,723,000 | ) | $ | (1,657,000 | ) | ||||||||||||||
| Fair value of vesting of options to employees and directors | 199,000 | 199,000 | ||||||||||||||||||||||||||
| Fair value of common shares issued for services | 62,365 | - | 99,000 | 99,000 | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants, net | 1,122,376 | - | 1,650,000 | 1,650,000 | ||||||||||||||||||||||||
Extinguishmentof warrant liability | 2,634,000 | 2,634,000 | ||||||||||||||||||||||||||
| Fair value of warrants issued for financing costs | 689,000 | 689,000 | ||||||||||||||||||||||||||
| Common shares issued for cash | 117,647 | - | 200,000 | 200,000 | ||||||||||||||||||||||||
| Preferred dividends paid in Common stock | 1,640 | - | 5,000 | (5,000 | ) | - | ||||||||||||||||||||||
| Net loss | (7,457,000 | ) | (7,457,000 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2017 | 15,286,258 | $ | 1,000 | 9,411 | $ | 94,000 | $ | 35,447,000 | $ | (39,185,000 | ) | $ | (3,643,000 | ) | ||||||||||||||
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, June 30, 2022 | 112,652,320 | $ | 11 | 9,411 | $ | 94 | $ | 112,675 | $ | (113,199 | ) | $ | (419 | ) | ||||||||||||||
| Fair value of vested options | 185 | 185 | ||||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | 100,430 | 29 | 29 | |||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (3,231 | ) | (3,231 | ) | |||||||||||||||||||
| Balance, September 30, 2022 | 112,752,750 | $ | 11 | 9,411 | $ | 94 | $ | 112,889 | $ | (116,430 | ) | $ | (3,436 | ) | ||||||||||||||
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, December 31, 2021 | 93,733,975 | $ | 9 | 9,411 | $ | 94 | $ | 107,237 | $ | (103,137 | ) | $ | 4,203 | |||||||||||||||
| Fair value of vested options | 448 | 448 | ||||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | 337,454 | 137 | 137 | |||||||||||||||||||||||||
| Issuance of shares for dividends on Series A Convertible Preferred Stock | - | - | - | (5 | ) | (5 | ) | |||||||||||||||||||||
| Repurchase of common stock | (13,250 | ) | (2 | ) | (2 | ) | ||||||||||||||||||||||
| Common shares issued for financing costs | 100,000 | 37 | 37 | |||||||||||||||||||||||||
| Common shares issued for cash, net of offering costs | 18,594,571 | 2 | 5,032 | 5,034 | ||||||||||||||||||||||||
| Net loss | - | - | - | - | - | (13,288 | ) | (13,288 | ) | |||||||||||||||||||
| Balance, September 30, 2022 | 112,752,750 | $ | 11 | 9,411 | $ | 94 | $ | 112,889 | $ | (116,430 | ) | $ | (3,436 | ) | ||||||||||||||
| F-3 |
REED’S, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended September 30, 2022 and 2021
(Unaudited)
(Amounts in thousands except share amounts)
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, June 30, 2021 | 93,601,380 | $ | 9 | 9,411 | $ | 94 | $ | 105,847 | $ | (94,384 | ) | $ | 11,566 | |||||||||||||||
| Fair value of vested options | - | - | 436 | 436 | ||||||||||||||||||||||||
| Fair value of vested restricted shares granted to an officer for services | 61,475 | 65 | 65 | |||||||||||||||||||||||||
| Common shares issued on exercise of stock options | 5,000 | 3 | 3 | |||||||||||||||||||||||||
| Common shares issued pursuant to the rights offering, net of offering costs | - | - | - | (6 | ) | - | (6 | ) | ||||||||||||||||||||
| Net Loss | (3,887 | ) | (3,887 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | 93,667,855 | $ | 9 | 9,411 | $ | 94 | $ | 106,345 | $ | (98,271 | ) | $ | 8,177 | |||||||||||||||
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ Equity | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | (Deficit) | ||||||||||||||||||||||
| Balance, December 31, 2020 | 86,317,096 | $ | 9 | 9,411 | $ | 94 | $ | 97,031 | $ | (86,730 | ) | $ | 10,404 | |||||||||||||||
| Fair value of vested options | - | - | 1,264 | 1,264 | ||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | 221,252 | - | - | 234 | 234 | |||||||||||||||||||||||
| Issuance of shares for dividends on Series A Convertible Preferred Stock | - | - | - | (5 | ) | (5 | ) | |||||||||||||||||||||
| Repurchase of common stock | (13,493 | ) | (15 | ) | (15 | ) | ||||||||||||||||||||||
| Common shares issued on exercise of options | 63,000 | - | 32 | 32 | ||||||||||||||||||||||||
| Common shares issued for financing costs | 400,000 | 472 | 472 | |||||||||||||||||||||||||
| Common shares issued pursuant to the rights offering, net of offering costs | 6,680,000 | - | - | 7,327 | - | 7,327 | ||||||||||||||||||||||
| Net Loss | (11,536 | ) | (11,536 | ) | ||||||||||||||||||||||||
| Balance, September 30, 2021 | 93,667,855 | $ | 9 | 9,411 | $ | 94 | $ | 106,345 | $ | (98,271 | ) | $ | 8,177 | |||||||||||||||
The accompanying notes are an integral part of these condensed financial statementsstatements.
| F-4 |
REED’S, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)For the Nine Months Ended September 30, 2022 and 2021
| Nine months ended | ||||||||
| 9/30/2017 | 9/30/2016 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (7,457,000 | ) | $ | (2,591,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 430,000 | 503,000 | ||||||
| Amortization | 728,000 | 186,000 | ||||||
| Fair value of vested stock options issued to employees | 199,000 | 449,000 | ||||||
| Fair value of common stock issued for services | 99,000 | - | ||||||
| (Decrease) increase in allowance for doubtful accounts | 122,000 | (100,000 | ) | |||||
| Reserve for impairment on equipment held for sale | 2,000,000 | - | ||||||
| Fair value of warrants issued as financing cost | 908,000 | |||||||
| Modification cost of warrants | 1,868,000 | - | ||||||
| Change in fair value of warrant liability | (3,236,000 | ) | - | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (825,000 | ) | (61,000 | ) | ||||
| Inventory | (930,000 | ) | 122,000 | |||||
| Prepaid expenses and other assets | 199,000 | 6,000 | ||||||
| Accounts payable | 1,033,000 | (301,000 | ) | |||||
| Accrued expenses | 176,000 | 182,000 | ||||||
| Other long term liabilities | (43,000 | ) | - | |||||
| Net cash used in operating activities | (4,729,000 | ) | (1,605,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | (535,000 | ) | (585,000 | ) | ||||
| Net cash used in investing activities | (535,000 | ) | (585,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net borrowings (repayments) on advances from officers | 277,000 | - | ||||||
| Proceeds from sale of common stock | 200,000 | 2,230,000 | ||||||
| Proceeds from warrant exercises | 1,650,000 | 45,000 | ||||||
| Principal payments on capital expansion loan | (538,000 | ) | (168,000 | ) | ||||
| Proceeds from issuance of convertible note | 3,083,000 | - | ||||||
| Principal repayments on long term financial obligation | (139,000 | ) | (117,000 | ) | ||||
| Principal repayments on capital lease obligation | (141,000 | ) | (131,000 | ) | ||||
| Net borrowings (repayments) on existing line of credit | 769,000 | 462,000 | ||||||
| Net cash provided by financing activities | 5,161,000 | 2,321,000 | ||||||
| Net (decrease) increase in cash | (103,000 | ) | 131,000 | |||||
| Cash at beginning of period | 451,000 | 1,816,000 | ||||||
| Cash at end of period | $ | 348,000 | $ | 1,947,000 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 2,074,000 | $ | 843,000 | ||||
| Non Cash Investing and Financing Activities | ||||||||
| Property and equipment acquired through capital expansion loan | $ | 723,000 | $ | 1,307,000 | ||||
| Property and equipment acquired through capital lease obligations | - | 86,000 | ||||||
| Reclass of property to equipment held for sale | 4,465,000 | - | ||||||
| Fair value of warrants granted as debt discount | 3,083,000 | 54,000 | ||||||
| Dividends payable in common stock | 5,000 | 5,000 | ||||||
| Extinguishment of warrant liability | 2,634,000 | - | ||||||
(Unaudited)
(Amounts in thousands)
September 30, 2022 | September 30, 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (13,288 | ) | $ | (11,536 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | 79 | 106 | ||||||
| Gain on termination of leases | - | (2 | ) | |||||
| Gain on extinguishment of PPP note payable | - | (770 | ) | |||||
| Amortization of debt discount | 307 | 162 | ||||||
| Amortization of prepaid financing costs | 431 | 147 | ||||||
| Fair value of vested options | 448 | 1,264 | ||||||
| Fair value of vested restricted shares granted to officers | 137 | 234 | ||||||
| Common shares issued as financing costs | 37 | - | ||||||
| Change in allowance for doubtful accounts | (152 | ) | (95 | ) | ||||
| Inventory write-downs | 35 | (64 | ) | |||||
| Accrued interest on convertible note | 386 | - | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (673 | ) | (2,132 | ) | ||||
| Inventory | (2,901 | ) | (4,332 | ) | ||||
| Prepaid expenses and other assets | (399 | ) | (491 | ) | ||||
| Decrease in right of use assets | 86 | 74 | ||||||
| Accounts payable | (860 | ) | 2,126 | |||||
| Accrued expenses | (62 | ) | 82 | |||||
| Lease liability | (118 | ) | (78 | ) | ||||
| Net cash used in operating activities | (16,507 | ) | (15,305 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Trademark costs | (2 | ) | (6 | ) | ||||
| Purchase of property and equipment | - | (95 | ) | |||||
| Net cash used in investing activities | (2 | ) | (101 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from line of credit | 40,576 | 49,940 | ||||||
| Payments on line of credit | (41,299 | ) | (41,685 | ) | ||||
| Payment of debt issuance costs | (483 | ) | - | |||||
| Proceeds from sale of common stock | 5,034 | 7,327 | ||||||
| Proceeds from convertible note payable, net of expenses | 12,430 | - | ||||||
| Repayment of convertible notes payable | (400 | ) | ||||||
| Amounts from related party, net | 629 | 155 | ||||||
| Payments on capital lease obligation | - | (2 | ) | |||||
| Proceeds from exercise of options | - | 32 | ||||||
| Repurchase of common stock | (2 | ) | (15 | ) | ||||
| Net cash provided by financing activities | 16,485 | 15,752 | ||||||
| Net increase (decrease) in cash | (24 | ) | 346 | |||||
| Cash at beginning of period | 49 | 595 | ||||||
| Cash at end of period | $ | 25 | $ | 941 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | 1,051 | $ | 258 | ||||
| Non -cash investing and financing activities | ||||||||
| Dividends on Series A Convertible Preferred Stock | $ | 5 | $ | 5 | ||||
The accompanying notes are an integral part of these condensed financial statementsstatements.
| F-5 |
REED’S, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2017 and 2016 (Unaudited)
1. Basis of Presentation and Liquidity
The accompanying interim condensed financial statements are unaudited, but in the opinion of management of Reed’s, Inc. (the “Company”), contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at September 30, 2017 and the results of operations and cash flows for the Three and Nine Months Ended September 30, 20172022 and 2016. 2021 (Unaudited)
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The balance sheet as of December 31, 2016 is derived from the Company’s audited financial statements.
Certain information and footnote disclosures normally included inaccompanying condensed financial statements thatof Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), have been prepared in accordanceconformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to(“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission although management of(the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the Company believesfinancial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. 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 toThese condensed financial statements should be read in conjunction with the financial statements and the notes thereto includedcontained in the Company’s Annual Report on Form 10-K asfor the year ended December 31, 2021, filed with the Securities and Exchange CommissionSEC on April 24, 2017.15, 2022. The accompanying condensed financial statements are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position as of September 30, 2022, and the results of its operations and its cash flows for the nine months ended September 30, 2022 and 2021. The balance sheet as of December 31, 2021 is derived from the Company’s audited financial statements.
The results of operations for the Nine Monthsnine months ended September 30, 20172022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017.2022.
LiquidityGoing Concern
The accompanying financial statements have been prepared under the assumption that the Company will continue ason a going concern. Such assumptionconcern basis, which contemplates the realization of assets and satisfactionthe settlement of liabilities and commitments in the normal course of business. ForAs reflected in the Nine Monthsaccompanying financial statements, for the nine months ended September 30, 20172022, the Company recorded a net loss of $7,457,000$13,288 and used cash fromin operations of $4,729,000. $16,507. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2021, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
As of September 30, 2017,2022, we had a stockholder’s deficit of $3,643,000 and working capital deficit of $2,312,000 compared to stockholder’s deficit of $1,657,000 and working capital deficit of $1,563,000 at December 31, 2016.
As of September 30, 2017, the Company had a cash balance of $348,000$25, with $151 of current availability, and had available$3,494 of additional borrowing on our existing line of credit of $305,000. Furthermore, the Company has bank loans of $12,288,000 due to its major lender that become due October 21, 2018 as discussed in Note 7.capacity.
We believe that the Company currently has the necessary working capital to support existing operations for at least the next twelve months. The Company believes that we will be successful in renewing or renegotiating the PMC loans and/or other debt. But, there are no assurances that this refinancing will be completed. We anticipate that our primary capital source will be positive cash flow from operations. We believe we can achieve positive cash flow by a combination of achieving our sales goals and implementing cost reductions. Historically, we have financed our operations primarily through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines of creditfrom financial institutions, 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 will continue to 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. These losses, among other things, have had To alleviate these conditions, management is currently evaluating various funding alternatives and may continueseek to have an adverse effect on our working capital, total assets and stockholders’ equity. Ifraise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we are unable to achieve profitability, the market valueseek additional sources of our common stock would decline andfinancing, there would be a material adverse effect on our financial condition.
The Company has engaged a specialty valuation and advisory services firm to assist management and the board of directors in determining a plan to maximize the value of property, plant and equipment. As of this report date, management is considering various alternatives and has not yet committed to any specific plans to sell or dispose of any assets and/or to exit or cease any of the current activities. The Company expects that a decision related to the plan to maximize the value of property plant and equipment may occur either shortly before the pending rights offering or in early 2018. Accordingly, as decisions are made, and actions are committed to, the Company will recognize the results in the financial statements. These actions may lead to certain charges including, but not limited to additional cash-related expenses, non-cash impairment charges, discontinued operations and/or other costs in connection with exit and disposal activities. Such transactions will be recognized when appropriate and may require cash payments for obligations such as one-time employee involuntary termination benefits, lease and other contract termination costs, costs to close facilities, employee relocation costs and ongoing benefit arrangements.
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 would be available to us on acceptablefavorable terms or at all. If adequate funds are not available or are not availableOur ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.
During the first nine months of 2022, the Company continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses.
As noted above, the Company remains focused on acceptable terms,driving sales growth, improving margin, and reducing freight costs. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. During 2021, the Company experienced elevated transportation costs over the prior year and anticipates these costs to remain elevated for the balance of 2022. Plans have been implemented to mitigate the impact of these costs.
| F-6 |
Recent Trends - Market Conditions
During the period ended September 30, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Although the U.S. economy continued to grow during the first quarter of 2022, the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may not be able to pursueimpact our business objectivesin future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and would belabor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to reducemanufacture our level of operations, including reducing infrastructure, promotions, personnelproducts and other operating expenses. These events could adversely affect our business, resultsoperations. We expect the inflationary trends and supply chain pressures to continue throughout the remainder of operations2022.
Through September 30, 2022, the Company experienced elevated freight costs as a result of a higher transportation market as the capacity in the freight market has not kept up with demand. The Company believes these challenges will continue throughout the year. In addition, the Company experienced increases in the pricing of several of its raw materials and financial condition. If adequate funds are not available or if they are not available on acceptable terms,delays in procuring several of these items. However, mitigation plans have been implemented to manage this risk. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to fundbenefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company anticipates a continued impact throughout 2022.
Our ability to operate without significant incremental negative operational impact from the growthCOVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through September 30, 2022, we maintained the consistency of our operations take advantage of opportunities, develop products or services or otherwise respond to competitive pressures could be significantly limited.
2. Significant Accounting Policies
Income (Loss) per Common Share
Basic income (loss) per share is computed by dividing the net income (loss) applicable to common stock holders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividingonset of the net income (loss) applicableCOVID-19 pandemic. We will continue to common stock holders byinnovate in managing our business, coordinating with our employees and suppliers to do our part in the weighted average number of common shares outstanding plusinfection prevention and remain flexible in responding to our customers and suppliers. However, 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 excludeduncertainty resulting from the computation when their effect is antidilutive.pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
The Company had potentially dilutive securities that consisted of:We have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
| September 30, | ||||||||
| 2017 | 2016 | |||||||
| Warrants | 1,908,616 | 803,909 | ||||||
| Series A Preferred Stock | 37,644 | 37,644 | ||||||
| Options | 714,500 | 952,000 | ||||||
| Total | 2,660,760 | 1,793,553 | ||||||
Use of estimatesEstimates
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, impairment reserve on equipment held for sale, analysis of impairments of recorded intangibles,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, assumptions madeservices.
| F-7 |
Revenue Recognition
The Company recognizes revenue in valuing derivative liabilities and valuation of deferred tax assets.
Recent Accounting Pronouncements
In May 2014, the Financialaccordance with Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “RevenueCodification (ASC) 606, Revenue from Contracts with Customers”Customers (“ASC 606”). ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAPRevenue and replace it with a principle based approach for determining revenue recognition. Under ASU 2014-09, revenue iscosts of sales are recognized when acontrol 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. 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 fulfilment activity rather than a promised service to the customer. 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-fulfilment. 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.
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, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. 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. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive.
For the periods ended September 30, 2022 and 2021, 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, 2022 | September 30, 2021 | |||||||
| Warrants | 12,547,289 | 3,098,479 | ||||||
| Options | 8,836,872 | 11,260,876 | ||||||
| Convertible Note Payable | 22,457,782 | - | ||||||
| Vested restricted common stock | - | - | ||||||
| Unvested restricted common stock | 175,430 | 172,639 | ||||||
| Series A Convertible Preferred stock | 37,644 | 37,644 | ||||||
| Total | 44,055,017 | 14,569,638 | ||||||
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, and ASU 2016-20 all of which clarify certain implementation guidance within ASU 2014-09. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method).financing costs. The Company has concluded that this new pronouncement will require a reclassification of discount expenses currently included in bad debt expense as a reduction of net sales by the same amount. No other impact of adopting this new guidanceaccounts for such grants issued and vesting based on its financial position, results of operations, and cash flows is expected. The Company will adopt the provisions of this statement in the first quarter of fiscal 2018.
In February 2016, the FASB issued ASU No. 2016-02, “Leases”. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest period presented in the financial statements. The Company has evaluated the expected impact that the standard could have on its financial statements and related disclosures and expects to adopt standard with the reporting period ending December 31, 2018.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treatASC 718, Compensation-Stock Compensation whereby the value of the effectaward is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize theservices rendered.
The fair value of the down roundCompany’s stock options is 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 restricted stock, and future dividends. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
| F-8 |
Advertising Costs
Advertising costs are expensed as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effectiveincurred and are included in selling and marketing expense. Advertising costs for fiscal years beginning after December 15, 2018,the three months ended September 30, 2022 and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The adoption of ASU 2017-11 is not expected to have any impact on2021, aggregated $116 and $347, respectively. Advertising costs for the Company’s financial statement presentation or disclosures.nine months ended September 30, 2022 and 2021, aggregated $536 and $1,050, respectively.
Concentrations
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
ConcentrationsNet sales.
During the three months ended September 30, 2017, the Company had two2022, three customers that accounted for 19%16%, 11%, and 15%10% of gross sales, respectively, and 22% and 19% of sales induring the same period in the prior year. During the Nine Monthsnine months ended September 30, 2017, the Company had two2022, three customers that accounted for 21%19%, 11%, and 11% respectively10% of sales, and 24% and 13% of sales in the same period in the prior year. No other customer accounted for more than 10% of gross sales in the periods.
As of September 30, 2017, the Company had two customers that accounted for 19% and 17% respectively, of accounts receivable. As of December 31, 2016, the Company had two customers that accounted for 28% and 12% of accounts receivable. No other customer accounted for more than 10% accounts receivable as of those dates.
respectively. During the three months ended September 30, 2017,2021, one customer accounted for 24% of sales, and during the nine months ended September 30, 2021, two customers accounted for 21% and 11% of sales, respectively. No other customers exceeded 10% of sales in either period.
Accounts receivable. As of September 30, 2022, the Company had accounts receivable from three customers which comprised 18%, 13%, and 10% of its accounts receivable. As of December 31, 2021, the Company had accounts receivable from one vendor that accounted for 18%customer which comprised 18% of all purchases, and 24%its accounts receivable. No other customers exceeded 10% of all purchasesaccounts receivable in the same period in the prior year.either period.
Purchases from vendors. During the Nine Monthsthree months ended September 30, 2017,2022, one vendor accounted for 18% of purchases. During the Companynine months ended September 30, 2022, one vendor accounted for 15% of purchases. During the three months ended September 30, 2021, two vendors accounted for 13% and 12% of purchases, respectively. During the nine months ended September 30, 2021, two vendors accounted for 12% and 12% of purchases, respectively. No other vendors exceeded 10% of purchases in either period.
Accounts payable. As of September 30, 2022, the Company’s had one vendor that accounted for 18%which comprised 13% of purchases and 26% in the same period in the prior year. No othertotal accounts payable. As of December 31, 2021, no vendor accounted for more than 10% the total accounts payable. No other vendors exceeded 10% of purchases in the periods.
As of September 30, 2017, the Company had one vendor that accounted for 24% of all payables. As of December 31, 2016, the Company had one vendor that accounted for 12% of all payables. No other vendor accounted for more than 10% ofgross accounts payable as of that date.in either period.
Fair Value of Financial Instruments
The Company uses various inputs in determining the fair value of its investmentsfinancial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivitysubjectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASBASC 820 defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets: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 due to the fact that thebecause interest rates on these obligations are based on prevailing market interest rates.
| F-9 |
AsRecent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”).” ASU 2020-06 reduces the number of September 30, 2017,accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related disclosures.
In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 31,15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures.
Recently Issued Accounting Pronouncements Not Yet Adopted
In September 2016, the Company’s balance sheets included the warrant liabilityFASB issued ASU 2016-13, Measurement of $74,000 and $775,000 respectively, which wereCredit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on Level 2 measurements.current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
3. InventoryOther 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 financial statements.
2. Inventory
Inventory is valued at the lower of cost (first-in, first-outfirst-out) or market) and,net realizable value, net of reserves,write downs, and is comprised of the following (in thousands):
Schedule of Inventory
September 30, 2022 | December 31, 2021 | |||||||
| Raw materials and packaging | $ | 10,396 | $ | 11,221 | ||||
| Finished products | 9,520 | 5,828 | ||||||
| Total | $ | 19,916 | $ | 17,049 | ||||
| F-10 |
3. Property and Equipment
Property and equipment is comprised of the following (in thousands):
Schedule of Property and Equipment
September 30, 2022 | December 31, 2021 | |||||||
| Right-of-use assets under operating leases | $ | 724 | $ | 724 | ||||
| Computer hardware and software | 400 | 400 | ||||||
| Machinery and equipment | 429 | 429 | ||||||
| Total cost | 1,553 | 1,553 | ||||||
| Accumulated depreciation and amortization | (727 | ) | (561 | ) | ||||
| Net book value | $ | 826 | $ | 992 | ||||
Depreciation expense for the nine months ended September 30, 2022 and 2021 was $79 and $106, respectively, and amortization of right-of-use assets for the nine months ended September 30, 2022 and 2021 was $86 and $74, respectively.
4. Intangible Assets
Intangible assets consist of the following (in thousands):
Summary of Intangible Assets
September 30, 2022 | December 31, 2021 | |||||||
| Brand names | $ | 578 | $ | 576 | ||||
| Trademarks | 48 | 48 | ||||||
| Total | $ | 626 | $ | 624 | ||||
5. Line of Credit
Amounts outstanding under the Company’s credit facilities are as of:follows (in thousands):
| September 30, 2017 | December 31, 2016 | |||||||
| Raw Materials and Packaging | $ | 4,844,000 | $ | 3,874,000 | ||||
| Finished Goods | 2,971,000 | 3,011,000 | ||||||
| Total Inventory | $ | 7,815,000 | $ | 6,885,000 | ||||
Schedule of Amount Outstanding Under Credit Facilities
September 30, 2022 | December 31, 2021 | |||||||
| Line of credit – Alterna Capital Solutions | $ | 9,506 | $ | - | ||||
| Line of credit – Rosenthal & Rosenthal | - | 10,229 | ||||||
| Capitalized financing costs | (403 | ) | - | |||||
| Total | $ | 9,103 | $ | 10,229 | ||||
Alterna Capital Solutions
On March 28, 2022, the Company entered into a financing agreement with Alterna Capital Solutions (“ACS”), for a line of credit to replace its existing credit facility. The ACS line of credit is for a term of 3 years, provides for borrowings of up to $13,000, and is secured by eligible accounts receivable and inventory. An over advance rider provides for up to $400 of additional borrowing above the collateralized base (the “Over Advance”) up to a total borrowing of $13,000. At September 30, 2022, $151 of current availability and $3,494 of borrowing capacity was available under the financing agreement.
Borrowings based on receivables bears an interest of prime plus 4.75% but not less than 8.0%. Borrowings based on inventory bears an interest of prime plus 5.25% but not less than 8.5%. The additional over advance rider bears a rate of prime plus 12.75%, but not less than 16.00%. Additionally, the line of credit is subject to monthly monitoring fee of $1 with a minimum usage requirement on the credit facility. A loan balance of less than $1,500 will bear interest at a rate in line with account receivables advances plus the monthly monitoring fee of $1.
The Company incurred $483 of direct costs of the transaction, consisting primarily of broker, bank and legal fees. These costs have been capitalized and are being amortized over the 3-year life of the ACS agreement. For the nine months ended September 30, 2022, amortization of debt discount was $80, and as of September 30, 2022, the remaining unamortized debt discount balance is $403.
| F-11 |
Rosenthal & Rosenthal (paid off in full on March 30, 2022)
In 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that provided a maximum borrowing capacity of $13,000, based on eligible accounts receivable and inventories (the “permitted borrowings”) plus advances (an “over-advance” of up to $4,000) in excess of permitted borrowings. On March 30, 2022, the Company paid in full the outstanding balance on its credit facility with Rosenthal with proceeds from ACS discussed above.
Borrowings under the Rosenthal financing agreement bore interest at the greater of prime or 4.75%, plus an additional 2.0% to 3.5% depending on whether the borrowing was based upon receivables, inventory or is an over-advance. Additionally, the Rosenthal line of credit was subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $4.
The line of credit was secured by substantially all of the assets, excluding intellectual property, of the Company. The over-advance was secured by all of Reed’s intellectual property collateral. On March 11, 2021, the Company entered into an amendment to the Rosenthal agreement and replaced a standby letter of credit of $1,500 by a guarantor with a $2,000 pledge of securities to Rosenthal by John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust. John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party, and greater than 5% beneficial owner of Reed’s common stock. As consideration for the collateral support, Mr. Bello received shares of Reed’s restricted stock, with a fair value of $472 which was recorded a prepaid financing cost. During the nine months ended September 30, 2017,2022, $121 of the Company increased our reserve for obsolescence to $290,000 from $115,000prepaid financing cost was amortized, and as of December 31, 2016.September 30, 2022, there was no remaining unamortized prepaid finance cost balance.
4. Property and Equipment
Property and equipment are comprisedThe Company annually incurs an additional $130 of fees from the bank, which is equal to 1% of the following as of:
| September 30, 2017 | December 31, 2016 | |||||||
| Land | $ | 1,107,000 | $ | 1,107,000 | ||||
| Building | 2,360,000 | 1,875,000 | ||||||
| Vehicles | 651,000 | 666,000 | ||||||
| Machinery and equipment | 2,090,000 | 3,686,000 | ||||||
| Equipment under capital leases | 226,000 | 226,000 | ||||||
| Office equipment | 506,000 | 475,000 | ||||||
| Construction In Progress | 2,429,000 | 4,554,000 | ||||||
| Book value | 9,369,000 | 12,589,000 | ||||||
| Accumulated depreciation | (5,280,000 | ) | (4,863,000 | ) | ||||
| Net book value | $ | 4,089,000 | $ | 7,726,000 | ||||
Depreciation expense$13,000 borrowing limit. Amortization of this debt discount was $65 and $162 for the Nine Monthsnine months ended September 30, 20172022, and 20162021, respectively. At September 30, 2022, there was $430,000no remaining unamortized debt discount balance.
6. Secured Convertible Notes Payable
Amounts outstanding under secured convertible notes payable are as follows (in thousands):
Schedule of Debt
September 30, 2022 | December 31, 2021 | |||||||
| Secured Convertible Note Payable | $ | 13,350 | $ | - | ||||
| Accrued interest | 386 | - | ||||||
| Capitalized financing costs | (1,157 | ) | - | |||||
| Total | $ | 12,579 | $ | - | ||||
| Current portion | (4,414 | ) | - | |||||
| Long term portion | $ | 8,165 | $ | - | ||||
Secured Convertible Note Payable
On May 9, 2022, the Company entered into a note purchase agreement and $503,000, respectively.
agreed to issue $11,250 of secured convertible promissory notes (the “Notes”) to Whitebox Advisors, LLC (“Whitebox”). During the three months ended September 30, 2017,2022, the Company engaged a specialty valuation and advisory services firmissued an additional $2,500 of Notes to assist management andWhitebox. The net proceeds from the board of directors in determining a plan to maximize the value of property, plant and equipment. As of September 30, 2017, management is considering various alternatives and has not yet committed to any specific plans. However, management has identified certain assets classified as equipment held for sale that are likely to be divested. Management has estimated the fair valueissuance of the assets to beNotes, after deducting placement agent fees and other debt issuance costs, was approximately $2,465,000, and accordingly the Company recognized an impairment loss during$12,430. During the three months ended September 30, 20172022, the Company made principal payments of $400, and at September 30, 2022, the principal balance of the Notes was $13,350. Also, during the nine months ended September 30, 2022, accrued interest of $386 was recorded.
| F-12 |
The Notes bear interest at a rate of 10% per annum (with 5% per annum payable in the amount of $2,000,000.
| September 30, 2017 | December 31, 2016 | |||||||
| Equipment Held for sale | $ | 4,465,000 | $ | - | ||||
| Reserve | (2,000,000 | ) | $ | - | ||||
| Net book value | $ | 2,465,000 | $ | - | ||||
5. Intangible Assetscash and Impairment Policy
Intangible assets are comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names will contribute cash flows5% per annum payable “in kind” by adding such accrued interest 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 carryingprincipal 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. Based on management’s measurement, there were no indications of impairment at September 30, 2017.
| September 30,2017 | December 31, 2016 | |||||||
| Virgil’s | $ | 576,000 | $ | 576,000 | ||||
| Sonoma Sparkler | 229,000 | 229,000 | ||||||
| Brand names | $ | 805,000 | $ | 805,000 | ||||
6. Advances from Related Parties
During the year ended September 30, 2017, Chris Reed (the former CEO and current CIO), Daniel Miles (CFO) and Robert Reed (brother of Chris Reed, CIO) advanced funds of $260,000and $120,00 respectively to the Company for working capital uses. During the period, the Company repaid to Mr. Chris Reed $120,000 that was advanced from him, and also repaid Robert Reed $103,000 of the advances due him. As of September 30, 2017, the aggregate amount due for the remaining unpaid advances was $277,000. Notes).The advancesNotes are unsecured, non-interest bearing with no formal terms of repayment.
7. Notes Payable
The Company has a Loan and Security Agreement with PMC Financial Services Group, LLC (PMC) that provides a $6,000,000 revolving line of credit, a $3,000,000 term loan and a Capital Expansion loan up to $4,700,000. The loans are secured by substantially all the assets of the Company and were initially due on January 1, 2019. As a condition to PMC’s approval of the transaction described in Note 10, and Purchaser’s subordinated security interest, on April 21, 2017, Reed’s Inc. and PMC entered into Amendment Number Fifteen to Amended and Restated Loan and Security Agreement changing the Revolving Loan Maturity Date, Term Loan Maturity Date, Cap Ex Loan Maturity Date and Term Loan B Maturity Date from January 1, 2019, to October 21, 2018.
The notes are as follows:
Revolving Line of Credit
The agreement provides a $6,000,000 revolving line of credit. Consistent with prior year, the revolving line of credit has been expanded by an additional $630,000 to accommodate prepaid inventory. This expansion is payable by the end of the current year. At September 30, 2017 and December 31, 2016, the aggregate amount outstanding under the line of credit was $5,153,000 and $4,384,000, respectively.
The interest rate on the Revolving Loan is discussed below. In addition, there is a monthly management fee of .45% of the average monthly loan balance.
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. Asassets (including all of its intellectual property) and are subject to a collateral sharing agreement with ACS, the Company’s existing secured lender (see Note 5). The Notes mature on May 9, 2025. In November 2022, the Company paid off the $2,500 of Notes in cash, and issued shares of its common stock valued at $411 related to make whole interest on the $2,500 Notes.
Beginning in August 2022, $11,250 of the Notes have an amortization feature, which, if elected by a majority of Notes holders, require the Company to make monthly payments of principal of $200 plus accrued interest. Each amortization payment shall, at the option of the Company, be payable in cash or in shares of the Company’s common stock. Any portion of an amortization payment or interest payment that is paid in shares of the Company’s common stock shall be priced at 90% of the average of the daily volume weighted average prices of the Company’s common stock during the five trading days prior to the date of amortization payment. During the three months ended September 30, 2017,2022, the Company had $305,000 borrowing availabilitypaid, in cash, principal amortization payments of $400 plus accrued interest. Remaining amortization payments of principal would total approximately $600 million in 2022, $2.4 million in 2023, $2.4 million in 2024, and $800,000 in 2025, leaving a principal balance of the Notes of approximately $4.7 million due at maturity.
The initial conversion rate of the Notes is 4.1503 shares of the Company’s common stock per one dollar of principal converted, subject to customary anti-dilution adjustments. Upon conversion, holders of the Note are entitled to receive an interest make-whole payment, as defined. The make-whole amount is equal to the sum of the remaining scheduled payments of interest on the Notes to be converted that would be due if such notes matured May 9, 2025, payable, at the Company’s option in cash or in shares of common stock. The Company’s ability to settle conversions and make amortization payments and interest make-whole payments using shares of the Company’s common stock is subject to certain limitations set forth in the Notes. If the Company experiences a “fundamental change” (e.g., a change of control of the Company, the sale of substantially all of the Company’s assets, among others), the holders of the notes have the right to require the Company to repurchase the notes for cash at a repurchase price equal to 100% of the principal amount, plus accrued interest thereon. The holders of the Notes who redeem their Notes in connection with a make-whole fundamental change are, under certain circumstances, entitled to an increase in the conversion rate. At September 30, 2022, the Notes, including accrued interest, are convertible into shares of the Company’s common stock pursuant to a share conversion cap limit as defined in the Notes.
The Notes contain certain covenants, including, among others, a limitation to the amount of borrowings under the line of credit agreement.
The line of credit matures on October 21, 2018 and was subject to a 1% prepayment penalty for prepayment prior to the first anniversary of the effective date.
Bank Notes
Bank notes consist of the following as of September 30, 2017 and December 31, 2016:
| September 30,2017 | December 31, 2016 | |||||||
| Term Loans | $ | 3,000,000 | $ | 3,000,000 | ||||
| Capex loan | 4,135,000 | 3,950,000 | ||||||
| Valuation discount | - | (78,000 | ) | |||||
| Net | 7,135,000 | 6,872,000 | ||||||
| Current portion | (953,000 | ) | (953,000 | ) | ||||
| Long term portion | $ | 6,182,000 | $ | 5,919,000 | ||||
In connection with the Loan and Security Agreement with PMC, the Company entered into two Term Loans of $1,500,000 each, for an aggregate borrowing of $3,000,000. The term loans are secured by all of the unencumbered assets of the Company and are due on October 21, 2018. The annual interest rate on the loans are discussed below.ACS (see Note 5). As of September 30, 2017, and December 31, 2016,2022, the amount outstandingCompany was $3,000,000 and $3,000,000 respectively.
In connectionnot in compliance with the Loan and Security Agreement with PMC,covenant. On November 13, 2022, the Company entered into a Capital expansion loanLimited Waiver Agreement with Whitebox, pursuant to which after amendment allowsthe Company was provided a total borrowing of $4,700,000. The loans are secured by allwaiver of the property and equipment purchased under the loan. The interest rate on the CAPEX loan is the prime rate plus 5.75% (9.5% atcovenant violation as of September 30, 2017). Interest only is payable on CAPEX Loans through January 31, 2017,2022, in exchange for payment of $96 and issuance of shares of its common stock valued at which time principal$289.
The Company incurred $1,320 of direct costs of the transactions, consisting primarily of placement agent fees and interest will be aggregatedother offering expenses. These costs have been capitalized and repaid in equal monthly paymentsare being amortized over the 3-year life of principal and interest based on 48 month amortization. Currently and until the second tranche has been closed,Notes. For the estimated amount that will become due in the next twelvenine months is $953,000. Atended September 30, 2017 and December 31, 2016, the total balance on the CAPEX loan2022, amortization of debt discount was $4,135,000 and $3,950,000 respectively,$162, and as of September 30, 2017,2022, the remaining unamortized debt discount balance is $1,157.
The Company had future borrowing availability of $330,000.
In addition,entered into a registration rights agreement with the holders, pursuant to which the Company agreed to pre-payregister for resale shares issuable under the CAPEX Loan by at least $300,000 fromNotes.
7. Leases Liabilities
During the proceeds of the sale of idle equipment, if such sale were to occur.nine months ended September 30, 2022 and 2021, lease costs totaled $86 and $71, respectively.
In conjunction with this loan the Company placed equipment with a cost of $341,000 and a net book value of $250,000 at a co-packing facility to enable the co-packer to manufacture our products. Should the Company be unable to secure access to the equipment in the event of failure of the co-packer, the amount will become due and payable by the Company.
In prior years, the Company issued 225,000 warrants to PMC as part of various restructuring of the notes. The aggregate value of the warrants were valued at $179,000 using the Black Scholes Merton option pricing model and was recorded as a valuation discount and is being amortized over the term loans.
On December 7, 2016, the Company agreed to reprice the exercise price of 175,000 common stock purchase warrants granted. The incremental value of the warrants before and after the modification of $38,000 is being amortized over the remaining term of the loans.
As of December 31, 2016, the unamortized balance of the loans was $78,000.2021, operating lease liabilities totaled $555. During the Nine Monthsnine months ended September 30, 20172022, the remaining unamortized balance was fully amortized.
Notwithstanding the other borrowing terms above, if Excess Borrowing Availability under the $6 million Revolving lineCompany made payments of credit remains more than $1,500,000 at all times during the preceding month (currently the Company’s Borrowing Availability is $305,000) the additional interest rate for all loans will be eliminated. The following chart summarizes the loans as$118 towards its operating lease liability. As of September 30, 2017,2022, operating lease liabilities totaled $437.
| Description | Rate | Base Interest Rate | Increase in Prime | Current Original rate | Additional Interest | Current rate | ||||||||||||||||||
| Term A | P+5.75 | % | 9.00 | % | 1.00 | % | 10.00 | % | 3.00 | % | 13.00 | % | ||||||||||||
| Term B | P+11.60 | % | 14.85 | % | 1.00 | % | 15.85 | % | 0.00 | % | 15.85 | % | ||||||||||||
| Line of Credit (Prime Plus) | P+0.35 | % | 3.60 | % | 1.00 | % | 4.60 | % | 3.00 | % | 7.60 | % | ||||||||||||
| Capital Loans | P+5.75 | % | 9.00 | % | 1.00 | % | 10.00 | % | 3.00 | % | 13.00 | % | ||||||||||||
As noted above, there is a .45% monthly monitoring fee for the line of credit. When added to current rate, the current annual rate is approximately 13.5%
8. Obligations under Capital Leases
The Company leases equipment for its brewery operations with an aggregate value of $944,000 under Nine non-cancelable capital leases. Monthly payments range from $341 to $10,441 per month, including interest, at interest rates ranging from 6.51% to 17.31% per annum. At September 30, 2017, monthly payments under these leases aggregated $19,000. The leases expire at various dates through 2020.2022, the weighted average remaining lease terms for an operating lease are 2.25 years. As of September 30, 2022, the weighted average discount rate on the operating lease is 12.60%.
Future minimum lease payments under capital leases are as follows:
| F-13 |
| Years Ending September 30, | ||||
| 2018 | $ | 195,000 | ||
| 2019 | 246,000 | |||
| 2020 | 84,000 | |||
| 2021 | 16,000 | |||
| 2022 | - | |||
| Total payments | $ | 541,000 | ||
| Less: Amount representing interest | (61,000 | ) | ||
| Present value of net minimum lease payments | $ | 480,000 | ||
| Less: Current portion | (194,000 | ) | ||
| Non-current portion | $ | 286,000 | ||
8. Stockholder’s Equity
9. Long-term Financing Obligation
Common stock issuances
Long term financing obligation is comprised of the following as of:
| September 30,2017 | December 31,2016 | |||||||
| Financing obligation | $ | 2,239,000 | $ | 2,378,000 | ||||
| Valuation discount | (742,000 | ) | (825,000 | ) | ||||
| Net long term financing obligation | $ | 1,497,000 | $ | 1,553,000 | ||||
| Less current portion | (214,000 | ) | (190,000 | ) | ||||
| Long term financing obligation | $ | 1,283,000 | $ | 1,363,000 | ||||
On June 15, 2009,March 10, 2022, the Company closed escrow on the sale of its two buildings and its brewery equipment and concurrently entered into a long-term leasesecurities purchase agreement forwith certain institutional and accredited investors pursuant to which the same property and equipment. In connection with the lease the Company has the optioninvestors agreed to repurchase the buildings and brewery equipment from 12 months after the commencement date to the endpurchase shares of the lease term at the greater of the fair market value or an agreed upon amount. Since the lease contains a buyback provisionCompany’s common stock 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 of approximately $35,000 are recorded as interest expense and a reduction in the financing obligation at an implicit rate of 9.9%. During the period ended September 30, 2017 and 2016, the Company recorded interest expense of $172,000 and $184,000, respectively.
In connection with the financing obligation and subsequent amendments, the Company issued an aggregate of 600,000 warrants to purchase its common stock. The 600,000 warrants were valued at an aggregate amount of $1,336,000 and were recorded as valuation discount at date of issuance, and are being amortized over 15 years, the term of the purchase option. The balance of the unamortized valuation discount at December 31, 2016 was $825,000. Amortization of valuation discount was $83,000 during the Nine Months ended September 30, 2017 and the unamortized balance as of September 30, 2017 was $742,000.
10. Convertible Note
Convertible note consists of the following:
| September 30,2017 | December 31,2016 | |||||||
| 12% Convertible Note Payable | $ | 3,400,000 | $ | - | ||||
| Accrued Interest | 181,000 | |||||||
| Valuation Discount | (2,833,000 | ) | 0 | |||||
| Convertible Note Payable, Net | $ | 748,000 | $ | - | ||||
On April 21, 2017 (“Closing Date”), pursuant to a Securities Purchase Agreement (“Purchase Agreement”), the Company sold and issued a secured convertible subordinated non-redeemable note in the principal amount of $3,400,000 (“Note”) and a warrant to purchase 1,416,6679,297,289 shares of common stock (“Warrant Shares”) to Raptor/Harbor Reeds SPV LLC (“Purchaser”). The Note bears interest atin a rateprivate placement (including shares of 12% per annum, compounded monthly on a 360-day year/ 30-day month basis. The Note is secured by a second priority security interest in the Company’s assets, which is subordinatecommon stock and warrants to the first priority security interest of PMC Financial Services Group, LLC (“PMC”). The Note matures on the two-year anniversary of the Closing date and may not be prepaid. After 180 days, the Note may be converted, at any time and from time to time, into 1,133,333purchase 1,624,071 shares of common stock to investors who are officers and directors of the Company). The warrants have an exercise price of $0.2877 per share for a period of five years commencing six months from the closing date of March 11, 2022. The purchase price per share of common stock and associated warrant was $ for certain investors and was $ for investors who are officers and directors of the Company (“Conversion Shares”).Wunderlich Securities,in compliance with the Company’s placement agent, received a feerules of $160,000 for placement agency services. In addition the Company incurred other direct costs of $157,000 resulting inNasdaq Stock Market. The net proceeds to the Company, of $3,083,000.
after deducting placement agent fees and other offering expenses, was approximately $5.0 million. The Warrant Shares will expire on the fifth (5th) anniversary of the Closing Dateofficers and have an exercise price equal to $4.00. The Warrant Shares will not be exercisable until 180 days after the Closing date. The Note and Warrant contain customary anti-dilution provisions and the Conversion Shares and Warrant Shares are subject to a registration rights agreement. The investor was granted a right to participate in future financing transactionsdirectors of the Company purchased approximately $1.1 million of the securities in the offering.
In January 2022, the Company issued shares of common stock valued at $37 to John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust as consideration for a termthe $2,000 pledge of two years. In addition, the warrants issuedsecurities to the investor included a fundamental transaction provision, and, as such, were accounted for as warrant liability. Upon their issuance, the fair value of these warrants was determined to be $3,302,000 using the Black-Scholes-Merton option pricing modelRosenthal (see Note 115). John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party, and greater than 5% beneficial owner of Reed’s common stock.
On May 5, 2021, the Company entered into a placement agency agreement with Roth Capital Partners, LLC (the “Placement Agent”) and a securities purchase agreement with a certain purchaser for further discussionthe purchase of warrant liability)shares of the Company’s common stock, par value $ per share, in an offering of securities registered under an effective registration statement filed with the Securities and Exchange Commission (“SEC”). In accordance with the current accounting guidance $3,083,000 of this amount was recorded as a valuation discount, and the excess of the fair value of the warrant liability at the issuance date over the amount allocated to valuation discount of $219,000 was accounted for as a financing cost. As such,offering, the Company recognized a debt discount at the dates of issuance in the aggregate amount of $3,400,000 related to the fair value of the warrant liability of $3,083,000 and cash offering costs of $317,000. The debt discount is to be amortized over the term of the note. Amortization of the note discount during the Nine Months ended September 30, 2017 was $567,000, and the unamortized debt discount at September 30, 2017 was $2,833,000.
On April 19, 2017, three accredited investors that are party to the Securities Purchase Agreement dated May 26, 2016 and hold participation rights in the Company’s financing transactions agreed to waive their participation rights with regard to the April 21, 2017 financing. In consideration, these investors’ participation rights, expiring in May 2017, were extended for a period of two years. In addition, the Company increased the terms of their outstanding warrants by one year and reduced the exercise price from $4.25 to $3.00, The incremental change in their fair value of $187,000 was accounted for as an increase in the fair value of the warrant liabilities as of the date of modification and recorded as a cost of warrant modification. In addition, the Company also issued five-year warrants to purchase an aggregate of 210,111sold shares of common stock, at the exercisea price of $3.00$ per share. The offering closed on May 7, 2021 and total proceeds received, net of fees, were $7,327. The Placement Agent was paid a total cash fee at the closing of the Offering equal to these investors. The newly issued warrants contain customary anti-dilution provisions and included a fundamental transaction provision, and were accounted6.5% of the gross cash proceeds received by the Company from the sale of the shares of common stock in the offering.
Common stock repurchases
During the nine months ended September 30, 2022, the Company repurchased shares of common stock from an officer for as warrant liability. As such,$2 based on the fairmarket value of share on the new warrants of $571,000 was accounted for as a warrant liability and a financing cost atdate repurchased. The Company retired the issue date. Fair value was determined usingshares.
During the Black-Scholes-Merton option pricing model.
On July 13, 2017,nine months ended September 30, 2021, the Company entered into warrant exercise agreements with the investors to reprice the warrants to purchase 1,416,667 and 210,111repurchased shares of our common stock discussed above (see Note 11from an officer for additional information).
11. Warrants
Warrant Activity
$15 based on the market value of share on the date repurchased. The Company has issued warrants to investors and a placement agent as part of our financing transactions. retired the shares.
Restricted common stock
| Shares | Weighted- | Weighted- | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2016 | 803,909 | $ | 4.50 | 4.00 | $ | 26,000 | ||||||||||
| Granted | 2,227,083 | $ | 1.62 | |||||||||||||
| Exercised | (1,122,376 | ) | $ | 1.50 | ||||||||||||
| Forfeited or expired | - | |||||||||||||||
| Outstanding at September 30, 2017 | 1,908,616 | $ | 2.50 | 4.22 | $ | 709,000 | ||||||||||
| Exercisable at September 30, 2017 | 611,507 | $ | 4.19 | 3.32 | $ | 57,000 | ||||||||||
Summary of Non-vested Restricted Stock Activity
Unvested Shares | Issuable Shares | Fair Value at Date of Issuance | Weighted Average Grant Date Fair Value | |||||||||||||
| Balance, December 31, 2021 | 111,164 | - | $ | 54 | 0.89 | |||||||||||
| Granted | 441,892 | - | 150 | 0.35 | ||||||||||||
| Vested | (337,454 | ) | 337,024 | - | - | |||||||||||
| Forfeited | (40,172 | ) | (15 | ) | 0.37 | |||||||||||
| Issued | - | (337,024 | ) | (154 | ) | - | ||||||||||
| Balance, September 30, 2022 | 175,430 | - | $ | 44 | $ | 0.48 | ||||||||||
| F-14 |
On April 21, 2017January 26, 2022, the board of directors of Reed’s, pursuant to a joint recommendation from its governance and April 19, 2017,compensation committees, set the cash compensation of its non-employee directors at $50,000 for fiscal 2022, payable quarterly in accordance with the company’s policies for non-employee director compensation. In addition, the Company granted warrants restricted stock awards to purchase 1,416,667 shares and 210,111 shares, respectively, of our common stock in connection with a debt financing transaction (see Note 10 for additional information). These warrants initially included a “fundamental transaction clause” that resulted in the fair valuefive non-employee directors. of these warrants of $3,873,000 being characterized as liabilities (see Note 11). All such warrants were included in the July 13, 2017 repricing discussed below.
On July 13, 2017, the Company entered into warrant exercise agreements with certain investors holding participation rights in our financing transactions to reprice warrants to purchase 1,906,925 shares of our common stock.restricted stock awards vested on February 1, 2022, vested on May 1, 2022, and vested on August 1, 2022. The warrants were also revised to lower the exercise price from $3 and $4 per share to $1.50 per share,remaining restricted stock awards will vest November 1, 2022. The Company determined that the incremental cost before and after the modification of the warrants resulted in an incremental charge of $1,109,000. The warrants were also changed to modify language pertaining to a “fundamental transaction” that eliminated these warrants from being classified as warrant liabilities. As a result, the investors exercised warrants into 1,122,376 shares of common stock at the repriced $1.50 per share resulting in proceeds to the Company of $1,650,000. The Company’s modification of the fundamental transaction clause enabled the remaining investor warrants of 784,549 with a fair value of $1,033,000 to be reclassified from a liability to equity during the third quarter ended September 30, 2017 (see Warrant Liability below for additional information).
Additionally, as part of the warrant exercise agreements, the Company issued to the investors, pro rata based on the number of shares each investor exercised, a second tranche of warrants to purchase 512,560 shares of our common stock and on July 19, 2017 a third tranche of warrants to purchase 87,745 shares of our common stock. The second tranche of warrants have a term of 5 years, may be exercised commencing six months after issuance and have an exercise price of $2.00. The third tranche of warrants were exercisable immediately upon issuance for a term of 5 years and have an exercise price of $1.55. The newly issued warrants contain customary anti-dilution provisions. As such, the aggregate fair value of the new warrantsstock awards was $ based on the market price of $689,000our common stock price which was accounted for$ per share on the date of grants and is amortized as a financing costshares vest.
The total fair value of restricted common stock vesting during the nine months ended September 30, 2022 and 2021, was $137 and $234, respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of September 30, 2022, the amount of unvested compensation related to issuances of restricted common stock was $, which will be recognized as an expense in future periods as the shares vest. When calculating basic loss per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their respective issue dates. Fair value was determined usinggrant date.
Stock options
Schedule of Stock Option Activity
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | 10,522,995 | $ | 1.12 | $ | - | |||||||||||
| Granted | 685,456 | $ | 0.24 | |||||||||||||
| Exercised | - | $ | - | |||||||||||||
| Unvested forfeited | (1,391,874 | ) | $ | 1.21 | ||||||||||||
| Vested forfeited | (979,705 | ) | $ | 1.34 | ||||||||||||
| Outstanding at September 30, 2022 | 8,836,872 | $ | 1.02 | $ | - | |||||||||||
| Exercisable at September 30, 2022 | 4,584,987 | $ | 1.14 | $ | - | |||||||||||
During the Company’s statementnine months ended September 30, 2022, the Company approved options exercisable into shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. options were issued to employees, options vesting annually over a -year vesting period, and options vesting based on performance criteria to be established by the board of operations includesdirectors.
The stock options are exercisable at a charge of $1,480,000 related to warrant financing costs.
The intrinsic value was calculated as the difference between the closing market price, which was $2.20 and the exercise price of the Company’s common stock warrants as of September 30, 2017.
Warrant Liability
As of December 31, 2016, the Company had 418,908 outstanding warrants that included certain fundamental transaction terms.$ per share and expire in . The Company determined that the fundamental transaction terms of these warrants could give rise to an obligation of the Company to pay cash to the warrant holders. As such, in accordance with Accounting Standards Codification Topic 480, “Distinguishing Liabilities from Equity”, thetotal fair value of these warrantsoptions at grant date was classified asapproximately $, which was determined using a liability on the Company’s balance sheet and the corresponding changes in fair value is required to be recorded in the Company’s statements of operations in each subsequent reporting period. The fair value of these warrant liabilities at December 31, 2016 was $775,000. During the period ended September 30, 2017 the Company issued an additional 1,626,778 of these warrants with a fair value of $3,873,000 that contained the same terms that required the recognition of these warrants as liabilities. During the period ended September 30, 2017 holders converted 1,122,376 of these warrants into common shares. The fair value of the liability of these warrants at the date of exercise was $1,601,000, and was recorded as an adjustment to paid in capital. At the same date, the Company and the holders of the remaining warrants agreed to modify the language of the fundamental transaction clause where the definition became dependent on obtaining board approval, thus eliminating the need for the liability classification of warrants. As such, the fair value of these warrants of $1,033,000 was recorded as an adjustment to capital. Outstanding shares at September 30, 2017 include 138,762 warrants with a fair value of $74,000 which are classified as a warrant liability.
The warrant liability fair value was valued at the following reporting, issuance and modification dates using the Black-Scholes-Merton option pricing model with the following assumptions:
| As of | Upon Issuance | Upon Modification | Upon Modification | As of | ||||||||||||||||
| December 31, 2016 | April 21, 2017 | April 21, 2017 | July 13, 2017 | September 30, 2017 | ||||||||||||||||
| Stock Price | $ | 4.10 | $ | 4.75 | $ | 4.75 | $ | 2.35 | $ | 2.20 | ||||||||||
| Risk free interest rate | 1.58 | % | 1.51 | % | 1.51 | % | 1.65 | % | 1.62 | % | ||||||||||
| Expected Volatility | 54.71 | % | 49.33 | % | 49.33 | % | 53.75 | % | 53.95 | % | ||||||||||
| Expected life in years | 4.42 | 5.00 | 5.00 | 4.77 to 4.89 | 3.67 | |||||||||||||||
| Expected dividend yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
| Number of Warrants | 418,909 | 1,626,778 | 280,147 | 1,906,925 | 138,762 | |||||||||||||||
| Fair Value of Warrants | $ | 775,000 | $ | 3,873,000 | $ | 187,000 | $ | 1,109,000 | $ | 74,000 | ||||||||||
Theaverage assumption: stock price of $ share, expected term of , volatility of %, dividend rate of %, and weighted average risk-free interest rate used inof %. The expected term represents the calculation wasweighted-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 on rates established by the Federal Reserve Bank. The Company uses theupon historical volatility of itsthe Company’s common stock to estimatestock; the expected volatility. The expected life of the warrant was determined by the remaining contractual life of the warrant instrument. The expected dividend yield was determined to be zerois based on the fact that the Company has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders in the future.future; and 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.
During the Nine Monthsnine months ended September 30, 2017,2022 and 2021, the Company’s statementCompany recognized $448 and $1,264 of operations includes a gaincompensation expense relating to vested stock options. As of $3,236,000September 30, 2022, the aggregate amount of unvested compensation related to stock options was approximately $ which will be recognized as an expense as the changeoptions vest in fair valuefuture periods through March 28, 2026.
| F-15 |
As of the warrant liability and a charge of $1,296,000 related to warrant modification costs. In addition to the fair value gain, the warrant liability balance for the Nine Months ended September 30, 20017 was further reduced by $2,634,000 from exercised shares2022, the outstanding and a reclassification to equity as discussed in Warrant Activity above.
12. Stockholders’ Equity
Preferred Stock
On June 28, 2017 dividends were paid on the Series A Preferred stock in the amount of $5,000, by issuing 1,640 shares of common stock.
Common Stock
During the Nine Months ended September 30, 2017, the Company:
13. Share-Based Payments
Stockexercisable options granted under our equity incentive plans generally vest over 3 years from the date of grant, at 33% per year or over 4 years at 25% per year and expire 5 years from the date of grant. Stock options may be granted to eligible employees, directors and consultants of the Company. The following table summarizes stock option activity for the Nine Months ended September 30, 2017:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2016 | 1,048,500 | $ | 4.68 | 3.80 | $ | 61,000 | ||||||||||
| Granted | - | $ | - | |||||||||||||
| Exercised | - | $ | - | |||||||||||||
| Forfeited or expired | (334,000 | ) | $ | 4.85 | ||||||||||||
| Outstanding at September 30, 2017 | 714,500 | $ | 4.60 | 3.34 | $ | - | ||||||||||
| Exercisable at September 30, 2017 | 503,200 | $ | 4.65 | 2.23 | $ | - | ||||||||||
During the Nine Months ended September 30, 2017, the Company did not grant any stock options to any employee or other party.
have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of September 30, 2022, which was $2.20,$, and the exercise price of the outstanding stock options.
10. Stock Warrants
As of September 30, 2022, the Company has issued warrants to purchase an aggregate of 12,547,289 shares of common stock. The Company’s warrant activity during the nine months ended September 30, 2022 is as follows:
Schedule of Warrant Activity
| Shares | Weighted- Average | Weighted- Average Remaining Contractual | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2021 | 4,538,479 | $ | 1.02 | $ | - | |||||||||||
| Granted | 9,297,289 | 0.29 | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | (1,288,479 | ) | $ | 1.69 | - | |||||||||||
| Outstanding at September 30, 2022 | 12,547,289 | $ | 0.41 | $ | - | |||||||||||
| Exercisable at September 30, 2022 | 12,547,289 | $ | 0.41 | $ | - | |||||||||||
On March 10, 2022, the Company entered into a securities purchase agreement with certain institutional and accredited investors pursuant to which the investors agreed to purchase shares of the Company’s common stock and warrants to purchase 9,297,289 shares of common stock in a private placement. The warrants have an exercise price of $0.2877 per share for a period of five years commencing nine months from the closing date of March 11, 2022 (see Note 7).
On November 24, 2021, the Company granted John Bello, current Chairman, significant shareholder and former Interim Chief Executive Officer of Reed’s, who is a related party, a 5-year warrant to purchase 1,500,000 shares of the Company common stock with an exercise price of $0.46. The fair value of the warrants granted was determined to be $458 and was recorded as a prepaid financing costs. The unamortized balance of prepaid financing costs was $310 on December 31, 2021. During the nine months ended September 30, 2022, the Company amortized $310 of prepaid financing costs to interest expense, leaving no remaining prepaid financing cost balance at September 30, 2022.
As of September 30, 2022, the outstanding and exercisable warrants have no aggregate intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of September 30, 2022, which was $, and the exercise price of the Company’s stock options aswarrants to purchase common stock.
11. Related Party Activities
In 2018, the Company completed the sale of September 30, 2017. Stock-based compensation recognizedits Los Angeles manufacturing plant to California Custom Beverage, LLC (“CCB”), an entity owned by Christopher J. Reed, a related party, and CCB assumed the monthly payments on the Company’s statement of operationsour lease obligation for the Nine Months Ended September 30, 2017Los Angeles manufacturing plant. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $1,200 of security with the lessor. The deposit is secured by Mr. Reed’s pledge of common stock to the lessor and 2016 was $199,000guaranteed personally by Mr. Reed and $449,000, respectively.his wife. As of September 30, 2017, unamortized stock-based compensation2022, $800 has been deposited with the lessor and Mr. Reed has placed approximately pledged shares valued at $96 that remain in escrow with the lessor.
Beginning in 2019, we are to receive a 5% royalty on CCB’s private label sales to existing customers and a 5% referral fee on CCB’s private label sales to referred customers for three years. The royalty agreement terminated December 31, 2021. During the nine months ended September 30, 2022 and 2021, the Company recorded royalty revenue from CCB of $220,000$0 and $4, respectively.
At December 31, 2021, the Company had an aggregate receivable balance from CCB of $933. During the nine months ended September 30, 2022, the Company advanced expenses of $569, leaving an aggregate receivable balance of $1,502 at September 30, 2022.
At September 30, 2022 and December 31, 2021, the Company had accounts payable due to CCB of $1,811 and $614, respectively.
Lindsay Martin, daughter of a director of the Company, is expected to be recognized over a periodemployed as Vice President of 1.24 years.Marketing. Ms. Martin was paid approximately $131 and $178, respectively, for her services during the nine months ended September 30, 2022 and 2021, respectively.
12. Subsequent Events
14.
Subsequent Events
On October 23, 2017,to September 30, 2022, the Company filed withissued 100,430 shares of common stock on the SEC a rights offering (Form S-1). The rights offering is an offer to existing shareholders to purchase Company stock for purposesvesting of enabling the Company to fund key initiatives and retire certain debt. There is no assurance that such rights offering will be successful.restricted shares.
| F-16 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements and Information
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 report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.
Overview
In the prior quarter, the Company announced the installation of a new Chief Executive Officer, a new Chief Operating Officer and created the new position of Chief Innovation Officer. This newly installed leadership team has conducted a thorough review of the business including its current performance and core strategies. The Company is now in the process of executing significant changes to the Company’s strategy that includes a prioritization on the core Reed’s and Virgil’s brands, a discontinuing of non-core SKU’s and potentially repositioning the Company operationally to further outsource the manufacturing of its products. As such, the company is in the process of evaluating the current production capabilities of the Company which may allow for additional sales and marketing investment. Since it is,more likely than not, that the recently purchased equipment will not be installed in the LA Plant, in the quarter, the Company impaired the production assets that are not already in use.
In addition to our GAAP results, the ultimate use of the LA Plant will be analyzed by a leading professional services team once engaged to determine the Company’s options going forward. The analysis is focused on existing equipment, the infrastructure improvements in use, the real estate agreements in effect and other transition costs used in those operations. It is not known at this time what the ultimate resolution will be. The net assets under review have a current net book value of approximately $5,000,000 in addition to the impaired assets.
In conjunction with the rights offering in process, the Company will periodically update shareholders via filings with SEC and press releases with any significant news related to this process.
The Company recently announced key components to the transition and therefore the financial results presented and discussed here do not yet reflect the improvements currently underway led by the reconstituted board and the new management leadership. Our third quarter 2017 results reflect the first price increase in seven years which compressed volume temporarily in August but led to a record increase in gross revenue as measured by a 12-ounce case of $0.43 in the quarter just ended. The Company’s continued high manufacturing costs have led management to pursue the engagement of a professional services company to help reposition the Company’s manufacturing footprint and strategy.
Since 2016, the company has had sales and production of 111 separate SKU’s. The Company has streamlined the portfolio to focus on a total of 28 SKUs which are made up of two brands; Reeds and Virgils with twelve flavors and two primary packaging configurations consisting of 24 pack cases and 12 pack cases. There are two other segments of SKU’s that we use to categorize our portfolio; non-core and discontinued. The non-core category is comprised of SKU’s that are being evaluated and include such products as ginger candy, private label and swing top lid beverages. The discontinued category is defined as SKU’s not in the immediate plans of the company. Reed’s may re-introduce these items as market conditions change or improve.
Core brand focus - During the just completed third quarter, the Company took its first general price increase for established brands in almost seven years. Up to this point, the Company’s practice was to fully absorbed material price increases in its various input costs which negatively impacted our gross margins. While volume was compressed in the month after the increase, shipments and future orders have rebounded leading us to believe that the market has absorbed the price increase and the core brands may continue to improve in volume. Core brands represented 80% of the volume and increased gross selling price by $0.43 per 12-ounce case while COGS decreased $0.11 per 12-ounce case. As management continues to optimize and refine its pricing and discounting strategies, we believe there will be opportunities for further positive improvements in both price and targeted discounting.
Non-core brands and SKU’s –During the just completed quarter, non-core brands were almost exclusively private label and totaled 18% of the volume. Gross selling price decreased by $0.07 per 12-ounce case while COGS increased $0.36 per 12-ounce case.
Discontinued brands and SKUs – During the just completed quarter, discontinued brands were almost exclusively secondary packaging and specialty brands that totaled 2% of the volume. Gross selling price decreased by $4.24 per 12-ounce case while COGS decreased $1.33 per 12-ounce case.
Historical year over year top line comparisons
The total portfolio volume rate of decline slowed to 12.7% from 16.4% in the third quarter over the same quarter in the prior year for the nine months ended September 30, 2017. Total gross revenue rate of decline slowed to 10.8% in the third quarter over the same quarter in the prior year as compared to 13.8% for the nine months ended September 30, 2017.
Discountsfollowing discussion includes Modified EBITDA as a percentage of revenue increased 0.9% versus the same quarter in the prior year and increased 2.2% versus the year to date period in the prior year.
Cost of goods sold for all products declined in the third quarter 12.3% while non-core products cost of goods sold declined 51.8% versus the same quarter in the prior year. Year to date cost of goods sold for all products declined in the third quarter 14.8% and non-core products cost of goods sold year to date declined 53.8% over the same period in the prior year. Cost of goods sold for core products declined 5.4% in the third quarter and 7.0% year to date over the same period in the prior year.
Net margin declined 4.4% and 4.9% over the same quarter and year to date periods versus the prior year driven by increased idle plant charges.
Overall expenses during the third quarter increased by 13.3% but continue down 3.0% year to date over the prior year.
Delivery and General and administrative related expenses were up 24.2% and 26.3% respectively versus the same prior year periods. The delivery expense increase was due to a higher number of transports from east coast manufacturers to the west coast, while the General and administrative increase reflects higher director, higher filing fees, timing of the shareholder meeting and executive expenses. Sales expenses decreased 9.8% and 19.5% over the same time periods in the prior year primarily driven by lower employee costs, third party broker fees and consultant usage. Interest and warrant liability expense grew 345% year to date over the same time period in the prior year reflecting the change in fair value of the warrant liability.
The operating loss increased 601% in the third quarter and 168% year to date versus the same time periods in the prior year reflecting the decline in the non-core product volume, increased delivery expenses, increased idle plant cost and additional interest carrying costs.
Results of Operations – Three-months ended September 30, 2017
The following table sets forth key statistics for the Three Months Ended September 30, 2017 and 2016, respectively.
| Three months ended Sept. 30, | Pct. | |||||||||||
| 2017 | 2016 | Change | ||||||||||
| Gross sales | 12,065,000 | 13,529,000 | -11 | % | ||||||||
| Less: Promotional and other allowances | 1,178,000 | 1,200,000 | -2 | % | ||||||||
| Net sales | $ | 10,887,000 | $ | 12,329,000 | -12 | % | ||||||
| Cost of tangible goods sold | 8,133,000 | 9,275,000 | -12 | % | ||||||||
| As a percentage of: | ||||||||||||
| Gross sales | 67 | % | 69 | % | ||||||||
| Net sales | 75 | % | 75 | % | ||||||||
| Cost of goods sold – idle capacity | 690,000 | 168,000 | 311 | % | ||||||||
| As a percentage of net sales | 6 | % | 1 | % | ||||||||
| Gross profit | 2,062,000 | $ | 2,886,000 | -28 | % | |||||||
| Gross profit margin as a percentage of net sales | 19 | % | 23 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | 1,119,000 | 901,000 | 24 | % | ||||||||
| Selling and marketing | 828,000 | 918,000 | -10 | % | ||||||||
| General and administrative | 1,105,000 | 871,000 | 27 | % | ||||||||
| Impairment Expense (Note 4) | 2,000,000 | 0 | 100 | % | ||||||||
| Total Operating expenses | $ | 5,052,000 | $ | 2,690,000 | 88 | % | ||||||
| Income from operations | $ | (2,990,000 | ) | $ | 196,000 | -1626 | % | |||||
| Interest expense and other expense | (2,627,000 | ) | (415,000 | ) | 533 | % | ||||||
| Net Income/ loss to stockholders | $ | (5,617,000 | ) | $ | (219,000 | ) | 2465 | % | ||||
| Shares outstanding | 15,033,000 | 13,908,000 | 10 | % | ||||||||
| Net income(loss) per share | $ | (0.37 | ) | $ | (0.02 | ) | 2234 | % | ||||
Metrics
| Third Quarter 2017 | ||||||||||||||||||||||||||||||||||||||||
| 12 Ounce Volume | 12 Ounce Gross Sales Revenue | Per 12 ounces | ||||||||||||||||||||||||||||||||||||||
| Gross Sales | 2017 | 2016 | Change | 2017 | 2016 | Change | 2017 | 2016 | Change | % | ||||||||||||||||||||||||||||||
| Reeds Beverages | 308,000 | 328,000 | -6.1 | % | $ | 5,292,000 | $ | 5,580,000 | -5.2 | % | 17.18 | 17.01 | 0.17 | 1.0 | % | |||||||||||||||||||||||||
| Virgils | 200,000 | 216,000 | -7.4 | % | 3,655,000 | 3,884,000 | -5.9 | % | 18.28 | 17.98 | 0.29 | 1.6 | % | |||||||||||||||||||||||||||
| Kombucha | 2,000 | 15,000 | -86.7 | % | 18,000 | 328,000 | -94.5 | % | 9.00 | 21.87 | (12.87 | ) | -58.8 | % | ||||||||||||||||||||||||||
| All Other Reeds Beverages | 38,000 | 47,000 | -19.1 | % | 666,000 | 785,000 | -15.2 | % | 17.53 | 16.70 | 0.82 | 4.9 | % | |||||||||||||||||||||||||||
| Private Label | 126,000 | 166,000 | -24.1 | % | 2,003,000 | 2,549,000 | -21.4 | % | 15.90 | 15.36 | 0.54 | 3.5 | % | |||||||||||||||||||||||||||
| Reeds Candy | 408,000 | 353,000 | 15.6 | % | ||||||||||||||||||||||||||||||||||||
| All Other Non-Beverages | 23,000 | 50,000 | -54.0 | % | ||||||||||||||||||||||||||||||||||||
| Total Gross Sales | 674,000 | 772,000 | -12.7 | % | $ | 12,065,000 | $ | 13,529,000 | -10.8 | % | 17.90 | 17.52 | 0.38 | 2.1 | % | |||||||||||||||||||||||||
| Sales Discounts Unallocated to Specific SKU's* | (1,178,000 | ) | (1,200,000 | ) | -1.8 | % | (1.75 | ) | (1.55 | ) | (0.19 | ) | 12.4 | % | ||||||||||||||||||||||||||
| Net Sales | 674,000 | 772,000 | -12.7 | % | $ | 10,887,000 | $ | 12,329,000 | -11.7 | % | 16.15 | 15.97 | 0.18 | 1.1 | % | |||||||||||||||||||||||||
| Gross Sales per 12 ounce | $ | 17.90 | $ | 17.52 | 2.1 | % | ||||||||||||||||||||||||||||||||||
| Net Sales per 12 ounce | $ | 16.15 | $ | 15.97 | 1.1 | % | ||||||||||||||||||||||||||||||||||
| Cost of Goods Sold | ||||||||||||||||||||||||||||||||||||||||
| Reeds Beverages | 308,000 | 328,000 | -6.1 | % | $ | 3,508,000 | $ | 3,712,000 | -5.5 | % | 11.39 | 11.32 | 0.07 | 0.6 | % | |||||||||||||||||||||||||
| Virgil’s | 200,000 | 216,000 | -7.4 | % | 2,215,000 | 2,345,000 | -5.5 | % | 11.08 | 10.86 | 0.22 | 2.0 | % | |||||||||||||||||||||||||||
| Kombucha | 2,000 | 15,000 | -86.7 | % | 19,000 | 173,000 | -89.0 | % | 9.50 | 11.53 | (2.03 | ) | -17.6 | % | ||||||||||||||||||||||||||
| All Other Reeds Beverages | 38,000 | 47,000 | -19.1 | % | 436,000 | 486,000 | -10.3 | % | 11.47 | 10.34 | 1.13 | 11.0 | % | |||||||||||||||||||||||||||
| Private Label | 126,000 | 166,000 | -24.1 | % | 1,345,000 | 1,694,000 | -20.6 | % | 10.67 | 10.20 | 0.47 | 4.6 | % | |||||||||||||||||||||||||||
| Costs Unallocated to Specific SKU's* | 233,000 | 468,000 | -50.2 | % | ||||||||||||||||||||||||||||||||||||
| Reeds Candy | 280,000 | 268,000 | 4.5 | % | ||||||||||||||||||||||||||||||||||||
| All Other Non-Beverages | 97,000 | 129,000 | -24.8 | % | ||||||||||||||||||||||||||||||||||||
| Cost of Goods Sold | 674,000 | 772,000 | -12.7 | % | $ | 8,133,000 | $ | 9,275,000 | -12.3 | % | 12.07 | 12.01 | 0.05 | 0.4 | % | |||||||||||||||||||||||||
| Additional Cost of Goods Produced | ||||||||||||||||||||||||||||||||||||||||
| Idle Plant | 690,000 | 168,000 | 310.7 | % | 1.02 | 0.22 | 0.81 | 370.4 | % | |||||||||||||||||||||||||||||||
| Cost of Goods produced and Sold | 674,000 | 772,000 | $ | 8,825,000 | $ | 9,443,000 | -6.6 | % | 13.09 | 12.23 | 0.86 | 7.0 | % | |||||||||||||||||||||||||||
| Cost of Goods Sold Per 12 ounce | $ | 12.07 | $ | 12.01 | 0.4 | % | ||||||||||||||||||||||||||||||||||
| Cost of Goods Produced Per 12 ounce | $ | 13.09 | $ | 12.23 | 7.0 | % | ||||||||||||||||||||||||||||||||||
| Gross Profit including Idle Plant | 2,064,000 | 2,886,000 | -28.5 | % | ||||||||||||||||||||||||||||||||||||
| Gross Profit on a 12 ounce basis including Idle Plant | 3.06 | 3.74 | -18.1 | % | ||||||||||||||||||||||||||||||||||||
| Gross Margin including Idle Plant | 19.0 | % | 23.4 | % | -4.4 | % | ||||||||||||||||||||||||||||||||||
* Discounts and costs incurred that do not relate to specific SKU's
* Discounts and costs incurred that do not relate to specific SKU’s
* 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 usefulsupplemental measure of our performance. We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Gross salesIn addition, we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA is not a measure that is recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.
The following discussion also includes the use of gross billing, a key performance indicator and metric. Gross billing represents invoiced amounts to distributors and retailers, excluding sales adjustments. Gross billing may include deductions from MSRP or “list price”, where applicable, and excludes promotional costs of generating such sales. Management utilizes gross billing to monitor operating performance of products and salespersons, which performance can be masked by the effect of promotional or other allowances. Management believes that the presentation of gross billing provides a useful measure of Reed’s operating performance.
Overview
During the period ended September 30, 2022, the Company continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses. In addition, it continues to build its innovation pipeline with sustained growth in Reed’s Real Ginger Ale and Reed’s Classic Mule. At the end of the first quarter, the Company shipped its rebranded Virgil’s zero sugar line in 12 oz. sleek cans and produced its new line of Reed’s Hard Ginger Ale.
As noted above, the Company remains focused on driving sales growth, improving margin, and reducing freight costs. The sales growth focus is on channel expansion, new product introduction and improved sales execution. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. During 2021, the Company experienced elevated transportation costs over the prior year. Whilethese costs remained elevated for the first six months of 2022, averaging $4.47 per case, during the 3 month period ended 9/30/22 transportation costs were reduced to $3.38 per case or a 24% decline. . Plans have been implemented to further mitigate the impact of these costs.
Recent Trends – Market Conditions
During the period ended September 30, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Although the U.S. economy continued to grow during the first quarter of 2022, the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout the remainder of 2022.
| 1 |
During the three months ended September 30, 2022, the Company experienced relief from elevated freight costs. The average cost of shipping and handling for the six months ended June 30, 2022 was $4.47 per case, while is was $3.38 per case for the three month period ended September 30, 2022. The Company believes these challenges will continue throughout the year. In addition, the Company experienced increases in the pricing of several of its raw materials and delays in procuring several of these items. However, mitigation plans have been implemented to manage this risk. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company anticipates a continued impact throughout 2022.
Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through September 30, 2022, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
We have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
Results of Operations – Three Months Ended September 30, 2022, as compared to September 30, 2021
The following table sets forth key statistics for the three months ended September 30, 2022 and 2021, respectively, in thousands.
Three Months Ended September 30, | Pct. | |||||||||||
| 2022 | 2021 | Change | ||||||||||
| Gross billing (A) | $ | 14,101 | $ | 14,538 | -3 | % | ||||||
| Less: Promotional and other allowances (B) | 2,007 | 1,136 | 77 | % | ||||||||
| Net sales | $ | 12,094 | $ | 13,402 | -10 | % | ||||||
| Cost of goods sold | 9,659 | 9,530 | 1 | % | ||||||||
| % of Gross billing | 68 | % | 66 | % | ||||||||
| % of Net sales | 80 | % | 71 | % | ||||||||
| Gross profit | $ | 2,435 | $ | 3,872 | -37 | % | ||||||
| % of Net sales | 20 | % | 29 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | $ | 2,249 | $ | 3,093 | -27 | % | ||||||
| % of Net sales | 19 | % | 23 | % | ||||||||
| Dollar per case ($) | $ | 3.38 | $ | 3.89 | ||||||||
| Selling and marketing | 1,220 | 2,644 | -54 | % | ||||||||
| % of Net sales | 10 | % | 20 | % | ||||||||
| General and administrative | 1,420 | 1,788 | -21 | % | ||||||||
| % of Net sales | 12 | % | 13 | % | ||||||||
| Total operating expenses | 4,889 | 7,525 | -35 | % | ||||||||
| Loss from operations | $ | (2,454 | ) | $ | (3,653 | ) | -33 | % | ||||
| Interest expense and other income (expense) | $ | (777 | ) | $ | (234 | ) | 232 | % | ||||
| Net loss | $ | (3,231 | ) | $ | (3,887 | ) | -17 | % | ||||
| Loss per share – basic and diluted | $ | (0.03 | ) | $ | (0.04 | ) | -37 | % | ||||
| Weighted average shares outstanding - basic & diluted | 112,652,320 | 93,644,935 | 20 | % | ||||||||
(A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and should not be used alone as an indicatorcan mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance in place of net sales.performance. Additionally, gross salesbilling may not be comparable to similarly titled measures used by other companies, as gross salesbilling has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receiptspractices.
(B) We define promotional and other allowances as promotional payments and allowances may becosts deducted from payments received from certain customers.
**Althoughgross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. 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. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform withto 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.
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Sales, Cost of Sales, and Gross Margins
Gross sales dollars decreased inThe following chart sets forth key statistics for the transition of the Company’s top line activity from the second quarter of 2021 through the third quarter of 20172022.
| 2022 | 2021 | Q3 Per Case | Sept YTD Per Case | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Q1 | Q2 | Q3 | YTD | Q3 vs PY | YTD vs PY | Q1 | Q2 | Q3 | YTD | 2022 | 2021 | vs PY | 2022 | 2021 | vs PY | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cases: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reed’s | 415 | 410 | 357 | 1,182 | -15 | % | 1 | % | 395 | 353 | 420 | 1,168 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Virgil’s | 302 | 351 | 304 | 957 | -18 | % | -9 | % | 339 | 347 | 371 | 1,057 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Core | 717 | 761 | 661 | 2,139 | -16 | % | -4 | % | 734 | 700 | 791 | 2,225 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Non Core | - | - | - | - | - | % | -100 | % | - | 2 | - | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Candy | 4 | 5 | 4 | 13 | -20 | % | -38 | % | 8 | 8 | 5 | 21 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 721 | 766 | 665 | 2,152 | -16 | % | -4 | % | 742 | 710 | 796 | 2,248 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Billing: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Core | $ | 13,287 | $ | 14,972 | $ | 13,876 | $ | 42,135 | -2 | % | 7 | % | $ | 12,955 | $ | 12,200 | $ | 14,199 | $ | 39,354 | $ | 21.0 | $ | 18.0 | 17 | % | $ | 19.7 | $ | 17.7 | 11 | % | ||||||||||||||||||||||||||||||||||
| Non Core | 75 | 16 | 47 | 138 | -68 | % | -57 | % | 33 | 140 | 148 | 320 | $ | - | $ | - | - | % | - | 160.0 | -% | |||||||||||||||||||||||||||||||||||||||||||||
| Candy | 274 | 167 | 178 | 619 | -7 | % | -20 | % | 294 | 286 | 191 | 771 | $ | 44.5 | $ | 38.2 | 16 | % | 47.6 | 36.7 | 30 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 13,636 | $ | 15,155 | $ | 14,101 | $ | 42,892 | -3 | % | 6 | % | $ | 13,281 | $ | 12,626 | $ | 14,538 | $ | 40,445 | $ | 21.2 | $ | 18.3 | 16 | % | 19.9 | 18.0 | 11 | % | ||||||||||||||||||||||||||||||||||||
| Discounts: | Total | $ | (1,454 | ) | $ | (1,430 | ) | $ | (2,007 | ) | $ | (4,891 | ) | 77 | % | 35 | % | $ | (1,135 | ) | $ | (1,356 | ) | $ | (1,136 | ) | $ | (3,627 | ) | $ | (3.0 | ) | $ | (1.4 | ) | 111 | % | $ | (2.3 | ) | $ | (1.6 | ) | 41 | % | |||||||||||||||||||||
| COGS: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Core | $ | (9,150 | ) | $ | (10,286 | ) | $ | (9,548 | ) | $ | (28,984 | ) | 2 | % | 14 | % | $ | (8,122 | ) | $ | (7,851 | ) | $ | (9,372 | ) | $ | (25,345 | ) | $ | (14.4 | ) | $ | (11.9 | ) | 22 | % | $ | (13.6 | ) | $ | (11.4 | ) | 19 | % | ||||||||||||||||||||||
| Non Core | (13 | ) | (14 | ) | (5 | ) | (32 | ) | -62 | % | 22 | % | (6 | ) | (7 | ) | (13 | ) | (26 | ) | - | - | - | % | - | 13.1 | - | |||||||||||||||||||||||||||||||||||||||
| Candy | (87 | ) | (126 | ) | (106 | ) | (319 | ) | -27 | % | -30 | % | (165 | ) | (143 | ) | (145 | ) | (453 | ) | (26.5 | ) | (29.0 | ) | -9 | % | (24.5 | ) | (21.6 | ) | -14 | % | ||||||||||||||||||||||||||||||||||
| Total | $ | (9,250 | ) | $ | (10,426 | ) | $ | (9,659 | ) | $ | (29,335 | ) | 1 | % | 14 | % | $ | (8,293 | ) | $ | (8,001 | ) | $ | (9,530 | ) | $ | (25,824 | ) | $ | (14.5 | ) | $ | (12.0 | ) | 21 | % | $ | (13.6 | ) | $ | (11.5 | ) | 19 | % | ||||||||||||||||||||||
| Gross Margin: | $ | 2,932 | $ | 3,299 | $ | 2,435 | $ | 8,666 | -37 | % | -21 | % | $ | 3,853 | $ | 3,269 | $ | 3,872 | $ | 10,995 | $ | 3.7 | $ | 4.9 | -25 | % | $ | 4.0 | $ | 4.9 | -18 | % | ||||||||||||||||||||||||||||||||||
| as % Net Sales | 24 | % | 24 | % | 20 | % | 23 | % | 32 | % | 29 | % | 29 | % | 30 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||
Sales, Cost of Sales, and Gross Margins
As part of the Company’s ongoing initiative to $12,065,000simplify and streamline operations the Company has identified core products on which to place its strategic focus. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs.
Core beverage volume for the three months ended September 30, 2022, represents 99% of all beverage volume.
Core brand gross billing decreased by 2% to $13,876 compared to $14,199 during the same period last year, driven by Reed’s volume decline of 15% and Virgil’s volume decline of 18%. The result is a decrease in total gross billing of 3%, to $14,101 during the three months ended September 30, 2022, from $13,529,000$14,538 in the same period in 2016 or 10.8%. Onlast year. Price on our core brands increased 17% to $20.99 per case.
Discounts as a 12-ounce serving basis,percentage of gross sales increased $0.38 per 12-ounce serving or 2.1%to 14% from 8% in the three-monthssame period last year. As a result, net sales revenue decreased 10% in the three months ended September 30, 2017 when2022, to $12,094, compared to $13,402 in the same period last year.
Cost of Goods Sold
Cost of goods sold increased $129 during the three months ended September 30, 2022, as compared to the same period inlast year. As a percentage of net sales, cost of goods sold for the prior year. The main driver of the increase on a 12-ounce basisthree months ended September 30,2022, was a mid-quarter price increase.
Net sales decreased in the first quarter of 201780% as compared to $10,887,000 from $12,329,000 in71% for the same period last year.
The total cost of goods per case increased to $14.52 per case in 2016. On a 12-ounce serving basis, net sales increased $0.18the three months ended September 30, 2022, from $11.97 per 12-ounce serving or 1.1% incase for the same period in 2016.last year. The main drivercost of goods sold per case on core brands was $14.44 during the increase was a mid-quarter price increase partially offset 12.4% increase in promotional costs or $0.19 per 12-ounce serving. It should be noted that with the candy supply returningthree months ended September 30, 2022, compared to normal levels, candy sales increased $55,000 or 16.6% over$11.85 for the same period in 2016.last year.
Cost of Goods Sold and ProducedGross Margin
Cost of tangible goods sold consists ofGross margin decreased to 20% for the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments and internal transfer costs. Idle capacity consists of direct production costs of our Los Angeles plant in excess of charges allocatedthree months ended September 30, 2022, compared to our finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and depreciation. Our charges29% 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 of goodssold decreased in the third quarter of 2017 to $8,133,000 from $9,275,000 in the same period in 2016. On a 12-ounce serving basis, cost of goodssoldincreased $0.06 per 12-ounce case or 0.4% in the same period in 2016. The main driver of increase was in product mix cost increases of 12.3% on lower unit volume.last year.
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Cost of goodsproduced decreased in the third quarter of 2017 to $8,825,000 from $9,443,000 in the same period in 2016. On a 12-ounce serving basis, cost of goodssoldincreased $0.86 per 12-ounce case or 7.0% in the same period in 2016. The main driver of the increase was the cost of private label production at the LA Plant over the same period in 2016.Operating Expenses
Gross Margin
Gross margin declined in third quarter of 2017 to $2,062,000 from $2,886,000 in the same period in 2016. On a 12-ounce serving basis, gross margin declined $0.68 or 18.0% year over year. The main driver of the decrease was the $0.80 increase in idle plant costs partially offset by $0.18 per 12-ounce case in higher revenue.
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousewarehousing costs incurred for handling our finished goods after production. Delivery and handling expenses increaseddecreased by $844 in the third quarter of 2017three months ended September 30, 2022, to $1,119,000$2,249 from $901,000 or 24.2% versus the same period in 2016. The temporary increase was due to our west coast production being dedicated to private label causing an increase in transportation costs from the east coast to the west coast of our branded products. On a percentage of net sales basis, delivery costs were up to 10.3% from 7.3%$3,093 in the same period last year. Delivery costs in 2016.the three months ended September 30, 2022, were 19% of net sales and $3.38 per case, compared to 23% of net sales and $3.89 per case during the same period last year. The decrease was primarily related to freight costs associated with lower inventory production during the third quarter.
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows. Selling and marketing expenses continued their decline in third quarter of 2017were $1,220 during the three months ended September 30, 2022, compared to $828,000 from $918,000 or 9.8% in$2,644 during the same period in 2016. Onlast year. As a percentage of net sales, selling and marketing costs were flat at 7.5%10% of net sales during the three months ended September 30, 2022, as compared to 20% of net sales during the same period last year. The decrease was driven by lower headcount, reduced marketing spend, stock compensation and distributor buyouts.
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increaseddecreased in third quarterthe three months ended September 30, 2022, to $1,420 from $1,788, a decrease of 2017 to $1,107,000 from $871,000 or 27.0% versus$368 over the same period in 2016. As a percentage of net sales, Generallast year. The decrease was driven by lower employee related costs and administrative expenses increased 3% to 10.1% from 7.1%. The main driver of the increase was an increase in support functions of $137,000stock compensation partially offset higher professional fees and miscellaneous expenses of $67,000. The increases were comprised of: legal expenses related to SEC filings of $50,000, increased filing fees of $61,000 and the timing of the shareholder meeting of $27,000.bad debt expense.
Loss from Operations
The loss from operations was ($2,990,000) in$2,454 for the three-monthsthree months ended September 30, 2017,2022, as compared to incomea loss of $196,000$3,653 in the same period of 2016 or an overall change of $3,186,000, The loss was comprised of the decrease inlast year driven by increased gross profit of $1,361,000, an increaseoffset by increases in deliveryoperating expenses of $319,000, an increase in general and administrative expenses of $234,000, an impairment of $2,000,000 for equipment that were offset partially by a decrease in sales expenses of $90,000.discussed above.
Interest and Finance Related ExpensesOther Expense
Interest expense and bank related charges increased to $757,000 inother income for the three-monthsthree months ended September 30, 2017, compared to expenses2022, consisted of $415,000 in$777 of interest expense. During the same period of 2016. The increase is primarily due to the cost of the convertible note accruedlast year, interest and debt discount amortizationother income consisted of $274,000.$234 of interest expense.
Warrant and financing cost totaled $1,870,000. This amount is made up of $1,798,000 cost of warrant modification and financing costs related to the convertible note offset by a derivative gain in the third quarter of $72,000 as explained in Note #10 to the financial statements.
Modified EBITDA
In addition to our GAAP results, we present AdjustedModified EBITDA as a supplemental measure of our performance. However, AdjustedModified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define AdjustedModified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, financing costs and changes in fair value of warrant liability.expense, legal settlements, and one-time restructuring-related costs including employee severance and asset impairment.
Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis.2alysis. In evaluating AdjustedModified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of AdjustedModified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
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Set forth below is a reconciliation of Adjusted EBITDAnet loss to net income (loss) for the three ended September 30, 2017 and 2016:
MODIFIED EBITDA SCHEDULE
Three months ended | ||||||||
| 2017 | 2016 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net income (loss) | $ | (5,617,000 | ) | $ | (219,000 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation | 171,000 | 214,000 | ||||||
| Interest expense | 757,000 | 415,000 | ||||||
| Stock option and warrant compensation | (20,000 | ) | 147,000 | |||||
| Impairment costs | 2,000,000 | - | ||||||
| Financing costs and warrant modification | 1,798,000 | - | ||||||
| Change in fair value of warrant liability | 72,000 | - | ||||||
| Total EBITDA adjustments | 4,778,000 | 776,000 | ||||||
| Modified EBITDA | $ | (839,000 | ) | $ | 557,000 | |||
The $1,396,000 decrease in modifiedModified EBITDA for the three months ended September 30, 2017 compared to the same period2022 and 2021 (unaudited; in 2016, resulted from the decreases in the EBITDA adjustments totaling $1,393,000 for the quarter ended September 30, 2017. The decrease is due to warrant modifications and the equipment impairment.thousands):
Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | (3,231 | ) | $ | (3,887 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation and amortization | 58 | 62 | ||||||
| Interest expense | 777 | 234 | ||||||
| Stock option and other noncash compensation | 214 | 501 | ||||||
| Total EBITDA adjustments | $ | 1,050 | $ | 797 | ||||
| Modified EBITDA | $ | (2,182 | ) | $ | (3,090 | ) | ||
We present AdjustedModified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. We believe investors will realize that the accounting required for liabilities as described in Note #10, impacts this quarter. In addition, we use AdjustedModified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisionsdecisions; and in communications with our board of directors concerning our financial performance. AdjustedModified EBITDA has limitations as an analytical tool, which includes, among others, the following:
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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 report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.
Results of Operations – Nine-monthsNine months ended September 30, 20172022
The following table sets forth key statistics for the Nine Months Endednine months ended September 30, 20172022 and 2016, respectively.2021, respectively, in thousands.
| Nine months ended Sept. 30, | Pct. | |||||||||||
| 2017 | 2016 | Change | ||||||||||
| Gross sales | 31,151,000 | $ | 36,141,000 | -14 | % | |||||||
| Less: Promotional and other allowances | 3,105,000 | 2,815,000 | 10 | % | ||||||||
| Net sales | $ | 28,046,000 | $ | 33,326,000 | -16 | % | ||||||
| Cost of tangible goods sold | 21,149,000 | 24,820,000 | -15 | % | ||||||||
| As a percentage of: | ||||||||||||
| Gross sales | 68 | % | 69 | % | ||||||||
| Net sales | 75 | % | 74 | % | ||||||||
| Cost of goods sold – idle capacity | 2,067,000 | 1,125,000 | 84 | % | ||||||||
| As a percentage of net sales | 7 | % | 3 | % | ||||||||
| Gross profit | 4,830,000 | $ | 7,381,000 | -35 | % | |||||||
| Gross profit margin as a percentage of net sales | 17 | % | 22 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | $ | 2,731,000 | $ | 2,815,000 | -3 | % | ||||||
| Selling and marketing | 2,344,000 | 2,911,000 | -19 | % | ||||||||
| General and administrative | 3,402,000 | 3,007,000 | 13 | % | ||||||||
| Impairment expense (Note 4) | 2,000,000 | - | 100 | % | ||||||||
| Total Operating expenses | $ | 10,477,000 | $ | 8,733,000 | 20 | % | ||||||
| Income from operations | $ | (5,647,000 | ) | $ | (1,352,000 | ) | 318 | % | ||||
| Interest expense and other expense | (1,810,000 | ) | (1,239,000 | ) | 46 | % | ||||||
| Net loss to stockholders | $ | (7,457,000 | ) | $ | (2,591,000 | ) | 188 | % | ||||
| Shares outstanding | 14,336,000 | 13,504,000 | 10 | % | ||||||||
| Net income(loss) per share | $ | (0.52 | ) | $ | (0.19 | ) | 162 | % | ||||
Nine Months Ended September 30, | Pct. | |||||||||||
| 2022 | 2021 | Change | ||||||||||
| Gross billing (A) | $ | 42,892 | $ | 40,445 | 6 | % | ||||||
| Less: Promotional and other allowances (B) | 4,891 | 3,627 | 35 | % | ||||||||
| Net sales | $ | 38,001 | $ | 36,818 | 3 | % | ||||||
| Cost of goods sold | 29,335 | 25,824 | 14 | % | ||||||||
| % of Gross billing | 68 | % | 64 | % | ||||||||
| % of Net sales | 77 | % | 70 | % | ||||||||
| Gross profit | $ | 8,666 | $ | 10,994 | -21 | % | ||||||
| % of Net sales | 23 | % | 30 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | $ | 8,893 | $ | 8,888 | 0 | % | ||||||
| % of Net sales | 23 | % | 24 | % | ||||||||
| Dollar per case ($) | 4.13 | 3.95 | ||||||||||
| Selling and marketing | 5,623 | 7,493 | -25 | % | ||||||||
| % of Net sales | 15 | % | 20 | % | ||||||||
| General and administrative | 5,319 | 6,227 | -15 | % | ||||||||
| % of Net sales | 14 | % | 17 | % | ||||||||
| Total operating expenses | 19,835 | 22,608 | -12 | % | ||||||||
| Loss from operations | $ | (11,169 | ) | $ | (11,614 | ) | -4 | % | ||||
| Interest expense and other income (expense) | (2,119 | ) | 78 | -2,817 | % | |||||||
| Net loss | $ | (13,288 | ) | $ | (11,536 | ) | 15 | % | ||||
| Loss per share – basic and diluted | $ | (0.13 | ) | $ | (0.13 | ) | 3 | % | ||||
| Weighted average shares outstanding - basic & diluted | 101,229,082 | 90,400,832 | 12 | % | ||||||||
Metrics
| (A) | We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing have been defined by our internal reporting practices. |
| Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
| 12 Ounce Volume | 12 Ounce Gross Sales Revenue | Per 12 ounces | ||||||||||||||||||||||||||||||||||||||
| Gross Sales | 2017 | 2016 | Change | 2017 | 2016 | Change | 2017 | 2016 | Change | % | ||||||||||||||||||||||||||||||
| Reeds Beverages | 904,000 | 979,000 | -7.7 | % | 15,421,000 | 16,285,000 | -5.3 | % | 17.06 | 16.63 | 0.42 | 2.6 | % | |||||||||||||||||||||||||||
| Virgil’s | 576,000 | 630,000 | -8.6 | % | 10,166,000 | 11,194,000 | -9.2 | % | 17.65 | 17.77 | (0.12 | ) | -0.7 | % | ||||||||||||||||||||||||||
| Kombucha | 15,000 | 63,000 | -76.2 | % | 300,000 | 1,404,000 | -78.6 | % | 20.00 | 22.29 | (2.29 | ) | -10.3 | % | ||||||||||||||||||||||||||
| All Other Reeds Beverages | 99,000 | 106,000 | -6.6 | % | 1,678,000 | 1,790,000 | -6.3 | % | 16.95 | 16.89 | 0.06 | 0.4 | % | |||||||||||||||||||||||||||
| Private Label | 169,000 | 331,000 | -48.9 | % | 2,348,000 | 4,052,000 | -42.1 | % | 13.89 | 12.24 | 1.65 | 13.5 | % | |||||||||||||||||||||||||||
| Reeds Candy | 1,164,000 | 1,343,000 | -13.3 | % | ||||||||||||||||||||||||||||||||||||
| All Other Non-Beverages | - | 74,000 | 73,000 | 1.4 | % | |||||||||||||||||||||||||||||||||||
| Total Gross Sales | 1,763,000 | 2,109,000 | -16.4 | % | 31,151,000 | 36,141,000 | -13.8 | % | 17.67 | 17.14 | 0.53 | 3.1 | % | |||||||||||||||||||||||||||
| Sales Discounts Unallocated to Specific SKU's* | (3,105,000 | ) | (2,815,000 | ) | 10.3 | % | (1.76 | ) | (1.33 | ) | (0.43 | ) | 31.9 | % | ||||||||||||||||||||||||||
| Net Sales | 1,763,000 | 2,109,000 | -16.4 | % | $ | 28,046,000 | $ | 33,326,000 | -15.8 | % | 15.91 | 15.80 | 0.11 | 0.7 | % | |||||||||||||||||||||||||
| Gross Sales per 12 ounce | $ | 17.67 | $ | 17.14 | 3.1 | % | ||||||||||||||||||||||||||||||||||
| Net Sales per 12 ounce | $ | 15.91 | $ | 15.80 | 0.7 | % | ||||||||||||||||||||||||||||||||||
| Cost of Goods Sold | ||||||||||||||||||||||||||||||||||||||||
| Reeds Beverages | 904,000 | 979,000 | -7.7 | % | 10,378,000 | 10,740,000 | -3.4 | % | 11.48 | 10.97 | 0.51 | 4.6 | % | |||||||||||||||||||||||||||
| Virgils | 576,000 | 630,000 | -8.6 | % | 6,426,000 | 6,961,000 | -7.7 | % | 11.16 | 11.05 | 0.11 | 1.0 | % | |||||||||||||||||||||||||||
| Kombucha | 15,000 | 63,000 | -76.2 | % | 184,000 | 733,000 | -74.9 | % | 12.27 | 11.63 | 0.63 | 5.4 | % | |||||||||||||||||||||||||||
| All Other Reeds Beverages | 99,000 | 106,000 | -6.6 | % | 1,111,000 | 1,133,000 | -1.9 | % | 11.22 | 10.69 | 0.53 | 5.0 | % | |||||||||||||||||||||||||||
| Private Label | 169,000 | 331,000 | -48.9 | % | 1,543,000 | 2,723,000 | -43.3 | % | 9.13 | 8.23 | 0.90 | 11.0 | % | |||||||||||||||||||||||||||
| Costs Unallocated to Specific SKU's* | 419,000 | 1,228,000 | -65.9 | % | ||||||||||||||||||||||||||||||||||||
| Reeds Candy | 824,000 | 1,001,000 | -17.7 | % | ||||||||||||||||||||||||||||||||||||
| All Other Non-Beverages | 264,000 | 301,000 | -12.3 | % | ||||||||||||||||||||||||||||||||||||
| Cost of Goods Sold | 1,763,000 | 2,109,000 | -16.4 | % | $ | 21,149,000 | $ | 24,820,000 | -14.8 | % | 12.00 | 11.77 | 0.23 | 1.9 | % | |||||||||||||||||||||||||
| Additional Cost of Goods Produced | ||||||||||||||||||||||||||||||||||||||||
| Idle Plant | 2,067,000 | 1,125,000 | 83.7 | % | 1.17 | 0.53 | 0.64 | 119.8 | % | |||||||||||||||||||||||||||||||
| Cost of Goods produced and Sold | 1,763,000 | 2,109,000 | $ | 23,216,000 | $ | 25,945,000 | -10.5 | % | 13.17 | 12.30 | 0.87 | 7.0 | % | |||||||||||||||||||||||||||
| Cost of Goods Sold Per 12 ounce | $ | 12.00 | $ | 11.77 | 1.9 | % | ||||||||||||||||||||||||||||||||||
| Cost of Goods Produced Per 12 ounce | $ | 13.17 | $ | 12.30 | 7.0 | % | ||||||||||||||||||||||||||||||||||
| Gross Profit including Idle Plant | 4,830,000 | 7,381,000 | -34.6 | % | ||||||||||||||||||||||||||||||||||||
| Gross Profit on a 12 ounce basis including Idle Plant | 2.74 | 3.50 | -21.7 | % | ||||||||||||||||||||||||||||||||||||
| Gross Margin including Idle Plant | 17.2 | % | 22.1 | % | -4.9 | % | ||||||||||||||||||||||||||||||||||
* Discounts and costs incurred that do not relate to specific SKU's
* Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.
| 5 |
Sales, Cost of Sales, and Gross Margins As part of the Company’s **Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform(B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. 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. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to 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. 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. distributors or retail customers including, but not limitedongoing initiative to simplify and streamline operations the following: (i) reimbursements givenCompany has identified core products on which to the Company’s distributors for agreed portionsplace its strategic focus. These core products consist of their promotional spend with retailers, including slotting, shelf space allowancesReed’s and other fees for both newVirgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketingslower selling discontinued Reed’s 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.
Sales
Gross sales decreasedCore beverage volume for the Nine-monthsnine months ended September 30, 20172022, represents 99% of all beverage volume.
Core brand gross billing increased by 7% to $31,151,000$42,135 compared to $39,354 during the same period last year, driven by Reed’s volume growth of 1% offset by Virgil’s volume decline of 9%. The result is an increase in total gross billing of 6%, to $42,892 during the nine months ended September 30, 2022, from $36,141,000$40,445 in the same period in 2016. Onlast year. Price on our core brands increased 11% to $19.70 per case.
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Discounts as a 12-ounce serving basis,percentage of gross sales increased $0.53 per 12-ounce case or 3.1% year over year. The main driver of the increase was a price increase in the third quarter of 2017.
Net sales decreased for the Nine-months ended September 30, 201711% compared to $28,046,000 from $33,326,0009% in the same period in 2016. Although grosslast year. As a result, net sales revenue increased $0.53 per 12-ounce case for3% in the Nine-monthsnine months ended September 30, 2017, net sales only increased $0.11 per 12-ounce case or 0.7% year over year. The main driver of the difference was a 31.9% increase or $0.42 per 12-ounce case in promotional costs.
Cost of Goods Sold and Produced
Cost of tangible goods sold consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments and internal transfer costs. Idle capacity consists of direct production costs of our Los Angeles plant in excess of charges allocated2022, to our finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and depreciation. Our charges for labor and overhead allocated$38,001, compared 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 of goodssold decreased for the Nine-months ended September 30, 2017 to $21,149,000 from $24,820,000$36,818 in the same period in 2016. Onlast year.
Cost of Goods Sold
Cost of goods sold increased $3,511 during the nine months ended September 30, 2022, as compared to the same period last year. As a 12-ounce serving basis,percentage of net sales, cost of goodssold decreased $0.23 per 12-ounce case or 14.8% year over year. The main driver of decrease was a volume decrease of 16.9% partially offset by raw material price increases of 2.1% over the prior year.
Cost of goodsproduced decreased for the Nine-monthsnine months ended September 30, 20172022, was 77% as compared to $23,216,000 from $25,945,000 in70% for the same period in 2016. On a 12-ounce serving basis,last year.
The total cost of goodsproduced per case increased $0.87to $13.63 per 12-ounce case or 7.0% year over year. The main driver ofin the increase is the LA Plant Idle Plant costs and raw material price increases. Idle Plant costs increased $0.64nine months ended September 30, 2022, from $11.97 per 12-ounce case or 119.6% and raw materials increased $0.23 per 12-ounce case or 1.9% overfor the same period in 2016.
Gross Margin
Gross margin declined forlast year. The cost of goods sold per case on core brands was $13.55 during the Nine-monthsnine months ended September 30, 20172022, compared to $4,832,000 from $7,381,000 in$11.85 for the same period in 2016. On a 12-ounce serving basis, grosslast year.
Gross Margin
Gross margin declined $1.03 per 12-ounce case or 28% year overdecreased to 23% for the nine months ended September 30, 2022, compared to 30% for the same period last year. The main drivers of the decrease were the $0.54 increase per 12-ounce case in sales discounts and $0.55 per 12-ounce case increase in idle plant costs.
Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousewarehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased forincreased by $5 in the Nine-monthsnine months ended September 30, 20172022, to $2,731,000$8,893 from $2,815,000 or 2.9%$8,888 in the same period last year. Delivery costs in 2016. This decrease was impacted by a need to transport finished goods from the east coast to customers on the west coast when the LA Plant was being used for private label production. As a percentagenine months ended September 30, 2022, were 23% of net sales delivery costs increasedand $4.13 per case, compared to 9.7% from 8.4% over24% of net sales and $3.95 per case during the same period in the priorlast year.
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows. Selling and marketing expenses continued their decline forwere $5,623 during the Nine-monthsnine months ended September 30, 20172022, compared to $2,344,000 from $2,911,000 or 19.5% versus$7,493 during the same period in 2016.last year. As a percentage of net sales, selling and marketing costs remained flat at 8.4%.were 15% of net sales during the three months ended September 30, 2022, as compared to 20% of net sales during the same period last year. The Company kept expenses in line with sales revenuedecrease was driven by reducinglower employee costs, trade shows expensesrelated cost, stock compensation, distributor buyouts and broker fee reductions.reduced sampling and marketing spend partially offset by higher professional fees.
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased fordecreased in the Nine-monthsnine months ended September 30, 20172022, to $3,402,000$5,319 from $3,007,000 or 12.9% versus$6,227, a decrease of $908 over the same period in 2016. As a percentage of net sales, General and administrativelast year. The decrease was driven by lower employee related costs, increased 3.1% to 12.1% from 9.0%. The main driver of the increase was due to net employee transition costs, director’sstock compensation and legal costs.settlements, partially offset by higher public company costs and bad debt expense.
Loss from Operations
The loss from operations was ($5,647000) in$11,169 for the Nine Months Endednine months ended September 30, 2017,2022, as compared to a loss of ($1,352,000)$11,614 in the same period of 2016 or an overall increase in the loss of $4,295,000. The loss was comprised of the decrease in net sales revenue of $2,111,000, and increaseslast year driven by decreased gross profit partially offset by decreases in operating expense categories that totaled $621,000.expenses discussed above.
| 7 |
Interest and Finance Related ExpensesOther Expense
Interest expense and bank related charges increased to $2,270,000 inother income for the Nine Months Endednine months ended September 30, 2017, compared to expenses2022, consisted of $1,239,000 in$2,119 of interest expense. During the same period of 2016. The increase is primarily due to increased borrowing on the April 21 convertible note accruedlast year, interest and debt discount amortizationother income consisted of $501,000.
Warrant and financing cost totaled $460,000. This amount is made up$692 of $2,776,000 in the convertible note related costsinterest expense offset by a derivative$770 gain in the third quarteron forgiveness of $3,236,000 as explained in Note #11 above.debt.
Modified EBITDA
In addition to our GAAP results, we present AdjustedModified EBITDA as a supplemental measure of our performance. However, AdjustedModified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define AdjustedModified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, and changes in fair value of warrant expense.expense, and one-time restructuring-related costs including employee severance and asset impairment.
Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating AdjustedModified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of AdjustedModified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Set forth below is a reconciliation of Adjustednet loss to Modified EBITDA to net income (loss) for the threenine months ended September 30, 20172022 and 2016:2021 (unaudited; in thousands):
Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net loss | $ | (13,288 | ) | $ | (11,536 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation and amortization | 165 | 180 | ||||||
| Interest expense | 2,119 | 692 | ||||||
| Severance expense | 66 | - | ||||||
| Stock option and other noncash compensation | 585 | 1,498 | ||||||
| Gain on forgiveness of PPP note payable | - | (770 | ) | |||||
| Legal settlements | - | 345 | ||||||
| Total EBITDA adjustments | $ | 2,936 | $ | 1,945 | ||||
| Modified EBITDA | $ | (10,353 | ) | $ | (9,591 | ) | ||
MODIFIED EBITDA SCHEDULE
| Nine months ended Sept. 30, | ||||||||
| 2017 | 2016 | |||||||
| (unaudited) | (unaudited) | |||||||
| Net income (loss) | $ | (7,457,000 | ) | $ | (2,591,000 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation | 430,000 | 689,000 | ||||||
| Interest expense | 2,270,000 | 1,239,000 | ||||||
| Stock option and warrant compensation | 298,000 | 449,000 | ||||||
| Impairment costs | 2,000,000 | - | ||||||
| Financing costs and warrant modification | 2,776,000 | - | ||||||
| Change in fair value of warrant liability | (3,236,000 | ) | - | |||||
| Total EBITDA adjustments | 4,538,000 | 2,377,000 | ||||||
| Modified EBITDA | $ | (2,919,000 | ) | $ | (214,000 | ) | ||
The $2,705,000 decrease in modified EBITDA for the Nine Months ended September 30, 2017 is due to the increase in net loss, impairment charges, the increase in interest expense and the net warrant related charges.
We present AdjustedModified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. We believe investors will realize that the accounting required for liabilities as described in Note #10, impacts this quarter. In addition, we use AdjustedModified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; and in making compensation decisionsdecisions; and in communications with our board of directors concerning our financial performance. AdjustedModified EBITDA has limitations as an analytical tool, which includes, among others, the following:
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| 8 |
Liquidity and Capital Resources
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 Monthsnine months ended September 30, 20172022, the Company recorded a net loss of $7,457,000$13,288 and used cash fromin operations of $4,729,000.$16,507. As of September 30, 2017,2022, we had a working capital deficiency of $3,643,000 and a stockholders’ deficit of $2,312,000.
As of September 30, 2017, the Company had a cash balance of $348,000$25, with $151 of current availability, and had$3,494 of additional available borrowing on our existingcapacity, a stockholder’s deficit of $3,436 and a working capital of $3,533, compared to a cash balance of $49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981 at December 31, 2021. Notwithstanding the net loss for the nine months ended September 30, 2022, management projects adequate cash from operations and available line of credit to ensure continuation of $305,000. Furthermore, during the Company as a going concern for at least one year ended December 31, 2016, we were able to extendfrom the maturity date of our operating line of credit and our other bank loans through October 21, 2018. We estimatethis quarterly report.
During the nine months ended September 30, 2022, the Company currently has sufficiententered into a note purchase agreement with Whitebox Advisors, LLC and agreed to issue $13,750 of secured convertible promissory notes (the “Notes”). The net proceeds from the issuance of the Notes, after deducting placement agent fees and other debt issuance costs, was approximately $12,430.
The Notes will mature on May 9, 2025, bear interest at a rate of 10% per annum (with 5% per annum payable in cash and liquidity5% per annum payable “in kind” by adding such accrued interest to meetthe principal amount of the Notes). The Notes are secured by substantially all of the Company’s assets (including all of its anticipated working capital forintellectual property) and are subject to a collateral sharing agreement with ACS, the next twelve months.Company’s existing secured lender (see Note 5). During the nine months ended September 30, 2022, principal payment of $400 were made, and accrued interest of $386 was added to the principal balance, leaving a balance owed of $13,736 at September 30, 2022.
Historically, we have financed our operations primarily through public and private sales of common stock, issuance of preferred and common stock, a line ofconvertible debt instruments, term loans and credit lines from a financial institutioninstitutions, and cash generated from operations. We anticipate thathave taken decisive action to improve our primary capital source will be positive cash flow from operations. Ifmargins, including fully outsourcing our sales goals do not materialize as planned, we believe that the Company can reduce its operating costsmanufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and achieve positive cash flow from operations. However, 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 may have insufficient working capital to maintainrestructuring our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.selling prices.
Critical Accounting Policies and Estimates
OurThe preparation of the Company’s financial statements are prepared in accordanceconformity with generally accepted accounting principles generally accepted in the United States of America, or GAAP. GAAP(“U.S. GAAP”) requires usmanagement to make estimates and assumptions that affect the reported amounts in ourof assets and liabilities at the date of the financial statements includingand the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various allowances and reservesassumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for accounts receivable and inventories,making judgments about the estimated livescarrying values of long-lived assets and trademarksliabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and trademark licenses, as well as claimsassumptions used to develop the estimates utilizing currently available information, changes in facts and contingencies arising out of litigation or other transactions that occur in the normal course of business. The following summarize our most significant accountingcircumstances, historical experience and reporting policies and practices:
Revenue Recognition. Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfersreasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to our customers, and collection of the receivable is reasonably assured. 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 activitiesassumptions used in the promotionestimates for reserves 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. Our management regularly reviews property, equipment and other long-lived assets, including identifiable amortizing intangibles, for possible impairment. This review occurs quarterly or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairmentuncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, or amortizableanalysis of impairments of recorded long-term tangible and intangible assets, then management prepares an estimaterealization of future cash flows (undiscounteddeferred tax assets, accruals for potential liabilities and without interest charges) expectedassumptions made in valuing stock instruments issued for services. There were no changes to result fromour critical accounting policies described in the useconsolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that impacted our condensed consolidated financial statements and related notes included herein.
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Recent Accounting Pronouncements
See Note 1 of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognizedNotes to write down the asset to its estimated fair value. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Quarterly, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. The Company recorded a reserve for impairment on equipment held for sale of $2,000,000 during the Nine Months Ended September 30,2017.
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.
Recent Accounting Pronouncements
See Note 2 of the financial statementsCondensed Financial Statements for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of 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(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, Rules 13a-15(f)as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017.2022, to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 20172022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
We are subject to various legal proceedings from time to time in the ordinary course of business, none of which are required to be disclosed under this Item 1.
Our failure to maintain compliance with Nasdaq’s continued listing requirements could result in the delisting of our common stock.
Our common stock is currently listed for trading on The Nasdaq Capital Market. We must satisfy the continued listing requirements of Nasdaq to maintain the listing of our common stock on The Nasdaq Capital Market.
On August 16, 2021, we received notice from the Staff of Nasdaq indicating that, based upon the closing bid price of our common stock for the prior 30 consecutive business days, we were not in compliance with the requirement to maintain a minimum bid price of $1.00 per share for continued listing on Nasdaq as set forth in Nasdaq Listing Rule 5550(a)(2). We had 180 days from August 16, 2021, or through February 14, 2022, to regain compliance with the Bid Price Rule. On February 15, 2022, we were provided an additional 180 calendar day compliance period, or until August 15, 2022, to demonstrate compliance with the Bid Price Rule. On August 16, 2022, we received a letter from the Staff indicating that, based upon our continued non-compliance with the Bid Price Rule, the Staff had determined to delist our securities from Nasdaq unless we timely requested a hearing before the Panel. Such letter also indicated that we were not in compliance with the $2.5 million minimum stockholders’ equity requirement for continued listing of the Common Stock on Nasdaq as set forth in Nasdaq Listing Rule 5550(b)(1). Our Form 10-Q for the period ended June 30, 2022 reported a stockholders’ deficit of $419,000, and as of August 16, 2022 and the date of this prospectus, we did not meet the alternative compliance standards relating to the market value of listed securities or net income from continuing operations.
We timely requested a hearing before the Panel. Following the hearing, on September 28, 2022, the Panel granted our request for continued listing of our common stock. Pursuant to the Exception, we have until February 13, 2023 to regain compliance with the Bid Price Rule and the Minimum Stockholders’ Equity Rule. The Exception is subject to a number of conditions that must be satisfied on or before interim deadlines.
There can be no assurance that we will be able to satisfy the conditions set forth in the Exception on a timely basis, if at all, or that we will ultimately regain and sustain compliance with all applicable requirements for continued listing on The Nasdaq Capital Market. In the event that we are unable to comply with the terms of the Exception, our common stock may be delisted from Nasdaq.
If our common stock were delisted from Nasdaq, trading of our common stock would most likely take place on an over-the-counter market established for unlisted securities, such as the OTCQB or the Pink Market maintained by OTC Markets Group Inc. An investor would likely find it less convenient to sell, or to obtain accurate quotations in seeking to buy, our common stock on an over-the-counter market, and many investors would likely not buy or sell our common stock due to difficulty in accessing over-the-counter markets, policies preventing them from trading in securities not listed on a national exchange or other reasons. In addition, as a delisted security, our common stock would be subject to SEC rules as a “penny stock,” which impose additional disclosure requirements on broker-dealers. The regulations relating to penny stocks, coupled with the typically higher cost per trade to the investor of penny stocks due to factors such as broker commissions generally representing a higher percentage of the price of a penny stock than of a higher-priced stock, would further limit the ability of investors to trade in our common stock. In addition, delisting would materially and adversely affect our ability to raise capital on terms acceptable to us, or at all, and may result in the potential loss of confidence by investors, suppliers, customers and employees and fewer business development opportunities. For these reasons and others, delisting would adversely affect the liquidity, trading volume and price of our common stock, causing the value of an investment in us to decrease and having an adverse effect on our business, financial condition and results of operations, including our ability to attract and retain qualified employees and to raise capital.
We expect to complete a reverse stock split to regain compliance with Nasdaq listing rules prior to December 31, 2022 and we cannot predict the effect that any reverse stock split will have on the market price for shares of our common stock.
We expect to complete a reverse stock split on or before December 31, 2022, in order to regain compliance with the Bid Price Rule. We cannot predict the effect that a reverse stock split will have on the market price for shares of our common stock, and the history of similar reverse stock splits for companies in like circumstances has varied. Some investors may have a negative view of a reverse stock split. Even if a reverse stock split has a positive effect on the market price for shares of our common stock, performance of our business and financial results, general economic conditions and the market perception of our business, and other adverse factors which may not be in our control could lead to a decrease in the price of our common stock following the reverse stock split.
The total number of authorized shares of common stock will not be reduced in accordance with the exchange ratio of the proposed reverse stock split, which will result in a significant increase in the availability of authorized shares of common stock.
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Furthermore, even if the reverse stock split does result in an increased market price per share of our common stock, the market price per share following the reverse stock split may not increase in proportion to the reduction of the number of shares of our common stock outstanding before the implementation of the reverse stock split. Accordingly, even with an increased market price per share, the total market capitalization of shares of our common stock after a reverse stock split could be lower than the total market capitalization before the reverse stock split. Also, even if there is an initial increase in the market price per share of our common stock after a reverse stock split, the market price many not remain at that level.
If the market price of shares of our common stock declines following a reverse stock split, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the reverse stock split due to decreased liquidity in the market for our common stock. Accordingly, the total market capitalization of our common stock following the reverse stock split could be lower than the total market capitalization before the reverse stock split.
We cannot assure you that the proposed reverse stock split will increase our stock price and have the desired effect of maintaining compliance with the Nasdaq bid price rule.
Our board expects that the reverse stock split of our common stock will increase the market price of our common stock so that we are able to attract investment and maintain compliance with the Nasdaq bid price rule. However, the effect of a reverse stock split upon the market price of our common stock cannot be predicted with any certainty, and the history of similar stock splits for companies in like circumstances, is varied. It is possible that (i) the per share price of our common stock after the reverse stock split will not rise in proportion to the reduction in the number of shares of our common stock outstanding resulting from the reverse stock split, (ii) the reverse stock split may not result in a per share price that would attract brokers and investors who do not trade in lower priced stocks, or result in increased trading volume or liquidity; or (iii) the market price per post-reverse stock split share may not exceed or remain in excess of the $1.00 minimum bid price for a sustained period of time. Even after we effect a reverse stock split, the market price of our common stock may decrease due to factors unrelated to the reverse stock split. In any case, the market price of our common stock will be based on other factors which may be unrelated to the number of shares outstanding, including our future performance. If the reverse stock split is consummated and the trading price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the reverse stock split. Even if the market price per post-reverse stock split share of our common stock remains in excess of $1.00 per share, we may be delisted due to a failure to meet other continued listing requirements, including the Minimum Stockholders’ Equity Rule.
The delisting of our common stock from Nasdaq would constitute a Make-Whole Fundamental Change under our 10% Secured Convertible Promissory Notes.
On May 9, 2022, we sold $11,250 of secured convertible promissory notes (“Notes”) in a private placement. We also granted the investors an option to purchase up to an additional $12,000 aggregate principal amount of Notes, having identical terms (other than with respect to the issue date) to the initial Notes issued. Investors exercised $2,500 of the option on September 14, 2022, subject to certain terms and conditions. The Notes are convertible at the option of the holder into shares of common stock.
The delisting of our common stock from Nasdaq would constitute a Make-Whole Fundamental Change under the Notes. In such circumstance, the holders of the Notes would have the right to require Reed’s to repurchase the Notes at a purchase price of 100% of the principal amount held by such holder, plus accrued and unpaid interest through, but not including, the repurchase date. In addition, we would also be required to pay the holders of the Notes a Make-Whole Fundamental Change payment. The repurchase of the Notes as a result of a Make-Whole Fundamental Change would likely render us insolvent and result in a bankruptcy, insolvency, liquidation, reorganization or other similar event. Such an event could result in substantial dilution to investors in our common stock or a total loss of your investment.
The total number of authorized shares of common stock will not be reduced in accordance with the exchange ratio of the reverse stock split, which may result in a significant increase in the availability of authorized shares of common stock and will be dilutive to our stockholders.
The total number of authorized shares of common stock will not be reduced in accordance with the exchange ratio of the reverse stock split, which will result in a significant increase in the availability of authorized shares of common stock. Any additional common stock so authorized will be available for issuance by the board for stock splits or stock dividends, acquisitions, raising additional capital, conversion of our debt into equity, or other corporate purposes, and any such issuances may be dilutive to current stockholders.
Your ownership may be diluted if additional capital stock is issued to raise capital, to finance acquisitions or in connection with strategic transactions.
We may seek to raise additional funds for our operations, to finance acquisitions or to develop strategic relationships by issuing equity or convertible debt securities in addition to the securities issued in this offering, which would reduce the percentage ownership of our existing stockholders. Our board of directors has the authority, without action or vote of the stockholders, to issue all or any part of our authorized but unissued shares of common or preferred stock. Our articles of incorporation authorize us to issue up to 180,000,000 shares of common stock and 500,000 shares of preferred stock. The total number of authorized shares of common stock will not be reduced in accordance with the exchange ratio of the proposed reverse stock split, which will result in a significant increase in the availability of authorized shares of common stock. Any additional common stock so authorized will be available for issuance by the board for stock splits or stock dividends, acquisitions, raising additional capital, conversion of our debt into equity, or other corporate purposes, and any such issuances may be dilutive to current stockholders. Future issuances of common or preferred stock would reduce your influence over matters on which stockholders vote and would be dilutive to earnings per share. In addition, any newly issued preferred stock could have rights, preferences and privileges senior to those of the common stock. Those rights, preferences and privileges could include, among other things, the establishment of dividends that must be paid prior to declaring or paying dividends or other distributions to holders of our common stock or providing for preferential liquidation rights. These rights, preferences and privileges could negatively affect the rights of holders of our common stock, and the right to convert such preferred stock into shares of our common stock at a rate or price that would have a dilutive effect on the outstanding shares of our common stock.
A smaller reporting companyOur ability to service our indebtedness will depend on our ability to generate cash in the future.
Our ability to make payments on our indebtedness (including our Notes) will depend on our ability to generate cash in the future. Our ability to generate cash is subject to general economic and market conditions and financial, competitive, legislative, regulatory and other factors that are beyond our control. Our business may not generate sufficient cash to fund our working capital requirements, capital expenditure, debt service and other liquidity needs, which could result in our inability to comply with financial and other covenants contained in our debt agreements, our being unable to repay or pay interest and penalties on our indebtedness, and our inability to fund our other liquidity needs. If we are unable to service our debt obligations, fund our other liquidity needs and maintain compliance with our financial and other covenants, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies and we could be required to provide the information required by this Item.pursue one or more alternative strategies, such as selling assets or refinancing or restructuring our indebtedness. However, such alternatives may not be feasible or adequate.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.None that have not been previously disclosed in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
On September 14, 2022, Whitebox Advisors, LLC and certain of its affiliates (“Whitebox”) exercised $2,500 of the option previously granted on May 9, 2022, subject to certain additional terms and conditions. In November 2022, the Company paid off the $2,500 of Notes in cash and issued 3,483,993 shares of its common stock related to make whole interest on the $2,500 Notes.
On November 13, 2022, the Company entered into a Limited Waiver Agreement with Whitebox, pursuant to which the Company was provided a waiver of the covenant violation as of September 30, 2022, in exchange for payment of $96 and issuance of 2,470,118 shares of its common stock.
The shares of common stock referenced have not been registered under the Securities Act of 1933, as amended (the “Securities Act”) and instead were offered pursuant to the exemption provided in Section 4(a)(2) under the Securities Act on the basis of the Company’s pre-existing relationship with the purchaser and that there was no public offering.
The shares are “registrable securities” under that certain registration rights agreement by and between the purchasers and the Company dated May 9, 2022.
Item 6. Exhibits
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*filed herewith
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
Furnished herewith, XBRL (Extensive 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.
SIGNATURES
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Reed’s, Inc. (Registrant) | |
| Date: November 14, 2022 | /s/ Norman E. Snyder, Jr. |
| Norman E. Snyder, Jr. | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 14, 2022 | /s/ Thomas J. Spisak |
| Thomas J. Spisak | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
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