NOTES
TO CONDENSED FINANCIAL STATEMENTS
Three
months Ended March 31, 2020 and 2019 (Unaudited)
(In
thousands, except share and per share amounts)
1.
Basis of Presentation and Liquidity
The
accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”,
or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments,
necessary to present fairly our financial position at March 31, 2020 and the results of operations and cash flows for the three
months ended March 31, 2020 and 2019. The balance sheet as of December 31, 2019 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in
these condensed financial statements are adequate to make the information presented herein not misleading. For further information,
refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2019, as filed with the Securities and Exchange Commission on March 18, 2020 and amended on April 8,
2020.
The
results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations to
be expected for the full fiscal year ending December 31, 2020.
In March 2020 the World Health Organization
declared coronavirus COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, has adversely
affected workforces, customers, economies, and financial markets globally. It has also disrupted the normal operations of many
businesses, including ours. This outbreak could decrease spending, adversely affect demand for our product and harm our business
and results of operations. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak
and its effects on our business or results of operations at this time.
Liquidity
The
accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such
assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
For
the three months ended March 31, 2020, the Company recorded a net loss of $2,580 and used cash in operations of $2,352.
As of March 31, 2020, we had a cash balance of $28 with borrowing capacity of $2,961, a stockholder’s deficit of $653 and
a working capital of $3,173, compared to a cash balance of $913 with borrowing capacity of $3,235, stockholders’ equity
of $1,147 and a working capital of $4,885 at December 31, 2019.
In April 2020, the Company conducted a public
offering of 15,333,334 shares of its common shares at a public offering price of $0.375 per share. The net proceeds to the Company
from this offering are $5,362, after deducting underwriting discounts and commissions and other offering expenses. Proceeds from
the offering will provide capital for working capital, and general corporate purposes. On April 29, 2020, the Company received
loan proceeds in the amount of $770 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic
Security Act (the “Cares Act”), which was enacted on March 27, 2020.
Historically,
we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible
debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive
action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating
improved vendor contracts and restructuring our selling prices.
2.
Significant Accounting Policies
Use of estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those
estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable
lives of property and equipment, analysis of impairments of recorded long-term tangible
and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing
stock instruments issued for services.
Revenue
Recognition
The
Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”).
The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount
expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms
of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations
in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance
obligations, and (5) recognizing revenue as each performance obligation is satisfied.
The
Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers
contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities
are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised
service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which
generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time.
All
of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required
post-shipment for customers to derive the expected value from them.
The
Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns
have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance
obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance
for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Loss
per Common Share
Basic
earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the
net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional
common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock
method. Potential common shares are excluded from the computation when their effect is antidilutive.
For
the periods ended March 31, 2020 and 2019, 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:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
Convertible note to a related party
|
|
|
2,266,667
|
|
|
|
2,266,667
|
|
Warrants
|
|
|
6,413,782
|
|
|
|
6,827,167
|
|
Common stock equivalent of Series A Convertible Preferred stock
|
|
|
37,644
|
|
|
|
37,644
|
|
Common stock issuable
|
|
|
350,000
|
|
|
|
-
|
|
Unvested restricted common stock
|
|
|
150,000
|
|
|
|
598,370
|
|
Options
|
|
|
4,683,380
|
|
|
|
4,331,234
|
|
Total
|
|
|
13,901,473
|
|
|
|
14,061,082
|
|
The
Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4.
Stock Compensation Expense
The Company periodically issues stock options
and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing
costs. The Company accounts for such grants issued and vesting based on ASC 718, whereby the value of the award is measured on
the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes
the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of
the services rendered.
The fair value of the Company’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. Compensation
expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience.
The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in
future periods.
Advertising Costs
Advertising costs are expensed as incurred
and are included in selling and marketing expense. Advertising costs aggregated $302 and $307 for the three months ended March
31, 2020 and 2019, respectively.
Concentrations
Gross sales. During the three months
ended March 31, 2020, the Company’s two largest customers accounted for 22% and 14% of gross sales,
respectively. During the three months ended March 31, 2019, the Company’s two largest customers accounted for
25% and 9% of gross sales, respectively. No other customers exceeded 10% of sales in either period.
Accounts receivable. As of March 31,
2020, the Company had accounts receivable from three customers which comprised 18%, 14%, and 10% of its gross
accounts receivable, respectively. As of December 31, 2019, the Company had accounts receivable from one customer which
comprised 14% of its gross accounts receivable.
Purchases
from vendors. During the three months ended March 31, 2020, the Company’s largest vendor accounted for approximately
10% of all purchases. During the three months ended March 31, 2019, the Company’s two largest vendors accounted
for approximately 17% and 13% of all purchases, respectively. No other customers exceeded 10% of all purchases in either periods.
Accounts
payable. As of March 31, 2020, the Company’s two largest vendors accounted for 16% and 10% of the total accounts payable,
respectively. As of December 31, 2019, the Company’s largest three vendors accounted for 19%, 15% and 14% of the total accounts
payable, respectively.
Fair
Value of Financial Instruments
The
Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on
a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs
used to measure their fair value. ASC 820 defines the following levels of subjectivity associated with the inputs:
Level
1—Quoted prices in active markets for identical assets or liabilities.
Level
2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level
3—Unobservable inputs based on the Company’s assumptions.
The
carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank
loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these
instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values
because interest rates on these obligations are based on prevailing market interest rates.
As
of March 31, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair
value of warrant liabilities aggregating $2 and $8, respectively (see Note 9).
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13,
Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on
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.
Other recent accounting pronouncements
issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities
and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or
future financial statements.
3.
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following
(in thousands):
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
Raw materials and packaging
|
|
$
|
4,473
|
|
|
$
|
4,261
|
|
Finished products
|
|
|
3,517
|
|
|
|
6,247
|
|
Total
|
|
$
|
7,990
|
|
|
$
|
10,508
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at March 31, 2020, and December
31, 2019, was $262 and $646, respectively.
4.
Property and Equipment
Property
and equipment is comprised of the following (in thousands):
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
Right-of-use assets under operating leases
|
|
$
|
730
|
|
|
$
|
730
|
|
Right-of-use assets under finance leases
|
|
|
168
|
|
|
|
179
|
|
Computer hardware and software
|
|
|
648
|
|
|
|
626
|
|
Total cost
|
|
|
1,546
|
|
|
|
1,535
|
|
Accumulated depreciation and amortization
|
|
|
(520
|
)
|
|
|
(482
|
)
|
Net book value
|
|
$
|
1,026
|
|
|
$
|
1,053
|
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was $12 and $13, respectively.
Equipment
held for sale consists of the following (in thousands):
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
Equipment held for sale
|
|
$
|
163
|
|
|
$
|
163
|
|
Reserve
|
|
|
(96
|
)
|
|
|
(96
|
)
|
Net book value
|
|
$
|
67
|
|
|
$
|
67
|
|
The
balance as of March 31, 2020, and December 31, 2019, consists of residual manufacturing equipment, at estimated net realizable
value, which management anticipates selling during 2020.
5.
Intangible Assets
Intangible
assets are comprised of brand names acquired, specifically Virgil’s. They have been assigned an indefinite life, as we currently
anticipate that they will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized
but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful life remains appropriate.
We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If further testing
is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds
its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized
in an amount equal to that excess. Based on management’s measurement, there were no indications of impairment at March 31,
2020.
6.
Line of Credit
Amounts
outstanding under the Company’s credit facilities are as follows (in thousands):
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
Line of Credit
|
|
$
|
5,173
|
|
|
$
|
3,661
|
|
Capitalized finance costs
|
|
|
(388
|
)
|
|
|
(484
|
)
|
Net balance
|
|
$
|
4,785
|
|
|
$
|
3,177
|
|
On
October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The financing agreement provides
a maximum borrowing capacity of $13,000. Borrowings are based on a formula of eligible accounts receivable and inventories (the
“permitted borrowings”) plus advances (an “over-advance”) of up to $4,000 in excess of permitted borrowings.
At March 31, 2020, the unused borrowing capacity under the financing agreement was $2,961. The line of credit matures on April
20, 2021.
Borrowings
under the Rosenthal financing agreement bear interest at the greater of prime or 4.75%, plus an additional 2% to 3.5% depending
upon whether the borrowing is based upon receivables, inventory or is an over-advance. The effective interest rate as of March
31, 2020 on outstanding borrowings was 7.2%. Additionally, the line of credit is subject to monthly facility and administration
fees, and aggregate minimum monthly fees (including interest) of $4.
The
line of credit is secured by substantially all of the assets excluding intellectual property of the Company. Additionally,
any over-advance is guaranteed by an irrevocable stand-by letter of credit in the amount of $1,500, issued by Daniel J. Doherty
III and the Daniel J. Doherty, III 2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV LLC (“Raptor”). The
over-advance is secured by all of Reed’s intellectual property collateral. Raptor beneficially owns 11.6% of the Company’s
outstanding common stock as of March 31, 2020. Mr. Doherty is a member of the Company’s Board of Directors. In the event
of a default under the financing agreement, Raptor has a put option to purchase from Rosenthal the entire amount of any outstanding
over-advance plus accrued interest, prior to Rosenthal declaring an event of default under the financing agreement. If Raptor
exercises the option, Rosenthal will release its first priority security interest on all intellectual property collateral of the
Company to Raptor and terminate the letter of credit.
As
part of the financing agreement in 2018, the Company amended and restated a subordinated convertible non-redeemable secured note
to Raptor, to provide for additional advances of up to $4,000 in the event that Raptor exercises its put option described above
(see Note 7). Consequently, the exercise price of 750,000 of Raptor’s outstanding warrants to purchase the Company’s
common stock was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants of $161. This amount
has been reflected as a capitalized finance cost and is being amortized over the life of the financing agreement.
The
financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions,
including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement
contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of
the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of March 31, 2020.
In
2018, the Company incurred $882 of direct costs in conjunction with the initial financing agreement, consisting primarily of broker,
bank and legal fees, and $161 cost of warrant modification. The Company annually incurs an additional $130 of fees from the bank,
which is equal to 1% of the $13,000 borrowing limit. These costs have been capitalized and recorded as a debt discount and are
being amortized over the 2.5 year life of the Rosenthal agreement. Amortization of debt discount was $96 and $75 for the three
months ended March 31, 2020 and 2019, respectively.
7.
Convertible Note to a Related Party
The
Convertible Note to a Related Party consists of the following (in thousands):
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
12% Convertible Note Payable
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
Accrued Interest
|
|
|
1,431
|
|
|
|
1,289
|
|
Total obligation
|
|
$
|
4,831
|
|
|
$
|
4,689
|
|
On
April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable
note in the principal amount of $3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock.
The purchaser, Raptor/Harbor Reeds SPV LLC (“Raptor”), beneficially owned approximately 11.6% and 14.9% of the Company’s
common stock at March 31, 2020 and December 31, 2019, respectively.
The
Raptor Note bears interest at a rate of 12% per annum, compounded monthly. It is secured by the Company’s assets, subordinate
to the first priority security interest of Rosenthal & Rosenthal (see Note 6). The note may not be prepaid and matures on
April 21, 2021. It may be converted, at any time and from time to time, into shares of common stock of the Company, at a revised
conversion price of $1.50.
The
warrant will expire on April 21, 2022 and has an adjusted exercise price of $1.50 per share. The note and warrant contain customary
anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have
been registered on Form S-3. The investor was also granted the right to participate in future financing transactions of the Company
for a term of two years.
On
October 4, 2018, in connection with the execution of the Rosenthal financing agreement, the Company amended and restated the subordinated
convertible non-redeemable secured note to Raptor, to provide for additional advances of up to $4,000. In consideration therefore,
the exercise price of 750,000 of Raptor’s outstanding warrants was reduced from $1.50 to $1.10, resulting in an increase
in the fair value of the warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of $161. This
amount was recorded as a debt discount to the Rosenthal line of credit and is being amortized as interest expense over the life
of the financing agreement (See Note 6).
8.
Leases Payable
The
Company adopted ASU 2016-02, Leases, effective October 1, 2018. The standard requires a lessee to record a right-of-use asset
and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments.
As a result, we recorded right-of-use assets aggregating $862 as of October 1, 2018, utilizing a discount rate of 12.6%. That
amount consists of new leases on the Company’s Norwalk office and certain office equipment of $730, and existing capitalized
leases reclassified to right of use assets of $132.
ASU
2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is
allocated over the lease term, generally on a straight-line basis. During the three months ended March 31, 2020, the Company reflected
amortization of right of use asset of $32 related to these leases, resulting in a net asset balance of $661 as of March 31, 2020.
In
accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.
As
of December 31, 2019, liabilities recorded under finance leases and operating leases were $89 and $697, respectively. During the
three months ended March 31, 2020, the Company made payments of $22 towards finance lease liability and $7 towards operating lease
liability. As of March 31, 2020, liability under finance lease amounted to $67 and liability under operating lease amounted to
$690, of which $66 and $29 were reflected as current due, under finance leases and operating leases, respectively.
As
of March 31, 2020, the weighted average remaining lease terms for operating lease and finance lease are 4.76 years and 0.75 years,
respectively. The weighted average discount rate for operating lease is 12.6% and 6.93% for finance lease.
9.
Warrant Liability
Various
stock sales made by the Company to finance operations have been accompanied by the issuance of warrants. Some of these warrant
agreements contain fundamental transaction provisions which may give rise to an obligation of the Company to pay cash to the warrant
holders. For accounting purposes, in accordance with ASC 480, Distinguishing Liabilities from Equity, those warrants with
fundamental transaction terms are accounted for as liabilities given the terms may give rise to an obligation of the Company to
the warrant holders. These liabilities are measured at fair value at each reporting period and the change in the fair value is
recognized in earnings in the accompanying Statements of Operations.
The
fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at March 31, 2020 and December
31, 2019, using the following assumptions:
|
|
March
31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Stock Price
|
|
$
|
0.48
|
|
|
$
|
0.91
|
|
Risk free interest rate
|
|
|
1.69
|
%
|
|
|
1.95
|
%
|
Expected volatility
|
|
|
99.39
|
%
|
|
|
83.36
|
%
|
Expected life in years
|
|
|
1.17
|
|
|
|
1.42
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Number of Warrants containing fundamental transaction provisions
|
|
|
138,762
|
|
|
|
138,762
|
|
Fair Value of Warrants
|
|
$
|
2
|
|
|
$
|
8
|
|
The
risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual
life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and
does not expect to do so in the foreseeable future.
The
following table sets forth a summary of the changes in the estimated fair value of the warrant liability during the three months
ended March 31, 2020 and 2019:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
Beginning Balance
|
|
$
|
8
|
|
|
$
|
38
|
|
Change in fair value
|
|
|
(6
|
)
|
|
|
47
|
|
Ending balance
|
|
$
|
2
|
|
|
$
|
85
|
|
10.
Stock-Based Compensation
Restricted
common stock
The
following table summarizes restricted stock activity during the three months ended March 31, 2020:
|
|
Unvested
Shares
|
|
|
Issuable
Shares
|
|
|
Fair Value
at Date of
Issuance
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance, December 31, 2019
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Granted
|
|
|
500,000
|
|
|
|
-
|
|
|
|
418
|
|
|
|
0.84
|
|
Vested
|
|
|
(350,000
|
)
|
|
|
350,000
|
|
|
|
(285
|
)
|
|
|
-
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, March 31, 2020
|
|
|
150,000
|
|
|
|
350,000
|
|
|
$
|
133
|
|
|
$
|
0.84
|
|
During
the three months ended March 31, 2020, the Company issued 500,000 shares of restricted stock to a director and two executive employees.
350,000 of these shares vested immediately, 75,000 shares will vest in increments of 18,750 each over four years from the date
of grant, and 75,000 shares will vest over four years based on performance criteria determined by the Board of Directors or Compensation
Committee. Unvested shares remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock
awards was $418 based on the market price of our common stock price which ranged from $0.81 to $0.89 per share on the dates of
grants and is amortized as shares vest. The total fair value of restricted common stock vesting during the three months ended
March 31, 2020 and 2019 was $285 and $150, respectively, and is included in general and administrative expenses in the accompanying
statements of operations. As of March 31, 2020, the amount of unvested compensation related to issuances of restricted common
stock was $133, 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 grant date.
Stock
options
The
following table summarizes stock option activity during the three months ended March 31, 2020:
|
|
Shares
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Weighted-
Average
Remaining
Contractual
Terms
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at December 31, 2019
|
|
|
3,265,580
|
|
|
$
|
2.19
|
|
|
|
7.09
|
|
|
$
|
6
|
|
Granted
|
|
|
1,617,800
|
|
|
$
|
0.67
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Unvested Forfeited or expired
|
|
|
(36,625
|
)
|
|
$
|
1.92
|
|
|
|
|
|
|
|
|
|
Vested Forfeited or expired
|
|
|
(163,375
|
)
|
|
$
|
4.72
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
4,683,380
|
|
|
$
|
1.56
|
|
|
|
8.74
|
|
|
$
|
-
|
|
Exercisable at March 31, 2020
|
|
|
1,520,086
|
|
|
$
|
1.41
|
|
|
|
8.14
|
|
|
$
|
-
|
|
During
the three months ended March 31, 2020, the Company approved options exercisable into 1,617,800 shares to be issued pursuant to
Reed’s 2017 Incentive Compensation Plan. 1,282,800 options were issued to employees including 582,800 options that vested
immediately, 350,000 options vesting annually over a four-year vesting period, and 350,000 options that will vest based on performance
criteria to be established by the board. In addition, 335,000 options granted to consultants, board members, and former employees
vest over various periods.
The stock options are exercisable at a price
ranging from $0.44 to $0.89 per share and expire in ten years. The total fair value of these options at grant date was approximately
$896, which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price
ranging from $0.44 to $0.89 per share, expected term of seven years, volatility of 120%, dividend rate of 0%, and risk-free interest
rate ranging from 0.56% to 1.63%. The expected term represents the weighted-average period of time that share option awards granted
are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected
volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the
fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; 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. The fair value of the options of $896 will be amortized as the options vest in future
periods through March 28, 2024.
During the three months ended March 31, 2020
and 2019, the Company recognized $495 and $412 of compensation expense relating to vested stock options. As of March
31, 2020, the aggregate amount of unvested compensation related to stock options was approximately $1,875 which will be
recorded as an expense in future periods as the options vest.
As
of March 31, 2020, the outstanding options have no intrinsic value. The aggregate intrinsic value was calculated as the difference
between the closing market price as of March 31, 2020, which was $0.48, and the exercise price of the outstanding stock options.
11.
Stock Warrants
As
of March 31, 2020, the Company has issued warrants to purchase an aggregate of 6,413,782 shares of common stock. The Company’s
warrant activity during the three months ended March 31, 2020 is as follows:
|
|
Shares
|
|
|
Weighted-
Average Exercise Price
|
|
|
Weighted-
Average Remaining Contractual Terms (Years)
|
|
|
Aggregate Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
6,413,782
|
|
|
$
|
2.06
|
|
|
|
1.52
|
|
|
$
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2020
|
|
|
6,413,782
|
|
|
$
|
2.06
|
|
|
|
1.27
|
|
|
$
|
-
|
|
Exercisable at March 31, 2020
|
|
|
6,413,782
|
|
|
$
|
2.06
|
|
|
|
1.27
|
|
|
$
|
-
|
|
There
were no warrant transactions during the three months ended March 31, 2020. As of March 31, 2020, the outstanding warrants have
no intrinsic value. The intrinsic value was calculated as the difference between the closing market price as of March 31, 2020,
which was $0.48, and the exercise price of the Company’s warrants to purchase common stock.
12.
Related Party Activities
On
December 31, 2018, the Company completed the sale of its Los Angeles manufacturing plant to CCB, an entity owned by Chris Reed,
a related party. The sale included substantially all machinery, equipment, furniture and fixtures of the manufacturing plant.
CCB assumed the monthly payments on our lease obligation effective immediately upon closing of the sale. Our release from the
obligation by the lessor, however, is dependent upon CCB’s deposit of $1,200 of security with the lessor. As of March 31,
2020, $800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 shares of the Company’s common
stock valued at $174 that he owns into escrow with the lessor. Mr. Reed expects to deposit the proceeds from the sale of the shares
with the lessor in 2020, at which time we expect to be released from the lease obligation.
Beginning
in 2019, we are to receive a 5% royalty on CCB’s private label sales to existing customers for three years and a 5% referral
fee on CCB’s private label sales to referred customers for three years. For the year ended December 31, 2019, the Company
recorded royalty revenue from CCB of $128 which is recorded as a receivable. In addition, at December 31, 2019, the Company has
outstanding receivable from CCB of $228 consisting of inventory advances to CCB. The aggregate receivable from CCB at December
31, 2019 was $356. During the three months ended March 31, 2020, the Company received payment of $126, leaving a receivable balance
of $230 at March 31, 2020.
13.
Subsequent Events
In
April 2020, the Company conducted a public offering of 15,333,334 shares of its common shares at a public offering price of $0.375
per share. The net proceeds to the Company from this offering are $5,362, after deducting underwriting discounts and commissions
and other offering expenses. Proceeds from the offering will provide capital for working capital, and general corporate purposes.
On April 29, 2020, the Company received
loan proceeds in the amount of $770 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic
Security Act (the “Cares Act”), which was enacted on March 27, 2020.
On
April 9, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department notifying the Company
that the bid price of our common stock had closed at less than $1.00 per share over the previous 30 consecutive business
days, and, as a result, did not comply with Listing Rule 5550(a)(2), the continued listing bid price rule. The Company
was provided 180 calendar days to regain compliance with the continued listing bid price rule. Subsequently, in response
to the COVID-19 pandemic and related extraordinary market conditions, Nasdaq announced that the compliance period for any company
previously notified about non-compliance with the continued listing bid price rule will be suspended and resume on July 1, 2020.
If, at any time during the extended compliance period, the bid price of our common stock closes at $1.00 per share
or more for a minimum of 10 consecutive business days, Nasdaq staff will provide written notification that the Company has achieved
compliance with the continued listing bid price rule. If we fail to regain compliance with the continued listing bid
price rule during this period but meet all of the other applicable standards for initial listing on the Nasdaq Capital Market
with the exception of the continued listing bid price rule, we may be eligible for additional time. To qualify,
we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial
listing standards for the Nasdaq Capital Market, with the exception of the continued listing bid price rule, and would
need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse
stock split, if necessary.
On
April 20, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department that, based upon
review of Nasdaq Listing Rule 5550(b)(2) which requires the Company to maintain a minimum Market Value of Listed Securities (the
“MVLS Rule”) of $35 million, the Company’s MVLS for the last 30 consecutive business days no longer
meets this requirement. Consequently, a deficiency exists with regard to the MVLS Rule. Nasdaq listing Rule 5810(c)(3)(C) provides
Reed’s a compliance period of 180 calendar days, or through October 19, 2020, during which to regain compliance. If, at
any time during the compliance period the MVLS closes at $35 million or more for a minimum of ten consecutive business days, the
Nasdaq Listing Qualifications Department will provide the Company written confirmation of compliance with the MVLS Rule and this
matter will be closed. If we fail to regain compliance with the MVLS Rule during the compliance period, we will receive written
notification that our securities will be subject to delisting.