The accompanying notes are an integral part of these
condensed financial statements.
The accompanying notes are an integral part of these
condensed financial statements.
The accompanying notes are an integral part of these
condensed financial statements.
The accompanying notes are an integral part of these
condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three and Six Months Ended June 30, 2022 and 2021
(Unaudited)
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed financial statements of
Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), have been prepared in conformity
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations
of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note
disclosures normally included in the financial 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. These condensed financial statements should be read in conjunction with the financial
statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April
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 June 30, 2022, and the results
of its operations and its cash flows for the six months ended June 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 six months ended
June 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31,
2022.
Going Concern
The accompanying financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal
course of business. As reflected in the accompanying financial statements, for the six months ended June 30, 2022, the Company recorded
a net loss of $10,057 and used cash in operations of $16,330. 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 June 30, 2022, we had a cash balance of $280,
with $969 of current availability, and $1,361 of additional borrowing capacity.
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. To alleviate these conditions, management is currently evaluating
various funding alternatives and may seek to raise 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 seek additional sources of financing,
there can be no assurance that such financing would be available to us on favorable terms or at all. Our 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 six 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 driving
sales growth, improving margin, and reducing freight costs. The sales growth focus is on channel expansion, new product introduction and improved sales execution
resulting in increased sales velocity. 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 and anticipates these costs
to remain elevated for the balance of 2022. Plans have been implemented to mitigate the impact of these costs.
Recent Trends - Market Conditions
During the period ended June
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.
Through June 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 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 June 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.
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
Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). 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. 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.
Loss per Common Share
Basic earnings (loss) per share is computed by dividing
the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the
year, 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 June 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:
Schedule of Potentially Dilutive Securities
| |
June 30, 2022 | | |
June 30, 2021 | |
Warrants | |
| 13,107,469 | | |
| 3,088,479 | |
Options | |
| 9,801,201 | | |
| 12,173,607 | |
Convertible Note Payable | |
| 22,457,782 | | |
| - | |
Unvested restricted common stock | |
| 275,860 | | |
| 234,114 | |
Series A Convertible Preferred stock | |
| 37,644 | | |
| 37,644 | |
Total | |
| 45,679,956 | | |
| 15,533,844 | |
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, Compensation-Stock Compensation whereby the value of the award 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 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 for the three months ended June 30, 2022 and 2021, aggregated $111 and $353,
respectively. Advertising costs for the six months ended June 30, 2022 and 2021, aggregated $423 and $702, respectively.
Concentrations
Net sales. During the three months ended June
30, 2022, three customers accounted for 23%, 11%, and 10% of gross billing, respectively, and during the six months ended June 30, 2022,
three customers accounted for 21%, 11%, and 10% of gross billing, respectively. During the three months ended June 30, 2021, two customers
accounted for 19% and 12% of gross billing, respectively, and during the six months ended June 30, 2021, two customers accounted for 20%
and 12% of gross billing, respectively. No other customers exceeded 10% of sales in either period.
Accounts receivable. As of June 30, 2022, the
Company had accounts receivable from two customers which comprised 29% and 10% of its gross accounts receivable. As of December 31, 2021,
the Company had accounts receivable from one customer which comprised 18% of its gross accounts receivable. No other customers exceeded
10% of gross accounts receivable in either period.
Purchases from vendors. During the three months
ended June 30, 2022, one vendor accounted for 14% of all purchases. During the six months ended June 30, 2022, one vendor accounted for
14% of all purchases. During the three months ended June 30, 2021, two vendors accounted for 13% and 12% of all purchases, respectively.
During the six months ended June 30, 2021, two vendors accounted for 13% and 12% of all purchases, respectively. No other vendors exceeded
10% of all purchases in either period.
Accounts payable. As of June 30, 2022, the
Company’s had one vendor which comprised 11% of total accounts payable. As of December 31, 2021, no vendor accounted for more than
10% the total accounts payable. No other vendors exceeded 10% of gross accounts payable in either period.
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.
Recent 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 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 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 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.
2. Inventory
Inventory is valued at the lower of cost (first-in,
first-out) or net realizable value, net of write downs, and is comprised of the following (in thousands):
Schedule
of Inventory
| |
June 30, 2022 | | |
December 31, 2021 | |
Raw materials and packaging | |
$ | 12,990 | | |
$ | 11,221 | |
Finished products | |
| 11,203 | | |
| 5,828 | |
Total | |
$ | 24,193 | | |
$ | 17,049 | |
3. Property and Equipment
Property and equipment is comprised of the following
(in thousands):
Schedule of Property and Equipment
| |
June 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 | |
| (668 | ) | |
| (561 | ) |
Net book value | |
$ | 885 | | |
$ | 992 | |
Depreciation expense for the six months ended June
30, 2022 and 2021 was $51 and $69, respectively, and amortization of right-of-use assets for the six months ended June 30, 2022 and 2021
was $56 and $48, respectively.
4. Intangible Assets
Intangible assets consist of the following (in thousands):
Summary of Intangible Assets
| |
June 30, 2022 | | |
December 31, 2021 | |
Brand names | |
$ | 576 | | |
$ | 576 | |
Trademarks | |
| 48 | | |
| 48 | |
Total | |
$ | 624 | | |
$ | 624 | |
5. Line of Credit
Amounts outstanding under the Company’s credit
facilities are as follows (in thousands):
Schedule of Amount Outstanding Under Credit Facilities
| |
June 30, 2022 | | |
December 31, 2021 | |
Line of credit – Alterna Capital Solutions | |
$ | 11,537 | | |
$ | - | |
Line of credit – Rosenthal & Rosenthal | |
| - | | |
| 10,229 | |
Capitalized financing costs | |
| (443 | ) | |
| - | |
Total | |
$ | 11,094 | | |
$ | 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 up to a total borrowings of $13,000 (the “Over Advance”). At June 30,
2022, $969 of current availability and $1,361 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 six months ended June 30, 2022, amortization of debt discount was $40, and
as of June 30, 2022, the remaining unamortized debt discount balance is $443.
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 400,000 shares of Reed’s restricted stock, with a fair value of $472 which was recorded a prepaid financing cost. During
the six months ended June 30, 2022, $121 of the prepaid financing cost was amortized, and as of June 30, 2022, there was no remaining
unamortized prepaid finance cost balance.
The Company annually incurs an additional $130 of
fees from the bank, which is equal to 1% of the $13,000 borrowing limit. Amortization of this debt discount was $65 and $162 for the six
months ended June 30, 2022, and 2021, respectively. At June 30, 2022, there was no 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
| |
June
30, 2022 | | |
December 31, 2021 | |
Secured Convertible Note Payable | |
$ | 11,250 | | |
$ | - | |
Accrued interest | |
| 160 | | |
| - | |
Capitalized financing costs | |
| (1,183 | ) | |
| - | |
Total | |
$ | 10,227 | | |
$ | - | |
Current portion | |
| (1,786 | ) | |
| - | |
Long term portion | |
$ | 8,441 | | |
$ | - | |
On May 9, 2022, the Company entered into a note
purchase agreement with Whitebox Advisors, LLC and agreed to issue $11,250 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 $10,008.
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 5% per annum payable “in kind” by adding such accrued interest to the principal
amount of the Notes). The Notes are secured by substantially all of the Company’s assets (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). During the six
months ended June 30, 2022, accrued interest of $160
was added to the principal balance, leaving a balance owed of $11,410
at June 30, 2022.
Beginning in August 2022, the Notes
have an amortization feature, which, if elected by a majority of Notes holders, would 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. On August 9, 2022, the Company paid, in cash, its first monthly amortization payment of $200 plus accrued
interest. Amortization payments of principal would total approximately $1.0
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 June 30, 2022, the Notes, including accrued
interest, are convertible into 35,564,397 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 with ACS (see Note 5). As of June 30, 2022, the Company was not
in compliance with the covenant, however, on August 11, 2022, the Company entered into a Limited Waiver and Amendment to 10% Secured Convertible
Notes, pursuant to which the Company was provided a waiver of the covenant violation as of June 30, 2022.
The Company incurred $1,242
of direct costs of the transaction, consisting primarily of placement agent fees and other offering expenses. These costs have been capitalized
and are being amortized over the 3-year life of the Notes. For the six months ended June 30, 2022, amortization of debt discount was $59,
and as of June 30, 2022, the remaining unamortized debt discount balance is $1,183.
The Company entered into a registration rights agreement
with the holders, pursuant to which the Company agreed to register for resale shares issuable under the Notes.
7. Leases Liabilities
During the six months ended June 30, 2022 and 2021,
lease costs totaled $56 and $48, respectively.
As of December 31, 2021, operating lease liabilities
totaled $555. During the six months ended June 30, 2022, the Company made payments of $77 towards its operating lease liability. As of
June 30, 2022, operating lease liabilities totaled $478.
As of June 30, 2022, the weighted average remaining
lease terms for an operating lease are 2.51 years. As of June 30, 2022, the weighted average discount rate on the operating lease is 12.60%.
8. Stockholder’s Equity
Common stock issuances
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 18,594,571 shares
of the Company’s common stock and warrants to purchase 9,297,289 shares of common stock in a private placement (including 3,248,142
shares of the Company’s common stock and warrants to purchase 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 $0.28 for certain investors
and was $0.3502 for investors who are officers and directors of the Company in compliance with the rules of the Nasdaq Stock Market. The
net proceeds to the Company, after deducting placement agent fees and other offering expenses, was approximately $5.0 million. The officers
and directors of the Company purchased approximately $1.1 million of the securities in the offering.
In January 2022, the Company issued 100,000 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 the $2,000 pledge of securities to Rosenthal (see Note 5). 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 the purchase of shares of the Company’s common stock, par value $0.0001 per share, in an offering of securities registered
under an effective registration statement filed with the Securities and Exchange Commission (“SEC”). In the offering, the
Company sold 6,680,000 shares of common stock, at a price of $1.18 per share. The offering closed on May 7, 2021 and total proceeds received,
net of fees, were $7,333. The Placement Agent was paid a total cash fee at the closing of the Offering equal to 6.5% 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 six months ended June 30, 2022, the Company
repurchased 13,250 shares of common stock from an officer for $2 based on the market value of share on the date repurchased. The Company
retired the shares.
During the six months ended June 30, 2021, the Company
repurchased 13,943 shares of common stock from an officer for $15 based on the market value of share on the date repurchased. The Company
retired the shares.
9. Stock-Based Compensation
Restricted common stock
The following table summarizes restricted stock activity
during the six months ended June 30, 2022:
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 | |
| 401,720 | | |
| - | | |
| 150 | | |
| 0.37 | |
Vested | |
| (237,024 | ) | |
| 237,024 | | |
| - | | |
| - | |
Forfeited | |
| - | | |
| | | |
| | | |
| - | |
Issued | |
| - | | |
| (237,024 | ) | |
| (114 | ) | |
| - | |
Balance, June 30, 2022 | |
| 275,860 | | |
| - | | |
$ | 90 | | |
$ | 0.56 | |
On January 26, 2022, the board of directors of Reed’s,
pursuant to a joint recommendation from its governance and 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 401,720 restricted stock awards to five non-employee directors. 100,430 of these restricted stock awards
vested on February 1, 2022, and 100,430 of these restricted stock awards vested on May 1, 2022. The remaining 200,860 restricted stock
awards will vest equally on August 1, 2022, and November 1, 2022. The aggregate fair value of the stock awards was $150 based on the market
price of our common stock price which was $0.32 per share on the date of grants and is amortized as shares vest.
The total fair value of restricted common stock vesting
during the six months ended June 30, 2022 and 2021, was $108 and $168, respectively, and is included in general and administrative expenses
in the accompanying statements of operations. As of June 30, 2022, the amount of unvested compensation related to issuances of restricted
common stock was $90, 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 six months ended June 30, 2022:
During the six months ended June 30, 2022, the Company
approved options exercisable into 685,456 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 685,456 options were
issued to employees, 342,748 options vesting annually over a four-year vesting period, and 342,728 options vesting based on performance
criteria to be established by the board of directors.
As of June 30, 2022, the outstanding and exercisable
options have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of
June 30, 2022, which was $0.16, and the exercise price of the outstanding stock options.
As of June 30, 2022, the Company has issued warrants
to purchase an aggregate of 13,835,768 shares of common stock. The Company’s warrant activity during the six months ended June 30,
2022 is as follows:
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 18,594,571 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 six months from the closing date of March 11, 2022 (see Note
7).
As of June 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 June 30, 2022, which was $0.16, and the exercise price of the Company’s warrants to purchase common stock.
In 2018, the Company completed the sale of its 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 our lease obligation for the Los 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 guaranteed personally by Mr. Reed and his wife. As of June 30, 2022, $800 has been deposited
with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $58 that remain in escrow with the lessor.
At December 31, 2021, the Company had an aggregate
receivable balance from CCB of $933. During the six months ended June 30, 2022, the Company advanced expenses of $67, leaving an aggregate
receivable balance of $1,000 at June 30, 2022.
At June 30, 2022 and December 31, 2021, the Company
had accounts payable due to CCB of $1,328 and $614, respectively.
Lindsay Martin, daughter of a director of the Company,
is employed as Vice President of Marketing. Ms. Martin was paid approximately $92 and $133, respectively, for her services during the
six months ended June 30, 2022 and 2021, respectively.