UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _______ to _______
Commission
file number:
(Exact name of registrant as specified in its charter)
| (State of incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of Each Class | Trading Symbol | Names of each exchange on which registered | ||
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 shares of Common Stock outstanding as of May 10, 2024.
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.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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 such files).
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.:
| Large Accelerated Filer ☐ | 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
There are shares outstanding as of May 10th, 2024.
TABLE OF CONTENTS
| i |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This report contains statements reflecting our views about our future performance that constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (Reform Act). Statements that constitute forward-looking statements within the meaning of the Reform Act are generally identified through the inclusion of words such as “aim,” “anticipate,” “believe,” “drive,” “estimate,” “expect,” “expressed confidence,” “forecast,” “future,” “goal,” “guidance,” “intend,” “may,” “objective,” “outlook,” “plan,” “position,” “potential,” “project,” “seek,” “should,” “strategy,” “target,” “will” or similar statements or variations of such words and other similar expressions. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. These forward-looking statements are based on currently available information, operating plans and projections about future events and trends. They inherently involve risks and uncertainties that could cause actual results to differ materially from those predicted in any such forward-looking statement. These risks and uncertainties include, but are not limited to, those described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 (“2023 Form 10-K”) as updated by “Part II, Item 1A” of this report should be considered when evaluating our trends and future results. Investors are cautioned not to place undue reliance on any such forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. The discussion of risks in this report is by no means all-inclusive but is designed to highlight what we believe are important factors to consider when evaluating our future performance.
| ii |
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
REED’S, INC,
CONDENSED BALANCE SHEETS
(Amounts in thousands, except share amounts)
| March
31, 2024 | December
31, 2023 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts
receivable, net of allowance of $ | ||||||||
| Inventory | ||||||||
| Receivable from former related party | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property
and equipment, net of accumulated depreciation of $ | ||||||||
| Intangible assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Revolving
line of credit, net of capitalized financing costs of $ | ||||||||
| Payable to former related party | ||||||||
| Current
portion of convertible notes payable, net of debt discount of $ | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| SAFE agreements | ||||||||
| Convertible
note payable, net of debt discount of $ | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit: | ||||||||
| Series A Convertible Preferred stock, $ par value, shares authorized, shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these financial statements.
| F-1 |
REED’S, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
(Amounts in thousands, except share and per share amounts)
| March
31, 2024 | March
31, 2023 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Delivery and handling expense | ||||||||
| Selling and marketing expense | ||||||||
| General and administrative expense | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share – basic and diluted | $ | ) | $ | ) | ||||
| Weighted average number of shares outstanding – basic and diluted | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-2 |
REED’S, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
(Amounts in thousands except share amounts)
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Fair value of vested options | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Fair value of vested options | ||||||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | ||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common shares issued for financing costs | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-3 |
REED’S, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2024 and 2023
(Unaudited)
(Amounts in thousands)
| March
31, 2024 | March
31, 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of debt discount | ||||||||
| Fair value of vested options | ||||||||
| Fair value of vested restricted shares granted to officers | ||||||||
| Change in allowance for doubtful accounts | ( | ) | ( | ) | ||||
| Inventory write-downs | ( | ) | ( | ) | ||||
| Accrued interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ||||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Decrease in right of use assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ( | ) | ||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Trademark costs | ( | ) | ||||||
| Purchase of property and equipment | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from line of credit | ||||||||
| Payments on line of credit | ( | ) | ( | ) | ||||
| Proceeds from convertible note payable, net of expenses | ||||||||
| Proceeds from SAFE agreement | ||||||||
| Payment of cost recorded as debt discount | ( | ) | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Amounts from former related party, net | ( | ) | ||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
Non-cash investing and financing activities: | ||||||||
| Reclass of prepaid expenses and accounts payable | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-4 |
REED’S, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three Months Ended March 31, 2024 and 2023 (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, 2023, filed with the SEC on April 1, 2024. 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 March 31, 2024, and the results of its operations and its cash flows for the three months ended March 31, 2024 and 2023. The balance sheet as of December 31, 2023 is derived from the Company’s audited financial statements.
The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024.
Liquidity
For the three months ended March 31, 2024, the Company
recorded a net loss of $1,673 and used cash in operations of $2,395. In accordance with Accounting Standards Codification (“ASC”)
205-40, Going Concern, the Company’s management has evaluated whether there are conditions and events, considered in the
aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date
the accompanying financial statements were issued. As of the issuance date of these financial statements, management expects that the
Company’s existing cash of $
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, strategic transactions 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.
We have also 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.
Recent Trends - Market Conditions
Although the U.S. economy continued to grow throughout 2023 and into Q1 2024, the 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.
During
the three months ended March 31, 2024, the Company experienced moderation from the elevated freight
costs experienced in 2023. The average cost of shipping and handling for the three months
ended March 31, 2024, was $
| F-5 |
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 credit loss reserves for accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in the determination of the Company’s liquidity.
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.
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 March 31, 2024 and 2023, 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, 2024 | March
31, 2023 | |||||||
| Warrants | ||||||||
| Options | ||||||||
| Convertible note payable | ||||||||
| Unvested restricted common stock | ||||||||
| Common stock equivalent of Series A Convertible Preferred stock | ||||||||
| Total | ||||||||
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.
| F-6 |
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 $
Concentrations
Net
sales. During the three months ended March 31, 2024, the Company’s two largest customers accounted for
Accounts
receivable. As of March 31, 2024, the Company had accounts receivable from one customer which comprised
The Company utilizes co-packers to produce 100% of its products. During the three months ended March 31, 2024 and the year ended December 31, 2023, the Company utilized six separate co-packers for most its production and bottling of beverage products in the United States. The Company has long-standing relationships with two different co-packers, and a third co-packing agreement with California Custom Beverage LLC (“CCB”), a former related party (see Note 11). Although there are other packers, a change in co-packers may cause a delay in the production process, which could ultimately affect operating results.
Purchases
from vendors. During the three months ended March 31, 2024, the Company’s largest vendor accounted for approximately
Accounts
payable. As of March 31, 2024, one vendor accounted for
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.
Reclassifications
Certain prior year amounts have been reclassified for consistency with
the current period presentation. Collection from customers amounting to $
Recent Accounting Pronouncements
In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure, which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting, including the significant segment expense disclosures. This standard will be effective for the Company on January 1, 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. The Company does not expect this standard to have a material impact on its results of operations, financial position or cash flows.
| F-7 |
In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The ASU requires buyers to disclose information about their supplier finance programs. Interim and annual requirements include the disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted ASU 2022-04 on January 1, 2023, and there was no material impact on our financial statements.
Other recent accounting pronouncements and guidance 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):
| March
31, 2024 | December
31, 2023 | |||||||
| Raw materials and packaging | $ | $ | ||||||
| Finished products | ||||||||
| Total | $ | $ | ||||||
3. Property and Equipment
Property and equipment are comprised of the following (in thousands):
| March
31, 2024 | December
31, 2023 | |||||||
| Right-of-use assets under operating leases | $ | $ | ||||||
| Computer hardware and software | ||||||||
| Machinery and equipment | ||||||||
| Construction in progress | ||||||||
| Total cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
| F-8 |
Depreciation
expense for the three months ended March 31, 2024 and 2023 was $
4. Intangible Assets
Intangible assets consist of the following (in thousands):
| March
31, 2024 | December
31, 2023 | |||||||
| Brand names | $ | $ | ||||||
| Trademarks | ||||||||
| Total | $ | $ | ||||||
5. Line of Credit
The Company’s credit facility consisted of the following (in thousands):
| March
31, 2024 | December
31, 2023 | |||||||
| Line of credit – Alterna Capital Solutions | $ | $ | ||||||
| Less: capitalized financing costs | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
In
March, 2022, the Company entered into a financing agreement for a line of credit with Alterna Capital Solutions (“ACS”) The
ACS line of credit is for a term of
The
Company incurred $
6. Secured Convertible Notes Payable
Amounts outstanding under the Company’s convertible notes payable are as follows (amounts in 000’s except share amounts):
March 31, 2024 | December 31, 2023 | |||||||
| Secured Convertible “Original” Notes Payable (A) | $ | $ | ||||||
| Secured Convertible “Option”” Notes Payable (B) | ||||||||
| Accrued interest | ||||||||
| Accrued interest on excess debt borrowing | ||||||||
| Capitalized financing costs | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Secured Convertible Notes
| (A) | In
May 2022, the Company issued $ |
The
Original Notes have an amortization feature which requires the Company to make monthly payments of principal of $
The
terms of the Original Notes contained conversion terms that are expected to be amended, subject to satisfaction of certain conditions. Under the revised terms, the conversion
price of the Original Notes will be between
In
addition on February 12, 2024, subject to the satisfaction of certain conditions, the parties agreed that a portion of the
outstanding ABL accrued fees will be satisfied through payment of $
| F-9 |
| (B) | In
February 2023 and May 2023, the Company issued an aggregate of $ |
The
terms of the Original Notes contained conversion terms that are expected to be amended , subject to the satisfaction of certain conditions by the Company. Under the revised terms, the conversion
price of the Option Notes will be
Waiver of Default
On February 12, 2024, the Company entered into a Limited Waiver, Deferral, and Amendment and Restatement Agreement (the “Waiver and Amendment”) with each holder (each an entity affiliated with Whitebox Advisors, LLC) of the Original and Option Notes payable to Whitebox (the “Notes”). Subject to the Waiver and Amendment, the holders agreed to temporarily waive certain events of default under the Notes, including the failure to pay Excess ABL Amounts and the failure to pay amortization payments due December 1, 2023 to April 30, 2024. Subject to satisfaction of certain conditions by March 31, 2024, the parties further agreed to amend and restate the Notes, to extend the maturity date of the Option Notes originally due November 28, 2023, to March 31, 2025 and to equitize certain interest and fees owing on the Notes.
The
conversion rate under the amended and restated notes is to be based on the pricing and size of the Company’s proposed equity financing
of a minimum of $
Accrued Interest
At
December 31, 2023, the balance of accrued interest was $
Debt Discount
At
December 31, 2023, the unamortized debt discount was $
| F-10 |
7. Leases Liabilities
During
the three months ended March 31, 2024 and 2023, lease costs totaled $
As
of December 31, 2023, operating lease liabilities totaled $
As
of March 31, 2024, the weighted average remaining lease terms for an operating lease are
8. Simple Agreements for Future Equity (“SAFE”) Investments
During
the first quarter of 2024, the Company received $
Stock Options
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate
Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Unvested forfeited | $ | |||||||||||||||
| Vested forfeited | ( | ) | $ | |||||||||||||
| Outstanding at March 31, 2024 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2024 | $ | $ | ||||||||||||||
During the three months ended March 31, 2024 and 2023, the Company recognized $ and $ of compensation expense relating to vested stock options. As of March 31, 2024, the aggregate amount of unvested compensation related to stock options was approximately $ which will be recognized as an expense as the options vest in future periods through March 28, 2027.
As of March 31, 2024, 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 March 31, 2024, which was $, and the exercise price of the outstanding stock options.
| F-11 |
10. Stock Warrants
The Company’s warrant activity during the three months ended March 31, 2024 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2023 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited | - | |||||||||||||||
| Outstanding at March 31, 2024 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2024 | $ | $ | ||||||||||||||
As
of March 31, 2024, 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 March 31, 2024, which was $
11. Transactions with California Custom Beverage, LLC, former related party
In
December 2018, the Company signed a co-packing agreement with California Custom Beverage, LLC’s (“CCB”), an entity
owned by Christopher J. Reed, a former related party, pursuant to which CCB agreed to produce certain products for the Company for agreed
fees. The co-packing agreement, as amended, includes certain provisions for product inputs, shrinkage, and quality assurance. Also beginning
in 2019, CCB agreed to pay the Company a
At March 31, 2024 and 2023, accounts receivable due from and accounts payable due to CCB were as follows:
| March
31, 2024 | December
31, 2023 | |||||||
| Accounts
receivable, net of provision of $ | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Net (payable) receivable | ( | ) | ||||||
In
addition, on April 19, 2023, the Company received a letter from CCB demanding payment of various amounts, including the $
12. Commitments and Contingencies
During 2023, the firm engaged an investment bank to explore financing options
for the Company. We have a maximum obligation of $
In
2018, CCB assumed the monthly payments on our lease obligation for a Los Angeles manufacturing plant for payments through September
2024, and our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable.
We believe that there are no material litigation matters at the current time. Although the result of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations.
13. Subsequent Events
Secured Convertible Notes Payable
The
Company has not yet satisfied conditions required for issuance of the amended and restated Notes and equitization of certain
interest and fees owing on the Notes. The conversion rate under the amended and restated Notes is to be based on the pricing and
size of the Company’s proposed equity financing of a minimum of $
| F-12 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our discussion and analysis is intended to help the reader understand our results of operations and financial condition and is provided as an addition to, and should be read in connection with, our condensed financial statements and the accompanying notes. Cautionary statements on page [ii] of this report and in “Part I, Item 1A. Risk Factors” of our 2023 Form 10-K as updated by “Part II, Item 1A” of this report, should be considered when evaluating our trends and future results.
In addition to our GAAP results, the following discussion includes Modified EBITDA as a supplemental 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. In 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 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.
Amounts presented in the discussion below are in thousands, except share and per share amounts.
Results of Operations
Overview
During the three months ended March 31, 2024, 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, Virgil’s Zero Sugar handcrafted sodas, Reed’s Classic and Stormy Mule, and Reed’s Hard Ginger Ale.
The Company remains focused on driving sales growth, improving gross margin, and reducing freight costs. The sales growth focus is on channel expansion, increase in store placements, new product introduction and improved sales execution. The margin enhancement initiative is driven by packaging savings, co-packer upgrades, and better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. In addition, the Company continues to augment its co-packer network to drive further efficiencies and build proper levels of inventory at the appropriate location to maximize delivery metrics.
Recent Trends – Market Conditions
Although the U.S. economy continued to grow throughout 2023 and into Q1 2024, the 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.
During the three months ended March 31, 2024, the Company experienced moderation from the elevated freight costs experienced in 2023. The average cost of shipping and handling for period March 31, 2024, was $3.01 per case, as compared to $3.46 per case for the period ended March 31, 2023. Although the Company has experienced decreases in freight costs over the last four quarters, in the Company’s opinion there remains a volatile environment and the Company will continue to monitor pricing and availability in transportation. Mitigation plans have been implemented to manage this risk. The Company has been negatively impacted by supply chain challenges affecting 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. The Company has experienced moderation in inflation and anticipates this to continue throughout 2024.
| 1 |
During the three months ended March 31, 2024, we continued to generate cash flows to meet our short-term liquidity needs, and we expected to maintain access to the capital markets.
Results of Operations – Three Months Ended March 31, 2024, as compared to March 31, 2023
The following table sets forth key statistics for the three months ended March 31, 2024 and 2023, respectively, in thousands.
| Three
Months Ended March 31, | Pct. | |||||||||||
| 2024 | 2023 | Change | ||||||||||
| Gross billing (A) | $ | 10,379 | $ | 12,453 | -17 | % | ||||||
| Less: Promotional and other allowances (B) | 784 | 1,296 | -40 | % | ||||||||
| Net sales | $ | 9,595 | $ | 11,157 | -14 | % | ||||||
| Cost of goods sold | 6,182 | 8,459 | -27 | % | ||||||||
| % of Gross billing | 59 | % | 68 | % | ||||||||
| % of Net sales | 64 | % | 76 | % | ||||||||
| Gross profit | $ | 3,413 | $ | 2,698 | 28 | % | ||||||
| % of Net sales | 36 | % | 24 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | $ | 1,502 | $ | 2,120 | -29 | % | ||||||
| % of Net sales | 16 | % | 19 | % | ||||||||
| Dollar per case ($) | $ | 3.01 | $ | 3.46 | ||||||||
| Selling and marketing | 1,093 | 1,447 | -24 | % | ||||||||
| % of Net sales | 11 | % | 13 | % | ||||||||
| General and administrative | 1,468 | 1,709 | -14 | % | ||||||||
| % of Net sales | 15 | % | 15 | % | ||||||||
| Total operating expenses | 4,063 | 5,276 | -23 | % | ||||||||
| Loss from operations | $ | (650 | ) | $ | (2,578 | ) | -76 | % | ||||
| Interest expense and other expense | $ | (1,023 | ) | $ | (1,779 | ) | -42 | % | ||||
| Net loss | $ | (1,673 | ) | $ | (4,357 | ) | -62 | % | ||||
| Loss per share – basic and diluted | $ | (0.40 | ) | $ | (1.70 | ) | -77 | % | ||||
| Weighted average shares outstanding - basic & diluted | 4,187,291 | 2,559,855 | 64 | % | ||||||||
(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 has been defined by our internal reporting practices.
| 2 |
(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.
Sales, Cost of Sales, and Gross Margins
The following chart sets forth key statistics for the transition of the Company’s top line activity from the first quarter of 2023 through the first quarter of 2024.
| 2024 | 2023 | vs PY | Q1 Per Case | |||||||||||||||||||||||
| Q1 | Q1 | Q1 | 2024 | 2023 | vs PY | |||||||||||||||||||||
| Cases: | ||||||||||||||||||||||||||
| Reed’s | 348 | 370 | -6 | % | ||||||||||||||||||||||
| Virgil’s | 151 | 241 | -37 | % | ||||||||||||||||||||||
| Total Core | 499 | 611 | -18 | % | ||||||||||||||||||||||
| Non Core | - | 2 | -100 | % | ||||||||||||||||||||||
| Total | 499 | 613 | -19 | % | ||||||||||||||||||||||
| Gross Billing: | ||||||||||||||||||||||||||
| Core | $ | 10,377 | $ | 12,333 | -16 | % | $ | 20.80 | $ | 20.18 | 3 | % | ||||||||||||||
| Non Core | 2 | 120 | -98 | % | - | $ | 60.60- | |||||||||||||||||||
| Total | $ | 10,379 | $ | 12,453 | -17 | % | 20.80 | 20.31 | 2 | % | ||||||||||||||||
| Discounts: | Total | $ | (784 | ) | $ | (1,296 | ) | -40 | % | $ | (1.57 | ) | $ | (2.11 | ) | -26 | % | |||||||||
| COGS: | ||||||||||||||||||||||||||
| Core | $ | (6,182 | ) | $ | (8,422 | ) | -27 | % | $ | (12.39 | ) | $ | (13.78 | ) | -10 | % | ||||||||||
| Non Core | - | (37 | ) | -100 | % | - | $ | (18.50 | ) | |||||||||||||||||
| Total | $ | (6,182 | ) | $ | (8,459 | ) | -27 | % | $ | (12.39 | ) | $ | (13.80 | ) | -10 | % | ||||||||||
| Gross Margin: | $ | 3,413 | $ | 2,698 | 27 | % | $ | 6.84 | $ | 4.40 | 55 | % | ||||||||||||||
| as % Net Sales | 36 | % | 24 | % | ||||||||||||||||||||||
Sales, Cost of Sales, and Gross Margins
As part of the Company’s ongoing initiative to simplify 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 candy and slower selling discontinued Reed’s and Virgil’s SKUs.
During 2023, the Company licensed its candy business to Rootstock Trading, a company founded and owned by our former Chief Sales Officer, Neal Cohane. As part of this agreement, Rootstock agrees to pay a royalty on a percentage of its net sales of licensed products. The royalty fees are 0% for 2023, 2% for 2024, 4% for 2025, and 5% thereafter.
Core beverage volume for the three months ended March 31, 2024, represents 100% of all beverage volume.
| 3 |
Core brand gross billing decreased by 16% to $10,377 compared to $12,333 during the same period last year, driven by a Reed’s volume decline of 6% and Virgil’s volume decline of 37%. The result is a decrease in total gross billing of 17%, to $10,379 during the three months ended March 31, 2024, from $12,453 in the same period last year. Price on our core brands increased 3% to $20.80 per case. The increase was a result of price increases across the channels of our product lines.
Discounts as a percentage of gross sales decreased to 8% from 10% in the same period last year. This decline in discounts partially offset the revenue decline. Net sales revenue decreased 14% in the three months ended March 31, 2024, to $9,595, compared to $11,157 in the same period last year.
Cost of Goods Sold
Cost of goods sold decreased $2,277 during the three months ended March 31, 2024, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended March 31, 2023, was 64% as compared to 76% for the same period last year.
The total cost of goods per case increased to $12.39 per case in the three months ended March 31, 2024, from $13.80 per case for the same period last year. The cost of goods sold per case on core brands was $12.39 during the three months ended March 31, 2024, compared to $13.78 for the same period last year.
Gross Margin
Gross margin was 36% for the three months ended March 31, 2024, compared to 24% for the same period last year.
Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $618 in the three months ended March 31, 2024, to $1,502 from $2,120 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended March 31, 2024, were 16% of net sales and $3.01 per case, compared to 19% of net sales and $3.46 per case during the same period last 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 were $1,093 during the three months ended March 31, 2024, compared to $1,447 during the same period last year. As a percentage of net sales, selling and marketing costs was 11% during the three months ended March 31, 2024, as compared to 13% during the same period last year. The decrease was primarily driven by lower employee related costs, marketing expenditures, and travel and entertainment expense, partially offset by slightly 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 decreased in the three months ended March 31, 2024, to $1,468 from $1,709, a decrease of $241 over the same period last year. As a percentage of net sales, general and administrative expenses were 15% during the three months ended March 31, 2024, as compared to 15% during the same period last year. The decrease was driven by lower employee related costs, professional fees, and stock compensation.
Loss from Operations
The loss from operations was $650 for the three months ended March 31, 2024, as compared to a loss of $2,578 in the same period last year driven by decreased gross profit offset by decreases in operating expenses discussed above.
Interest and Other Expense
Interest and other expense for the three months ended March 31, 2024, consisted of $1,023 of interest expense. During the same period last year, interest and other expense consisted of $1,779 of interest expense.
| 4 |
Modified EBITDA
In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified 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 Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant 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. In evaluating Modified 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 Modified 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 net loss to Modified EBITDA for the three months ended March 31, 2024 and 2023 (unaudited; in thousands):
| Three
Months Ended March 31 | ||||||||
| 2024 | 2023 | |||||||
| Net loss | $ | (1,673 | ) | $ | (4,357 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation and amortization | 68 | 80 | ||||||
| Tax expense | 54 | |||||||
| Interest expense | 1,023 | 1,779 | ||||||
| Product quality hold write-down | 29 | |||||||
| Stock option and other noncash compensation | 129 | 233 | ||||||
| Total EBITDA adjustments | $ | 1,303 | $ | 2,092 | ||||
| Modified EBITDA | $ | (370 | ) | $ | (2,265 | ) | ||
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. In 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 has limitations as an analytical tool, which includes, among others, the following:
| ● | Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; | |
| ● | Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs; | |
| ● | Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and | |
| ● | Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements. |
Liquidity and Capital Resources
For the three months ended March 31, 2024, the Company recorded a net loss of $1,673 and used cash in operations of $2,395. In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern, the Company’s management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying financial statements were issued. As of the issuance date of these financial statements, management expects that the Company’s existing cash of $314, which includes $4,100 of additional cash received during the three months ended March 31, 2024, from investments with significant stockholders and expected cash flow from operations, will be sufficient to fund the Company’s current operating plan for at least twelve months from the date of issuance of these financial statements. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management’s assessment whether there is sufficient cash on hand, together with expected capital raises, to assure operations for a period of at least twelve months from the date these financial statements are issued, is based on conditions that are known and reasonably knowable to management, considering various scenarios, projections, and estimates and certain key assumptions. These assumptions include, among other factors, management’s ability to raise additional capital, and the expected timing and nature of the Company’s forecasted cash expenditures.
Historically, the Company has financed its operations through public and private sales of common stock, convertible debt instruments, credit lines from financial institutions, and cash generated from operations. 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.
| 5 |
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and 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 assumptions 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 making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable 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 assumptions used in 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. There were no changes to our critical accounting policies described in the condensed financial statements included in our 2023 10-K that impacted our condensed financial statements and related notes included herein.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed 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 Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, 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 March 31, 2023, 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 March 31, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
| 6 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
We are subject to a variety of variety of litigation, claims, legal or regulatory proceedings, inquiries and investigations from time to time in the ordinary course of business. Management evaluates, and periodically re-evaluates, whether the final result of any of the foregoing may be expected to have a material adverse effect on our financial condition, results of operations or cash flows. Management has determined that no disclosure is required under this Item 1.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes with respect to the risk factors disclosed in our 2023 Form 10-K.
Risks Related to Our Debt Service Obligations
Our ability to service our indebtedness will depend on our ability to generate cash in the future.
At March 31, 2024, our outstanding obligation on our 10% Secured Convertible Notes (“Notes”) was approximately $18.7 million and the balance on our ABL line of credit was approximately $8 million. Our Note holders have been amenable to making accommodations under the Notes by waiving conditions and financial covenants in exchange for certain negotiated penalties in lieu of declaring default. 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 and maintain compliance with our financial and other covenants or, in the alternative, continue to negotiate suitable accommodations and fund our other liquidity needs, we could be forced to curtail our operations, our creditors could accelerate our indebtedness and exercise other remedies. We could be required to 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.
Holders of our Notes have been amenable to making accommodations under the Notes by waiving conditions and financial covenants in exchange for certain negotiated penalties in lieu of declaring default. If do not meet our obligations under the Notes and are unable to negotiate accommodations in the future, the Note holders may declare a default, which would likely force us into bankruptcy.
At March 31, 2024, our outstanding obligation under the Notes was approximately $18.7 million. The Notes are secured by substantially all of the Company’s assets. The indebtedness under the Notes limits our growth, and management of the debt requires a significant amount of time and effort of our executive officers. While we have been successful negotiating waivers and amendments under the Notes, we may not be able to continue to do so in the future. We have further been exploring our options to refinance these Notes. If we are unable to service or repay these obligations at maturity and we are otherwise unable to extend the maturity dates or refinance these obligations, we may default. A default would trigger acceleration under the Notes, and it is unlikely that we would have sufficient funds to make these payments. Upon a default, the holders have the right to exercise their remedies to collect, including foreclosing on our assets. Accordingly, we would likely be forced to seek bankruptcy protection in the event of default.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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.
Item 5. Other Information
The Company has not yet satisfied conditions required for issuance of the amended and restated Notes and equitization of certain interest and fees owing on the Notes. The conversion rate under the amended and restated Notes is to be based on the pricing and size of the Company’s proposed equity financing of a minimum of $3 million (which will include conversion of approximately $4.1 million of previously funded SAFE investments into equity of the Company). Delays related to the Company’s evaluation of long term financing options have delayed the proposed financing. On May 17, 2024, Reed’s entered into a Limited Waiver, Deferral, and Amendment and Restatement Agreement (the “Waiver and Amendment”) with each holder. The holders agreed to temporarily waive certain specified events of default and the payment of Excess ABL Fees through June 10, 2024. Further, the holders agreed to waive the payment of monthly amortization payments through June 30, 2024. Amortization payments are scheduled to resume on July 1, 2024. The Company further remitted $40 representing all interest (including default interest) to the holders and reimbursed the holders for certain fees and expenses.
Item 6. Exhibits
See Exhibit Index on page. [8].
| 7 |
INDEX TO EXHIBITS
ITEM 15(a)(3)
The following is a list of the exhibits filed as part of this Form 10-Q. The documents incorporated by reference can be viewed on the SEC’s website at http://www.sec.gov.
Exhibit
| 8 |
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: May 20, 2024 | /s/ Norman E. Snyder, Jr. |
| Norman E. Snyder, Jr. | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: May 20, 2024 | /s/ Joann Tinnelly |
| Joann Tinnelly | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
| 9 |