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Section 1: 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2019

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______

 

Commission File Number: 001-32501

 

REED’S, INC.

 

(Exact name of registrant as specified in its charter)

 

Delaware   35-2177773
(State of incorporation)   (I.R.S. Employer Identification No.)

 

201 Merritt 7, Norwalk, CT   06851
(Address of principal executive offices)   (Zip Code)

 

(800) 997-3337

 

(Registrant’s telephone number, including area code)

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically 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). Yes [X] No [  ]

 

No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the 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 [  ]
Non-accelerated filer [  ]   Smaller reporting company [X]
    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 registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock   REED   The NASDAQ Stock Market LLC

 

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 47,595,206 shares of Common Stock outstanding as of November 11, 2019.

 

 

 

 
 

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report includes forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

2
 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION F-1
   
Item 1. Condensed Financial Statements F-1
   
Condensed Balance Sheets - September 30, 2019 (unaudited) and December 31, 2018 F-1
   
Condensed Statements of Operations for the three and nine months ended September 30, 2019 and 2018 (unaudited) F-2
   
Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2019 and 2018 (unaudited) F-3
   
Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (unaudited) F-4
   
Notes to Condensed Financial Statements (unaudited) F-5
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 4
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
   
Item 4. Controls and Procedures 14
   
PART II - OTHER INFORMATION 15
   
Item 1. Legal Proceedings 15
   
Item 1A. Risk Factors 15
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 15
   
Item 3. Defaults Upon Senior Securities 15
   
Item 4. Mine Safety Disclosures 15
   
Item 5. Other Information 15
   
Item 6. Exhibits 15

 

3
 

 

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REED’S INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

   September 30, 2019   December 31, 2018 
   (Unaudited)     
ASSETS          
Current assets:          
Cash  $1,016   $624 
Accounts receivable, net of allowance for doubtful accounts and returns and discounts of $223 and $623, respectively   4,129    2,608 
Receivable from related party   -    195 
Inventory, net of reserve for obsolescence of $522 and $197, respectively   9,575    7,380 
Prepaid expenses and other current assets   470    131 
Total current assets   15,190    10,938 
           
Property and equipment, net of accumulated depreciation of $438 and $342, respectively   1,053    896 
Equipment held for sale, net of impairment reserves of $118 and $118, respectively   82    82 
Intangible assets   576    576 
Total assets  $16,901   $12,492 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $5,525   $5,721 
Accrued expenses   1,141    1,483 
Revolving line of credit   7,079    6,980 
Current portion of leases payable   51    51 
Total current liabilities   13,796    14,235 
           
Leases payable, less current portion   747    801 
Convertible note to a related party   4,551    4,161 
Warrant liability   15    38 
Total liabilities   19,109    19,235 
           
Stockholders’ deficit:          
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,412 shares issued and outstanding   94    94 
Common stock, $.0001 par value, 70,000,000 shares authorized, 33,720,044 and 25,729,461 shares issued and outstanding, respectively   3    3 
Additional paid in capital   70,420    53,591 
Accumulated deficit   (72,725)   (60,431)
Total stockholders’ deficit   (2,208)   (6,743)
Total liabilities and stockholders’ deficit  $16,901   $12,492 

 

The accompanying notes are an integral part of these condensed financial statements.

 

F-1
 

 

REED’S, INC.

CONDENSED STATEMENTS OF OPERATIONS

For the Three and Nine months Ended September 30, 2019 and 2018

(Unaudited)

(Amounts in thousands, except share and per share amounts)

 

   Three Months Ended   Nine months Ended 
   2019   2018   2019   2018 
Net sales  $8,740   $10,796   $26,669   $28,473 
Cost of goods sold   6,238    8,115    19,390    20,447 
Gross profit   2,502    2,681    7,279    8,026 
                     
Operating expenses:                    
Delivery and handling expense   1,902    1,395    4,369    3,598 
Selling and marketing expense   2,508    1,378    7,718    3,601 
General and administrative expense   2,470    1,987    6,587    6,853 
Gain on sale of assets   -    -    (30)   - 
Total operating expenses   6,880    4,760    18,644    14,052 
                     
Loss from operations   (4,378)   (2,079)   (11,365)   (6,026)
                     
Interest expense   (318)   (621)   (947)   (1,542)
Change in fair value of warrant liability   131    26    23    (97)
                     
Net loss   (4,565)   (2,674)   (12,289)   (7,665)
                     
Dividends on Series A Convertible Preferred Stock   -    -    (5)   (5)
                     
Net loss attributable to common stockholders  $(4,565)  $(2,674)  $(12,294)  $(7,670)
                     
                     
Loss per share – basic and diluted  $(0.14)  $(0.10)  $(0.38)  $(0.30)
                     
Weighted average number of shares outstanding – basic and diluted   33,716,359    25,587,191    32,179,119    25,242,780 

 

The accompanying notes are an integral part of these condensed financial statements.

 

F-2
 

 

REED’S, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Three and Nine months Ended September 30, 2019 and 2018

(Unaudited)

(Amounts in thousands except share amounts)

 

   Common Stock   Preferred Stock   Common Stock
Issuable
   Additional Paid In   Accumulated   Total Stockholders’
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, June 30, 2019   33,708,826   $3    9,411   $94    -   $-   $70,051   $(68,160)  $1,988 
Fair value of vested options                                 223         223 
Shares granted to Directors for services   8,072                             29         29 
Fair value of vested restricted shares granted to an officer for services                                 116         116 
Exercise of warrants   3,146                             1         1 
Net Loss                                      (4,565)   (4,560)
Balance, September 30, 2019   33,720,044   $3    9,411   $94    0   $-   $70,420   $(72,725)  $(2,208)

 

   Common Stock   Preferred Stock   Common Stock
Issuable
   Additional Paid In   Accumulated   Total Stockholders’
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, December 31, 2018   25,729,461   $3    9,411   $94    -   $-   $53,591   $(60,431)  $(6,743)
Fair value of vested options                                 1,077         1,077 
Shares granted to Directors for services   33,796                             115         115 
Fair value of vested restricted shares granted to an officer for services                                 405         405 
Dividends on Series A Convertible Preferred Stock                                      (5)   (5)
Common shares issued pursuant to the rights offering, net of offering costs   7,733,750                             14,867         14,867 
Exercise of warrants   223,037                             365         365 
Net Loss                                      (12,289)   (12,289)
Balance, September 30, 2019   33,720,044   $3    9,411   $94    0   $-   $70,420   $(72,725)  $(2,208)

 

   Common Stock   Preferred Stock   Common Stock
Issuable
   Additional Paid In   Accumulated   Total Stockholders’
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, June 30, 2018   25,525,996   $3    9,411   $94    634,254   $84   $52,182   $(55,097)  $(2,734)
Fair value of vested options                                 394         394 
Shares granted to Directors for services   37,052                             100         100 
Fair value vesting of restricted common stock                            542    (593)        (51)
Dividends on Series A Convertible Preferred Stock   1,734                             5         5 
Common shares issued to Directors for services provided in 2018   18,237                   (18,237)   128    (128)        - 
Exercise of warrants   75,140                             136         136 
Net Loss                                      (2,674)   (2,674)
Balance, September 30, 2018   25,658,159   $3    9,411   $94    616,017   $754   $52,096   $(57,771)  $(4,824)

 

   Common Stock   Preferred Stock   Common Stock Issuable   Additional Paid In   Accumulated   Total Stockholders’
Equity
 
   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   (Deficit) 
Balance, December 31, 2017   24,619,591   $2    9,411   $94    400,000   $680   $49,833   $(50,101)  $508 
Fair value of vested options                                 864         864 
Shares granted to Directors for services   37,052                             100         100 
Fair value vesting of restricted common stock                       854,592    655              655 
Dividends on Series A Convertible Preferred Stock   1,734                             5    (5)   - 
Common shares issued to Directors for services provided in 2018   638,575                   (638,575)   (581)   581         - 
Exercise of warrants   361,207    1                        713         714 
Net Loss                                      (7,665)   (7,665)
Balance, September 30, 2018   25,658,159   $3    9,411   $94    616,017   $754   $52,096   $(57,771)  $(4,824)

 

The accompanying notes are an integral part of these condensed financial statements.

 

F-3
 

 

REED’S, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Nine months Ended September 30, 2019 and 2018

(Unaudited)

(Amounts in thousands)

 

   September 30, 2019   September 30, 2018 
Cash flows from operating activities:          
Net loss  $(12,289)  $(7,665)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   12    492 
Gain on sale of property & equipment   (30)   - 
Loss on termination of leases   2    94 
Amortization of debt discount   225    - 
Amortization of right of use assets   96    82 
Stock options issued to employees for services   1,077    864 
Common stock issuable for services   -    655 
Common stock issued for services   520    100 
Decrease in allowance for doubtful accounts   (400)   (37)
Increase in inventory reserve   325    126 
Increase/(decrease) in fair value of warrant liability   (23)   97 
Accrual of interest on convertible note to a related party   390    346 
Lease liability   (10)   - 
Changes in operating assets and liabilities:          
Accounts receivable   (1,121)   (1,077)
Inventory   (2,520)   (1,236)
Prepaid expenses and other assets   (339)   (239)
Accounts payable   (196)   (4,100)
Accrued expenses   (347)   1,648 
Other long term obligations   -    (16)
Net cash used in operating activities   (14,628)   (10,496)
Cash flows from investing activities:          
Proceeds from sale of property and equipment   30    52 
Purchase of property and equipment   (273)   (102)
Net cash used in investing activities   (243)   (50)
Cash flows from financing activities:          
Borrowings on line of credit   42,179    13,495 
Repayments of line of credit   (42,175)   (14,107)
Capitalization of financing cost   (130)   - 
Principal repayments on capital expansion loan   -    (907)
Principal repayments on long term financial obligation   -    (174)
Advances from officers   -    50 
Repayment of amounts due to/from officers   195    (277)
Principal repayments on capital lease obligation   (38)   (187)
Exercise of warrants   365    714 
Proceeds from sale of common stock   14,867    - 
Net cash provided by (used in) financing activities   15,263    (1,393)
           
Net increase/(decrease) in cash   392    (11,939)
Cash at beginning of period   624    12,127 
Cash at end of period  $1,016   $188 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $408   $971 
Non Cash Investing and Financing Activities          
Dividends on Series A Convertible Preferred Stock  $5   $5 
Vendor credits issued for fixed asset purchases  $-   $108 

 

The accompanying notes are an integral part of these condensed financial statements.

 

F-4
 

 

REED’S, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Three and Nine months Ended September 30, 2019 and 2018 (Unaudited)

(In thousands, except share and per share amounts)

 

1. Basis of Presentation and Liquidity

 

The accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position at September 30, 2019 and the results of operations and cash flows for the three and nine months ended September 30, 2019 and 2018. The balance sheet as of December 31, 2018 is derived from the Company’s audited financial statements.

 

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 1, 2019.

 

The results of operations for the nine months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019.

 

Liquidity

 

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

For the nine months ended September 30, 2019, the Company recorded a net loss of $12,289 and used cash in operations of $14,628. As of September 30, 2019, we had a cash balance of $1,016 with borrowing capacity of $1,019, a stockholders’ deficit of $2,208 and a working capital of $1,394 compared to a cash balance of $624, stockholders’ deficit of $6,743 and working capital shortfall of $3,297 at December 31, 2018. On February 20, 2019, the Company conducted a public offering of 7,733,750 shares of its common stock at $2.10 per share resulting in net proceeds to the Company of $14,867. In October 2019, the Company conducted a public offering of 13,416,667 shares of its common stock at $0.60 per share resulting in net proceeds to the Company of $7,536.

 

Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices.

 

2. Significant Accounting Policies

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.

 

F-5
 

 

The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time.

 

All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

 

The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

 

Loss per Common Share

 

Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive.

 

For the periods ended September 30, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:

 

   September 30, 2019   September 30, 2018 
Convertible note to a related party   2,266,667    2,266,667 
Warrants   6,413,782    6,951,173 
Common stock equivalent of Series A Convertible Preferred Stock   37,644    37,644 
Unvested restricted common stock   610,609    616,017 
Options   4,373,566    3,440,904 
Total   13,702,268    13,312,405 

 

The Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4.

 

Use of estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

 

Recent Accounting Pronouncements

 

In September 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718); Improvements to Non-Employee Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 generally aligns the measurement and classification of share-based awards to non-employees with that of share-based awards to employees. Non-employee equity awards will be measured at the fair value of the equity instruments to be issued, as of the grant date, and the resulting amount will be recognized as expense over the expected or contractual term of the award. The ASU applies to all share-based payments to nonemployees in exchange for goods or services used or consumed in an entity’s own operations. It does not apply to instruments issued to a lender or investor in a financing transaction, or to instruments granted when selling goods or services to customers. ASU 2018-07 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company adopted the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The adoption of ASU 2018-07 did not have any impact on the Company’s financial statement presentation or disclosures.

 

F-6
 

 

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 amends certain disclosure requirements pertaining to fair value measurement, and is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s financial position, results of operations, and cash flows.

 

Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

Concentrations

 

Gross sales. During the three months ended September 30, 2019, the Company’s largest two customers accounted for 15% and 12% of gross sales, respectively. During the nine months ended September 30, 2019, these customers accounted for 23% and 13% of gross sales, respectively. During the three months ended September 30, 2018, the two largest customers accounted for 22% and 18% of gross sales, respectively. During the nine months ended September 30, 2018, the two largest customers accounted for 24% and 13% of gross sales, respectively.

 

Accounts receivable. As of September 30, 2019, the Company had accounts receivable from one customer which comprised 14% of its gross accounts receivable. As of December 31, 2018, accounts receivable from two customers comprised 36% and 19% of total accounts receivable, respectively.

 

Purchases from vendors. During the three months ended September 30, 2019, the Company’s largest three vendors accounted for approximately 13%, 11% and 10% of all purchases, respectively. During the nine months ended September 30, 2019, two vendors accounted for 12% and 10% of all purchases, respectively. During the three months ended September 30, 2018, the Company’s largest vendor accounted for approximately 10% of all purchases. During the nine months ended September 30, 2018, 15% of all purchases were made from this vendor.

 

Accounts payable. As of September 30, 2019, the Company’s largest three vendors accounted for 23%, 18% and 14% of the total accounts payable, respectively. As of September 30, 2018, a single vendor accounted for 15% of the Company’s total accounts payable. As of December 31, 2018, one vendor accounted for 24% of total accounts payable.

 

Fair Value of Financial Instruments

 

The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs:

 

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3—Unobservable inputs based on the Company’s assumptions.

 

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates.

 

F-7
 

 

As of September 30, 2019, and December 31, 2018, the Company’s balance sheets included warrant liabilities aggregating $15 and $38 respectively, measured at fair value based on Level 3 inputs.

 

3. Inventory

 

Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, and net of reserves is comprised of the following (in thousands):

 

   September 30,
2019
   December 31,
2018
 
Raw Materials and Packaging  $5,962   $3,053 
Finished Goods   3,613    4,327 
Total  $9,575   $7,380 

 

The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at September 30, 2019 and December 31, 2018 was $522 and $197, respectively.

 

4. Property and Equipment

 

Property and equipment is comprised of the following (in thousands):

 

   September 30,
2019
   December 31,
2018
 
Right-of-use assets under operating leases  $730   $730 
Right-of-use assets under finance leases   179    204 
Computer hardware and software   582    304 
Total cost   1,491    1,238 
Accumulated depreciation and amortization   (438)   (342)
Net book value  $1,053   $896 

 

Depreciation expense for the three months ended September 30, 2019 and 2018 was $8 and $155 respectively. Depreciation expense for the nine months then ended was $12 and $492, respectively.

 

5. Intangible Assets

 

Intangible assets are comprised of brand names acquired, specifically Virgil’s. They have been assigned an indefinite life, as we currently anticipate that they will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful life remains appropriate. We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized in an amount equal to that excess. Based on management’s measurement, there were no indications of impairment at September 30, 2019.

 

6. Receivable from a Related Party

 

As of December 31, 2018, the Company had outstanding receivable from California Custom Beverage (CCB), an entity owned by Christopher J. Reed, founder, chief innovation officer and board member of Reed’s. The receivable consisted of certain costs such as sales tax and prepayments arising from the sale of the Los Angeles plant on December 31, 2018 to CCB. Such amount was collected from CCB during the nine months ended September 30, 2019. Amount was outstanding was $0 and $195, as of September 30, 2019 and December 31, 2018, respectively.

 

7. Line of Credit

 

Amounts outstanding under the Company’s credit facilities are as follows (in thousands):

 

   September 30,
2019
   December 31,
2018
 
Line of Credit  $7,661   $7,657 
Capitalized finance costs   (582)   (677)
Net balance  $7,079   $6,980 

 

On October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The Company incurred $882 of direct costs in conjunction with the transaction, consisting primarily of broker, bank and legal fees, and $161 cost of warrant modification. The Company annually incurs an additional $130 of fees from the bank, which is equal to 1% of the $13,000 borrowing limit. These costs have been capitalized and recorded as a debt discount and are being amortized over the 2.5 year life of the Rosenthal agreement. Amortization of debt discount was $225 for the nine months ended September 30, 2019. The line of credit matures on April 20, 2021 and has $1,019 of unused borrowing capacity under the financing agreement as of September 30, 2019.

 

F-8
 

 

The line of credit is secured by substantially all of the assets of the Company. Additionally, the over-advance is guaranteed by an irrevocable stand-by letter of credit in the amount of $1,500, issued by Daniel J. Doherty III and the Daniel J. Doherty, III 2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV LLC (“Raptor”). Raptor beneficially owns 20.1% of the Company’s outstanding common stock as of September 30, 2019. Mr. Doherty is a member of the Company’s Board of Directors. In the event of a default under the financing agreement, Raptor has a put option to purchase from Rosenthal the entire amount of any outstanding over-advance plus accrued interest, prior to Rosenthal declaring an event of default under the financing agreement.

 

As part of the transaction, the Company issued an amended and restated subordinated convertible non-redeemable secured note to Raptor, to provide for additional advances of up to $4,000 in the event that Raptor exercises its put option described above. Consequently, the exercise price of 750,000 of Raptor’s outstanding warrants to purchase the Company’s common stock was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants of $161. This amount has been reflected as a capitalized finance cost and is being amortized over the life of the financing agreement.

 

The financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions, including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of September 30, 2019.

 

Interest Rates

 

Borrowings under the Rosenthal financing agreement bear interest at the greater of prime or 4.75%, plus an additional 2% to 3.5% depending upon whether the borrowing is based upon receivables, inventory or is an Over-Advance. The effective interest rate as of September 30, 2019 on outstanding borrowings was 8.2%. Additionally, the line of credit is subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $4.

 

8. Leases Payable

 

The Company adopted ASU 2016-02, Leases, effective October 1, 2018. The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments. As a result, we recorded right-of-use assets aggregating $862 as of October 1, 2018, utilizing a discount rate of 12.60%. That amount consists of new leases on the Company’s Norwalk office and certain office equipment of $730, and existing capitalized leases reclassified to right of use assets of $132.

 

ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. During the nine months ended September 30, 2019, the Company reflected amortization of right of use asset of $96 related to these leases, resulting in a net asset balance of $730 as of September 30, 2019.

 

In accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.

 

As of December 31, 2018, liabilities recorded under finance leases and operating leases were $133 and $719, respectively. During the nine months ended September 30, 2019, the Company made payments of $38 towards finance lease liability and $18 towards operating lease liability. As of September 30, 2019, liability under finance lease amounted to $97 and liability under operating lease amounted to $701, of which $24 and $27 were reflected as current due, under finance leases and operating leases, respectively.

 

As of September 30, 2019, the weighted average remaining lease terms for operating lease and finance lease are 5.26 years and 1.25 years, respectively. The weighted average discount rate for operating lease is 12.60% and 6.93% for finance lease.

 

F-9
 

 

9. Convertible Note to a Related Party

 

The Convertible Note to a Related Party consists of the following (in thousands):

 

   September 30,
2019
   December 31,
2018
 
12% Convertible Note Payable  $3,400   $3,400 
Accrued Interest   1,151    761 
Total obligation  $4,551   $4,161 

 

On April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable note in the principal amount of $3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock. The purchaser, Raptor/Harbor Reeds SPV LLC (“Raptor”), beneficially owned approximately 20.1% and 27.1% of the Company’s common stock at September 30, 2019 and December 31, 2018, respectively.

 

The note bears interest at a rate of 12% per annum, compounded monthly. It is secured by the Company’s assets, subordinate to the first priority security interest of Rosenthal & Rosenthal. The note may not be prepaid and matures on April 21, 2021. It may be converted, at any time and from time to time, into shares of common stock of the Company, at a revised conversion price of $1.50.

 

The warrant will expire on April 21, 2022 and has an adjusted exercise price of $1.50 per share. The note and warrant contain customary anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have been registered on Form S-3. The investor was also granted the right to participate in future financing transactions of the Company for a term of two years.

 

On October 4, 2018, in connection with the execution of the Rosenthal financing agreement, the Company issued an amended and restated subordinated convertible non-redeemable secured note to Raptor, to provide for additional advances of up to $4,000. In consideration therefore, the exercise price of 750,000 of Raptor’s outstanding warrants was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of $161. This amount was recorded as a debt discount to the Rosenthal line of credit and is being amortized as interest expense over the life of the financing agreement (See Note 7).

 

10. Warrant Liability

 

Certain of the Company’s outstanding warrants require the Company to pay cash to the warrant holders, in the event of a fundamental transaction as defined. Such warrants are accounted for as liabilities in accordance with ASC 480. These liabilities are measured at fair value each reporting period and the change in the fair value is recognized in earnings in the accompanying Statements of Operations.

 

The fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at September 30, 2019 and December 31, 2018, using the following assumptions:

 

   September 30,
2019
   December 31,
2018
 
Stock Price  $1.30   $2.07 
Risk free interest rate   2.26%   2.69%
Expected volatility   69.95%   50.07%
Expected life in years   1.67    2.42 
Expected dividend yield   0%   0%
           
Fair Value - Warrants  $15   $38 

 

The risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and does not expect to do so in the foreseeable future.

 

   September 30,
2019
   September 30,
2018
 
Beginning Balance  $38   $36 
Change in fair value   (23)   97 
Ending balance  $15   $133 

 

F-10
 

 

11. Stock Based Activity

 

Common stock issuance

 

In February 2019, the Company conducted a public offering 7,733,750 shares of its common shares including 1,008,750 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering price of $2.10 per share. The net proceeds to the Company from this offering are $14,867, after deducting underwriting discounts and commissions and other offering expenses. Proceeds from the offering will provide capital to fund the growth of our business, new products, sales and marketing efforts, working capital, and for general corporate purposes.

 

Restricted common stock

 

The following table summarizes restricted stock activity during the nine months ended September 30, 2019:

 

   Unvested Shares   Fair Value   Weighted Average
Grant Date Fair
Value
 
Balance, December 31, 2018   598,370   $592    1.63 
Granted   46,035   $132    2.87 
Vested   (33,796)  $(477)     
Issued   -    -      
Balance, September 30, 2019   610,609   $246    1.13 

 

Prior to January 1, 2019, the Company issued 854,592 shares of restricted common stock to the Company’s Chief Executive Officer and members of the board valued at $1,413, of which 256,222 shares have vested, and $820 has been recognized as an expense.

 

During the nine months ended September 30, 2019, the Company issued an additional 17,652 shares of restricted stock to members of the board of directors. These shares vested immediately upon issuance during February 2019. The aggregate fair value of the stock awards was $44 based on the market price of our common stock at $2.49 per share on the date of grant, which were amortized in full during February 2019.

 

During the nine months ended September 30, 2019, the Company issued an additional 24,216 shares of restricted stock to members of the board of directors. These shares vest through November 2019 over 3 equal periods, and remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock awards was $76 based on the market price of our common stock at $3.14 per share on the date of grant, which will be amortized through November 2019.

 

During the nine months ended September 30, 2019, the Company issued an additional 4,167 shares of restricted stock to a member of the board of directors. These shares vest in November 2019 and remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock awards was $12 based on the market price of our common stock at $3.00 per share on the date of grant, which will be amortized through November 2019.

 

On October 31, 2019, the Company and the Chief Executive Officer entered into a separation agreement extending the vesting of the 392,002 shares that were scheduled to vest on June 29, 2019 to October 31, 2019.

 

The total fair value of restricted common stock vesting during the nine months ended September 30, 2019 was $477 and is included in general and administrative expenses in the accompanying statements of operations. As of September 30, 2019, the amount of unvested compensation related to issuances of restricted common stock was $246, which will be recognized as an expense in future periods as the shares vest.

 

Stock options

 

   Shares   Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual
Terms
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018   3,674,236   $2.16                        
Granted   1,404,840   $2.52           
Exercised   -   $-           
Unvested Forfeited or expired   (610,510)  $2.64           
Vested Forfeited or expired   (95,000)  $4.75           
Outstanding at September 30, 2019   4,373,566   $2.15    8.25   $- 
Exercisable at September 30, 2019   1,404,537   $2.33    6.78   $- 

 

During the nine months ended September 30, 2019, the Company approved options to be issued pursuant to Reed’s 2017 Incentive Compensation Plan to certain current employees totaling 1,231,000 shares. One half of these options vest annually over a four-year vesting period; the other half of these options will vest based on performance criteria to be established by the board. In addition, during the nine months ended September 30, 2019, the Company granted options to purchase 113,330 shares of common stock to new board members. Options granted to consultants, former employees, and board members vest at various periods. On September 11, 2019, the Company granted options to purchase 60,510 shares of common stock to certain consultants, which were forfeited on the same day resulting in net $0 of compensation expense.

 

The stock options are exercisable at a price ranging from $2.33 to $3.37 per share and expire in ten years. Total fair value of these options at grant date was approximately $989, which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price ranging from $2.33 to $3.37 per share, expected term of seven years, volatility of 61%, dividend rate of 0% and risk-free interest rate ranging from 1.39% to 2.60%. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award; the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future.

 

F-11
 

 

The Company determined that the options had a fair value of $989 which will be amortized in future periods through September 30, 2023. During the nine months ended September 30, 2019, the Company recognized $1,077 of compensation expense relating to vested stock options. As of September 30, 2019, the amount of unvested compensation related to stock options was approximately $2,672 which will be recorded as an expense in future periods as the options vest.

 

The aggregate intrinsic value was calculated as the difference between the closing market price as of September 30, 2019, which was $1.30, and the exercise price of the outstanding stock options.

 

Common stock purchase warrants

 

The following table summarizes warrant activity for the nine months ended September 30, 2019:

 

   Shares   Weighted-
Average
Exercise Price
   Weighted-
Average
Remaining
Contractual
Terms
(Years)
   Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2018   6,897,277   $2.06    2.42   $1,447 
Granted                    
Exercised   (283,495)  $2.09           
Forfeited or expired   (200,000)  $5.60           
Outstanding at September 30, 2019   6,413,782   $2.06    1.72   $150 
Exercisable at September 30, 2019   6,413,782   $2.06    1.72   $150 

 

During the nine months ended September 30, 2019, warrants to acquire 283,495 shares of common stock were exercised, including 87,485 warrants that were exercised on a cashless basis, resulting in the issuance of 223,037 shares of common stock. Aggregate proceeds to the Company were $365. In addition, during the nine months ended September 30, 2019, warrants to acquire 200,000 shares of common stock expired.

 

The intrinsic value was calculated as the difference between the closing market price as of September 30, 2019, which was $1.30, and the exercise price of the Company’s warrants to purchase common stock.

 

12. Contingencies

 

On December 31, 2018, the Company completed the sale of its Los Angeles manufacturing facility to California Custom Beverage, LLC (“CCB”) an entity owned by Chris Reed, founder, Chief Innovation Officer, and board member. The sale included substantially all machinery, equipment, furniture and fixtures of the facility. By the terms of the sale CCB assumed the monthly payments on our lease obligation effective immediately upon closing of the sale. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $1.2 million of security with the lessor no later than December 31, 2019. In the three months period ending in March 31, 2019, Mr. Reed sold 246,000 shares valued at approximately $656 that was deposited to the escrow account. In the three months period ending in June 30, 2019, Mr. Reed sold an additional 191,600 shares valued at approximately $613. Mr. Reed currently has $650 deposited to the escrow account with the remainder expected to be deposited by December 31, 2019 fully satisfying the security requirements. Mr. Reed has zero shares remaining in escrow as of September 30, 2019.

 

13. Subsequent Events

 

In October 2019, the Company conducted a public offering of 13,416,667 shares of its common shares including 1,750,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments, at a public offering price of $0.60 per share. The net proceeds to the Company from this offering are $7,536, after deducting underwriting discounts and commissions and other offering expenses. Proceeds from the offering will provide capital to fund the growth of our business, new products, sales and marketing efforts, working capital, and for general corporate purposes.

 

On October 18, 2019, the Company issued 4,254 preferred shares to its preferred shareholders as a result of its annual preferred stock dividend.

 

On October 30, 2019, Iris Snyder notified the Company of her intent to resign from her positions as Chief Financial Officer and Secretary, effective on November 22, 2019. On November 1, 2019, Reed’s appointed Joann Tinnelly to serve as Interim Chief Financial Officer effective November 22, 2019.

 

On October 31, 2019, the Company entered into a Separation, Settlement and Release of Claims Agreement (the “Agreement”) with Valentin Stalowir, its former Chief Executive Officer in connection with Mr. Stalowir’s resignation from his position as Chief Executive Officer and the subsequent termination of his employment on October 31, 2019. As part of the Agreement, the Company issued Mr. Stalowir 392,002 shares of its common shares on October 31, 2019, as well as an additional 50,000 shares of its common shares on November 8, 2019.

 

On November 1, 2019, the Company issued a total of 12,239 shares of its common shares to the members of the board of directors.

 

On November 12, 2019, the Nasdaq Listing Qualifications Department (“Staff”) notified the Company that the bid price of its common stock had closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, did not comply with Listing Rule 5550(a)(2). Therefore, in accordance with Listing Rule 5810(c)(3)(A), the Company is being provided 180 calendar days, or until May 11, 2020, to regain compliance with the Rule. If, at any time before May 11, 2020 the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, Nasdaq staff will provide written notification that it has achieved compliance with the Bid Price Rule.

 

If the Company fails to regain compliance with the Bid Price Rule before May 11, 2020 but meets all of the other applicable standards for initial listing on the Nasdaq Capital Market with the exception of the minimum bid price, the Company may be eligible for additional time. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.

 

F-12
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.

 

Overview

 

The third quarter of 2019 continues to reflect the transformation efforts the Company implemented in 2017 and 2018. With the sale of the Los Angeles manufacturing facility on December 31, 2018, we began 2019 positioned as an asset-light company, with a significantly enhanced sales and marketing infrastructure capable of driving accelerated growth. The Company is better positioned to focus on driving growth and building its brands, with capital flexibility, a reduced need for capital expenditures, and an improved operating model.

 

Public equity offerings, which closed on February 20, 2019 and October 25, 2019, respectively, have provided the Company with funds to invest in additional sales support and marketing initiatives as well as working capital to drive brand awareness and support accelerated growth as the Company’s expands its copacking capabilities and flexibility. Reed’s first ever, fully integrated marketing campaign and accelerated new product innovation has driven incremental demand, and the company is now focused on broadening its supply chain capabilities to support the increased demand and improve fulfillment rates.

 

The Company continues to focus on increasing core brands’ sales and improved gross margins through both pricing and COGS reduction. Reed’s launched several new SKUs in the 3rd quarter of 2019 such as Reed’s cans and Zero Sugar Reed’s in both cans and bottles.

 

4
 

 

Results of Operations – Three months ended September 30, 2019

 

The following table sets forth key statistics for the three months ended September 30, 2019 and 2018, respectively, in thousands.

 

   Three Months Ended September 30,   Pct. 
   2019   2018   Change 
Gross sales (A)  $10,112   $11,925    -15%
Less: Promotional and other allowances (B)   1,372    1,129    22%
Net sales  $8,740   $10,796    -19%
                
Cost of goods produced (C)   6,238    7,005    -11%
% of Gross sales   62%   59%     
% of Net sales   71%   65%     
Cost of goods sold – idle capacity (D)   -    1,110    -100%
% of Net sales   0%   10%     
Gross profit  $2,502   $2,681    -7%
% of Net sales   29%   25%     
                
Expenses               
Delivery and handling  $1,902   $1,395    36%
% of Net sales   22%   13%     
Dollar per case ($)   3.5    2.3      
Selling and marketing   2,508    1,378    82%
% of Net sales   29%   13%     
General and administrative   2,470    1,987    24%
% of Net sales   28%   18%     
(Gain)/Loss on sales of assets   -    -      
Total Operating expenses   6,880    4,760    45%
                
Loss from operations  $(4,378)  $(2,079)   111%
                
Interest expense and other expense  $(187)  $(595)   -69%
                
Net loss  $(4,565)  $(2,674)   71%
                
Loss per share – basic and diluted  $(0.14)  $(0.10)   30%
                
Weighted average shares outstanding - basic & diluted   33,716,359    25,587,191    32%

 

(A) Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales have been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

 

5
 

 

(B) Although 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. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.

 

(C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.

 

(D) Cost of goods sold – idle capacity: Cost of goods sold – idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Cost of goods sold – idle capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.

 

6
 

 

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 third quarter of 2018 through the third quarter of 2019.

 

      2019   2018   Q3 Per Case   Sept YTD 
      Q1   Q2   Q3   YTD   Q3 vs PY   YTD vs PY   Q1   Q2   Q3   YTD   2019   2018   vs PY   2019   2018   vs PY 
Cases:                                                                   
   Reed’s   235    278    237    750    -5%   -2%   256    260    250    766                               
   Virgil’s   253    282    298    834    22%   29%   173    231    244    648                               
   Total Core   488    560    535    1,584    8%   12%   429    491    494    1,414                               
   Non Core   15    2    4    21    -97%   -89%   31    51    104    186                               
   Candy   9    9    6    24    -34%   -18%   11    9    9    29                               
   Total   512    572    545    1,628    -10%   0%   471    551    607    1,629                               
                                                                                    
Gross Sales:                                                                                   
   Core  $9,098   $10,436   $9,832   $29,365    5%   11%  $7,917   $9,241   $9,375   $26,533   $18.4   $19.0    -3%  $18.5   $18.8    -1%
   Non Core   181    49   $109   $339    -95%   -91%   609    878    2,270    3,757   $30.7   $21.8    40%   16.2    20.2    -20%
   Candy   241    274   $172   $686    -39%   -19%   329    242    280    851   $28.8   $31.1    -8%   28.8    29.3    -2%
   Total  $9,520   $10,758   $10,112   $30,391    -15%   -2%  $8,855   $10,361   $11,925   $31,141   $18.6   $19.6    -5%   18.7    19.1    -2%
                                                                                    
Discounts:  Total  $(1,071)  $(1,278)  $(1,372)  $(3,721)   22%   39%  $(567)  $(972)  $(1,129)  $(2,668)  $(2.5)  $(1.9)   35%  $(2.3)  $(1.6)   40%
                                                                                    
COGS:                                                                                   
   Core  $(5,469)  $(6,843)  $(6,098)  $(18,410)   16%   23%  $(4,586)  $(5,067)  $(5,260)  $(14,913)  $(11.4)  $(10.6)   7%  $(11.6)  $(10.5)   10%
   Non Core   (167)   (28)   (34)   (229)   -98%   -92%   (524)   (735)   (1,555)   (2,814)   (9.6)   (15.0)   -36%   (10.9)   (15.1)   -28%
   Candy   (159)   (177)   (106)   (442)   -44%   -18%   (199)   (153)   (190)   (542)   (17.7)   (21.1)   -16%   (18.6)   (18.7)   -1%
   Idle Plant   (150)   (159)   0    (309)   -100%   -86%   (676)   (392)   (1,110)   (2,178)   -    (1.8)   -100%   (0.2)   (1.3)   -86%
   Total  $(5,945)  $(7,207)  $(6,238)  $(19,390)   -23%   -5%  $(5,985)  $(6,347)  $(8,115)  $(20,447)  $(11.5)  $(13.4)   -15%  $(11.9)  $(12.6)   -6%
                                                                                    
Gross Margin:  $2,504   $2,273   $2,502   $7,280    -7%   -9%  $2,303   $3,042   $2,681   $8,026   $4.6   $4.4    4%  $4.5   $4.9    -9%
as % Net Sales   30%   24%   29%   27%             28%   32%   25%   28%                              

 

As part of the Company’s ongoing initiative to simplify and streamline operations by focusing on the appropriate number of SKUs, the Company has identified core products to place its strategic focus on. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of slower selling discontinued Reed’s and Virgil’s SKUs, discontinued brands such as China Cola and Sonoma Sparklers, as well private label SKUs which were sold to California Custom Beverage as part of the plant sale on Dec 31, 2018.

 

Sales

 

As a result of our decision to focus on the core Reed’s and Virgil’s beverage brands and simplify operations by reducing the overall number of SKUs that we offer, the Company’s core beverage volume for the quarter ended September 30, 2019 represents almost 100% of all beverage volume.

 

Core brand gross revenue increased 5% during the current quarter as compared to the year ago quarter, from $9,375 to $9,832, driven by Virgil’s volume growth of 22%, offset by Reed’s volume decline of 5%. This increase was reduced by lapping $2,270 of discontinued and private label sales which are no longer part of our portfolio. Candy gross sales declined by 39% to $172 from $280 last year. The result is a decrease of total gross revenue of 15%, to $10,112 from $11,925 during the year ago period. Our sales in Q3 were suppressed as we short shipped orders in hand by approximately $1,200 due to unavailability of product related to the second quarter production issues.

 

On a 12-ounce case basis, price on our core brands decreased $0.60 per 12-ounce case or 3% year over year, while core volume grew 8% vs the year-ago quarter. Price per case decline is a result of brand mix shifting from glass to cans and the lower pricing associated with such brand mix.

 

Discounts as a percentage of gross sales increased to 14% in the third quarter of 2019 from 9% in the prior year period. The increase in our promotions was due to the activation of new promotions for our existing Reed’s and Virgil’s SKUs as well as the incremental promotional and slotting spend related to product introduction of our innovative SKUs such as Reed’s Zero sugar bottles and cans and Reed’s cans. As a result, total net sales decreased 19% in the third quarter of 2019 to $8,740, compared to $10,796 in the same period in 2018.

 

Cost of Goods Sold and Produced

 

Cost of goods sold decreased $1,877 during the third quarter of 2019 as compared to the year-ago quarter. As a percentage of net sales, cost of goods sold decreased 4 percentage points in the third quarter of 2019, to 71% from 75% in the year-ago period. The decrease in cost of goods sold was largely driven by idle capacity reduced to $0, down from $1,110 in the prior year period. We do not anticipate any more idle plant costs now that we have exited the Los Angeles facility.

 

Total cost of goods per case decreased to $11.5 per case in the third quarter of 2019 from $13.4 per case in the third quarter of 2018. Cost of goods sold per case on core brands increased to $11.4 during the third quarter of 2019 from $10.6 per case during the third quarter of 2018 driven by brand mix. We are continuing to work with suppliers and co-packers to improve our processes and maximize cost efficiencies as the company’s new product offerings continue to grow and scale.

 

Gross Margin

 

The cost of goods reduction resulted in a 4-percentage point increase in gross margin in the third quarter of 2019, to 29% compared to 25% in same quarter of 2018.

 

7
 

 

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 increased by $507 in the third quarter of 2019 to $1,902 from $1,395 in the same period in 2018. The increase in the rate per case to $3.5 per case this quarter from $2.3 per case in the prior year period is driven by additional freight required to rebalance inventory at the needed warehouse locations, shipping innovation products produced in limited locations and higher than expected LTL (less than truck load) shipments to support of the launch of new retail accounts. As we work to expand our copacker footprint and capabilities later this year, we anticipate transportation costs to reduce.

 

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 $2,508 during the third quarter of 2019, compared to $1,378 during the year-ago period. As a percentage of net sales, selling and marketing costs increased to 29% during the three months ended September 30, 2019, as compared to 13% during the same period of the prior year. The increased investment in sales and marketing is consistent with the Company’s strategy to refresh the brands, increase brand awareness, launch new products into the market, open new doors of distribution, create new pull campaigns to increase core brands sales velocity and lay the groundwork to re-accelerate growth of the core brands. The increase is due to additional personnel and broker selling network, integrated marketing campaign creative and production, several media buys and innovation development (product, research, and packaging).

 

General and Administrative Expenses

 

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the third quarter of 2019 to $2,470 from $1,987, an increase of $483 over the same period in 2018. Our general and administrative expense increase was largely driven by $643 of severance accruals with regards to the recent management changes announced on September 30, 2019.

 

Loss from Operations

 

The loss from operations was $4,378 for the three months ended September 30, 2019, as compared to a loss of $2,079 in the same period of 2018 driven by our investment in sales and marketing initiatives, an increase in delivery and handling, as well as an increase in general and administrative costs.

 

Interest and Other Expense

 

Interest and other expense for the three months ended September 30, 2019 consisted of $318 of interest expense as well as the expense related to the change in fair value of our warrant liability of $131. During the same period of 2018, interest expense was $621, and expense related to the change in fair value of our warrant liability was $26. The decrease in interest expense is the result of lower rates on our revolving line of credit.

 

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, 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.

 

8
 

 

Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended September 30, 2019 and 2018 (unaudited; in thousands):

 

   Three Months Ended
September 30
 
   2019   2018 
Net loss  $(4,565)  $(2,674)
           
Modified EBITDA adjustments:          
Depreciation and amortization   38    155 
Interest expense   318    621 
Stock option and other noncash compensation   368    443 
Change in fair value of warrant liability   (131)   (26)
Severance   643    - 
Total EBITDA adjustments  $1,236   $1,193 
           
Modified EBITDA  $(3,329)  $(1,481)

 

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.

 

9
 

 

Results of Operations – Nine months ended September 30, 2019

 

The following table sets forth key statistics for the nine months ended September 30, 2019 and 2018, respectively, in thousands.

 

   Nine months Ended September 30, 2019   Pct. 
   2019   2018   Change 
Gross sales (A)  $30,391   $31,141    -2%
Less: Promotional and other allowances (B)   3,721    2,668    39%
Net sales  $26,669   $28,473    -6%
                
Cost of goods produced (C)   19,081    18,269    4%
% of Gross sales   63%   59%     
% of Net sales   72%   64%     
Cost of goods sold – idle capacity (D)   309    2,178    -86%
% of Net sales   1%   8%     
Gross profit  $7,279   $8,026    9%
% of Net sales   27%   28%     
                
Expenses               
Delivery and handling  $4,369   $3,598    21%
% of Net sales   16%   13%     
Dollar per case ($)   2.7    2.2      
Selling and marketing   7,718    3,601    114%
% of Net sales   29%   13%     
General and administrative   6,587    6,853    -4%
% of Net sales   25%   24%     
(Gain)/Loss on sales of assets   (30)   -      
Total Operating expenses   18,644    14,052    33%
                
Loss from operations  $(11,365)  $(6,026)   89%
                
Interest expense and other expense  $(924)  $(1,639)   -44%
                
Net loss  $(12,289)  $(7,665)   60%
                
Loss per share – basic and diluted  $(0.38)  $(0.30)   26%
                
Weighted average shares outstanding - basic & diluted   32,179,119    25,242,780    27%

 

(A) Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales have been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

 

10
 

 

(B) Although 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. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.

 

(C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.

 

(D) Cost of goods sold – idle capacity: Cost of goods sold – idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Cost of goods sold – idle capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.

 

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 nine-month period ending September 30, 2018 through the nine-month period ending September 30, 2019.

 

As part of the Company’s ongoing initiative to simplify and streamline operations by reducing the number of SKUs, the Company has identified core products to place its strategic focus on. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of slower selling discontinued Reed’s and Virgil’s SKUs, discontinued brands such as China Cola and Sonoma Sparklers, as well private label SKUs which were sold to California Custom Beverage as part of the plant sale on Dec 31, 2018.

 

Sales

 

As a result of our decision to focus on the core Reed’s and Virgil’s beverage brands and simplify operations by reducing the overall number of SKUs that we offer, the Company’s core beverage volume for the nine months ended September 30, 2019 represents 97% of all beverage volume.

 

Core brand gross revenue increased 11% during the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018, from $26,533 to $29,365, driven by Virgil’s volume growth of 29%. This increase was reduced by lapping $3,757 of discontinued and private label sales which are no longer part of our portfolio. The result is a decrease of total gross revenue of 2%, to $30,391 from $31,141 during the year ago period. Our gross sales were impacted as we short shipped approximately $2,300 of orders to customers during the nine months ended September 30, 2019 due to unavailability of product related to lower than expected co-packer production and innovation production delays.

 

On a 12-ounce case basis, price on our core brands decreased $0.30 per 12-ounce case or 1% year over year, while core volume grew 12% vs the year-ago period.

 

Discounts as a percentage of gross sales increased to 12% in the nine months ended September 30, 2019 from 9% in the prior year period. The increase in our promotions was due to the activation of new promotions for our existing Reed’s and Virgil’s SKUs as well as the incremental promotional and slotting spend related to product introduction of our innovation SKUs such as Reed’s Zero sugar bottles and cans and Reed’s cans. As a result, net sales revenue decreased 6% in the nine months ended September 30, 2019 to $26,669, compared to $28,473 in the same period in 2018.

 

11
 

 

Cost of Goods Sold and Produced

 

Cost of goods sold decreased $1,057 during the nine months ended September 30, 2019 as compared to the year-ago period. As a percentage of net sales, cost of goods sold increased 1 percentage point during the nine months ended September 30, 2019, to 73% from 72% in the year-ago period. Idle and other costs were reduced to $309, down from $2,178 in the prior year period. The plant sale has significantly reduced our idle costs, while the remaining other costs were related to completing the transition of the plant to California Custom Beverages. We do not anticipate idle charges to be incurred going forward. The increase in cost of goods sold was driven by an increase in inventory obsolescence reserves and write offs of related to our rebranding efforts and formulation enhancements, mostly offset by the reduction in idle costs.

 

Idle and other costs were reduced to $309, down from $2,178 in the prior year period. The plant sale has significantly reduced our idle costs, while the remaining other costs were related to completing the transition of the plant to California Custom Beverages. We do not anticipate any more idle plant costs now that we have exited the Los Angeles facility.

 

Total cost of goods per case decreased to $11.9 per case in the nine months ended September 30, 2019 from $12.6 per case during the same period in 2018 driven by increased efficiencies having exited the Los Angeles facility. We are continuing to work with suppliers and co-packers to improve our processes and maximize cost efficiencies as the company’s new product offerings continue to grow and scale.

 

Gross Margin

 

The impact of the increase in inventory obsolescence reserves and write offs resulted in a reduction in gross margin in the nine months ended September 30, 2019, to 27% compared to 28% in same period of 2018.

 

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 increased by $771 in the nine months ended September 30, 2019 to $4,369 from $3,598 in the same period in 2018 driven by increased volumes. The increase in the rate per case to $2.7 per case this period from $2.2 per case in the prior year period is driven by additional freight required to rebalance inventory at the needed warehouse locations, shipping innovation products produced in limited locations and higher than expected less than truck load shipments to support of the launch of new retail accounts. As we work to expand our copacker footprint and capabilities later this year, we anticipate transportation costs to reduce.

 

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 $7,718 during the nine months ended September 30, 2019, compared to $3,601 during the year-ago period. As a percentage of net sales, selling and marketing costs increased to 29% during the nine months ended September 30, 2019, as compared to 13% of net revenue during the same period of the prior year. The increased investment in sales and marketing is consistent with the Company’s strategy to refresh the brands, launch new products into the market, open new doors of distribution, create new communication campaigns to increase core brands sales velocity and lay the groundwork to re-accelerate growth of the core brands. The increase is due to additional personnel and broker selling network, integrated marketing campaign creative and production, and innovation development (product, research, and packaging).

 

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 nine months ended September 30, 2019 from $6,853 to $6,587, a decrease of $266 over the same period in 2018. Our general and administrative expense decrease was largely driven by the exit of the Los Angeles facility and reduction of office expenses, leases, and utilities.

 

Loss from Operations

 

The loss from operations was $11,365 for the nine months ended September 30, 2019, as compared to a loss of $6,026 in the same period of 2018 driven by increase investment in sales and marketing initiatives as well as delivery and handling expenses.

 

Interest and Other Expense

 

Interest and other expense for the nine months ended September 30, 2019 consisted of $947 of interest expense as well as the expense related to the change in fair value of our warrant liability of $23. During the same period of 2018, interest expense was $1,542, and expense related to the change in fair value of our warrant liability was $97. The decrease in interest expense is the result of lower borrowings as well as lower rates on our revolving line of credit.

 

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, 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.

 

12
 

 

Set forth below is a reconciliation of net loss to Modified EBITDA for the nine months ended September 30, 2019 and 2018 (unaudited; in thousands):

 

   Nine months Ended September 30 
   2019   2018 
Net loss  $(12,289)  $(7,665)
           
Modified EBITDA adjustments:          
Depreciation and amortization   108    492 
Interest expense   947    1,542 
Stock option and other noncash compensation   1,597    1,619 
Change in fair value of warrant liability   (23)   97 
Severance   682    642 
Total EBITDA adjustments  $3,311   $4,392 
           
Modified EBITDA  $(8,978)  $(3,273)

 

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

 

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

For the nine months ended September 30, 2019, the Company recorded a net loss of $12,289 and used cash in operations of $14,628. For the three months ended September 30, 2019, the Company used cash in operations of $3,108. As of September 30, 2019, we had a cash balance of $1,016 with borrowing capacity of $1,019, a stockholders’ deficit of $2,208 and a working capital of $1,394 compared to a cash balance of $624 stockholders’ deficit of $6,743 and working capital shortfall of $3,297 at September 30, 2018. On February 20, 2019, the Company conducted a public offering of 7,733,750 shares of its common stock at $2.10 per share resulting to net proceeds to the Company of $14,867. In October 2019, the Company conducted a public offering of 13,416,667 shares of its common stock at $0.60 per share resulting in net proceeds to the Company of $7,536.

 

Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices.

 

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Critical Accounting Policies and Estimates

 

The Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied.

 

The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time.

 

All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.

 

The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

 

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 such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

14
 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are subject to various legal proceedings from time to time in the ordinary course of business, none of which are required to be disclosed under this Item 1.

 

Item 1A. Risk Factors

 

Except as set forth below, there have been no material changes to our risk factors as previously disclosed in “Risk Factors” in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2018 (“Risk Factors”). Readers should carefully consider these Risk Factors, which could materially affect our business, financial condition or future results. These Risk Factors are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

 

We have been notified by NASDAQ that the bid price of our common stock has closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, does not comply with Listing Rule 5550(a)(2). If we are unable to cure the failure within the prescribed time period, our common stock will be subject to delisting. A delisting would materially reduce the liquidity of our common stock and have an adverse effect on our market price.

 

The Nasdaq Listing Qualifications Department (“Staff”) notified us on November 12, 2019 that the bid price of our common stock had closed at less than $1 per share over the previous 30 consecutive business days, and, as a result, did not comply with Listing Rule 5550(a)(2). Therefore, in accordance with Listing Rule 5810(c)(3)(A), we are being provided 180 calendar days, or until May 11, 2020, to regain compliance with the Rule. If, at any time before May 11, 2020 the bid price of the Company’s common stock closes at $1.00 per share or more for a minimum of 10 consecutive business days, Nasdaq staff will provide written notification that it has achieved compliance with the Bid Price Rule.

 

If the Company fails to regain compliance with the Bid Price Rule before May 11, 2020 but meets all of the other applicable standards for initial listing on the Nasdaq Capital Market with the exception of the minimum bid price, the Company may be eligible for additional time. To qualify, the Company will be required to meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the bid price requirement, and will need to provide written notice of its intention to cure the deficiency during the second compliance period, by effecting a reverse stock split, if necessary.

 

A delisting would materially reduce the liquidity of our common stock and have an adverse effect on our market price. A delisting would also likely make it more difficult for us to obtain financing through the sale of our equity. Any such sale of equity would likely be more dilutive to our current stockholders than would be the case if our shares were listed. 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit

No.

  Description
10.1  

Amendment No. 1 to Employment Agreement by and between Reed’s Inc. and Valentin Stalowir dated September 29, 2019*^

     
10.2  

Employment Agreement by and between Reed’s Inc. and Norman Snyder dated September 30, 2019*^

     
10.3  

Manufacturing and Distribution Agreement by and between Reed’s Inc. and B C Marketing Concepts Inc., dba Full Sail Brewing Company dated October 11, 2019*

     
10.4  

Recipe Development Agreement Reed’s Inc. and B C Marketing Concepts Inc., dba Full Sail Brewing Company dated October 11, 2019*

     
10.5  

Separation, Settlement and Release of Claims Agreement between Reed’s Inc. and Valentin Stalowir dated October 31, 2019*^

     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

*filed herewith

^ compensatory plan or arrangement

 

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

 

Furnished herewith, XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

15
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

Reed’s, Inc.

(Registrant)

   
Date: November 13, 2019 /s/ John Bello
  John Bello
  Interim Chief Executive Officer
  (Principal Executive Officer)
   
Date: November 13, 2019 /s/ Iris Snyder
  Iris Snyder
  Chief Financial Officer
  (Principal Financial Officer)

 

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Section 2: EX-10.1

 

Amendment No. 1 to Employment Agreement

 

This Amendment No. 1 (“Amendment”) to that certain Employment Agreement dated June 28, 2017 (“Employment Agreement”) by and between Reed’s Inc., a Delaware corporation (the “Company”) and Valentin Stalowir (the “Executive”) is made and effective as of September 29, 2019. Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Employment Agreement.

 

WHEREAS, Executive has resigned from the offices of Chief Executive Officer and President of the Company and from the position of director serving on the board of directors of the Company;

 

WHEREAS, the parties are negotiating a separation agreement to modify the remuneration provisions of Section 7 of the Employment Agreement, in good faith and for the mutual benefit of the parties (“Separation Agreement”);

 

WHEREAS, Executive has agreed to continue as an employee of the Company through the earlier of (i) the effective date of the Separation Agreement, and (ii) October 31, 2019 (“Separation Date”) in order assist with the transition of his duties to the newly appointed Chief Executive Officer;

 

WHEREAS, that certain Restricted Stock award comprised of 392,000 shares of common stock of the Company (“Award”) granted to Executive by the Company pursuant to the Employment Agreement is scheduled to vest on September 30, 2019;

 

WHEREAS, Executive is the holder of certain incentive stock option awards (“ISOs”) granted to Executive pursuant to the Employment Agreement under the Company’s 2017 Incentive Compensation Plan;

 

WHEREAS, as of the Separation Date 461,504 of the ISOs will have vested and certain of the additional ISOs will vest pursuant to an acceleration clause in the Employment Agreement (“Vested ISOs”);

 

WHEREAS, the parties desire to extend the vesting date of the Award and the provisions of the Employment Agreement in its entirety through the Separation Date; and

 

WHEREAS, the parties desire that the Vested ISOs be treated as nonqualified stock options as of Separation Date, exercisable through the expiration date of the applicable Vested ISO.

 

NOW THEREFORE, the parties agree as follows:

 

1. Executive will continue as an employee of the Company through the Separation Date in order to assist with the transition of his duties to the newly appointed Chief Executive Officer.

 

2. The vesting date of the Award is, and, notwithstanding Executive’s resignation, the terms of the Employment Agreement in their entirety are, extended to the Separation Date.

 

3. The Vested ISOs will automatically and without further action on the part of either party convert into nonqualified stock options as of Separation Date, exercisable through the expiration date of the applicable Vested ISO.

 

4. All the terms of this Employment Agreement not specifically changed by this Amendment will remain in full force and effect through the Separation Date.

 

5. This Amendment may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page was an original thereof.

 

 
 

 

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first above written.

 

  COMPANY
   
  REED’S, INC.,
  a Delaware corporation
     
  By: /s/ Iris Snyder
  Name: Iris Snyder
  Title: Chief Financial Officer
     
  EXECUTIVE
     
  By: /s/ Valentin Stalowir
  Name: Valentin Stalowir

 

 
 

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Section 3: EX-10.2

 

EMPLOYMENT AGREEMENT

 

This Employment Agreement (the “Agreement”) is made and effective as of September 30, 2019 (the “Effective Date”) by and between Reed’s, Inc., a Delaware corporation (“Reed’s” or the “Company”), and Norman E. Snyder (the “Executive”).

 

WHEREAS, Reed’s and the Executive desire to enter into this Agreement to evidence the terms and conditions of the employment of the Executive by Reed’s.

 

NOW, THEREFORE, intending to be legally bound and in consideration of the mutual provisions set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows:

 

Section 1 Employment. Reed’s hereby employs the Executive and the Executive hereby accepts such employment, in accordance with the terms and conditions set forth in this Agreement. By executing this Agreement, Executive represents and warrants to Reed’s that (i) the Executive is entering into this Agreement voluntarily and that his employment hereunder and compliance with the terms and conditions hereof will not conflict with or result in the breach by him of any agreement to which he is a party or by which he may be bound; (ii) the Executive has not violated, and in connection with his employment with Reed’s will not violate, any non- solicitation, non-competition, or other similar covenant or agreement of a prior employer by which he is bound; and (iii) in connection with his employment with Reed’s, the Executive will not use any confidential or proprietary information he may have obtained in connection with employment with any prior employer.

 

Section 2 Term. The Executive’s employment (the “Term”) with Reed’s under this Agreement will commence on the Effective Date and continue until terminated in accordance with Section 6 below. Executive’s employment with the Company shall be on an “at-will” basis.

 

Section 3 Position. The Executive will be employed as the Chief Operating Officer (“COO”) of Reed’s and will report to the Chief Executive Officer. The Executive will have the duties and responsibilities customarily attendant to the position of COO. Executive will also have such other duties and responsibilities that are commensurate with his position as specifically delegated to him from time to time by the Chief Executive Officer. Executive shall be subject to the Bylaws, policies, practices, procedures and rules of the Company, currently existing and as may be modified from time to time, including those policies and procedures set forth in the Company’s Code of Conduct and Ethics. Executive’s principal office, and principal place of employment, shall be at the Company’s offices, currently in Norwalk, Connecticut, provided that Executive may be required under business circumstances to travel outside the location of his principal employment in connection with performing his or her duties under this Agreement.

 

Section 4  Restrictive Covenants; Representations.

 

4.1 Loyal Performance. During the Executive’s employment with Reed’s, the Executive will devote his full business time and attention to the performance of his duties as COO and will perform his duties and carry out his responsibilities as COO in a diligent and businesslike manner. Nothing in this Section 4.1, however, will prevent the Executive from engaging in additional activities in connection with personal investments or from serving in a non-management capacity with any for profit or not for profit organization that does not conflict with his duties under this Agreement, provided that the Executive shall give the Board prior notice of his service to any for profit or not for profit organization so that it may review the same for compliance with the terms of this Agreement.

 

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4.2 Confidentiality; Return of Property.

 

(a) Executive acknowledges that: (i) the Confidential Information (as hereinafter defined) is a valuable, special, and unique asset of the Company, the unauthorized disclosure or use of which could cause substantial injury and loss of profits and goodwill to the Company; (ii) Executive is in a position of trust and subject to a duty of loyalty to the Company, and (iii) by reason of his employment and service to the Company, Executive will have access to the Confidential Information. Executive, therefore, acknowledges that it is in the Company’s legitimate business interest to restrict Executive’s disclosure or use of Confidential Information for any purpose other than in connection with Executive’s performance of Executive’s duties for the Company, and to limit any potential misappropriation of such Confidential Information by Executive. Executive agrees to keep secret and to treat confidentially all of the Confidential Information (as defined below), and not to, without the express prior written consent of Reed’s or in connection with the good faith performance of his duties to Reed’s, directly or indirectly, (i) divulge, disclose or intentionally make accessible any Confidential Information to any other Person (as defined below) or assist any other Person or entity in improperly using any Confidential Information or (ii) use any Confidential Information for his own purposes or for the benefit of any other Person (except when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of Reed’s, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order the Executive to divulge, disclose or make accessible such Confidential Information; provided, however, that, in the event that the Executive is so required to disclose Confidential Information, the Executive shall, if legally permitted to do so, prior to making any such disclosure, provide Reed’s with prompt written notice of such requirement so that Reed’s may seek an appropriate protective order); provided, further, that, during the Employment Period, the Executive may utilize any Confidential Information in the course of performing his services under this Agreement. All Confidential Information is and shall remain the property of Reed’s. For purposes of this Agreement, “Person” shall mean an individual, a partnership, a corporation, a limited liability company, an association, a joint stock company, an estate, a trust, a joint venture, an unincorporated organization or a governmental entity or any department, agency or political subdivision thereof.

 

(b) For purposes of this Agreement, “Confidential Information” shall mean any and all proprietary information, trade secrets, know-how or other information of Reed’s or concerning the affairs of Reed’s (whether tangible or intangible and whether or not such information is in writing or other physical form), including, but not limited to, data, plans, concepts, programs, procedures, innovations, inventions, improvements, information regarding customers, financial information, costs, prices, earnings, systems, sources of supply, marketing, prospective and executed contracts, budgets, business plans and other business arrangements, information on the performance, identities, capabilities, performance strength and weaknesses, and compensation arrangements of particular managerial or technical employees of Reed’s; provided, however, that Confidential Information will not include any information that (i) is in the public domain (other than on account of the actions of Executive) prior to the date Executive proposes to disclose or use such information or (ii) is the subject of discovery. In the event of any discovery request made of Executive, Executive shall give prompt notice of same to the Company, and the Company shall have an opportunity to quash or limit such discovery at the Company’s sole expense. If a court orders disclosure or if the Company does not attempt to quash or otherwise limit such discovery, then Executive shall be permitted to disclose such Confidential Information.

 

2
 

 

(c) Upon termination of the Executive’s employment, the Executive shall promptly return to Reed’s any car, cell phone, mobile device, laptop or other property provided to the Executive by Reed’s, and any Confidential Information or proprietary information of Reed’s that remains in the Executive’s possession (“Reed’s Property”); provided, however, that nothing in this Agreement or elsewhere shall prevent the Executive from retaining and utilizing documents and information relating to his personal benefits, entitlements and obligations, documents relating to his personal tax obligations. If the Executive discovers Reed’s Property in his possession after the termination of his employment he shall notify Reed’s and promptly either deliver the same to Reed’s or destroy it as directed by Reed’s.

 

4.3 Nonsolicitation. To the fullest extent permitted by law, the Executive will not directly or indirectly, individually or on behalf of any person, company, enterprise or entity, or as a sole proprietor, partner, stockholder, director, officer, principal, agent, executive, or in any other capacity or relationship, during his employment with Reed’s and for a period of six (6) months thereafter:

 

(a) encourage, solicit, induce, cause, or in any manner attempt to encourage, solicit, induce or cause any person, firm, corporation, or other entity or organization which is a client, customer, account, vendor, supplier, distributor, licensee of, or has any business relationship with, Reed’s or any of its subsidiaries to terminate such relationship with, reduce the amount of business conducted with, or change in a manner adverse to Reed’s or its subsidiaries; or

 

(b) encourage, solicit, induce, cause, or in any manner attempt to encourage, solicit, induce or cause, any person employed by or providing services to Reed’s or its subsidiaries to leave, curtail, or change in a manner adverse to Reed’s, such employment or service relationship.

 

4.4 Cooperation. The Executive agrees that, following any termination of the Executive’s employment, the Executive will continue to provide reasonable cooperation to Reed’s and/or any of its subsidiaries and its or their respective counsel in connection with any investigation, administrative proceeding, or litigation relating to any matter that occurred during the Executive’s employment in which the Executive was involved or of which the Executive has knowledge. As a condition of such cooperation, Reed’s shall reimburse the Executive for reasonable out-of-pocket expenses incurred at the request of Reed’s and shall compensate Executive at a daily rate equal to his daily rate of compensation at the time of termination of his employment. The Executive also agrees that, in the event that the Executive is subpoenaed by any person or entity (including, but not limited to, any government agency) to give testimony or provide documents (in a deposition, court proceeding, or otherwise) that in any way relates to the Executive’s employment by Reed’s, the Executive will, if legally permitted, give prompt notice of such request to Reed’s and, unless legally required to do so, will make no disclosure until Reed’s subsidiaries has had a reasonable opportunity to contest the right of the requesting person or entity to such disclosure.

 

3
 

 

4.5 Property; Inventions and Patents.

 

(a) Property. Executive agrees that all inventions, innovations, improvements, technical information, systems, software developments, methods, designs, analyses, drawings, reports, service marks, trademarks, trade names, logos, products, equipment, and all similar or related information and materials (whether patentable or unpatentable) (collectively, “Inventions”) which relate to Reed’s actual or planned business, research and development, or existing or future products or services and which are conceived, developed, or made by Executive (whether or not during usual business hours and whether or not alone or in conjunction with any other person) while employed by Reed’s (including those conceived, developed, or made prior to the date of this Agreement) together with all patent applications, letters patent, trademark, brands, tradename and service mark applications or registrations, copyrights, and reissues thereof that may be granted for or upon any of the foregoing (collectively referred to herein as, the “Work Product”), belong in all instances to Reed’s. Executive will promptly disclose such Work Product to Reed’s and perform all actions reasonably requested by Reed’s (whether during or after the Term) to establish and confirm Reed’s ownership of such Work Product (including, without limitation, the execution and delivery of assignments, consents, powers of attorney, and other instruments) and to provide reasonable assistance to Reed’s (whether during or after the Term) in connection with the prosecution of any applications for patents, trademarks, brands, trade names, service marks, or reissues thereof or in the prosecution or defense of interferences relating to any Work Product. Executive recognizes and agrees that the Work Product, to the extent copyrightable, constitutes works for hire under the copyright laws of the United States and that to the extent Work Product constitutes works for hire, the Work Product is the exclusive property of Reed’s, and all right, title, and interest in the Work Product vests in Reed’s. To the extent any Work Product is not a work for hire, the Work Product, and all of Executive’s right, title, and interest in Work Product, including without limitation every priority right, is hereby assigned to the Company.

 

(b) Cooperation. Executive shall, during the Term and at any time thereafter, at the expense of Reed’s and with no expense or potential expense or liability to the Executive, assist and cooperate with the Company in obtaining for the Company the grant of letters patent, copyrights, and any other intellectual property rights relating to the Work Product in the United States and/or such other countries as the Company may designate. With respect to Work Product, Executive shall, during the Term and at any time thereafter, at the expense of Reed’s and with no expense or potential expense or liability to the Executive, execute all applications, statements, instruments of transfer, assignment, conveyance or confirmation, or other documents, furnish all such information to the Company and take all such other appropriate lawful actions as the Company requests that are necessary to establish Reed’s ownership of such Work Product. Executive will not assert or make a claim of ownership of any Work Product, and Executive will not file any applications for patents or copyright or trademark registration relating to any Work Product, except on behalf of or as directed by Reed’s.

 

4
 

 

(c) No Designation as Inventor; Waiver of Moral Rights. Executive agrees that the Company shall not be required to designate Executive as the inventor or author of any Work Product. Executive hereby irrevocably and unconditionally waives and releases, to the extent permitted by applicable law, all of Executive’s rights to such designation and any rights concerning future modifications to any Work Product. To the extent permitted by applicable law, Executive hereby waives all claims to moral rights in and to any Work Product.

 

(d) Pre-Existing and Third Party Materials. Executive will not, in the course of employment with Reed’s, incorporate into or in any way use in creating any Work Product any pre-existing invention, improvement, development, concept, discovery, works, or other proprietary right or information owned by Executive or in which Executive has an interest without Reed’s prior written permission. Executive hereby grants the Company a nonexclusive, royalty-free, fully-paid, perpetual, irrevocable, sublicensable, worldwide license to make, have made, modify, use, sell, copy, and distribute, and to use or exploit in any way and in any medium, whether or not now known or existing, such item as part of or in connection with such Work Product. Executive will not incorporate any invention, improvement, development, concept, discovery, intellectual property, or other proprietary information owned by any party other than Executive into any Work Product without the Company’s prior written permission.

 

(e) Attorney-in-Fact. Executive hereby irrevocably designates and appoints Reed’s and its duly authorized officers and agents as Executive’s agent and attorney-in-fact, to act for and on Executive’s behalf to execute and file any such applications and to do all other lawfully permitted acts as contemplated by this Section 4 above to further the prosecution and issuance of patents, copyright, trademark, and mask work registrations with the same legal force and effect as if executed by Executive, if Reed’s is unable because of Executive’s unavailability, dissolution, mental or physical incapacity, or for any other reason, to secure Executive’s signature for the purpose of applying for or pursuing any application for any United States or foreign patents or mask work or copyright or trademark registrations covering the Work Product owned by Reed’s pursuant to this Section.

 

Section 5 Compensation.

 

5.1 Base Salary. The Executive will be paid a base salary at the initial rate of $250,000.00 per year (the “Base Salary”). Base Salary shall be subject to annual review for additional increase, but not decrease, in the sole discretion of the Board. The Base Salary will be payable in equal periodic installments in accordance with Reed’s customary payroll practices.

 

5.2 Bonus.

 

(a) Annual Bonus. In addition to the Base Salary, the Executive will be eligible to receive an annual or other periodic bonus for each partial or full calendar year (which may, to the extent not relating to achievement of a specific objective established by the Board in consultation with the Executive as provided below, be pro-rated for partial calendar years) included in the Term at a target amount equal to 30% of then current Base Salary payable and based upon performance criteria to be established by the Board in consultation with the Executive which are anticipated to consist of specific objectives for which specified portions of Bonus will be payable upon achievement and any remainder discretionary based on individual and Company performance as determined by the Board ( “Bonus”). Except as otherwise provided herein, in order to be eligible to receive the Bonus, the Executive must be employed at the time of achievement of the specific objective relating thereto. Any portion of Bonus relating to achievement of a specific objective will be paid upon or as soon as practicable after achievement of such objective, and all Bonus payments will in any event be paid not later March 15 of the calendar year following the full or partial calendar year to which they relate. The Board and the Executive will consult in good faith to establish the Bonus criteria for each full or partial year included in the Term starting with the Effective Date and with the commencement of each calendar year included in the Term commencing after the Effective Date.

 

5
 

 

5.3 Benefits. The Executive will be entitled to four weeks of paid vacation per calendar year in accordance with the Company’s vacation and paid time off policy, inclusive of vacation days and sick days and excluding standard paid Company holidays, in the same manner as paid time off days for employees of the Company generally accrue. The Executive and his dependents will be entitled to participate in all medical insurance and other benefit programs in effect from time to time and available to senior executives of Reed’s at levels commensurate with Executive’s position as COO. Executive shall be entitled to reimbursement for expenses incurred in connection with performance of services to Reed’s, including, without limitation, mobile phone and other communications equipment and travel expenses, in accordance with Reed’s expense reimbursement policies as in effect from time to time. Reed’s will also provide Executive with a car allowance initially at $900 per month and subject to increase in the discretion of the Company. Upon submission of invoice, Reed’s will reimburse the Executive for or pay directly all costs up to $2,500 incurred in connection with the negotiation and preparation of this Agreement.

 

5.4 Equity. The Executive shall be eligible to receive an initial equity award of 446,000 stock options (“Initial Equity Award”) 90 days after the Effective Date (“Grant Date”), in accordance with the terms and conditions of available plan and subject to Board approval and plan availability. Of the Initial Equity Award, one-half (223,000 options) will vest in equal increments of 55,750 on each of the first, second, third and fourth anniversaries of the grant date (“Incentive Equity”). Of the Initial Equity Award, the remainder (223,000 options) will vest based on performance criteria to be determined by the Board or compensation committee of the Board (as the case may be) in its sole discretion (“Performance Equity”). Vesting of all Incentive Equity and Performance Equity (and related payment rights) shall accelerate upon any Change in Control. “Change in Control” for this purpose means any (i) any individual, entity or group (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1933) (a “Person”) acquires beneficial ownership, directly or indirectly (within the meaning of Rule 13d-3 promulgated under the Exchange Act) (a “Beneficial Owner”), of more than fifty percent of the combined voting power of the then issued and outstanding shares of the voting common stock of the Company (the “Voting Stock”), (ii) the occurrence of a merger, consolidation, reorganization, share exchange or similar corporate transaction, whether or not the Company is the surviving corporation, other than a transaction which would result in the Voting Stock outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent of the voting stock of the Company or such surviving entity immediately after such transaction, or (iii) the sale, transfer or disposition of all or substantially all of the business and assets of the Company to any Person. The Executive may also make equity investments in Reed’s on terms that may be agreed upon by the Executive and Reed’s.

 

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Section 6 Termination of Employment.

 

6.1 Termination by Reed’s. Reed’s may terminate the Executive’s employment with Reed’s for Cause or without Cause, effective immediately on the day Reed’s gives notice of such termination to the Executive. For purposes of this Agreement, “Cause” means (i) a breach by Executive of his or her fiduciary duties to the Company; (ii) Executive’s breach of this Agreement, which, if curable, remains uncured or continues after 30 days’ notice by the Company thereof; (iii) the commission of (A) any crime, other than motor vehicle crimes, constituting a felony in the jurisdiction in which committed, (B) any felony involving moral turpitude, or (C) any other criminal act involving embezzlement, misappropriation of money, fraud, theft, or bribery (whether or not a felony); (iv) illegal or controlled substance abuse or insobriety while on the Company’s premises, with an employee, customer or vendor, or while on Company business by Executive; (v) Executive’s material negligence or dereliction in the performance of, or failure to perform Executive’s duties of employment with the Company, which remains uncured or continues after 30 days’ notice by the Company thereof; (vi) any conduct, action or behavior by Executive that is, or is reasonably expected to be, materially damaging to the Company, whether to the business interests, finance or reputation; or (vii) any disqualifying event causing Company “bad actor” disqualification under Rule 506(d) of the Securities Act of 1933, as amended. The cure periods set forth in Sections 6.1(ii) and 6.1(v) shall be extended if (x) Executive commenced such cure within the aforesaid thirty (30) day period, (y) Executive pursues such cure to completion, and (z) such further cure period does not cause material harm to the Company.

 

6.2 Termination by the Executive. The Executive may terminate the Executive’s employment with Reed’s for Good Reason or without Good Reason, by written notice to Reed’s effective no earlier than 30 days after the date of such notice if termination is other than for Good Reason (provided that Reed’s shall have the right to waive such 30-day notice period and accelerate termination to any date on or after the date of such notice) and effective upon the expiration of the cure period described below in this Section 6.2 if termination is for Good Reason. During any period between receipt of notice of termination from the Executive, Reed’s may suspend, reduce, or otherwise modify any or all of Executive’s authority, duties, and responsibilities, and may require the Executive’s absence from Reed’s offices without any such suspension, reduction, modification, or requirement constituting grounds for Good Reason. “Good Reason” means any (i) material breach (whether or not specified above) of this Agreement by Reed’s, (ii) change in Executive’s title, duties, or status within the Company that differ materially from Executive’s title, duties and status hereunder, and/or (iii) actual or de facto change in the Company’s principal executive office headquarters and personnel to a location that is more than 60 miles from the Company’s present headquarters in Norwalk, Connecticut. An event described in this Section 6.2 will not constitute Good Reason unless the Executive provides written notice to Reed’s of the Executive’s intention to resign for Good Reason and specifying the event or circumstance giving rise to Good Reason within 90 days of its initial existence and Reed’s does not cure such breach or action within 30 days after the date of the Executive’s notice.

 

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6.3 Death and Disability. The Executive’s employment under this Agreement will terminate upon the Executive’s death. In addition, Reed’s may terminate the Executive’s employment with Reed’s by written notice to the Executive due to Disability. For purposes of this Agreement, “Disability” means that the Executive has been unable, with or without reasonable accommodation and due to physical or mental incapacity, to substantially perform the essential functions of his duties for 120 days, whether consecutive or non-consecutive, within any calendar year.

 

6.4 Termination of Agreement. This Agreement will terminate when all obligations of the parties under this Agreement have been satisfied.

 

6.5 Resignations. Upon any termination of the Executive’s employment hereunder for any reason, except as may otherwise be requested by Reed’s in writing, the Executive agrees that he will resign from any and all directorships, committee memberships and any officer positions that he holds with Reed’s or any of its subsidiaries.

 

Section 7  Remuneration upon Termination of Employment.

 

7.1 Termination by Reed’s without Cause or by the Executive for Good Reason. If the Executive’s employment with Reed’s is terminated pursuant to Section 6.1 by Reed’s without Cause or pursuant to Section 6.2 by the Executive for Good Reason, the Executive will be entitled to the following:

 

(a) the Accrued Benefits;

 

(b) payment in lump sum within 30 days after the date of termination of employment of an amount equal to 6 months of the Executive’s Base Salary in effect immediately prior to the Executive’s termination of employment with Reed’s plus any Bonus earned and unpaid as well as a prorated Bonus for the year of termination, vested Incentive Equity and six months acceleration of unvested Incentive Equity, calculated on a pro-rata, monthly basis and based on full calendar months (the “Severance Amount”). For clarity, Performance Equity will not be subject to six-month acceleration. In addition, to the extent permitted by applicable law, subject to the Executive’s election of COBRA continuation coverage under Reed’s group health plan, on the first regularly scheduled payroll date of each month during the six month period following the date of termination of employment (the “Severance Period”), Reed’s will pay the Executive an amount equal to the difference between the monthly COBRA premium cost and the premium cost to the Executive as if the Executive were an employee of Reed’s; provided, that such payments shall cease earlier than the expiration of the Severance Period in the event that the Executive becomes eligible to receive any comparable health benefits, including through a spouse’s employer, during the Severance Period (the “COBRA Payments”). Executive will notify Reed’s of Executive’s eligibility for health benefits during the Severance Period within 15 days of such eligibility; and

 

(c) any and all rights he may have as a holder of vested equity interests in Reed’s or under any applicable plan, program, or arrangement of Reed’s, including the vested awards under the Initial Equity Grant.

 

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7.3 Termination by Reed’s for Cause, by the Executive without Good Reason. If the Executive’s employment with Reed’s is terminated for Cause, or by the Executive without Good Reason, the Executive will be entitled to the Accrued Benefits and any and all rights he may have as a holder of vested equity interests in Reed’s or under any applicable plan, program, or arrangement of Reed’s, including vested awards under the Initial Equity Grant.

 

7.4 Termination as a Result of Death or Disability. In the event of the termination of the Executive’s employment with Reed’s pursuant to Section 6.3 as a result of death or Disability, the Executive or the Executive’s heirs will be entitled to the Accrued Benefits.

 

7.5 Release. The payment of the Severance Amount and the COBRA Payment shall be conditioned upon the Executive’s (or, if applicable the Executive’s estate’s or legal representative’s) execution, delivery to Reed’s, and non-revocation of a release of claims (the “Release of Claims”) in substantially the form attached to this Agreement as Exhibit A within 30 days following the date of the Executive’s termination of employment hereunder. Further, to the extent that any portion of the Severance Amount or COBRA Payment constitutes “nonqualified deferred compensation” for purposes of Section 409A of the Code (as defined below), any payment of any amount otherwise scheduled to occur prior to the thirtieth (30th) day following the date of the Executive’s termination of employment hereunder, but for the condition on executing the Release of Claims as set forth herein, shall not be made until the first regularly scheduled payroll date following such thirtieth (30th) day, after which any remaining installment of the Severance Amount or the COBRA Payment, as applicable, shall thereafter be provided to Employee according to the applicable schedule set forth herein. With respect to any portion of the Severance Amount or COBRA Payment that does not constitute “nonqualified deferred compensation” for purposes of Section 409A of the Code (as defined below), any payment of any amount otherwise scheduled to occur following the date of the Executive’s termination of employment hereunder, but for the condition on executing the Release of Claims as set forth herein, shall not be made until the first regularly scheduled payroll date following the date such Release of Claims is timely executed and the applicable revocation period has ended, after which the entire Severance Amount and any unpaid installments of the COBRA Payment, as applicable, shall thereafter be provided to Employee according to the applicable schedule set forth herein. Each payment of the Severance Amount or COBRA Payment shall be deemed to be a separate payment for purposes of Section 409A of the Code.

 

7.6 Obligations Absolute. The payment and other obligations of Reed’s under this Agreement or in connection with the Incentive Equity are absolute and unconditional and not subject to offset or any other defense.

 

Section 8  General Provisions.

 

8.1 Notices. All notices and other communications under this Agreement must be in writing and are deemed duly delivered when (a) delivered if delivered personally or by recognized overnight courier service (costs prepaid), (b) sent by facsimile with confirmation of transmission by the transmitting equipment (or, the first business day following such transmission if the date of transmission is not a business day) (c) sent by electronic mail with receipt acknowledged by the recipient via email reply, or (d) received or rejected by the addressee, if sent by certified or registered mail, return receipt requested; in each case to the following addresses or facsimile numbers and marked to the attention of the individual (by name or title) designated below (or to such other address, facsimile number or individual as a party may designate by notice to the other parties in writing):

 

If to the Executive:

 

Norman E. Snyder

88 Grey Rocks Road

Wilton, CT 06897

 

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If to Reed’s:

 

Attention: Iris Snyder

Chief Financial Officer

201 Merritt 7 Corporate Park

Norwalk CT 06851

 

8.2 Amendment. This Agreement may not be amended, supplemented or otherwise modified except in a writing signed by the Executive and a director or authorized officer of Reed’s (other than the Executive).

 

8.3 Waiver and Remedies. The Executive and Reed’s may (a) extend the time for performance of any of the obligations or other acts of the other party, (b) waive any inaccuracies in the representations and warranties of the other party contained in this Agreement or in any certificate, instrument or document delivered pursuant to this Agreement or (c) waive compliance with any of the covenants, agreements or conditions for the benefit of such party contained in this Agreement. Any such extension or waiver will be valid only if set forth in a written document signed on behalf of the party against whom the waiver or extension is to be effective. No extension or waiver will apply to any time for performance, inaccuracy in any representation or warranty, or noncompliance with any covenant, agreement or condition, as the case may be, other than that which is specified in the written extension or waiver. No failure or delay by a party in exercising any right or remedy under this Agreement or any of the documents delivered pursuant to this Agreement, and no course of dealing between the parties, operates as a waiver of such right or remedy, and no single or partial exercise of any such right or remedy precludes any other or further exercise of such right or remedy or the exercise of any other right or remedy. Any enumeration of a party’s rights and remedies in this Agreement is not intended to be exclusive, and a party’s rights and remedies are intended to be cumulative to the extent permitted by law and include any rights and remedies authorized in law or in equity. Because Executive’s services are special, unique, and extraordinary and because Executive has access to Confidential Information and Work Product, the parties hereto agree that money damages may be an inadequate remedy for any breach of Section 4 of this Agreement. Therefore, in the event of a breach or threatened breach of Section 4 of this Agreement, the Company, or any of its successors or assigns may, in addition to other rights and remedies existing in their favor at law or in equity, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security).

 

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8.4 Entire Agreement. This Agreement constitutes the entire agreement between the Executive and Reed’s with respect to its subject matter and supersedes any prior understandings, agreements or representations between the parties, written or oral, with respect to the subject matter of this Agreement.

 

8.5 Assignment and Successors. This Agreement binds and benefits the parties and their respective heirs, executors, administrators, successors and assigns, except that the Executive may not assign any rights under this Agreement without the prior written consent of Reed’s and Reed’s may not assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the Executive except in the case of an assignment of this Agreement to a successor to all or substantially all of the business and assets of Reed’s and its subsidiaries or any business division thereof or a restructuring of Reed’s. The Executive’s obligations under this Agreement are personal to the Executive and may not be delegated.

 

8.6 Severability. If any provision of this Agreement is held invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement are not affected or impaired in any way and the parties agree to negotiate in good faith to replace such invalid, illegal and unenforceable provision with a valid, legal and enforceable provision that achieves, to the greatest lawful extent under this Agreement, the economic, business and other purposes of such invalid, illegal or unenforceable provision. A court of competent jurisdiction, if it determines any provision of this Agreement to be unreasonable in scope, time or geography, is hereby authorized by the Executive and Reed’s to enforce the same in such narrower scope, shorter time or lesser geography as such court determines to be reasonable and proper under all the circumstances.

 

8.7 Governing Law; Mediation. The validity, interpretation, performance and enforcement of this Agreement shall be governed by the laws of the Connecticut without giving effect to any choice of law rules or other conflicting provision or rule that would cause the laws of any jurisdiction to be applied. Reed’s and the Executive agree that any and all disputes arising out of the terms of this Agreement, the Executive’s employment by Reed’s, the Executive’s service as an employee or officer of Reed’s or any of its subsidiaries, or the Executive’s compensation and benefits, will be litigated in the federal or state courts in Fairfield County, Connecticut; provided however, prior to the filing of any lawsuit, the parties agree to mediate any dispute, controversy, or claim between them arising out of this Agreement. Either party may commence mediation by providing the other parties involved with a written demand for mediation, setting forth the subject of the dispute and the relief requested. The mediation shall be administered by JAMS, AAA or some other neutral mediator designated by the party that first submits the demand for mediation. The mediation fees, if any, shall be divided equally among the parties involved. If a settlement is not reached by the parties within thirty (30) days of the demand for mediation, then the aggrieved party may then file for suit pursuant to this Agreement The prevailing party’s fees and costs resulting from litigation shall be paid by the non-prevailing party. Notwithstanding the foregoing, nothing in this subsection shall be construed as precluding the bringing an action for injunctive relief or specific performance as provided in this Agreement.

 

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8.8 Survival. The respective rights and obligations of the parties hereunder shall survive any termination of this Agreement to the extent necessary to the intended preservation of such rights and obligations and to the extent that any performance is required following termination or expiration of this Agreement.

 

8.9 Withholding. All amounts paid pursuant to this Agreement shall be subject to withholding for taxes (federal, state, local, non-U.S. or otherwise) to the extent required by applicable law.

 

8.10 Counterparts. The parties may execute this Agreement in multiple counterparts, each of which constitutes an original as against the party that signed it, and all of which together constitute one agreement. This Agreement is effective upon delivery of one executed counterpart from each party to the other party. The signatures of all parties need not appear on the same counterpart. The delivery of signed counterparts by facsimile or email transmission that includes a copy of the sending party’s signature is as effective as signing and delivering the counterpart in person.

 

8.11 Code Section 409A Compliance ; Parachute Payements.

 

(a) Notwithstanding anything herein to the contrary, this Agreement is intended to be interpreted and applied so that the payment of the benefits set forth herein shall either be exempt from, or in the alternative, comply with, the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), and the published guidance thereunder (“Section 409A”). A termination of employment shall not be deemed to have occurred for purposes of any provision of this Agreement providing for the payment of any amounts or benefits upon or following a termination of employment that are considered “nonqualified deferred compensation” under Section 409A unless such termination is also a “separation from service” within the meaning of Section 409A and, for purposes of any such provision of this Agreement, references to a “termination,” “Termination Date,” or like terms shall mean “separation from service.” Notwithstanding any provision of this Agreement to the contrary, if Executive is a “specified employee” within the meaning of Section 409A, any payments or arrangements due upon a termination of Executive’s employment under any arrangement that constitutes a “nonqualified deferral of compensation” within the meaning of Section 409A and which do not otherwise qualify under the exemptions under Treas. Regs. Section 1.409A-1 (including without limitation, the short-term deferral exemption or the permitted payments under Treas. Regs. Section 1.409A-1(b)(9)(iii)(A)), shall be delayed and paid or provided on the earlier of (a) the date which is six months after Executive’s “separation from service” for any reason other than death, or (b) the date of Executive’s death. This Agreement may be amended without requiring Executive’s consent to the extent necessary (including retroactively) by the Company in order to preserve compliance with Section 409A. The preceding shall not be construed as a guarantee of any particular tax effect for Executive’s compensation and benefits and the Company does not guarantee that any compensation or benefits provided under this Agreement will satisfy the provisions of Section 409A. After any Termination Date, Executive shall have no duties or responsibilities that are inconsistent with having a “separation from service” within the meaning of Section 409A as of the Termination Date and, notwithstanding anything in the Agreement to the contrary, distributions upon termination of employment of nonqualified deferred compensation may only be made upon a “separation from service” as determined under Section 409A and such date shall be the Termination Date for purposes of this Agreement. Each payment under this Agreement or otherwise shall be treated as a separate payment for purposes of Section 409A. In no event may Executive, directly or indirectly, designate the calendar year of any payment to be made under this Agreement which constitutes a “nonqualified deferral of compensation” within the meaning of Section 409A and to the extent an amount is payable within a time period, the time during which such amount is paid shall be in the discretion of the Company.

 

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(b) All reimbursements and in-kind benefits provided under this Agreement shall be made or provided in accordance with the requirements of Section 409A. To the extent that any reimbursements are taxable to Executive, such reimbursements shall be paid to Executive on or before the last day of Executive’s taxable year following the taxable year in which the related expense was incurred. Reimbursements shall not be subject to liquidation or exchange for another benefit and the amount of such reimbursements that Executive receives in one taxable year shall not affect the amount of such reimbursements that Executive receives in any other taxable year.

 

(c) If any payment, benefit, or distribution of any type to or for the benefit of Executive, whether paid or payable, provided or to be provided, or distributed or distributable pursuant to the terms of this Agreement or otherwise (collectively, the “Parachute Payments”) would (as determined by the Company) subject Executive to the excise tax imposed under Section 4999 of the Code (the “Excise Tax”), the Parachute Payments shall be reduced so that the maximum amount of the Parachute Payments (after reduction) shall be one dollar less than the amount which would cause the Parachute Payments to be subject to the Excise Tax. The Company shall reduce or eliminate the Parachute Payments by first reducing or eliminating any cash Parachute Payments that do not constitute deferred compensation within the meaning of Section 409A, then by reducing or eliminating any other Parachute Payments that do not constitute deferred compensation within the meaning of Section 409A, then by reducing or eliminating all other Parachute Payments that do constitute deferred compensation withi