UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
For the transition period from _______ to _______
Commission
file number:
(Exact name of registrant as specified in its charter)
(State of incorporation) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
| Title of Each Class | Trading Symbol | Names of each exchange on which registered | ||
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were a total of shares of Common Stock outstanding as of May 15, 2023.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | |
| Smaller
Reporting Company |
Emerging
Growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
TABLE OF CONTENTS
| i |
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION
This Quarterly Report on Form 10-Q as well as our other public filings or public statements include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are identified by terms and phrases such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “should,” and “will” and similar expressions and include references to assumptions and relate to our future prospects, developments, and business strategies.
These forward-looking statements involve known and unknown risks, assumptions and 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. Management cautions that these forward-looking statements are qualified by their terms and/or important factors, many of which are outside of our control, and involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following risk factors:
● We have a history of operating losses. Our estimates regarding the sufficiency of our cash resource and capital requirements and needs for additional financing raises substantial doubt about our ability to continue as a going concern.
● We may not be able to extend or repay our indebtedness owed to our secured lenders, which would have a material adverse effect on our financial condition and ability to continue as a going concern.
● We require additional financing to support our working capital and execute our operating plans for fiscal 2023, which may not be available or may be costly and dilutive.
● Our ability to absorb, mitigate or pass on cost increases to our bottlers/distributors and/or customers;
● The impact of rising costs, interest rates, and inflation on the discretionary income of our consumers, particularly the rising cost of energy;
● Uncertainties associated with an economic slowdown or recession that could negatively impact the financial condition of our customers and could result in a reduced demand for our products;
● The impact of the military conflict in Ukraine, including supply chain disruptions, volatility in commodity prices, increased economic uncertainty and escalating geopolitical tensions;
● The impact of logistical issues and delays;
● Our ability to effectively manage our inventories and/or our accounts receivables;
● Our ability to continue to generate sufficient cash flows to support our expansion plans and general operating activities;
● Changes in demand that are weather, or season related and/or for other reasons, including changes in product category and/or package consumption and changes in cost and availability of certain key ingredients including aluminum cans, as well as disruptions to the supply chain, as a result of climate change and poor or extreme weather conditions;
● The impact on our business of competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace as a result of actions by competitors;
● Our ability to implement and/or maintain price increases, including through reductions in promotional allowances;
● The effectiveness of sales and/or marketing efforts by us and/or by distributors of our products, most of whom distribute products that may be regarded as competitive with our products;
● The costs and/or effectiveness, now or in the future, of our advertising, marketing and promotional strategies;
● The failure of our co-packers to manufacture our products on a timely basis or at all;
● Our ability to make suitable arrangements and/or procure sufficient capacity for the co-packing of any of our products, the timely replacement of discontinued co-packing arrangements and/or limitations on co-packing availability;
● Volatility of stock prices which may restrict stock sales, stock purchases or other opportunities as well as negatively impact the motivation of equity award grantees;
● Any disruption in and/or lack of effectiveness of our information technology systems, including a breach of cyber security, which disrupts our business or negatively impacts customer relationships, as well as cybersecurity incidents involving data shared with third parties;
● The imposition of additional regulation imposing excise taxes and/or sales taxes on sweetened beverages or alcoholic beverages; and
● Recruitment and retention of senior management, other key employees and our employee base in general.
We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements.
| ii |
Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
REED’S, INC,
CONDENSED BALANCE SHEETS
(Amounts in thousands, except share amounts)
March 31, 2023 | December 31, 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance of $ | ||||||||
| Inventory, net | ||||||||
| Receivable from former related party | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Intangible assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Revolving line of credit, net of capitalized financing costs of $ | ||||||||
| Payable to former related party | ||||||||
| Current portion of convertible notes payable, net of debt discount of $ | ||||||||
| Current portion of lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Convertible note payable, net of debt discount of $ | ||||||||
| Lease liabilities, less current portion | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit: | ||||||||
| Series A Convertible Preferred stock, $ par value, shares authorized, shares issued and outstanding | ||||||||
| Common stock, $ par value, shares authorized; and shares issued and outstanding, respectively | ||||||||
| Additional paid in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-1 |
REED’S, INC.
CONDENSED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2023 and 2022
(Unaudited)
(Amounts in thousands, except share and per share amounts)
| March 31, 2023 | March 31, 2022 | |||||||
| Net Sales | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Delivery and handling expense | ||||||||
| Selling and marketing expense | ||||||||
| General and administrative expense | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share – basic and diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average number of shares outstanding – basic and diluted | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-2 |
REED’S, INC.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
For the Three Months Ended March 31, 2023 and 2022
(Unaudited)
(Amounts in thousands except share amounts)
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Fair value of vested options | ||||||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | ||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common shares issued for financing costs | ||||||||||||||||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||
| Common Stock | Preferred Stock | Additional Paid In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
| Fair value of vested options | ||||||||||||||||||||||||||||
| Fair value of vested restricted shares granted to officers | ||||||||||||||||||||||||||||
| Repurchase of common stock | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||
| Common shares issued for financing costs | ||||||||||||||||||||||||||||
| Common shares issued for cash, net of offering costs | ||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | ( | ) | ||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-3 |
REED’S, INC.
CONDENSED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2023 and 2022
(Unaudited)
(Amounts in thousands)
| March 31, 2023 | March 31, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization of debt discount | ||||||||
| Amortization of prepaid financing costs | ||||||||
| Fair value of vested options | ||||||||
| Fair value of vested restricted shares granted to officers | ||||||||
| Fair value of common shares issued as financing costs | ||||||||
| Change in allowance for doubtful accounts | ( | ) | ||||||
| Inventory write-downs | ( | ) | ||||||
| Accrued interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Decrease in right of use assets | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Lease liabilities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Net cash used in investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from line of credit | ||||||||
| Payments on line of credit | ( | ) | ( | ) | ||||
| Proceeds from convertible note payable, net of expenses | ||||||||
| Proceeds from sale of common stock | ||||||||
| Repurchase of common stock | ( | ) | ( | ) | ||||
| Amounts from former related party, net | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
| F-4 |
REED’S, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
Three Months Ended March 31, 2023 and 2022 (Unaudited)
(In thousands, except share and per share amounts)
1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. These condensed financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on May 15, 2023. The accompanying condensed financial statements are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2023, and the results of its operations and its cash flows for the three months ended March 31, 2023 and 2022. The balance sheet as of December 31, 2022 is derived from the Company’s audited financial statements.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023.
Going Concern
The
accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement
of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the three
months ended March 31, 2023, the Company recorded a net loss of $
As
of March 31, 2023, we had a cash balance of $
Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.
We have also taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices.
| F-5 |
Recent Trends - Market Conditions
During the period ended December 31, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively affects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Although the U.S. economy continued to grow during the first quarter of 2023, the higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout 2023.
During
the period ended March 31, 2023, the Company experienced moderation from the elevated freight costs experienced in 2022. The average
cost of shipping and handling for the period ended March 31, 2023, was $
Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through March 31, 2023, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part to be responsible to our employees and business partners in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
We have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
Reverse Stock Split
At
a special meeting of shareholders held on January 24, 2023, the Company’s shareholders granted the Company’s board of directors
the discretion to effect a reverse stock split of the common stock through an amendment to the Company’s Certificate of Incorporation,
as amended, at a ratio of any ratio not less than
The authorized number of shares of common stock were not affected by the reverse stock split. No fractional shares were issued in connection with the reverse stock split, as all fractional shares were rounded up to the next whole share. Accordingly, all share and per share amounts presented herein with respect to common stock have been retroactively adjusted to reflect the above-described reverse stock split for all periods presented.
| F-6 |
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for credit loss reserves for accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity.
Revenue Recognition
The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer. All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them.
The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfilment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive.
For the periods ended March 31, 2023 and 2022, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
March 31, 2023 | March 31, 2022 | |||||||
| Warrants | ||||||||
| Options | ||||||||
| Convertible note payable | ||||||||
| Unvested restricted common stock | ||||||||
| Common stock equivalent of Series A Convertible Preferred stock | ||||||||
| Total | ||||||||
| F-7 |
The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.
The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Advertising Costs
Advertising
costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $
Concentrations
Net
sales. During the three months ended March 31, 2023, the Company’s two largest customers accounted for
Accounts
receivable. As of March 31, 2023, the Company had accounts receivable from two customers which comprised
During
the three months ended March 31, 2023 and the year ended December 31, 2022, the Company utilized six separate co-packers for most its
production and bottling of beverage products in the United States. The Company utilizes co-packers to produce
Purchases
from vendors. During the three months ended March 31, 2023, the Company’s largest vendor accounted for approximately
Fair Value of Financial Instruments
The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. ASC 820 defines the following levels of subjectivity associated with the inputs:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
| F-8 |
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates.
Recent Accounting Pronouncements
In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures.
In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company adopted this standard effective January 1, 2023 and there was no material impact of adopting this standard on the Company’s financial statements and related disclosures.
Other recent accounting pronouncements and guidance issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
| F-9 |
2. Inventory
Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, net of write downs, and is comprised of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
| Raw materials and packaging | $ | $ | ||||||
| Finished products | ||||||||
| Total | $ | $ | ||||||
3. Property and Equipment
Property and equipment is comprised of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
| Right-of-use assets under operating leases | $ | $ | ||||||
| Computer hardware and software | ||||||||
| Machinery and equipment | ||||||||
| Total cost | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Net book value | $ | $ | ||||||
Depreciation
expense for the three months ended March 31, 2023 and 2022 was $
4. Intangible Assets
Intangible assets consist of the following (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
| Brand names | $ | $ | ||||||
| Trademarks | ||||||||
| Total | $ | $ | ||||||
5. Line of Credit
Amounts outstanding under the Company’s credit facilities are as follows (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
| Line of credit – Alterna Capital Solutions | $ | $ | ||||||
| Capitalized financing costs | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
Alterna Capital Solutions
On
March 28, 2022, the Company entered into a financing agreement with Alterna Capital Solutions (“ACS”), for a line of credit
to replace its existing credit facility. The ACS line of credit is for a term of
| F-10 |
The
Company incurred $
6. Secured Convertible Notes Payable
Amounts outstanding under secured convertible notes payable are as follows (in thousands):
March 31, 2023 | December 31, 2022 | |||||||
| Secured Convertible Note Payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Capitalized financing costs | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
| Current portion | ( | ) | ( | ) | ||||
| Long term portion | $ | $ | ||||||
Secured Convertible Note Payable
In
May 2022, the Company entered into a note purchase agreement and agreed to issue $
On
May 9, 2022, the Company issued $
On
February 10, 2023, the Company entered into a Partial Option Exercise and Second Amendment to the
| F-11 |
On
February 13, 2023, the Company entered into a Limited Waiver and Deferral Agreement with Whitebox. Whitebox waived the
Company’s covenant violation of its Excess ABL Amount at November 30, 2022, December 31, 2022, and January 31, 2023, and
deferred payment of the
Upon
conversion, holders of the Note are entitled to receive an interest make-whole payment, as defined. The make-whole amount is equal to
the sum of the remaining scheduled payments of interest on the Notes to be converted that would be due if such notes matured
At
December 31, 2022, the balance of accrued interest was $
The
Company’s ability to settle conversions and make amortization payments and interest make-whole payments using shares of the Company’s
common stock is subject to certain limitations set forth in the Notes. If the Company experiences a fundamental change as defined, the
holders of the notes have the right to require the Company to repurchase the notes for cash at a repurchase price equal to
At March 31, 2023, the Notes, including accrued interest, are convertible into shares of the Company’s common stock pursuant to a share conversion cap limit as defined in the Notes.
The
unamortized debt discount was $
7. Leases Liabilities
During
the three months ended March 31, 2023 and 2022, lease costs totaled $
As
of December 31, 2022, operating lease liabilities totaled $
As
of March 31, 2023, the weighted average remaining lease terms for an operating lease are
8. Stockholder’s Equity
During
the three months ended March 31, 2023, the Company repurchased shares of common stock from an officer for $
| F-12 |
Restricted common stock
| Unvested Shares | Issuable Shares | Fair Value at Date of Issuance | Weighted Average Grant Date Fair Value | |||||||||||||
| Balance, December 31, 2022 | $ | |||||||||||||||
| Granted | - | |||||||||||||||
| Vested | ( | ) | - | |||||||||||||
| Forfeited | - | |||||||||||||||
| Issued | ( | ) | ( | ) | - | |||||||||||
| Balance, March 31, 2023 | $ | $ | ||||||||||||||
The
total fair value of restricted common stock vesting during the three months ended March 31, 2023 and 2022, was $
Stock options
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Unvested forfeited | $ | |||||||||||||||
| Vested forfeited | $ | |||||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2023 | $ | $ | ||||||||||||||
During the three months ended March 31, 2023, the Company approved options exercisable into shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. options were issued to employees, options vesting annually over a -year vesting period, and options vesting based on performance criteria to be established by the board of directors.
The stock options are exercisable at a price of $ per share and expire in . The total fair value of these options at grant date was approximately $, which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ share, expected term of six years, volatility of %, dividend rate of %, and weighted average risk-free interest rate of %. The expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award.
| F-13 |
During
the three months ended March 31, 2023 and 2022, the Company recognized $
As of March 31, 2023, the outstanding and exercisable options have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of March 31, 2023, which was $, and the exercise price of the outstanding stock options.
10. Stock Warrants
The Company’s warrant activity during the three months ended March 31, 2023 is as follows:
| Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Terms (Years) | Aggregate Intrinsic Value | |||||||||||||
| Outstanding at December 31, 2022 | $ | $ | ||||||||||||||
| Granted | - | |||||||||||||||
| Exercised | - | |||||||||||||||
| Forfeited | - | |||||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Exercisable at March 31, 2023 | $ | $ | ||||||||||||||
As of March 31, 2023, the outstanding and exercisable warrants have no aggregate intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of March 31, 2023, which was $, and the exercise price of the Company’s warrants to purchase common stock.
11. Transactions with California Custom Beverage, LLC, former related party
In
December 2018, the Company signed a co-packing agreement with California Custom Beverage, LLC’s (“CCB”), an entity
owned by Christopher J. Reed, a former related party, pursuant to which CCB agreed to produce certain products for the Company for agreed
fees. The co-packing agreement, as amended, includes certain provisions for product inputs, shrinkage, and quality assurance. Also beginning
in 2019, CCB agreed to pay the Company a
During
the three months ended March 31, 2023 and 2022, the Company incurred co-packing fees due to CCB of $ and $, respectively. As of March 31, 2023 and 2022, the aggregate of co-packing fees payable to CCB were
$
At March 31, 2023 and December 31, 2022, accounts receivable due from and accounts payable due to CCB were as follows:
March 31, 2023 | December 31, 2022 | |||||||
| Accounts receivable, net of provision of $ | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Net (payable) receivable | ( | ) | ( | ) | ||||
At
December 31, 2022, CCB disputes that it owes $
of the $
12. Commitments and Contingencies
In
2018, CCB assumed the monthly payments on our lease obligation for a Los Angeles manufacturing plant, and our release from the obligation
by the lessor, however, is dependent upon CCB’s deposit of $
From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable.
We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations.
13. Subsequent Events
On May 25, 2023, the Company entered into a
Securities Purchase Agreement with D&D Source of Life Holding Ltd., as the lead investor, and certain of Reed’s affiliates
pursuant to which the investors agreed to purchase an aggregate of
shares of Reed’s common stock and warrants to purchase
On May 25, 2023, in order to induce the lead investor to subscribe, the Company granted the lead investor certain preemptive rights and agreed to support the lead investor’s nomination of two board designees, one of which shall be an independent director.
On May 30, 2023, the Company entered into a Partial
Option Exercise and Third Amendment to 10% Convertible Notes (the Notes, see Note 6) with Whitebox a Limited Waiver and Deferral Agreement.
Whitebox exercised a partial option to purchase an aggregate of approximately $
The shares issued and the shares of common stock issuable upon conversion of the Option Notes are registrable and subject to that certain Registration Rights Agreement dated May 25, 2023.
| F-14 |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Statements and Information
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report.
In addition to our GAAP results, the following discussion includes Modified EBITDA as a supplemental measure of our performance. We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts, and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.
The following discussion also includes the use of gross billing, a key performance indicator and metric. Gross billing represents invoiced amounts to distributors and retailers, excluding sales adjustments. Gross billing may include deductions from MSRP or “list price”, where applicable, and excludes promotional costs of generating such sales. Management utilizes gross billing to monitor operating performance of products and salespersons, which performance can be masked by the effect of promotional or other allowances. Management believes that the presentation of gross billing provides a useful measure of Reed’s operating performance.
Overview
During the three months ended March 31, 2023, the Company continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and warehouse costs and reduce operating expenses. In addition, it continues to build its innovation pipeline with sustained growth in Reed’s Real Ginger Ale, Reed’s Classic and Stormy Mule, and Reed’s Hard Ginger Ale.
The Company remains focused on driving sales growth, improving gross margin, and reducing freight costs. The sales growth focus is on channel expansion, increase in store placements, new product introduction and improved sales execution. The margin enhancement initiative is driven by packaging savings, co-packer upgrades, and better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses.
COVID-19 Considerations
During the period ended December 31, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively affects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.
Although the U.S. economy continued to grow during the first quarter of 2023, the higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout 2023.
| 1 |
During the period ended March 31, 2023, the Company experienced moderation from the elevated freight costs experienced in 2022. The average cost of shipping and handling for the period ended March 31, 2023, was $3.46 per case, as compared to $3.90 per case for the period ended March 31, 2022. Although the Company has experienced decreases in freight costs over the last three quarters, in the Company’s opinion there remains a volatile environment and the Company will continue to monitor pricing and availability in transportation. Mitigation plans have been implemented to manage this risk. Although, the Company has been negatively impacted by supply chain challenges impacting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company has experienced moderation in inflation and anticipates this to continue throughout 2023.
Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through March 31, 2023, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part to be responsible to our employees and business partners in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
Through March 31, 2023, we continued to generate cash flows to meet our short-term liquidity needs, and we expected to maintain access to the capital markets. We did not observe any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
Results of Operations – Three Months Ended March 31, 2023, as compared to March 31, 2022
The following table sets forth key statistics for the three months ended March 31, 2023 and 2022, respectively, in thousands.
| Three Months Ended March 31, | Pct. | |||||||||||
| 2023 | 2022 | Change | ||||||||||
| Gross billing (A) | $ | 12,453 | $ | 13,636 | -9 | % | ||||||
| Less: Promotional and other allowances (B) | 1,296 | 1,454 | -11 | % | ||||||||
| Net sales | $ | 11,157 | $ | 12,182 | -8 | % | ||||||
| Cost of goods sold | 8,459 | 9,250 | -9 | % | ||||||||
| % of Gross billing | 68 | % | 68 | % | ||||||||
| % of Net sales | 76 | % | 76 | % | ||||||||
| Gross profit | $ | 2,698 | $ | 2,932 | -8 | % | ||||||
| % of Net sales | 24 | % | 24 | % | ||||||||
| Expenses | ||||||||||||
| Delivery and handling | $ | 2,120 | $ | 2,812 | -25 | % | ||||||
| % of Net sales | 19 | % | 23 | % | ||||||||
| Dollar per case ($) | $ | 3.46 | $ | 3.90 | ||||||||
| Selling and marketing | 1,447 | 2,178 | -34 | % | ||||||||
| % of Net sales | 13 | % | 18 | % | ||||||||
| General and administrative | 1,709 | 2,121 | -19 | % | ||||||||
| % of Net sales | 15 | % | 17 | % | ||||||||
| Total operating expenses | 5,276 | 7,111 | -26 | % | ||||||||
| Loss from operations | $ | (2,578 | ) | $ | (4,179 | ) | -38 | % | ||||
| Interest expense and other expense | $ | (1,779 | ) | $ | (801 | ) | 122 | % | ||||
| Net loss | $ | (4,357 | ) | $ | (4,980 | ) | -13 | % | ||||
| Loss per share – basic and diluted | $ | (1.70 | ) | $ | (2.56 | ) | -33 | % | ||||
| Weighted average shares outstanding - basic & diluted | 2,559,855 | 1,947,548 | 31 | % | ||||||||
| 2 |
(A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing has been defined by our internal reporting practices.
(B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year.
Sales, Cost of Sales, and Gross Margins
The following chart sets forth key statistics for the transition of the Company’s top line activity from the first quarter of 2022 through the first quarter of 2023.
| 2023 | 2022 | vs PY | Q1 Per Case | |||||||||||||||||||||||
| Q1 | Q1 | Q1 | 2023 | 2022 | vs PY | |||||||||||||||||||||
| Cases: | ||||||||||||||||||||||||||
| Reed’s | 370 | 415 | -11 | % | ||||||||||||||||||||||
| Virgil’s | 241 | 302 | -20 | % | ||||||||||||||||||||||
| Total Core | 611 | 717 | -15 | % | ||||||||||||||||||||||
| Non Core | - | - | - | |||||||||||||||||||||||
| Candy | 2 | 4 | -50 | % | ||||||||||||||||||||||
| Total | 613 | 721 | -15 | % | ||||||||||||||||||||||
| Gross Billing: | ||||||||||||||||||||||||||
| Core | $ | 12,333 | $ | 13,287 | -7 | % | $ | 20.18 | $ | 18.53 | 9 | % | ||||||||||||||
| Non Core | 53 | 75 | -30 | % | - | - | - | % | ||||||||||||||||||
| Candy | 67 | 274 | -76 | % | 42.51 | 68.50 | -38 | % | ||||||||||||||||||
| Total | $ | 12,453 | $ | 13,636 | -9 | % | 20.33 | 18.91 | 8 | % | ||||||||||||||||
| Discounts: | Total | $ | (1,296 | ) | $ | (1,454 | ) | -11 | % | $ | (2.12 | ) | $ | (2.02 | ) | 5 | % | |||||||||
| COGS: | ||||||||||||||||||||||||||
| Core | $ | (8,422 | ) | $ | (9,150 | ) | -8 | % | $ | (13.75 | ) | $ | (12.76 | ) | 8 | % | ||||||||||
| Non Core | - | (13 | ) | -100 | % | - | - | - | ||||||||||||||||||
| Candy | (37 | ) | (87 | ) | -57 | % | (23.63 | ) | (21.75 | ) | 9 | % | ||||||||||||||
| Total | $ | (8,459 | ) | $ | (9,250 | ) | -9 | % | $ | (13.81 | ) | $ | (12.83 | ) | 8 | % | ||||||||||
| Gross Margin: | $ | 2,698 | $ | 2,932 | -8 | % | $ | 4.40 | $ | 4.07 | 8 | % | ||||||||||||||
| as % Net Sales | 24 | % | 24 | % | ||||||||||||||||||||||
| 3 |
Sales, Cost of Sales, and Gross Margins
As part of the Company’s ongoing initiative to simplify and streamline operations the Company has identified core products on which to place its strategic focus. These core products consist of Reed’s and Virgil’s branded beverages. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs.
Core beverage volume for the three months ended March 31, 2023, represents 99% of all beverage volume.
Core brand gross billing decreased by 7% to $12,333 compared to $13,287 during the same period last year, driven by a Reed’s volume decline of 11% and Virgil’s volume decline of 20%. The result is a decrease in total gross billing of 9%, to $12,453 during the three months ended March 31, 2023, from $13,636 in the same period last year. Price on our core brands increased 9% to $20.18 per case. The decrease was a result of volume declines that have impacted the CSD segment as a result of price increases coupled with the Company’s inability to produce sufficient levels of inventory to meet current demand as a result of tighter credit terms from suppliers.
Discounts as a percentage of gross sales decreased to 10% from 11% in the same period last year. As a result, net sales revenue decreased 8% in the three months ended March 31, 2023, to $11,157, compared to $12,182 in the same period last year.
Cost of Goods Sold
Cost of goods sold decreased $791 during the three months ended March 31, 2023, as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended March 31, 2023, was 76% as compared to 76% for the same period last year.
The total cost of goods per case increased to $13.81 per case in the three months ended March 31, 2023, from $12.83 per case for the same period last year. The cost of goods sold per case on core brands was $13.75 during the three months ended March 31, 2023, compared to $12.77 for the same period last year.
Gross Margin
Gross margin was 24% for the three months ended March 31, 2023, compared to 24% for the same period last year.
Operating Expenses
Delivery and Handling Expenses
Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses decreased by $692 in the three months ended March 31, 2023, to $2,120 from $2,812 in the same period last year, driven by our efforts to mitigate inflationary costs. Delivery costs in the three months ended March 31, 2023, were 19% of net sales and $3.46 per case, compared to 23% of net sales and $3.90 per case during the same period last year.
| 4 |
Selling and Marketing Expenses
Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $1,447 during the three months ended March 31, 2023, compared to $2,178 during the same period last year. As a percentage of net sales, selling and marketing costs was 13% during the three months ended March 31, 2023, as compared to 18% during the same period last year. The decrease was primarily driven by lower employee related costs, marketing expenditures, and travel and entertainment expense, partially offset by higher broker fees, product samples, and trade show spend.
General and Administrative Expenses
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the three months ended March 31, 2023, to $1,709 from $2,121, a decrease of $412 over the same period last year. As a percentage of net sales, general and administrative expense was 15% during the three months ended March 31, 2023, as compared to 17% during the same period last year. The decrease was driven by lower employee related costs, professional fees and stock compensation.
Loss from Operations
The loss from operations was $2,578 for the three months ended March 31, 2023, as compared to a loss of $4,179 in the same period last year driven by decreased gross profit offset by decreases in operating expenses discussed above.
Interest and Other Expense
Interest and other expense for the three months ended March 31, 2023, consisted of $1,779 of interest expense. During the same period last year, interest and other expense consisted of $801 of interest expense.
Modified EBITDA
In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, legal settlements, and one-time restructuring-related costs including employee severance and asset impairment.
Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
| 5 |
Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended March 31, 2023 and 2022 (unaudited; in thousands):
Three Months Ended March 31 | ||||||||
| 2023 | 2022 | |||||||
| Net loss | $ | (4,357 | ) | $ | (4,980 | ) | ||
| Modified EBITDA adjustments: | ||||||||
| Depreciation and amortization | 80 | 52 | ||||||
| Interest expense | 1,779 | 801 | ||||||
| Stock option and other noncash compensation | 233 | 291 | ||||||
| Total EBITDA adjustments | $ | 2,092 | $ | 1,144 | ||||
| Modified EBITDA | $ | (2,265 | ) | $ | (3,836 | ) | ||
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 three months ended March 31, 2023, we recorded a net loss of $4,357. As of March 31, 2023, we had a cash balance of $467, with $62 of current availability, and $5,084 of additional borrowing capacity, a stockholder’s deficit of $12,322 and negative working capital of $4,952, compared to a cash balance of $533, with $110 of current availability, and $1,633 of additional borrowing capacity, a stockholder’s deficit of $8,470 and negative working capital of $1,563 at December 31, 2022.
Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we seek additional sources of financing, there can be no assurance that such financing will be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry.
We have 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.
| 6 |
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Some of those judgments can be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or conditions. Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates. Significant estimates include those related to assumptions used in estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services. There were no changes to our critical accounting policies described in the condensed financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, that impacted our condensed financial statements and related notes included herein.
Recent Accounting Pronouncements
See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
A smaller reporting company is not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023, to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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.
| 7 |
Item 1A. Risk Factors
In addition to other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K (our Form 10-K) for the year ended December 31, 2022 and any subsequent filings with the Securities and Exchange Commission (SEC) made prior to the date hereof, which could materially affect our business, financial condition, results of operations or future results. These risks and uncertainties discussed in our Form 10-K and in any subsequent filings with the SEC made prior to the date hereof are not the only ones facing our business. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may materially adversely affect our business, cash flows, financial condition and/or results of operations. Please also read the Cautionary Notice Regarding Forward-Looking Statements and Information of this Quarterly Report on Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None that have not been previously disclosed in a Current Report on Form 8-K.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
+Certain portions of this exhibit have been redacted pursuant to Item 601(b)(10)(iv) of Regulations S-K. The Company will furnish supplementally an unredacted copy of such exhibit to the Securities and Exchange Commission or its staff upon request.
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Reed’s, Inc. (Registrant) | |
| Date: June 1, 2023 | /s/ Norman E. Snyder, Jr. |
| Norman E. Snyder, Jr. | |
| Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: June 1, 2023 | /s/ Joann Tinnelly |
| Joann Tinnelly | |
| Interim Chief Financial Officer | |
| (Principal Financial Officer) |
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