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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE 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)

 

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

 

Title of Each Class   Trading Symbol   Names of each exchange on which registered
Common Stock   REED   NASDAQ

 

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 93,584,380 shares of Common Stock outstanding as of May 11, 2021.

 

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 ☒ 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 ☒ No ☐

 

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. (Check one):

 

Large Accelerated Filer Accelerated Filer ☐ Non-Accelerated Filer (do not check if Smaller Reporting Company)
Smaller Reporting Company Emerging Growth Company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION F-1
 
Item 1. Condensed Financial Statements F-1
 
Condensed Balance Sheets - March 31, 2021 and December 31, 2020 F-1
 
Condensed Statements of Operations for the three months ended March 31, 2021 and 2020 F-2
 
Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three months ended March 31, 2021 and 2020 F-3
 
Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020 F-4
 
Notes to Condensed Financial Statements F-5
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1
 
Item 3. Quantitative and Qualitative Disclosures About Market Risk 7
 
Item 4. Controls and Procedures 7
 
PART II - OTHER INFORMATION 7
 
Item 1. Legal Proceedings 7
 
Item 1A. Risk Factors 7
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 8
 
Item 3. Defaults Upon Senior Securities 8
 
Item 4. Mine Safety Disclosures 8
 
Item 5. Other Information 8
 
Item 6. Exhibits 8

 

  i  

 

 

Part I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

REED’S INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands, except share amounts)

 

   

March 31, 2021

   

December 31, 2020

 
    (Unaudited)        
ASSETS                
Current assets:                
Cash   $ 155     $ 595  
Accounts receivable, net of allowance for doubtful accounts and returns and discounts of $165 and $234, respectively     5,032       4,718  
Receivable from related party     701       682  
Inventory, net of reserve for obsolescence of $174 and $194, respectively     12,445       11,119  
Prepaid expenses and other current assets     2,110       1,341  
Total current assets     20,443       18,455  
                 
Property and equipment, net of accumulated depreciation of $379 and $361, respectively     949       920  
Equipment held for sale, net of impairment reserves of $96 and $96, respectively     67       67  
Intangible assets     617       615  
Total assets   $ 22,076     $ 20,057  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
Current liabilities:                
Accounts payable   $ 8,134     $ 6,746  
Payable to related party     1,034       557  
Accrued expenses     449       895  
Revolving line of credit     4,256       -  
Current portion of note payable     727       599  
Current portion of leases payable     145       130  
Total current liabilities     14,745       8,927  
                 
Leases payable, less current portion     518       555  
Note payable, less current portion     43       171  
Warrant liability     -       -  
Total liabilities     15,306       9,653  
                 
Stockholders’ equity:                
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding     94       94  
Common stock, $.0001 par value, 120,000,000 shares authorized, 86,807,905 and 86,317,096 shares issued and outstanding, respectively     9       9  
Additional paid in capital     97,904       97,031  
Accumulated deficit     (91,237 )     (86,730 )
Total stockholders’ equity     6,770       10,404  
Total liabilities and stockholders’ equity   $ 22,076     $ 20,057  

 

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, 2021 and 2020

(Unaudited)

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

 

    2021     2020  
    March 31, 2021     March 31, 2020  
Net Sales   $ 12,146     $ 9,523  
Cost of goods sold     8,293       6,653  
Gross profit     3,853       2,870  
                 
Operating expenses:                
Delivery and handling expense     3,286       1,263  
Selling and marketing expense     2,215       1,925  
General and administrative expense     2,603       1,932  
Total operating expenses     8,104       5,120  
                 
Loss from operations     (4,251 )     (2,250 )
                 
Interest expense     (256 )     (336 )
Change in fair value of warrant liability     -       6  
                 
Net loss   $ (4,507 )   $ (2,580 )
                 
Net loss per share – basic and diluted   $ (0.05 )   $ (0.05 )
                 
Weighted average number of shares outstanding – basic and diluted     86,631,304       47,595,206  

 

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, 2021 and 2020

(Unaudited)

(Amounts in thousands except share amounts)

 

    Shares     Amount     Shares     Amount     Shares     Amount     Capital     Deficit     (Deficit)  
    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, 2020     86,317,096     $ 9       9,411     $ 94       -     $ -     $ 97,031     $ (86,730 )   $ 10,404  
Fair value of vested options                                                     300               300  
Fair value of vested restricted shares granted to officers     84,809                                               98               98  
Common shares issued on exercise of options     6,000                                               3               3  
Common shares issued for financing costs      400,000                                               472               472  
Net loss     -       -       -       -       -       -       -       (4,507 )     (4,507 )
Balance, March 31, 2021     86,807,905     $ 9       9,411     $ 94       -     $ -     $ 97,904     $ (91,237 )   $ 6,770

 

 

 

    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, 2019     47,595,206     $ 5       9,411     $ 94       -     $ -     $ 77,596     $ (76,548 )   $ 1,147  
Fair value of vested options                                                     495               495  
Fair value of vested restricted shares granted to an officer                                     350,000       285                       285  
Net loss     -       -       -       -       -       -       -       (2,580 )     (2,580 )
Balance, March 31, 2020     47,595,206     $ 5       9,411     $ 94       350,000     $ 285     $ 78,091     $ (79,128 )   $ (653

)

 

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, 2021 and 2020

(Unaudited)

(Amounts in thousands)

 

    March 31, 2021     March 31, 2020  
Cash flows from operating activities:                
Net loss   $ (4,507 )   $ (2,580 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     32       12  
Gain on sale on termination of leases     (3 )     -  
Amortization of debt discount     162       96  
Amortization of prepaid financing costs     25       -  
Amortization of right of use assets     24       37  
Fair value of vested options     292       495  
Fair value of vested restricted shares granted to officers     106       285  
Decrease in allowance for doubtful accounts     (69 )     (93 )
Decrease in inventory reserve     (20 )     (384 )
Change in fair value of warrant liability     -       (6 )
Accrual of interest on convertible note to a related party     -       142  
Lease liability     (8 )     (7 )
Changes in operating assets and liabilities:                
Accounts receivable     (244 )     (1,826 )
Inventory     (1,306 )     2,902  
Prepaid expenses and other assets     (484 )     (365 )
Accounts payable     1,387       (1,038 )
Accrued expenses     (446 )     (22 )
Net cash used in operating activities     (5,059 )     (2,352 )
Cash flows from investing activities:                
Patent costs     (2 )     -  
Purchase of property and equipment     (95 )     (22 )
Net cash used in investing activities     (97 )     (22 )
Cash flows from financing activities:                
Borrowings on line of credit     16,154       9,188  
Repayments of line of credit     (11,898 )     (7,677 )
Amounts from related party     459       -  
Principal repayments on capital lease obligation     (2 )     (22 )
Exercise of options     3       -  
Net cash provided by financing activities     4,716       1,489  
                 
Net increase (decrease) in cash     (440 )     (885 )
Cash at beginning of period     595       913  
Cash at end of period   $ 155     $ 28  
                 
Supplemental disclosures of cash flow information:                
Cash paid for interest   $ 70     $ 98  

 

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, 2021 and 2020 (Unaudited)

(In thousands, except share and per share amounts)

 

1. Basis of Presentation and Liquidity

 

The accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position at March 31, 2021 and the results of operations and cash flows for the three months ended March 31, 2021 and 2020. The balance sheet as of December 31, 2020 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, 2020, as filed with the Securities and Exchange Commission on March 30, 2021.

 

The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021.

 

COVID-19 Considerations

 

During the period ended March 31, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued impact for the balance of the year. In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.

 

Through March 31, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up with demand. The Company believes that costs will continue to increase throughout the year. However, mitigation plans are being implemented to manage this risk.

 

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 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, 2021, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.

 

Net sales for the period ended March 31, 2021 were up 28% from the prior year period. Through March 31, 2021, we continue to generate cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. We have also 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.

 

  F- 5  

 

 

Liquidity

 

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the three months ended March 31, 2021, the Company recorded a net loss of $4,507 and used cash in operations of $5,059. As of March 31, 2021, we had a cash balance of $155 with borrowing capacity of $2,513, a stockholder’s equity of $6,770 and a working capital of $5,698, compared to a cash balance of $595 with borrowing capacity of $5,166, stockholders’ equity of $10,404 and a working capital of $9,528 at December 31, 2020. Notwithstanding the net loss for the three months ended March 31, 2021, management projects adequate cash from operations and available line of credit to ensure continuation of the Company as a going concern for at least one year from the date of this quarterly report.

 

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

 

2. Significant Accounting Policies

 

Use of estimates

 

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

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“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.

 

  F- 6  

 

 

Loss per Common Share

 

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

 

For the periods ended March 31, 2021 and 2020, 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,

2021

   

March 31,

2020

 
Convertible note to a related party     -       2,266,667  
Warrants     3,362,241       6,413,782  
Common stock equivalent of Series A Convertible Preferred stock     37,644       37,644  
Common stock issuable             350,000  
Unvested restricted common stock     309,082       150,000  
Options     11,028,322       4,683,380  
Total     14,737,289       13,901,473  

 

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

 

Stock Compensation Expense

 

The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, 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 $349 and $302 for the three months ended March 31, 2021 and 2020, respectively.

 

Concentrations

 

Gross sales. During the three months ended March 31, 2021, the Company’s two largest customers accounted for 23% and 12% of gross sales, respectively. During the three months ended March 31, 2020, the Company’s two largest customers accounted for 22% and 14% of gross sales, respectively. No other customers exceeded 10% of sales in either period.

 

Accounts receivable. As of March 31, 2021, the Company had accounts receivable from two customers which comprised 18% and 10% of its gross accounts receivable, respectively. As of December 31, 2020, the Company had accounts receivable from one customer which comprised 23% of its gross accounts receivable. No other customers exceeded 10% of gross accounts receivable in either period.

 

  F- 7  

 

 

Purchases from vendors. During the three months ended March 31, 2021, the Company’s two largest vendor accounted for approximately 13% and 13% of all purchases, respectively. During the three months ended March 31, 2020, the Company’s largest vendor accounted for approximately 10% of all purchases. No other vendors exceeded 10% of all purchases in either periods.

 

Accounts payable. As of March 31, 2021, the Company’s two largest vendors accounted for 19% and 10% of the total accounts payable, respectively. As of December 31, 2020 the Company’s largest two vendors accounted for 12% and 10% of the total accounts payable, respectively. No other vendors exceeded 10% of gross accounts payable in either period.

 

Fair Value of Financial Instruments

 

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

 

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

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

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

 

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

 

Recent Accounting Pronouncements

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

 

In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related disclosures.

 

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

 

  F- 8  

 

 

3. Inventory

 

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

 

   

March 31,

2021

   

December 31,

2020

 
Raw materials and packaging   $ 7,746     $ 6,793  
Finished products     4,699       4,326  
Total   $ 12,445     $ 11,119  

 

The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at March 31, 2021, and December 31, 2020, was $174 and $194, respectively.

 

4. Property and Equipment

 

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

 

   

March 31,

2021

   

December 31,

2020

 
Right-of-use assets under operating leases   $ 724     $ 724  
Right-of-use assets under finance leases     6       54  
Computer hardware and software     400       400  
Machinery and equipment     198       103  
Total cost     1,328       1,281  
Accumulated depreciation and amortization     (379 )     (361 )
Net book value   $ 949     $ 920  

 

Depreciation expense for the three months ended March 31, 2021 and 2020 was $32 and $12, respectively, and amortization of right-of-use assets for the three months ended March 31, 2021 and 2020 was $24 and $37, respectively. During the three months ended March 31, 2021, the Company disposed of right-of-use assets under finance leases with a cost of $48 and accumulated amortization of $38, and terminated $13 of related finance leases payable (see Note 8).

 

Equipment held for sale consists of the following (in thousands):

 

   

March 31,

2021

   

December 31,

2020

 
Equipment held for sale   $ 163     $ 163  
Reserve     (96 )     (96 )
Net book value   $ 67     $ 67  

 

The balance as of March 31, 2021, and December 31, 2020, consists of residual manufacturing equipment, at estimated net realizable value, which management anticipates selling during 2021.

 

5. Intangible Assets

 

Intangible assets are comprised of brand names acquired, specifically Virgil’s, and costs related to trademarks. 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 assessment, there were no indications of impairment at March 31, 2021.

 

  F- 9  

 

 

During the three months ended March 31, 2021, the Company capitalized costs of $2 pertaining to legal and other fees incurred in applying for international trademarks for Reeds and Virgil’s brands.

 

Intangible assets consist of the following (in thousands):

 

   

March 31,

2021

   

December 31,

2020

 
Brand names   $ 576     $ 576  
Trademarks     41       39  
Total   $ 617     $ 615  

 

6. Line of Credit

 

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

 

   

March 31,

2021

   

December 31,

2020

 
Line of credit   $ 4,256     $ -  

 

On October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The financing agreement provides a maximum borrowing capacity of $13,000. Borrowings are based on a formula of eligible accounts receivable and inventories (the “permitted borrowings”) plus advances (an “over-advance” of up to $4,000) in excess of permitted borrowings. At March 31, 2021, the unused borrowing capacity under the financing agreement was $2,513. The line of credit matured on March 30, 2021, with automatic yearly renewals thereafter until terminated.

 

Borrowings under the Rosenthal financing agreement bear interest at the greater of prime or 4.75%, plus an additional 2.0% to 3.5% depending on whether the borrowing is based upon receivables, inventory or is an over-advance. Additionally, the line of credit is subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $4.

 

The line of credit is secured by substantially all of the assets, excluding intellectual property, of the Company. The over-advance is secured by all of Reed’s intellectual property collateral. Additionally, any over-advance was 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”). On March 11, 2021, the Company entered into an amendment to the financing agreement, releasing that irrevocable standby letter of credit of $1,500 by Raptor with a $2,000 pledge of securities to Rosenthal by John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust.

 

John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party. He is also a greater than 5% beneficial owner of Reed’s common stock. As consideration for the collateral support, Mr. Bello received 400,000 shares of Reed’s restricted stock. The Company determined the fair value of the 400,000 restricted stock to be $472 which was recorded as a prepaid financing costs and included in prepaid expenses and other current assets on the condensed balance sheet at March 31, 2021. The prepaid financing fee is to be amortized over a twelve month period. During the three months ended March 31, 2021, the company amortized $25 of the prepaid financing costs to interest expense.

 

The financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions, including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of March 31, 2021.

 

  F- 10  

 

 

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 amortized over the remaining life of the Rosenthal agreement. On December 31, 2020, the remaining unamortized debt discount of $162 is included in prepaid expense and other current assets on the balance sheet. Amortization of debt discount was $162 and $96 for the three months ended March 31, 2021 and 2020, respectively. On March 31, 2021, no remaining unamortized debt discount remained.

 

7. Note Payable

 

On April 20, 2020, the Company was granted a loan (the “PPP loan”) from City National Bank in the aggregate amount of $770, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. At December 31, 2020, the note payable balance was $770, of which $599 was reflected as the current portion of note payable. At March 31, 2021, the note payable balance was $770, of which $727 was reflected as the current portion of note payable.

 

The PPP loan agreement is dated April 20, 2020, matures on April 20, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing on November 2020, and is unsecured and guaranteed by the U.S. Small Business Administration. We applied ASC 470, Debt, to account for the PPP loan. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company believes it used the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company was in compliance with the terms of the PPP loan as of March 31, 2021.

 

If the conditions outlined in the PPP loan program are adhered to by the Company, all or part of such loan could be forgiven. The Company believes that all or a substantial portion of the PPP loan is eligible for forgiveness. The Company applied for full forgiveness of the PPP loan on March 17, 2021. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. However, the Company cannot provide any assurance whether the PPP loan will ultimately be forgiven by the SBA.

 

8. Leases Liabilities

 

The Company accounts for leases under ASC 842, Leases. 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.

 

ASC 842 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. During the three months ended March 31, 2021, the Company reflected amortization of right of use asset of $24 related to these leases, resulting in a net asset balance of $730 as of March 31, 2021.

 

In accordance with ASC 842, the right-of-use assets are being amortized over the life of the underlying leases.

 

As of December 31, 2020, lease liabilities totaled $685, made up of finance lease liabilities of $16 and operating lease liabilities of $669. During the three months ended March 31, 2021, the Company terminated $13 of finance leases, and made payments of $2 towards its finance lease liability and $8 towards its operating lease liability. As of March 31, 2021, lease liabilities totaled $663, made up of finance lease liability of $1 and operating lease liability of $662.

 

As of March 31, 2021, the weighted average remaining lease terms for operating lease and finance lease are 3.76 years and 0.50 years, respectively. The weighted average discount rate for operating lease is 12.6% and 12.6% for finance lease.

 

  F- 11  

 

 

9. Stock-Based Compensation

 

Restricted common stock

 

The following table summarizes restricted stock activity during the three months ended March 31, 2021:

 

    Unvested
Shares
    Issuable
Shares
    Fair Value
at Date of
Issuance
    Weighted
Average
Grant Date
Fair Value
 
Balance, December 31, 2020     150,000       -     $ 92       0.89  
Granted     245,900       -       226       0.92  
Vested     (84,809 )     84,809       -       -  
Forfeited     (2,009 )                     0.89  
Issued     -       (84,809 )     (98 )     -  
Balance, March 31, 2021     309,082       -     $ 220     $ 0.89  

 

On January 26, 2021, the board of directors of Reed’s, pursuant to a joint recommendation from its governance and compensation committees, set the cash compensation of its non-employee directors at $50,000 for fiscal 2021, payable quarterly in accordance with the company’s policies for non-employee director compensation. In addition, the Company granted 245,900 restricted stock awards to five non-employee directors. 61,475 of these restricted stock awards vested on February1, 2021. The remaining 184,425 restricted stock awards will vest equally on May 1, 2021, August 1, 2021, and November 1, 2021. The aggregate fair value of the stock awards was $226 based on the market price of our common stock price which was $0.92 per share on the date of grants and is amortized as shares vest.

 

The total fair value of restricted common stock vesting during the three months ended March 31, 2021 and 2020 was $98 and $285, respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of March 31, 2021, the amount of unvested compensation related to issuances of restricted common stock was $220, which will be recognized as an expense in future periods as the shares vest. When calculating basic loss per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date.

 

Stock options

 

The following table summarizes stock option activity during the three months ended March 31, 2021:

 

    Shares     Weighted-
Average
Exercise Price
    Weighted-
Average
Remaining
Contractual
Terms
(Years)
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2020     9,417,898     $ 1.45       6.09     $ 78  
Granted     1,939,700     $ 1.01                  
Exercised     (6,000 )   $ 0.50                  
Unvested forfeited     (315,526 )   $ 1.75                  
Vested forfeited     (7,750 )   $ 2.51                  
Outstanding at March 31, 2021     11,028,322     $ 1.15       8.61     $ 2,332  
Exercisable at March 31, 2021     3,160,048     $ 1.34       6.76     $ 759  

 

During the three months ended March 31, 2021, the Company received proceeds of $3 and issued 6,000 shares of common shares on the exercise of stock options.

 

  F- 12  

 

 

During the three months ended March 31, 2021, the Company approved options exercisable into 1,939,700 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 1,939,700 options were issued to employees, 969,850 options vesting annually over a four-year vesting period, and 969,850 options that will vest based on performance criteria to be established by the board of directors.

 

The stock options are exercisable at a price of $1.01 per share and expire in ten years. The total fair value of these options at grant date was approximately $1,294, which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $1.01 per share, expected term of six years, volatility of 76%, dividend rate of 0%, and weighted average risk-free interest rate of 0.94%. 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.

 

During the three months ended March 31, 2021 and 2020, the Company recognized $300 and $495 of compensation expense relating to vested stock options. As of March 31, 2021, the aggregate amount of unvested compensation related to stock options was approximately $4,274 which will be recognized as an expense as the options vest in future periods through March 28, 2025.

 

As of March 31, 2021, the outstanding and exercisable options have an intrinsic value of $2,332 and $759, respectively. The aggregate intrinsic value was calculated as the difference between the closing market price as of March 31, 2021, which was $1.17, and the exercise price of the outstanding stock options.

 

10. Stock Warrants

 

As of March 31, 2021, the Company has issued warrants to purchase an aggregate of 3,362,241 shares of common stock. The Company’s warrant activity during the three months ended March 31, 2021 is as follows:

 

    Shares    

Weighted-

Average Exercise Price

   

Weighted-

Average Remaining Contractual Terms (Years)

    Aggregate Intrinsic Value  
                         
Outstanding at December 31, 2020     3,362,241     $ 1.56       2.49     $ -  
Exercised     -       -                  
Forfeited     -       -                  
Outstanding at March 31, 2021     3,362,241     $ 1.56       2.24     $ 526  
Exercisable at March 31, 2021     3,362,241     $ 1.56       2.24     $ 526  

 

There were no warrant transactions during the three months ended March 31, 2021. As of March 31, 2021, the outstanding and exercisable warrants have an intrinsic value of $526. The intrinsic value was calculated as the difference between the closing market price as of March 31, 2021, which was $1.17, and the exercise price of the Company’s warrants to purchase common stock.

 

11. Related Party Activities

 

On December 31, 2018, the Company completed the sale of its Los Angeles manufacturing plant to California Custom Beverage, LLC (“CCB”), an entity owned by Christopher J. Reed, a related party, and CCB assumed the monthly payments on our lease obligation for the Los Angeles manufacturing plant. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $1,200 of security with the lessor. The deposit is secured by Mr. Reed’s pledge of common stock to the lessor and guaranteed personally by Mr. Reed and his wife. As of March 31, 2021, $800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $425 that remain in escrow with the lessor.

 

  F- 13  

 

 

Beginning in 2019, we are to receive a 5% royalty on CCB’s private label sales to existing customers for three years and a 5% referral fee on CCB’s private label sales to referred customers for three years. During the three months ended March 31, 2021 and 2020, the Company recorded royalty revenue from CCB of $3 and $5, respectively.

 

At December 31, 2020, the Company had an aggregate receivable balance from CCB of $682 at December 3,1 2020. During the quarter ended March 31, 2021, the Company recorded royalty revenue receivable of $3, and advanced expenses of $16, leaving an aggregate receivable balance of $701 at March 31, 2021.

 

At March 31, 2021 and December 31, 2020, the Company had accounts payable due to CCB of $557 and $1,034, respectively.

 

Lindsay Martin, daughter of a director of the Company, is employed as Vice President of Marketing. Ms. Martin was paid approximately $87 and $42, respectively, for her services during the three months ended March 31, 2021 and 2020, respectively.

 

13. Subsequent Events

 

On May 5, 2021, the Company entered into a placement agency agreement with Roth Capital Partners, LLC (the “Placement Agent”) and a securities purchase agreement with a certain purchaser for the purchase and sale of shares of the Company’s common stock, par value $0.0001 per share, in an offering of securities registered under an effective registration statement filed with the Securities and Exchange Commission (“SEC”) pursuant to the Securities Act of 1933, as amended (SEC File No. 333-229105). In the offering, the Company sold 6,680,000 shares of common stock, at a price of $1.18 per share (the “Offering”). The offering closed on May 7, 2021.

 

For a period of 90 days after the closing date of the sale of the shares of common stock, the provisions of the securities purchase agreement generally prohibit the Company from issuing or agreeing to issue shares of common stock or common stock equivalents other than under equity compensation plans, outstanding rights to acquire common stock or common stock equivalents, or in connection with certain acquisitions or strategic transactions. The placement agency agreement provides that the Company will indemnify the Placement Agent against certain liabilities, including liabilities under the Securities Act of 1933, as amended. The Placement Agent agreed to use reasonable best efforts to arrange for the sale of the shares of common stock being issued and sold in the Offering. The Placement Agent will be paid a total cash fee at the closing of the Offering equal to 6.5% of the gross cash proceeds received by the Company from the sale of the shares of common stock in the offering.

 

  F- 14  

 

 

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

 

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. These risks, assumptions and uncertainties include difficulty in marketing Reed’s products and services, maintaining and protecting brand recognition, Reed’s ability to qualify for forgiveness of the PPP loan, the need for significant capital, dependence on third party distributors, dependence on third party brewers, increasing costs of fuel and freight, protection of intellectual property, competition and other factors, any of which could have an adverse effect on the business plans of Reed’s, its reputation in the industry or its expected financial return from operations and results of operations. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements.

 

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.

 

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.

 

Overview

 

During the first quarter of 2021, the Company fully utilized their expanded network of co-packers and continues to adhere to strict set of quality protocols. In addition to our traditional sales channels, the Company is expanding in the drug, convenience and ecommerce channels including their branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans.

 

The Company remains focused on driving sales growth and improving margin. The sales growth focus is on channel expansion, new product introduction and improved sales execution. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs. However, the Company experienced elevated transportation costs over the prior year and anticipates these costs to remain elevated for the balance of the year. Plans have been developed to mitigate the impact of these costs.

 

COVID-19 Considerations

 

During the period ended March 31, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued impact for the balance of the year. In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.

 

Through March 31, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up with demand. The Company believes that costs will continue to increase throughout the year. However, mitigation plans are being implemented to manage this risk.

 

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 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, 2021, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.

 

Net sales for the period ended March 31, 2021 were up 28% from the prior year period. Through March 31, 2021, we continue to generate cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. We have also 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.

 

  1  

 

 

Results of Operations – Three Months Ended March 31, 2021 as compared to March 31, 2020

 

The following table sets forth key statistics for the three months ended March 31, 2021 and 2020, respectively, in thousands.

 

    Three Months Ended March 31,     Pct.  
    2021     2020     Change  
Gross sales (A)   $ 13,281     $ 10,551       26 %
Less: Promotional and other allowances (B)     1,135       1,028       10 %
Net sales   $ 12,146     $ 9,523       28 %
                         
Cost of goods sold     8,293       6,653       25 %
% of Gross sales     62 %     63 %        
% of Net sales     68 %     70 %        
Gross profit   $ 3,853     $ 2,870       34 %
% of Net sales     32 %     30 %        
                         
Expenses                        
Delivery and handling   $ 3,286     $ 1,263       160 %
% of Net sales     27 %     13 %        
Dollar per case ($)     4.4       2.3          
Selling and marketing     2,215       1,925       15 %
% of Net sales     18 %     20 %        
General and administrative     2,603       1,932       35 %
% of Net sales     21 %     20 %        
Total operating expenses     8,103       5,120       58 %
                         
Loss from operations   $ (4,251 )   $ (2,250 )     89 %
                         
Interest expense and other expense   $ (256 )   $ (330 )     -22 %
                         
Net loss   $ (4,507 )   $ (2,580 )     75 %
                         
Loss per share – basic and diluted   $ (0.05 )   $ (0.05 )     0 %
                         
Weighted average shares outstanding - basic & diluted     86,631,304       47,595,206       82 %

 

(A) The Company considers Gross Sales to be a key performance indicator in our Management's Discussion and Analysis (MD&A). Gross Sales is a non-GAAP measure. We define Gross Sales as the total sales for the Company unadjusted for costs related to generating those sales. Gross Sales is calculated from the commonly understood GAAP amount, Net Sales, and adjusted to remove the reduction (i.e. adds back) promotional expense in the period the related revenue is recorded, with the resulting performance amount labeled Gross Sales. Management utilizes gross sales 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 sales provides a useful measure of our operating performance. 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.

 

(B) We define promotional and other allowances as costs deducted from gross sales 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.

 

  2  

 

 

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 2020 through the first quarter of 2021.

 

        2021     2020     Q1 Per Case  
        Q1    

vs

PY

    Q1     Q2     Q3     Q4     FY     2021     2020     vs PY  
Cases:                                                                
    Reed’s     395       37 %     288       335       314       317       1,254                          
    Virgil’s     339       29 %     262       308       319       315       1,204                          
    Total Core     734       33 %     550       643       633       632       2,458                          
    Non Core     -       -100 %     2       -       -       -       2                          
    Candy     8       0 %     8       8       5       5       26                          
    Total     742       33 %     560       651       638       637       2,486                          
                                                                                     
Gross Sales:                                                                                    
    Core   $ 12,955       27 %   $ 10,175     $ 11,940     $ 11,622     $ 11,587     $ 45,324     $ 17.6     $ 18.5       -5 %
    Non Core     33       -68 %     102       33       74       347       556       -       51.0       -100 %
    Candy     293       7 %     274       256       201       190       921       36.7       34.3       7 %
    Total   $ 13,281       26 %   $ 10,551     $ 12,229     $ 11,897     $ 12,124     $ 46,801       17.9       19.0       -6 %
                                                                                     
Discounts:   Total   $ (1,135 )     10 %   $ (1,028 )   $ (1,376 )   $ (1,335 )   $ (1,447 )   $ (5,186 )   $ (1.5 )   $ (2.3 )     -33 %
                                                                                     
COGS:                                                                                    
    Core   $ (8,122 )     27 %   $ (6,414 )   $ (7,674 )   $ (7,032 )   $ (7,019 )   $ (28,139 )   $ (11.1 )   $ (11.1 )     - %
    Non Core     (6 )     -89 %     (59 )     (15 )     (15 )     (21 )     (110 )     -       -       -  
    Candy     (165 )     -8 %     (180 )     (176 )     (129 )     (115 )     (600 )     (20.6 )     (23.0 )     -10 %
    Total   $ (8,293 )     25 %   $ (6,653 )   $ (7,865 )   $ (7,176 )   $ (7,155 )   $ (28,849 )   $ (11.2 )   $ (11.2 )     -1 %
                                                                                     
Gross Margin:       $ 3,853       34 %   $ 2,870     $ 2,988     $ 3,386     $ 3,522     $ 12,766     $ 5.2     $ 5.5       -6 %
as % Net Sales         32 %             30 %     28 %     32 %     33 %     31 %                        

  

  3  

 

 

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 on which to place its strategic focus. These core products consist of Reed’s and Virgil’s branded beverages. Beginning in 2020, our Wellness Shots are captured in Non-core products. Non-core products for 2020 consist primarily of slower selling discontinued Reed’s and Virgil’s SKUs.

 

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 three months ended March 31, 2021, represents 98% of all beverage volume.

 

Core brand gross revenue increased by 27% to $12,955 compared to the same period last year, driven by Reed’s volume growth of 37% and Virgil’s volume growth of 29%. The result is an increase in total gross revenue of 26%, to $13,281 in the three months ended March 31, 2021, from $10,551 during the three months ended March 31, 2020. Price on our core brands decreased 5% to $17.65 per case due to a shift in mix to lower priced, higher margin products.

 

Discounts as a percentage of gross sales decreased to 9% from 10% in the same period last year. As a result, net sales revenue grew 28% in the three months ended March 31, 2021 to $12,146, compared to $9,523 in the same period last year.

 

Cost of Goods Sold

 

Cost of goods sold increased $1,640 during the three months ended March 31, 2021 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, 2021 was 68% as compared to 70% for the same period last year.

 

The total cost of goods per case decreased to $11.18 per case in the three months ended March 31, 2021 from $11.23 per case for the same period last year. The cost of goods sold per case on core brands was $11.07 during the year months ended March 31, 2021, compared to $11.11 for the same period last year.

 

Gross Margin

 

Gross margin increased to 32% for the three months ended March 31, 2021, compared to 30% 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 increased by $2,023 in the three months ended March 31, 2021 to $3,286 from $1,263 in the same period last year, driven by increased volumes, ecommerce fulfillment costs, and increasing freight rates due to Covid-19. Delivery costs in the three months ended March 31, 2021 were 27% of net sales and $4.43 per case, compared to 13% of net sales and $2.26 per case during the same period last year.

 

Selling and Marketing Expenses

 

Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support.

 

Total selling and marketing expenses were $2,215 during the three months ended March 31, 2021, compared to $1,925 during the same period last year. As a percentage of net sales, selling and marketing costs decreased to 18% during the three months ended March 31, 2021, as compared to 20% during the same period last year. The increase was driven by an increase in sales force headcount and consumer facing marketing costs partially offset by reduced expenditures on trade shows and sponsorships and lower stock compensation.

 

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 three months ended March 31, 2021 to $2,603 from $1,932, an increase of $671 over the same period last year. The increase was driven by legal settlements, employee costs, consulting fees, public company and licensing costs, partially offset by lower stock compensation.

 

Loss from Operations

 

The loss from operations was $4,251 for the three months ended March 31, 2021, as compared to a loss of $2,250 in the same period last year driven by increased gross profit offset by increases in operating expenses discussed above.

 

Interest and Other Expense

 

Interest and other expense for the three months ended March 31, 2021, consisted of $256 of interest expense. During the same period last year, interest and other expense consisted of $336 of interest expense offset by the change in fair value of our warrant liability of $6.

 

  4  

 

 

Modified EBITDA

 

In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, legal settlements, and one-time restructuring-related costs including employee severance and asset impairment.

 

Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

 

Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended March 31, 2021 and 2020 (unaudited; in thousands):

 

    Three Months Ended March 31  
    2021     2020  
Net loss   $ (4,507 )   $ (2,580 )
                 
Modified EBITDA adjustments:                
Depreciation and amortization     56       49  
Interest expense     256       336  
Stock option and other noncash compensation     398       780  
Change in fair value of warrant liability     -       6  
Legal settlements     353       -  
Total EBITDA adjustments   $ 1,063     $ 1,171  
                 
Modified EBITDA   $ (3,444 )   $ (1,409 )

 

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.

 

  5  

 

 

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, 2021, the Company recorded a net loss of $4,507 and used cash in operations of $5,059. As of March 31, 2021, we had a cash balance of $155 with borrowing capacity of $2,513, a stockholder’s equity of $6,770 and a working capital of $5,698, compared to a cash balance of $595 with borrowing capacity of $5,166, stockholders’ equity of $10,404 and a working capital of $9,528 at December 31, 2020. Notwithstanding the net loss for the three months ended March 31, 2021, management projects adequate cash from operations and available line of credit to ensure continuation of the Company as a going concern for at least one year from the date of this quarterly report.

 

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.

 

Critical Accounting Policies and Estimates

 

Use of Estimates and Assumptions. 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 receivables, 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.

 

Accounts Receivable. Accounts receivable are recorded at the invoiced amounts. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.

 

Inventory. Inventory is stated at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

 

Revenue Recognition. 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 fulfillment activity rather than a promised service to the customer.

 

Stock Compensation Expense. The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting period. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.

 

  6  

 

 

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, 2021, 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, 2021 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.

 

Item 1A. Risk Factors

 

In addition to the following risk factors and the 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, 2020 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. The risks and uncertainties discussed below, 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. The risk factor below updates, and should be read together with, the risk factors disclosed in Part I, Item 1A of our Form 10-K. Please also read the Cautionary Notice Regarding Forward-Looking Statements and Information in Part I, Item 2 of this Quarterly Report on Form 10-Q under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

We may not be entitled to forgiveness of our recently received Paycheck Protection Program Loan, and our application for the Paycheck Protection Program Loan could in the future be determined to have been impermissible.

 

On April 20, 2020, we were granted a Paycheck Protection Program loan (the “PPP loan”) under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”) in the aggregate amount of $770,000 pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated April 20, 2020, matures on April 20, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, is payable monthly commencing on November 2020, and is unsecured and guaranteed by the U.S. Small Business Administration. The loan term may be extended to April 20, 2025, if mutually agreed to by the Company and lender. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Under the CARES Act, as amended in June 2020, loan forgiveness is generally available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the “Covered Period”, which is 8 weeks or 24 weeks (at the election of the Company) beginning on the date of the first disbursement of the PPP Loan. We will be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and we cannot provide any assurance that we will be eligible for loan forgiveness, that we will apply for forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. In order to apply for the PPP Loan, we were required to certify, among other things, that the current economic uncertainty made the PPP Loan request necessary to support our ongoing operations. We made this certification in good faith after analyzing, among other things, the maintenance of our workforce, our need for additional funding to continue operations, and our ability to access alternative forms of capital in the current market environment to offset the effects of the COVID-19 pandemic. Following this analysis, we believe that we satisfied all eligibility criteria for the PPP Loan, and that our receipt of the PPP Loan is consistent with the broad objectives of the CARES Act. The certification described above is subject to interpretation. On April 23, 2020, the SBA issued guidance stating that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. The lack of clarity regarding loan eligibility under the Paycheck Protection Program has resulted in significant media coverage and controversy with respect to public companies applying for and receiving loans. If, despite our good-faith belief that given our circumstances we satisfied all eligible requirements for the PPP Loan, we are later determined to have not been in compliance with these requirements or it is otherwise determined that we were ineligible to receive the PPP Loan, we may be required to repay the PPP Loan in its entirety and/or be subject to additional penalties. Should we be audited or reviewed by federal or state regulatory authorities as a result of filing an application for forgiveness of the PPP Loan or otherwise, such audit or review could result in the diversion of management’s time and attention and the incurrence of additional costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.

 

Increases in costs of freight may have an adverse impact on our gross and operating margins.

 

The capacity in the freight market has not kept up with demand and increased freight rates. During the quarter ended March 31, 2021, we experienced higher transportation expenses. We believe that costs will continue to increase throughout fiscal 2021. We are implementing mitigation plans to manage this risk; however, due to the price sensitivity of our products, we may not be able to pass such increases on to our customers. For a discussion of increased delivery and handling expenses, see “Operating Expenses” under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part I, Item 2 of this Form 10-Q.

 

  7  

 

 

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

 

Exhibit       Filed   Incorporated by Reference
No.   Exhibit Title   Herewith   Form   Exhibit   File No.   Date Filed
10.1   Amendment dated March 11, 2021 to Financing Agreement dated October 4, 2018 by and between Reed’s Inc. and Rosenthal & Rosenthal, Inc.       10-K   10.3   001-32501   3/30/2021
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X                
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   X                
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X                
32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   X                
101.INS   XBRL Instance Document   X                
101.SCH   XBRL Taxonomy Extension Schema Document   X                
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document   X                
101.DEF   XBRL Taxonomy Extension Label Linkbase Document   X                
101.LAB   XBRL Taxonomy Extension Presentation Linkbase Document   X                
101.PRE   XBRL Taxonomy Extension Label Linkbase Document   X                

 

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.

 

  8  

 

 

SIGNATURES

 

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

 

 

Reed’s, Inc.

(Registrant)

   
Date: May 17, 2021 /s/ Norman E. Snyder, Jr.
  Norman E. Snyder, Jr.
  Chief Executive Officer
  (Principal Executive Officer)
   
Date: May 17, 2021 /s/ Thomas J. Spisak
  Thomas J. Spisak
  Chief Financial Officer
  (Principal Financial Officer)

 

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