NOTES
TO CONDENSED FINANCIAL STATEMENTS
Three
months Ended March 31, 2019 and 2018 (Unaudited)
(In
thousands, except share and per share amounts)
1.
Basis of Presentation and Liquidity
The
accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”,
or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments,
necessary to present fairly our financial position at March 31, 2019 and the results of operations and cash flows for the three
months ended March 31, 2019 and 2018. The balance sheet as of December 31, 2018 is derived from the Company’s audited financial
statements.
Certain
information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting
principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in
these condensed financial statements are adequate to make the information presented herein not misleading. For further information,
refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2018, as filed with the Securities and Exchange Commission on April 1, 2019.
The
results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results of operations to
be expected for the full fiscal year ending December 31, 2019.
Liquidity
The
accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such
assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
For
the three months ended March 31, 2019, the Company recorded a net loss of $3,264 and used cash in operations of $8,756.
As of March 31, 2019, we had a cash balance of $2,650 with borrowing capacity of $6,826, a stockholder’s equity of
$5,512 and a working capital of $9,101 compared to a cash balance of $624 stockholder’s deficit of $6,743
and working capital shortfall of $3,297 at December 31, 2018. On February 20, 2019, the Company conducted a public offering of
7,733,750 shares of its common stock at $2.10 per share resulting to net proceeds to the Company of $14,867.
Historically,
we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible
debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive
action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio,
negotiating improved vendor contracts and restructuring our selling prices.
2.
Significant Accounting Policies
Revenue
Recognition
The
Company recognizes revenue in accordance with
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”). The underlying principle of ASC 606 is
to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606
creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include
(1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement,
(3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied.
The
Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers
contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities
are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised
service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which
generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time.
All
of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required
post-shipment for customers to derive the expected value from them.
The
Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns
have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance
obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance
for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.
Loss
per Common Share
Basic
earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average
number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net
income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional
common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock
method. Potential common shares are excluded from the computation when their effect is antidilutive.
For
the periods ended March 31, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential
dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
Convertible note to a related
party
|
|
|
2,266,667
|
|
|
|
2,266,667
|
|
|
Warrants
|
|
|
6,827,167
|
|
|
|
7,325,282
|
|
|
Common stock equivalent of Series A
Convertible Preferred stock
|
|
|
37,644
|
|
|
|
37,644
|
|
|
Unvested restricted common stock
|
|
|
598,370
|
|
|
|
0
|
|
|
Options
|
|
|
4,331,234
|
|
|
|
2,898,754
|
|
|
Total
|
|
|
14,061,082
|
|
|
|
12,528,347
|
|
The
Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4.
Use
of estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory
obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible
assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments
issued for services.
Recent
Accounting Pronouncements
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation – Stock Compensation (Topic 718); Improvements to Non-Employee
Share-Based Payment Accounting” (“ASU 2018-07”). ASU 2018-07 generally aligns the measurement and classification
of share-based awards to non-employees with that of share-based awards to employees. Non-employee equity awards will be measured
at the fair value of the equity instruments to be issued, as of the grant date, and the resulting amount will be recognized as
expense over the expected or contractual term of the award. The ASU applies to all share-based payments to nonemployees in exchange
for goods or services used or consumed in an entity’s own operations. It does not apply to instruments issued to a lender
or investor in a financing transaction, or to instruments granted when selling goods or services to customers. ASU 2018-07 is
effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company
adopted the provisions of ASU 2018-07 in the quarter beginning January 1, 2019. The adoption of ASU 2018-07 did not have any impact
on the Company’s financial statement presentation or disclosures.
In
August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the
Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 amends certain disclosure requirements pertaining to fair
value measurement, and is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal
years. The adoption of ASU 2018-13 is not expected to have a material impact on the Company’s financial position, results
of operations, and cash flows.
Other
recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
Concentrations
Gross
sales.
During the three months ended March 31, 2019, the Company’s largest two customers accounted for 25% and 9% of
gross sales, respectively. During the three months ended March 31, 2018, the two largest customers accounted for 27% and 11% of
gross sales, respectively. No other customers exceeded 10% of sales in either period.
Accounts
receivable.
As of March 31, 2019, the Company had
accounts receivable from two customers which comprised 34% and 10%, respectively, of its gross accounts receivable. As of December
31, 2018, accounts receivable from two customers comprised 36% and 19% of total accounts receivable, respectively.
Purchases
from vendors.
During the three months ended March 31, 2019, the Company’s largest two vendors which accounted for approximately
17% and 13% of all purchases, respectively. During the three months ended March 31, 2018, the Company’s two largest vendors
which accounted for approximately 17% and 14% of all purchases, respectively. No other customers exceeded 10% of all purchases
in either periods.
Accounts
payable.
As of March 31, 2019, the Company’s largest vendor accounted for 10% of the total accounts payable. As of March
31, 2018, the company had three vendors which accounted for 11%, 20% and 41% of total accounts payable, respectively. As of December
31, 2018, one vendor accounted for 24% of total accounts payable.
Fair
Value of Financial Instruments
The
Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on
a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs
used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated
with the inputs:
Level
1—Quoted prices in active markets for identical assets or liabilities.
Level
2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.
Level
3—Unobservable inputs based on the Company’s assumptions.
The
carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank
loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these
instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values
because interest rates on these obligations are based on prevailing market interest rates.
As
of March 31, 2019, and December 31, 2018, the Company’s balance sheets included warrant liabilities aggregating $85 and
$38 respectively, measured at fair value based on Level 3 inputs.
3.
Inventory
Inventory
is valued at the lower of cost (first-in, first-out) or market, and net of reserves is comprised of the following (in thousands):
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Raw Materials and Packaging
|
|
$
|
3,941
|
|
|
$
|
3,053
|
|
|
Finished Goods
|
|
|
6,791
|
|
|
|
4,327
|
|
|
Total
|
|
$
|
10,732
|
|
|
$
|
7,380
|
|
The
Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at March 31, 2019 and December
31, 2018 was $113 and $197, respectively.
4.
Property and Equipment
Property
and equipment is comprised of the following (in thousands):
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Right-of-use assets under
operating leases
|
|
$
|
730
|
|
|
$
|
730
|
|
|
Right-of-use assets under finance
leases
|
|
|
204
|
|
|
|
204
|
|
|
Computer hardware
and software
|
|
|
356
|
|
|
|
304
|
|
|
Total cost
|
|
|
1,290
|
|
|
|
1,238
|
|
|
Accumulated
depreciation & amortization
|
|
|
(378
|
)
|
|
|
(342
|
)
|
|
Net book value
|
|
$
|
912
|
|
|
$
|
896
|
|
Depreciation
expense for the three months ended March 31, 2019 and 2018 was $13 and $177 respectively.
5.
Intangible Assets
Intangible
assets are comprised of brand names acquired, specifically Virgil’s. They have been assigned an indefinite life,
as we currently anticipate that they will contribute cash flows to the Company perpetually. These indefinite-lived intangible
assets are not amortized but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful
life remains appropriate. We first assess qualitative factors to determine whether it is more likely than not that the asset is
impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying
amount of the asset exceeds its fair value, as determined by the discounted cash flows expected to be generated by the asset,
an impairment loss is recognized in an amount equal to that excess. Based on management’s measurement, there were no indications
of impairment at March 31, 2019.
6.
Receivable from a Related Party
As
of December 31, 2018, the Company had outstanding receivable from California Custom Beverage (CCB), an entity owned by Christopher
J. Reed, founder, chief innovation officer
and
board member of Reed’s. The receivable consisted of certain costs such as sales tax and prepayments arising from the sale
of the Los Angeles plant on December 31, 2018 to CCB. Such amount was collected from CCB during the three months ended March 31,
2019. Amount was outstanding was $0 and $195, as of March 31, 2019 and December 31, 2018, respectively.
7.
Line of Credit
Amounts
outstanding under the Company’s credit facilities are as follows (in thousands):
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Line of Credit
|
|
$
|
3,361
|
|
|
$
|
7,657
|
|
|
Capitalized finance
costs
|
|
|
(602
|
)
|
|
|
(677
|
)
|
|
Net balance
|
|
$
|
2,759
|
|
|
$
|
6,980
|
|
On
October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. The Company incurred $752
of direct costs of the transaction, consisting primarily of broker, bank and legal fees, and $161 cost of warrant modification.
These costs have been capitalized and recorded as a debt discount and are being amortized over the 2.5 year life of the Rosenthal
agreement. Amortization of debt discount was $75 for the three months ended March 31, 2019. The line of credit matures on April
20, 2021 and has $6,826 of unused borrowing capacity under the financing agreement as of March 31, 2019.
The
line of credit is secured by substantially all of the assets of the Company. Additionally, the over-advance is guaranteed
by an irrevocable stand-by letter of credit in the amount of $1,500, issued by Daniel J. Doherty III and the Daniel J. Doherty,
III 2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV LLC (“Raptor”). Raptor beneficially owns 21.7% of the
Company’s outstanding common stock as of March 31, 2019. Mr. Doherty is a member of the Company’s Board of Directors.
In the event of a default under the financing agreement, Raptor has a put option to purchase from Rosenthal the entire amount
of any outstanding over-advance plus accrued interest, prior to Rosenthal declaring an event of default under the
financing agreement.
As
part of the transaction, the Company issued an amended and restated subordinated convertible non-redeemable
secured note to Raptor, to provide for additional advances of up to $4,000 in the event that Raptor exercises its
put option described above. Consequently, the exercise price of 750,000 of Raptor’s outstanding warrants to purchase the
Company’s common stock was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants of $161.
This amount has been reflected as a capitalized finance cost and is being amortized over the life of the financing agreement.
The
financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions,
including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement
contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of
the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of March 31, 2019.
Interest
Rates
Borrowings
under the Rosenthal financing agreement bear interest at the greater of prime or 4.75%, plus an additional 2% to 3.5% depending
upon whether the borrowing is based upon receivables, inventory or is an Over-Advance. The effective interest rate as of March
31, 2019 on outstanding borrowings was 7.7%. Additionally, the line of credit is subject to monthly facility and administration
fees, and aggregate minimum monthly fees (including interest) of $4.
8.
Leases Payable
The
Company adopted ASU 2016-02, Leases, effective October 1, 2018. The standard requires a lessee to record a right-of-use asset
and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments.
As a result, we recorded right-of-use assets aggregating $862 as of October 1, 2018, utilizing a discount rate of 12.6%. That
amount consists of new leases on the Company’s Norwalk office and certain office equipment of $730, and existing capitalized
leases reclassified to right of use assets of $132.
ASU
2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is
allocated over the lease term, generally on a straight-line basis. During the three months ended March 31, 2019, the Company reflected
amortization of right of use asset of $33 related to these leases, resulting in a net asset balance of $840 as of March 31, 2019.
In
accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.
As
of December 31, 2018, liabilities recorded under finance leases and operating leases were $133 and $719, respectively. During
the three months ended March 31, 2019, the Company made payments of $8 towards finance lease liability and $4 towards operating
lease liability. As of March 31, 2019 liability under finance lease amounted to $125 and liability under operating lease amounted
to $715, of which $29 and $24 were reflected as current due, under finance leases and operating leases, respectively.
As
of March 31, 2019, the weighted average remaining lease terms for operating lease and finance lease are 5.89 years and 2.20 years,
respectively. The weighted average discount rate for operating lease is 12.6% and 5.43% for finance lease
.
9.
Convertible Note to a Related Party
The
Convertible Note to a Related Party consists of the following (in thousands):
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
12% Convertible Note Payable
|
|
$
|
3,400
|
|
|
$
|
3,400
|
|
|
Accrued Interest
|
|
|
887
|
|
|
|
761
|
|
|
Total obligation
|
|
$
|
4,287
|
|
|
$
|
4,161
|
|
On
April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable
note in the principal amount of $3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock.
The purchaser, Raptor/Harbor Reeds SPV LLC (“Raptor”), beneficially owned approximately 21.7% and 27.1% of the Company’s
common stock at March 31, 2019 and December 31, 2018, respectively.
The
note bears interest at a rate of 12% per annum, compounded monthly. It is secured by the Company’s assets, subordinate to
the first priority security interest of Rosenthal & Rosenthal. The note may not be prepaid and matures on April 21, 2021.
It may be converted, at any time and from time to time, into shares of common stock of the Company, at a revised conversion price
of $1.50.
The
warrant will expire on April 21, 2022 and has an adjusted exercise price of $1.50 per share. The note and warrant contain customary
anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have
been registered on Form S-3. The investor was also granted the right to participate in future financing transactions of
the Company for a term of two years.
On
October 4, 2018, in connection with the execution of the Rosenthal financing agreement, the Company issued an amended and
restated subordinated convertible non-redeemable secured note to Raptor, to provide
for additional advances of up to $4,000. In consideration therefore, the exercise price of 750,000 of Raptor’s outstanding
warrants was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants, determined in accordance
with the Black-Scholes-Merton option pricing model, of $161. This amount was recorded as a debt discount to the Rosenthal line
of credit and is being amortized as interest expense over the life of the financing agreement (See Note 7).
10.
Warrants and Warrant Liability
Certain
of the Company’s outstanding warrants require the Company to pay cash to the warrant holders, in the event of a fundamental
transaction as defined. Such warrants are accounted for as liabilities in accordance with ASC 480. These liabilities are measured
at fair value each reporting period and the change in the fair value is recognized in earnings in the accompanying Statements
of Operations.
The
fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at March 31, 2019 and December
31, 2018, using the following assumptions:
|
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
Stock Price
|
|
$
|
2.89
|
|
|
$
|
2.07
|
|
|
Risk free interest rate
|
|
|
2.68
|
%
|
|
|
2.69
|
%
|
|
Expected volatility
|
|
|
51.89
|
%
|
|
|
50.07
|
%
|
|
Expected life in years
|
|
|
2.18
|
|
|
|
2.42
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value - Warrants
|
|
$
|
85
|
|
|
$
|
38
|
|
The
risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual
life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and
does not expect to do so in the foreseeable future.
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
Beginning Balance
|
|
$
|
38
|
|
|
$
|
36
|
|
|
Change in
fair value
|
|
|
47
|
|
|
|
5
|
|
|
Ending balance
|
|
$
|
85
|
|
|
$
|
41
|
|
11.
Stock Based Activity
Common
stock issuance
In
February 2019, the Company conducted a public offering 7,733,750 shares of its common shares including 1,008,750 shares
sold pursuant to the underwriters’ full exercise of their option to purchase additional shares to cover over-allotments,
at a public offering price of $2.10 per share. The net proceeds to the Company from this offering are $14,867, after deducting
underwriting discounts and commissions and other offering expenses. Proceeds from the offering will provide capital to fund the
growth of our business, new products, sales and marketing efforts, working capital, and for general corporate purposes.
On
February 1, 2019, the Company issued 17,652 shares of common stock issued to certain directors of the Company as compensation
for services rendered. The shares had an aggregated value of approximately $44.
Restricted
common stock
The
following table summarizes restricted stock activity during the three months ended March 31, 2019:
|
|
|
Unvested
Shares
|
|
|
Fair
Value
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Balance, December 31, 2018
|
|
|
598,370
|
|
|
$
|
592
|
|
|
|
1.63
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
|
|
$
|
(150
|
)
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2019
|
|
|
598,370
|
|
|
$
|
442
|
|
|
|
1.70
|
|
Prior
to January 1, 2019, the Company issued 854,592 shares of restricted common stock to an officer and members of the board valued
at $1,412, of which 256,222 shares have vested, and $820 has been recognized as an expense.
The
total fair value of restricted common stock vesting during the three months ended March 31, 2019 was $150 and is included in general
and administrative expenses in the accompanying statements of operations. As of March 31, 2019, the amount of unvested compensation
related to issuances of restricted common stock was $442, which will be recognized as an expense in future periods as the shares
vest.
Stock
options
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining Contractual Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31,
2018
|
|
|
3,744,404
|
|
|
$
|
2.16
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
705,330
|
|
|
$
|
2.56
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Unvested Forfeited or
expired
|
|
|
91,000
|
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
|
Vested
Forfeited or expired
|
|
|
27,500
|
|
|
$
|
5.01
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March
31, 2019
|
|
|
4,331,234
|
|
|
$
|
2.21
|
|
|
|
8.51
|
|
|
$
|
3,404
|
|
|
Exercisable at March
31, 2019
|
|
|
1,153,653
|
|
|
$
|
2.54
|
|
|
|
6.36
|
|
|
$
|
912
|
|
During
the three months ended March 31, 2019, the Company approved options to be issued pursuant to Reed’s 2017 Incentive Compensation
Plan to certain current employees totaling 622,000. One half of these options vest annually over a four-year vesting period; the
other half of these options will vest based on performance criteria to be established by the board. In addition, during the three
months ended March 31, 2019, the Company granted options to purchase 83,330 shares of common stock to certain consultants and
former employees. Options granted to consultants and former employees vest at various periods.
The
stock options are exercisable at a price ranging from $2.33 to $2.89 per share and expire in ten years. Total fair value of these
options at grant date was approximately $1,003, which was determined using the Black-Scholes-Merton option pricing
model with the following average assumption: stock price ranging from $2.33 to $2.89 per share, expected term of seven
years, volatility of 59%, dividend rate of 0% and risk-free interest rate ranging from 2.23% to 2.87%. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the
share option award; the expected term represents the weighted-average period of time that share option awards granted are expected
to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility
is based upon historical volatility of the Company’s common stock; and the expected dividend yield is based on the fact
that the Company has not paid dividends in the past and does not expect to pay dividends in the future.
The
Company determined that the options had a fair value of $1,003 which will be amortized in future periods through March 31, 2023.
During the three months ended March 31, 2019, the Company recognized $412 of compensation expense relating to outstanding stock
options. As of March 31, 2019, the amount of unvested compensation related to stock options was approximately $3,293 which will
be recorded as an expense in future periods as the options vest.
The
aggregate intrinsic value was calculated as the difference between the closing market price as of March 31, 2019, which was $2.89,
and the exercise price of the outstanding stock options.
Common
stock purchase warrants
The
following table summarizes warrant activity for the three months ended March 31, 2019:
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining Contractual Terms (Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
Outstanding at December 31, 2018
|
|
|
6,897,277
|
|
|
$
|
2.06
|
|
|
|
2.42
|
|
|
$
|
1,447
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
70,110
|
|
|
$
|
2.03
|
|
|
|
|
|
|
|
|
|
|
Forfeited or
expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
6,827,167
|
|
|
$
|
2.06
|
|
|
|
2.22
|
|
|
$
|
6,613
|
|
|
Exercisable at March 31, 2019
|
|
|
6,827,167
|
|
|
$
|
2.06
|
|
|
|
2.22
|
|
|
$
|
6,613
|
|
The
intrinsic value was calculated as the difference between the closing market price as of March 31, 2019, which was $2.89, and the
exercise price of the Company’s warrants to purchase common stock.
During
the three months ended March 31, 2019, warrants to acquire 70,110 shares of common stock were exercised, including 47,210 warrants
that were exercised on a cashless basis, resulting in the issuance of 33,084 shares of common stock. Aggregate proceeds to the
Company were $46.
During
April of 2019, 166,181 warrants for the purchase of the Company’s common stock were exercised, resulting in the issuance
of 146,905 shares of common stock and proceeds to the Company of $236.
12.
Contingencies
On December 31, 2018, the Company completed the sale of its Los Angeles
manufacturing facility to California Custom Beverage, LLC (“CCB”) an entity owned by Chris Reed, founder, chief
innovation officer
, and board member. The sale
included substantially all machinery, equipment, furniture and fixtures of the facility. By the terms of the sale CCB assumed
the monthly payments on our lease obligation effective immediately upon closing of the sale. Our release from the obligation
by the lessor, however, was dependent upon CCB’s deposit of $1.2 million of security with the lessor no later than
December 31, 2019. In the three months period ending in March 31, 2019, Mr. Reed sold 246,000 shares of Reed’s common
stock pursuant to an established 10b5-1 Plan valued at approximately $656 for credit to his deposit with lessor. Mr.
Reed has 554,000 shares of common stock of Reed’s pledged to lessor as of March 31, 2019.
