REED's, INC. - Form 8-K Summary
Business Context and Reporting Period
Company: REED's, INC.
Filing Date: May 9, 2022 (Report Date: May 10, 2022)
Event: Entry into a Material Definitive Agreement (Item 1.01) and Unregistered Sales of Equity Securities (Item 3.02).
Context: The Company entered into a private placement transaction to raise capital through the issuance of secured convertible promissory notes.
Key Financial Metrics and Transaction Details
- Principal Amount: $11,250,000 in secured convertible promissory notes issued.
- Additional Option: Investors hold an option to purchase up to an additional $12,000,000 in notes with identical terms.
- Gross Proceeds: Approximately $11,100,000 (before fees and expenses).
- Interest Rate: 10% per annum (5% payable in cash, 5% payable in kind).
- Maturity Date: May 9, 2025.
- Placement Agent Fees: 6.6% of gross proceeds paid to Odeon Capital Group, LLC.
- Use of Proceeds: Repayment of a portion of outstanding borrowings under the existing Asset-Based Lending (ABL) facility and general working capital.
- Collateral: Notes are secured by substantially all Company assets, including intellectual property, subject to a Collateral Sharing Agreement with Alterna Capital Solutions, LLC.
Material Changes and Terms
The filing details the creation of a new direct financial obligation. Key structural terms include:
- Amortization Feature: Beginning August 2022, holders of a majority of notes may elect monthly principal payments of $200,000 plus an interest make-whole payment. Payments may be made in cash or shares of common stock (subject to limitations).
- Conversion Terms: Notes are convertible at the holder's option at an initial rate of 4.1503 shares per $1 of principal. Conversion is subject to Nasdaq stockholder approval or a waiver by majority note holders.
- Stockholder Approval Requirement: The Company must seek stockholder approval for the issuance of shares exceeding 19.9% of outstanding common stock and an amendment to increase authorized shares by August 31, 2022.
- Beneficial Ownership Limitation: Capped at 9.9% of outstanding shares for any single holder upon conversion or payment.
- Debt Capacity: Covenants permit up to $6,000,000 of indebtedness under ABL documents, potentially growing by $10,000,000 depending on note conversions.
Guidance, Risks, and Contingencies
- Registration Rights: The Company agreed to file a registration statement for resale of shares within 45 days of closing. Failure to meet filing deadlines may result in penalties and additional interest payments.
- Liquidity and Settlement Risk: The ability to settle conversions and make amortization payments in stock is limited until stockholder approval is obtained. Until then, cash payments may be required.
- Covenants: The notes contain customary affirmative and negative covenants and events of default.
- Unregistered Securities: The notes were offered pursuant to Section 4(a)(2) of the Securities Act of 1933 as a private placement.
Investor Verification Checklist
- Verify the status of the stockholder meeting scheduled prior to August 31, 2022, to approve the issuance of shares exceeding 19.9% of outstanding common stock.
- Confirm the filing of the registration statement for resale of shares within the 45-day window to avoid penalties.
- Review the Collateral Sharing Agreement with Alterna Capital Solutions, LLC to understand the priority of claims on Company assets.
- Monitor the Company's cash flow to ensure it can meet the 5% cash interest payments and potential amortization obligations if stock settlement is restricted.
- Assess the potential dilution impact of the initial conversion rate (4.1503 shares per $1) and the additional $12,000,000 option.