Business Context and Reporting Period
Company: REED's, INC.
Filing Type: Form 8-K (Current Report)
Reporting Date: December 12, 2017 (Earliest event reported: December 6, 2017)
Context: The filing details the entry into material definitive agreements regarding a rights offering to raise capital, including amendments to the dealer-manager agreement, a backstop commitment agreement, and amendments to a subordinated convertible note.
Key Financial Metrics and Capital Structure
The filing focuses on capital raising activities rather than operational financial performance. Key metrics include:
- Target Capital Raise: Up to $14 million via a rights offering.
- Offering Price: Reduced from $1.75 to $1.50 per unit (1 share + 1/2 warrant).
- Warrant Terms: Each whole warrant exercisable for one share at $2.025.
- Backstop Commitment: Minimum of $6 million from significant shareholder Raptor/Harbor Reed's SPV LLC for unsubscribed units.
- Existing Debt: Subordinated convertible non-redeemable secured note with a principal amount of $3.4 million.
- Transaction Fees: Dealer-manager fees range from 2% to 7% of gross proceeds depending on the source of funds; expense reimbursement capped at $75,000 for the dealer-manager and $50,000 for the backstop provider.
Material Changes Versus Prior Period
Significant amendments were made to the original terms of the capital raise on December 12, 2017:
- Price Reduction: The subscription price per unit was lowered from $1.75 to $1.50.
- Extension: The expiration of the rights offering was extended from December 15, 2017, to December 19, 2017.
- Debt Conversion Price: The conversion price of the $3.4 million convertible note was reduced from $3.00 to $1.75 (First Amendment) and subsequently to $1.50 (Second Amendment) to align with the new offering price.
- Note Maturity: The maturity of the convertible note was extended by 24 months.
- Backstop Cap: An amendment clarified that shares and warrant shares issued pursuant to the backstop commitment will not exceed 6,000,000.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook: The company is actively pursuing a rights offering to secure liquidity. The closing is subject to customary conditions. Maxim Group LLC has been granted a right of participation for future equity or debt offerings for 12 months, with at least 25% of the economics.
Risks and Contingencies:
- Closing Conditions: The rights offering and note amendments are contingent upon the successful completion of the offering.
- Liquidated Damages: The company is subject to liquidated damages if it fails to register shares underlying the units and warrants within the prescribed timeframe.
- Board Composition: Subject to NYSE American rules, the company agreed to use best efforts to appoint up to two individuals designated by Raptor to the board of directors.
- Break-up Fee: Backstop warrants may be issued to Raptor as a break-up fee if the company enters into a definitive backstop agreement with a third party unaffiliated with Raptor.
Unusual Items: The filing involves a complex restructuring of debt and equity terms simultaneously, including a significant reduction in conversion prices and offering prices to facilitate capital raising.
Important Facts for Investor Verification
- Verify the final closing status of the rights offering and the total gross proceeds raised.
- Confirm the actual amount funded by Raptor under the backstop commitment and the corresponding number of backstop warrants issued.
- Monitor the registration statement filing status for shares underlying the units and warrants to avoid potential liquidated damages.
- Check for the appointment of Raptor-designated directors to the board of directors.
- Review the impact of the reduced conversion price ($1.50) on existing shareholders regarding potential dilution upon conversion of the $3.4 million note.