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 ~~September 30, 2020~~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 ~~62,967,570~~93,584,380 shares of Common Stock outstanding as of ~~October 31, 2020.~~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 ☒

~~CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS~~

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report 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. Factors that could cause or contribute to such differences are discussed in the section entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which we filed with the SEC on March 18, 2020, as amended April 8, 2020, and our Quarterly Reports on Form 10-Q for periods ended March 30, 2020 and June 30, 2020, which we filed on May 12, 2020 and August 10, 2020. These documents are available on the SEC’s website at www.sec.gov.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	F-1

Item 1. Condensed Financial Statements	F-1

Condensed Balance Sheets ~~– September 30, 2020 (unaudited)~~- March 31, 2021 and December 31, ~~2019~~2020	F-1

Condensed Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019 (unaudited)~~	F-2

Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019 (unaudited)~~	F-3

Condensed Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019 (unaudited)~~	F-4

Notes to Condensed Financial Statements ~~(unaudited)~~	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	117

Item 4. Controls and Procedures	117

PART II - OTHER INFORMATION	127

Item 1. Legal Proceedings	127

Item 1A. Risk Factors	127

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	148

Item 3. Defaults Upon Senior Securities	148

Item 4. Mine Safety Disclosures	148

Item 5. Other Information	148

Item 6. Exhibits	148

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

REED’S INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands, except share amounts)

	September 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
	(Unaudited)						(Unaudited)
ASSETS
Current assets:
Cash	$	875		$	913		$	155		$	595
Accounts receivable, net of allowance for doubtful accounts and returns and discounts of $194 and $375, respectively		4,647			2,099
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		391			356			701			682
Inventory, net of reserve for obsolescence of $224 and $646, respectively		9,436			10,508
Inventory, net of reserve for obsolescence of $174 and $194, respectively								12,445			11,119
Prepaid expenses and other current assets		704			420			2,110			1,341
Total current assets		16,053			14,296			20,443			18,455

Property and equipment, net of accumulated depreciation of $316 and $482, respectively		984			1,053
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			67			67
Intangible assets		613			576			617			615
Total assets	$	17,717		$	15,992		$	22,076		$	20,057

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,441		$	5,539		$	8,134		$	6,746
Payable to related party								1,034			557
Accrued expenses		835			646			449			895
Revolving line of credit		4,272			3,177			4,256			-
Current portion of note payable		470			-			727			599
Convertible note to a related party		5,128			-
Current portion of leases payable		114			49			145			130
Total current liabilities		16,260			9,411			14,745			8,927

Leases payable, less current portion		592			737			518			555
Convertible note to a related party		-			4,689
Note payable		300			-
Note payable, less current portion								43			171
Warrant liability		7			8			-			-
Total liabilities		17,159			14,845			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			94			94
Common stock, $.0001 par value, 100,000,000 and 100,000,000 shares authorized, respectively; 62,960,570 and 47,595,206 shares issued and outstanding, respectively		6			5
Common stock issuable, 350,000 shares at September 30, 2020		285			-
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		83,646			77,596			97,904			97,031
Accumulated deficit		(83,473	)		(76,548	)		(91,237	)		(86,730	)
Total stockholders’ equity		558			1,147			6,770			10,404
Total liabilities and stockholders’ equity	$	17,717		$	15,992		$	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 ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~

(Unaudited)

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

	2020			2019			2020			2019
	Three Months Ended September 30,						Nine Months Ended September 30,						2021			2020
	2020			2019			2020			2019			March 31, 2021			March 31, 2020
Net Sales	$	10,562		$	8,740		$	30,938		$	26,669		$	12,146		$	9,523
Cost of goods sold		7,176			6,238			21,694			19,390			8,293			6,653
Gross profit		3,386			2,502			9,244			7,279			3,853			2,870

Operating expenses:
Delivery and handling expense		2,207			1,902			4,950			4,369			3,286			1,263
Selling and marketing expense		1,872			2,508			5,382			7,718			2,215			1,925
General and administrative expense		1,583			2,470			4,872			6,557			2,603			1,932
Total operating expenses		5,662			6,880			15,204			18,644			8,104			5,120

Loss from operations		(2,276	)		(4,378	)		(5,960	)		(11,365	)		(4,251	)		(2,250	)

Interest expense		(322	)		(318	)		(961	)		(947	)		(256	)		(336	)
Change in fair value of warrant liability		8			131			1			23			-			6

Net loss		(2,590	)		(4,565	)		(6,920	)		(12,289	)	$	(4,507	)	$	(2,580	)

Dividends on Series A Convertible Preferred Stock		-			-			(5	)		(5	)

Net Loss Attributable to Common Stockholders	$	(2,590	)	$	(4,565	)	$	(6,925	)	$	(12,294	)

Loss per share – basic and diluted	$	(0.04	)	$	(0.14	)	$	(0.12	)	$	(0.38	)
Net loss per share – basic and diluted													$	(0.05	)	$	(0.05	)

Weighted average number of shares outstanding – basic and diluted		62,940,091			33,716,359			56,706,141			32,179,119			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 ~~Nine months Ended September 30,~~ 2020 ~~and 2019~~

(Unaudited)

(Amounts in thousands except share amounts)

Common Stock Shares Common Stock Amount Preferred Stock Shares Preferred Stock Amount Common Stock Issuable Shares Common Stock Issuable Amount Additional Paid In Capital Accumulated Deficit Total Stockholders’ Equity (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, June 30, 2020 62,928,540 $ 6 9,411 $ 94 350,000 $ 285 $ 83,364 $ (80,883 ) $ 2,866
Fair value of vested options - - - 263 263
Common shares issued on exercise of options 27,500 - 14 14
Issuance of shares for dividends on Series A Convertible Preferred Stock 4,530 - - 5 - 5
Fair value of vested restricted shares granted to officers for services
Fair value of vested restricted shares granted to officers for services, shares
Common shares issued pursuant to the rights offering, net of offering costs
Common shares issued pursuant to the rights offering, net of offering costs, shares
Shares granted to Directors for services
Shares granted to Directors for services, shares
Exercise of warrants - - -
Net Loss (2,590 ) (2,590 )
Balance, September 30, 2020 62,960,570 $ 6 9,411 $ 94 350,000 $ 285 $ 83,646 $ (83,473 ) $ 558
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 - - 722 722
Fair value of vested restricted shares granted to officers - - 350,000 285 285
Dividends on Series A Convertible Preferred Stock 4,530 - - 5 (5 ) -
Common shares issued on exercise of options 27,500 - 14 14
Common shares issued pursuant to the rights offering, net of offering costs 15,333,334 1 - - 5,309 - 5,310
Exercise of warrants -
Net Loss (6,920 ) (6,920 )
Balance, September 30, 2020 62,960,570 $ 6 9,411 $ 94 350,000 $ 285 $ 83,646 $ (83,473 ) $ 558
Common Stock Preferred Stock Common Stock
Issuable Additional Paid In Accumulated Total Stockholders’
Equity
Shares Amount Shares Amount Shares Amount Capital Deficit (Deficit)
Balance, June 30, 2019 33,708,826 $ 3 9,411 $ 94 - $ - $ 70,051 $ (68,160 ) $ 1,988
Fair value of vested options - 223 223
Shares granted to Directors for services 8,072 - - - - 29 29
Fair value of vested restricted shares granted to an officer for services - - - - 116 116
Exercise of warrants 3,146 - 1 1
Net Loss (4,565 ) (4,565 )
Balance, September 30,2019 33,720,044 $ 3 9,411 $ 94 - $ - $ 70,420 $ (72,725 ) $ (2,208 )
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, 2018 25,729,461 $ 3 9,411 $ 94 - $ - $ 53,591 $ (60,431 ) $ (6,743 )
Fair value of vested options 1,077 1,077
Shares granted to Directors for services 33,796 - - - - 115 115
Fair value of vested restricted shares granted to an officer for services - - 405 405
Dividends on Series A Convertible Preferred Stock - - - - (5 ) (5 )
Common shares issued pursuant to the rights offering, net of offering costs 7,733,750 - - - 14,867 - 14,867
Exercise of warrants 223,037 365 365
Net Loss - (12,289 ) (12,289 )
Balance, September 30, 2019 33,720,044 $ 3 9,411 $ 94 - $ - $ 70,420 $ (72,725 ) $ (2,208 )
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 ~~Nine months~~Three Months Ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~
(Unaudited)
(Amounts in thousands)

September 30, 2020 September 30, 2019 March 31, 2021 March 31, 2020
Cash flows from operating activities:
Net loss $ (6,920 ) $ (12,289 ) $ (4,507 ) $ (2,580 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 56 12 32 12
(Gain)/loss on sale of property & equipment - (30 )
(Gain)/loss on termination of leases (6 ) 2
Gain on sale on termination of leases (3 ) -
Amortization of debt discount 290 225 162 96
Amortization of prepaid financing costs 25 -
Amortization of right of use assets 89 96 24 37
Fair value of vested options 722 1,077 292 495
Fair value of vested restricted shares granted to officers 285 520 106 285
Decrease in allowance for doubtful accounts (181 ) (400 ) (69 ) (93 )
Decrease (increase) in inventory reserve (422 ) 325
Decrease in inventory reserve (20 ) (384 )
Change in fair value of warrant liability (1 ) (23 ) - (6 )
Accrual of interest on convertible note to a related party 439 390 - 142
Lease liability (18 ) (10 ) (8 ) (7 )
Changes in operating assets and liabilities:
Accounts receivable (2,367 ) (1,121 ) (244 ) (1,826 )
Inventory 1,495 (2,520 ) (1,306 ) 2,902
Prepaid expenses and other assets (318 ) (339 ) (484 ) (365 )
Accounts payable (100 ) (196 ) 1,387 (1,038 )
Accrued expenses 189 (347 ) (446 ) (22 )
Net cash used in operating activities (6,768 ) (14,628 ) (5,059 ) (2,352 )
Cash flows from investing activities:
Trademark costs (37 ) -
Proceeds from sale of property and equipment - 30
Patent costs (2 ) -
Purchase of property and equipment (121 ) (273 ) (95 ) (22 )
Net cash used in investing activities (158 ) (243 ) (97 ) (22 )
Cash flows from financing activities:
Borrowings on line of credit 34,645 42,179 16,154 9,188
Repayments of line of credit (33,710 ) (42,175 ) (11,898 ) (7,677 )
Capitalization of financing costs (130 ) (130 )
Proceeds from note payable 770 -
Repayment of amounts due to/from officers - 195
Amounts from related party 459 -
Principal repayments on capital lease obligation (11 ) (38 ) (2 ) (22 )
Exercise of options 14 - 3 -
Exercise of warrants - 365
Proceeds from sale of common stock 5,310 14,867
Net cash provided by financing activities 6,888 15,263 4,716 1,489

Net increase in cash (38 ) 392
Net increase (decrease) in cash (440 ) (885 )
Cash at beginning of period 913 624 595 913
Cash at end of period $ 875 $ 1,016 $ 155 $ 28

Supplemental disclosures of cash flow information:
Cash paid for interest $ 231 $ 408 $ 70 $ 98

Non Cash Investing and Financing Activities

Dividends on Series A Convertible Preferred Stock $ 5 $ 5

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 ~~Nine months Ended September 30,~~ 2020 ~~and 2019~~ (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 ~~September 30, 2020,~~March 31, 2021 and the results of operations ~~for the three and nine months ended September 30, 2020 and 2019,~~ and cash flows for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 and ~~2019.~~2020. The balance sheet as of December 31, ~~2019~~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, ~~2019,~~2020, as filed with the Securities and Exchange Commission on March ~~18, 2020 and amended on April 8, 2020.~~30, 2021.

The results of operations for the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, ~~2020.~~2021.

COVID-19 Considerations

InDuring the ~~quarter~~period ended ~~September 30, 2020,~~March 31, 2021, the COVID-19 pandemic ~~did not have a material net impact on~~has impacted our operating ~~results.~~results and the Company anticipates a continued impact for the balance of the year. In ~~the future,~~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. ~~For~~Since the ~~six months ended September 30, 2020,~~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.

~~Through September 30, 2020,~~Net sales for the ~~COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Shipments to customers in the third quarter of 2020~~period ended March 31, 2021 were up ~~14%~~28% from the ~~first quarter of 2020, and down slightly (2%) from the second quarter of 2020 with fluctuations consistent with historical seasonal patterns.~~prior year period. Through ~~September 30, 2020,~~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.

~~For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.~~
~~F-5~~
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 ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company recorded a net loss of $~~6,920~~ 4,507and used cash in operations of $~~6,768~~5,059. As of ~~September 30, 2020,~~March 31, 2021, we had a cash balance of $~~875~~155 with borrowing capacity of $~~3,037~~2,513, a stockholder’s equity of $~~558~~6,770 and a ~~negative~~ working capital of $~~207~~5,698, compared to a cash balance of $~~913~~ 595with borrowing capacity of $~~3,235~~5,166, stockholders’ equity of $~~1,147~~10,404 and a working capital of $~~4,885~~ 9,528at December 31, ~~2019.~~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 ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ 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:

Schedule of Potentially Dilutive Securities
September 30, 2020 September 30, 2019
March 31,
2021

March 31,
2020

Convertible note to a related party 2,266,667 2,266,667 - 2,266,667
Warrants 6,413,782 6,413,782 3,362,241 6,413,782
Common stock equivalent of Series A Convertible Preferred stock 37,644 37,644 37,644 37,644
Common stock issuable 350,000 - 350,000
Unvested restricted common stock 244,740 610,609 309,082 150,000
Options 4,716,357 4,373,566 11,028,322 4,683,380
Total 14,029,190 13,702,268 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 $302for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019, aggregated $536~~ ~~and $661, respectively. Advertising costs for the nine months ended September 30, 2020 and 2019, aggregated $1,141~~ ~~and $2,194~~, respectively.
Concentrations

~~Sales.~~ Gross sales.During the three months ended ~~September 30, 2020,~~March 31, 2021, the Company’s two largest customers accounted for 24~~% and~~ 12~~% of gross sales, respectively, and during the nine months ended September 30, 2020, two customers accounted for~~ 25~~% and~~ 13~~% of gross sales, respectively. During the three months ended September 30, 2019, the Company’s largest two customers accounted for~~ 1523% and 12% of gross sales, respectively. During the ~~nine~~three months ended ~~September 30, 2019, these~~March 31, 2020, the Company’s two largest customers accounted for 2322% and 1314% of gross sales, respectively. No other customers exceeded 10% of sales in either period.

~~F-7~~
Accounts receivable. As of ~~September 30,~~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. ~~As of December 31, 2019, the Company had accounts receivable from one customer which comprised~~No other customers exceeded 1410% of ~~its~~ gross ~~accounts receivable. No other customer exceeded~~ 10~~% of~~ accounts receivable in either period.
F-7

Purchases from vendors. During the three months ended ~~September 30, 2020, two vendors accounted for~~ 13~~% and~~ 11~~% of all purchases. During the nine months ended September 30, 2020, two vendors accounted for~~ 11~~% and~~ 11~~% of all purchases. During the three months ended September 30, 2019,~~March 31, 2021, the Company’s two largest ~~three vendors~~vendor accounted for approximately 13%, 11% and 1013% of all purchases, respectively. During the ~~nine~~three months ended ~~September 30, 2019,~~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 ~~all purchases,~~the total accounts payable, respectively. No other vendors exceeded 10% of ~~all purchases in either period.~~
~~Accounts payable.~~ ~~As of September 30, 2020, of the Company’s two largest vendors, each accounted for~~ 18~~% and~~ 11~~% of the total accounts payable. As of December 31, 2019, of the Company’s three largest vendors, accounted for~~ 19%, 15~~%, and~~ 14~~% of the total accounts payable. 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.

~~As of September 30, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities aggregating $~~7 ~~and $~~8~~, respectively (see Note 10).~~
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.

~~F-8~~
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “~~Debt—~~“Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)~~: Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity~~.” ASU 2020-06 ~~will simplify the accounting for convertible instruments by reducing~~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 ~~preferred stock. Limiting~~instruments will require the ~~accounting models will result in fewer embedded conversion features being separately recognized from~~Company to use the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception forif-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 ~~reduce form-over-substance-based accounting conclusions.~~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 ~~will be~~is effective January 1, 2024, for the Company ~~January 1, 2024.~~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. ~~Management is currently evaluating~~Effective January 1, 2021, the ~~effect of the adoption of~~Company early adopted ASU 2020-06 and that adoption did not have an impact on ~~the consolidated~~our financial statements ~~but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect will largely depend on the composition~~ and ~~terms of the financial instruments at the time of adoption.~~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):
Schedule of Inventory
September 30,
2020 December 31,
2019
March 31,
2021

December 31,
2020

Raw materials and packaging $ 6,354 $ 4,261 $ 7,746 $ 6,793
Finished products 3,082 6,247 4,699 4,326
Total $ 9,436 $ 10,508 $ 12,445 $ 11,119

The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, was $~~224~~174 and $~~646~~194, respectively.

4. Property and Equipment

Property and equipment is comprised of the following (in thousands):
Schedule of Property and Equipment
September 30,
2020 December 31,
2019
March 31,
2021

December 31,
2020

Right-of-use assets under operating leases $ 730 $ 730 $ 724 $ 724
Right-of-use assets under finance leases 67 179 6 54
Computer hardware and software 400 543 400 400
Machinery and equipment 103 83 198 103
Total cost 1,300 1,535 1,328 1,281
Accumulated depreciation and amortization (316 ) (482 ) (379 ) (361 )
Net book value $ 984 $ 1,053 $ 949 $ 920

Depreciation expense for the three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was $35 ~~and $~~8~~, respectively. Depreciation expense for the nine months ended September 30, 2020 and 2019 was $~~5632 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 ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company disposed of right-of-use assets under finance leases with a ~~net book value~~cost of $4548 and accumulated amortization of $38, and terminated $5113 of related finance leases payable (see Note ~~9), resulting in a gain on lease termination of $~~68).
~~F-9~~

Equipment held for sale consists of the following (in thousands):
Schedule of Equipment Held for Sale
September 30,
2020 December 31,
2019
March 31,
2021

December 31,
2020

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

The balance as of ~~September 30, 2020,~~March 31, 2021, and December 31, ~~2019,~~2020, consists of residual manufacturing equipment, at estimated net realizable value, which management anticipates selling during ~~2020.~~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 ~~measurement,~~assessment, there were 0 indications of impairment at ~~September 30, 2020.~~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):

Summary of Intangible Assets

September 30,
2020

December 31,
2019

March 31,
2021

December 31,
2020

Brand names $ 576 $ 576 $ 576 $ 576
Trademarks 37 - 41 39
Total $ 613 $ 576 $ 617 $ 615
6. Line of Credit
Amounts outstanding under the Company’s credit facilities are as follows (in thousands):
Schedule of Amount Outstanding Under Credit Facilities
September 30,
2020 December 31,
2019
Line of Credit $ 4,596 $ 3,661
Capitalized finance costs (324 ) (484 )
Net balance $ 4,272 $ 3,177

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 ~~September 30, 2020,~~March 31, 2021, the unused borrowing capacity under the financing agreement was $~~3,037~~2,513. The line of credit ~~matures~~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. ~~The effective interest rate as of September 30, 2020 on outstanding borrowings was~~ ~~7.2~~%. Additionally, the line of credit is subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $4.
~~F-10~~

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 iswas 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”). ~~As of September 30, 2020, Raptor beneficially owns~~ ~~11.5% of~~On March 11, 2021, the ~~Company’s outstanding common stock and Mr. Doherty is a member of the Company’s Board of Directors. In the event of a default under~~Company entered into an amendment to the financing agreement, releasing that irrevocable standby letter of credit of $1,500 by Raptor ~~has~~with a ~~put option to purchase from Rosenthal the entire amount~~$2,000 pledge of ~~any outstanding over-advance plus accrued interest, prior~~securities to Rosenthal ~~declaring an event~~by John J. Bello and Nancy E. Bello, as Co-Trustees of ~~default under~~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 ~~agreement.~~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 ~~September 30, 2020.~~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~~$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. ~~The~~On December 31, 2020, ~~fee will be amortized over~~ the remaining unamortized debt discount of $~~0.5~~162 ~~years~~is included in prepaid expense and other current assets on the ~~2019 fee is being amortized over~~ ~~1.5~~ ~~years.~~balance sheet. Amortization of debt discount was $~~290~~162 and $~~225~~96 for the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively. On March 31, 2021, 0 remaining unamortized debt discount remained.

7.~~Convertible Note to a Related Party~~
~~The Convertible Note to a Related Party consists of the following (in thousands):~~
~~Schedule of Convertible Notes~~
September 30,
2020 December 31,
2019
12% Convertible Note Payable $ 3,400 $ 3,400
Accrued Interest 1,728 1,289
Total obligation $ 5,128 $ 4,689
~~On April 21, 2017, the Company issued a secured, convertible, subordinated, non-redeemable note in the principal amount of $3,400~~ ~~and warrants to purchase~~ ~~1,416,667~~ ~~shares of common stock to Raptor. Raptor beneficially owned approximately~~ ~~11.5~~% ~~and~~ ~~14.9% of the Company’s common stock at September 30, 2020 and December 31, 2019, respectively.~~
~~The Raptor Note bears interest at a rate of~~ 12% per annum, compounded monthly, and is secured by the Company’s assets, subordinate to the first priority security interest of Rosenthal & Rosenthal (see Note 6). 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 warrants expire on~~ ~~April 21, 2022~~ ~~and have an adjusted exercise price of $1.50~~ per share. The note and warrants contain customary anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrants have been registered on Form S-3.
8. 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. ~~The loan term may be extended to April 20, 2025, if mutually agreed to by the Company and lender.~~ We applied ASC 470, Debt, to account for the PPP loan. ~~The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties.~~ 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 ~~intends to use~~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 ~~intends~~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 ~~apply~~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 ~~with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur.~~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. ~~The terms of~~However, the Company cannot provide any assurance whether the PPP loan ~~provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with~~will ultimately be forgiven by the ~~terms of the PPP loan as of September 30, 2020. At September 30, 2020, the note payable balance was $770, of which $470~~ ~~were reflected as the current portion of note payable.~~SBA.
~~F-11~~

9.8. Leases ~~Payable~~Liabilities

The Company ~~adopted~~accounts for leases under ASC 842, 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.~~The Company leases its headquarters~~ ~~office~~, and certain office equipment and automobiles. The Company analyzes all leases at inception to determine if a right-of-use asset and lease liability should be recognized. Leases with an initial term of 12 months or less are not included on the condensed consolidated balance sheets. The lease liability is measured at the present value of future lease payments as of the lease commencement date.

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.

~~During~~In accordance with ASC 842, the ~~three and nine months ended September 30, 2020 and 2019, lease costs totaled $~~45 ~~and $~~51~~, and $135and~~ ~~$134, respectively.~~right-of-use assets are being amortized over the life of the underlying leases.

As of December 31, ~~2019, the Company’s~~2020, lease liabilities totaled $~~786~~685, made up of finance lease liabilities of $8916 and operating lease liabilities of $~~697~~669. During the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company terminated $5113 of finance leases, and made payments of $11 2towards its finance lease liability and $188 towards its operating lease liability. As of ~~September 30, 2020,~~March 31, 2021, lease liabilities totaled $~~706,~~663, made up of finance lease ~~liabilities~~liability of $271 and operating lease ~~liabilities~~liability of $~~679.~~662.

As of ~~September 30, 2020,~~March 31, 2021, the weighted average remaining lease terms for operating lease and finance lease are ~~4.25~~3.76 years and ~~0.39~~0.50 years, respectively. ~~As of September 30, 2020, the~~The weighted average discount rate for operating lease is 12.6% and ~~10.39~~12.6% for finance lease.

~~Future minimum lease payments under the leases are as follows (in thousands):~~
~~Schedule of Future Minimum Lease Payments~~
Years Ending December 31, Sep, 30
Remainder of 2020 $ 67
2021 221
2022 222
2023 226
2024 221
Total payments 957
Less: Amount representing interest (251 )
Present value of net minimum lease payments 706
Less: Current portion (114 )
Non-current portion $ 592
~~10.~~ ~~Warrant Liability~~
Various sales of common stock made by the Company to finance operations have been accompanied by the issuance of warrants. Some of these warrant agreements contain fundamental transaction provisions which may give rise to an obligation of the Company to pay cash to the warrant holders. For accounting purposes, in accordance with ASC 480, ~~Distinguishing Liabilities from Equity~~, those warrants with fundamental transaction terms are accounted for as liabilities given the terms may give rise to an obligation of the Company to the warrant holders. These liabilities are measured at fair value at each reporting period and the change in the fair value is recognized in earnings in the accompanying Statements of Operations.
~~F-12~~

~~The fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at September 30, 2020 and December 31, 2019, using the following assumptions:~~
~~Schedule of Warrant Liability Using Assumptions~~

September 30,
2020

December 31,
2019

Stock Price $ 0.93 $ 0.91
Risk free interest rate 0.80 % 1.95 %
Expected volatility 119.51 % 83.36 %
Expected life in years 0.67 1.42
Expected dividend yield 0 % 0 %
Number of Warrants containing fundamental transaction provisions 138,762 138,762
Fair Value of Warrants $ 7 $ 8
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.
~~The following table sets forth a summary of the changes in the estimated fair value of the warrant liability during the nine months ended September 30, 2020 and 2019:~~
~~Schedule of Warrant Liability~~
September 30,
2020 September 30,
2019
Beginning Balance $ 8 $ 38
Change in fair value (1 ) (23 )
Ending balance $ 7 $ 15
~~11.~~ ~~Stockholders’ Equity~~
~~Series A Convertible Preferred Stock~~
~~On July 2, 2020, the Company paid dividends on the Preferred Stock through the issuance of~~ ~~4,530~~ ~~of its common stock. The aggregate fair value of the common stock issued was $~~5 ~~based on an average market price of $1.04~~ ~~per share.~~
~~Common stock issuance~~
~~In April 2020, the Company conducted a public offering of~~ ~~15,333,334~~ ~~shares of its common shares at a public offering price of $0.375~~ ~~per share. The net proceeds to the Company from this offering are $5,310, after deducting underwriting discounts and commissions and other offering expenses. Proceeds from the offering will provide capital for working capital, and general corporate purposes.~~
~~During the nine months ended September 30, 2020, the Company received proceeds of $~~14~~, and issued~~ ~~27,500~~ ~~shares of common stock, on the exercise of stock options.~~
~~F-13~~F-11

~~12.~~9. ~~Share-based payments~~Stock-Based Compensation
Restricted common stock

The following table summarizes restricted stock activity during the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:

Summary of Non-vested Restricted Stock Activity
Unvested
Shares Issuable
Shares Fair Value
at Date of
Issuance Weighted
Average
Grant Date
Fair Value Unvested
Shares Issuable
Shares Fair Value
at Date of
Issuance Weighted
Average
Grant Date
Fair Value
Balance, December 31, 2019 - - $ - -
Balance, December 31, 2020 150,000 - $ 92 0.89
Granted 594,740 - 508 0.85 245,900 - 226 0.92
Vested (350,000 ) 350,000 (285 ) - (84,809 ) 84,809 - -
Forfeited (2,009 ) 0.89
Issued - - - - - (84,809 ) (98 ) -
Balance, September 30, 2020 244,740 350,000 $ 223 $ 0.85
Balance, March 31, 2021 309,082 - $ 220 $ 0.89

~~During~~On January 26, 2021, the ~~nine months ended September 30, 2020,~~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 ~~issued~~granted ~~594,740~~245,900 ~~shares of~~ restricted stock awards to ~~a director and two executive employees.~~five non-employee directors. ~~350,000~~61,475 of these ~~shares~~restricted stock awards vested ~~immediately,~~on February1, 2021. The remaining ~~94,740~~184,425 ~~shares~~restricted stock awards will vest ~~in increments of~~ ~~47,370~~ ~~each over a two month period of October~~equally on May 1, 2021, August 1, 2021, and November ~~2020,~~ ~~75,000~~ ~~shares will vest in increments of~~ ~~18,750~~ ~~each over four years from the date of grant, and 75,000 shares will vest over~~ ~~four years~~ ~~based on performance criteria determined by the Board of Directors or Compensation Committee. Unvested shares remain subject to forfeiture if vesting conditions are not met.~~1, 2021. The aggregate fair value of the stock awards was $~~508~~226 based on the market price of our common stock price which ~~ranged from~~was $~~0.81~~ ~~to $0.95~~0.92 per share on the ~~dates~~date of grants and is amortized as shares vest.
The total fair value of restricted common stock vesting during the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ was $~~$285~~98 and $~~477~~285, respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of ~~September 30, 2020,~~March 31, 2021, the amount of unvested compensation related to issuances of restricted common stock was $~~223~~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

~~Schedule of Stock Option Activity~~
The following table summarizes stock option activity during the ~~nine~~three months ended ~~September 30, 2020:~~March 31, 2021:
Schedule of Stock Option Activity
Shares Weighted-
Average
Exercise Price Weighted-
Average
Remaining
Contractual
Terms
(Years) Aggregate
Intrinsic
Value
Outstanding at December 31, 2019 3,265,580 $ 2.19 7.09 $ 6
Granted 2,067,800 $ 0.67
Exercised (34,500 ) $ 0.50
Unvested forfeited or expired (394,480 ) $ 1.93
Vested forfeited or expired (188,043 ) $ 4.20
Outstanding at September 30, 2020 4,716,357 $ 1.48 8.17 $ 505
Exercisable at September 30, 2020 2,169,690 $ 1.47 7.46 $ 338
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 ~~nine~~three months ended ~~September 30, 2020,~~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 ~~2,067,800~~1,939,700 shares to be issued pursuant to Reed’s ~~2017~~2020 Equity Incentive ~~Compensation~~ Plan. ~~1,732,800~~1,939,700 options were issued to employees, ~~including~~ ~~582,800~~ ~~options that vested immediately,~~ ~~575,000~~969,850 options vesting annually over a ~~four-year~~four-year vesting period,, and ~~575,000~~969,850 options that will vest based on performance criteria to be established by the ~~board. In addition,~~ ~~335,000~~ ~~options granted to consultants,~~ board ~~members, and former employees vest over various periods.~~of directors.
~~F-14~~

The stock options are exercisable at a price ~~ranging from~~of $~~0.44~~ ~~to $0.89~~1.01 per share and expire in ten years. The total fair value of these options at grant date was approximately $~~1,168~~1,294, which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price ~~ranging from $0.44 to $0.89~~of $1.01 per share, expected term of ~~seven~~six years, volatility of ~~120~~76%, dividend rate of 0%, and weighted average risk-free interest rate ~~ranging from~~of ~~0.56% to~~ ~~1.63~~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. ~~The fair value of the options of $1,168 will be amortized as the options vest in future periods through~~ ~~May 20, 2024~~.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ the Company recognized $~~722~~300 and $~~1,077~~495 of compensation expense relating to vested stock options. As of ~~September 30, 2020,~~March 31, 2021, the aggregate amount of unvested compensation related to stock options was approximately $~~1,594~~4,274 which will be ~~recorded~~recognized as an expense as the options vest in future periods ~~as the options vest.~~through March 28, 2025.

As of ~~September 30, 2020,~~March 31, 2021, the outstanding and exercisable options have an intrinsic value of $~~338~~2,332. and $759, respectively. The aggregate intrinsic value was calculated as the difference between the closing market price as of ~~September 30, 2020,~~March 31, 2021, which was $~~0.93~~1.17, and the exercise price of the outstanding stock options.

~~13.~~10. Stock Warrants

As of ~~September 30, 2020,~~March 31, 2021, the Company has issued warrants to purchase an aggregate of ~~6,413,782~~3,362,241 shares of common stock. The Company’s warrant activity during the ~~nine~~three months ended ~~September 30, 2020~~March 31, 2021 is as follows:
Schedule of Warrant Activity
Shares
Weighted-
Average Exercise Price

Weighted-
Average Remaining Contractual Terms (Years)

Aggregate
Intrinsic
Value

Outstanding at December 31, 2019 6,413,782 $ 2.06 1.52 $ -
Exercised - -
Forfeited or expired - -
Outstanding at September 30, 2020 6,413,782 $ 2.06 0.77 $ -
Exercisable at September 30, 2020 6,413,782 $ 2.06 0.77 $ -
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 0 warrant transactions during the ~~nine~~three months ended ~~September 30, 2020.~~March 31, 2021. As of ~~September 30, 2020,~~March 31, 2021, the outstanding and exercisable warrants have 0an intrinsic ~~value.~~value of $526. The intrinsic value was calculated as the difference between the closing market price as of ~~September 30, 2020,~~March 31, 2021, which was $~~0.93~~1.17, and the exercise price of the Company’s warrants to purchase common stock.

~~14.~~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 ~~September 30, 2020,~~March 31, 2021, $800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $~~338~~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 ~~nine~~three months ended ~~September 30,~~March 31, 2021 and 2020, the Company recorded royalty revenue from CCB of $263~~. During the nine months ended September 30, 2019, the Company recorded royalty revenue from CCB of~~ and $145., respectively.

At December 31, ~~2019,~~2020, the Company had ~~royalty revenue~~an aggregate receivable balance from CCB of $~~128~~682~~. In addition,~~ at December 3,1 2020. During the quarter ended March 31, ~~2019,~~2021, the Company ~~has outstanding receivable from CCB of $228~~ ~~consisting of inventory advances to CCB. The aggregate receivable from CCB at December 31, 2019 was $356. During the nine months ended September 30, 2020, the Company~~ recorded ~~additional~~ royalty revenue receivable of $263, ~~advance additional inventory~~ and ~~equipment~~advanced expenses of $~~138, and received payments of $129~~16, leaving an aggregate receivable balance of $~~391~~701 at ~~September 30, 2020.~~March 31, 2021.

At ~~September 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the Company had accounts payable due to CCB of $~~211~~557 and $~~182~~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.

~~15.~~13. Subsequent Events
~~Subsequent to September 30, 2020,~~On May 5, 2021, the Company ~~issued~~ 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 $~~7,000~~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 ~~the exercise of stock options.~~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-15~~
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. ~~This discussion and analysis may contain forward-looking statements based on assumptions about our future business.~~

Overview

During the ~~third~~first quarter of ~~2020,~~2021, the Company fully utilized their expanded network of co-packers and ~~implemented an upgraded~~continues to adhere to strict set of quality protocols. In addition to our traditional sales channels, the Company is ~~utilizing their~~expanding in the drug, convenience and ecommerce ~~platform that includes~~channels including their branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans.
A public equity offering, which closed on April 20, 2020, provided the Company with funds for working capital and general corporate purposes. These funds enabled us to initiate the implementation of our 2020 strategy that included driving growth while strategically reducing operating costs.

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

InDuring the ~~quarter~~period ended ~~September 30, 2020,~~March 31, 2021, the COVID-19 pandemic ~~did not have a material net impact on~~has impacted our operating ~~results.~~results and the Company anticipates a continued impact for the balance of the year. In ~~the future,~~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 ~~comply with~~follow the recommended actions of government and health authorities to protect our employees. ~~For~~Since the ~~six months ended September 30, 2020,~~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.

~~Through September 30, 2020, in part due to our innovative response to~~Net sales for the ~~COVID-19 pandemic, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Shipments to customers in the third quarter~~period ended March 31, 2021 were up ~~14%~~28% from the ~~first quarter of the~~prior year ~~and down slightly (2%) from the Second quarter of 2020, with fluctuations consistent with historical seasonal patterns.~~period. Through ~~September 30, 2020,~~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.
~~For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.~~
1

Results of Operations – Three ~~months ended September 30,~~Months Ended March 31, 2021 as compared to March 31, 2020

The following table sets forth key statistics for the three months ended ~~September 30,~~March 31, 2021 and 2020, ~~and 2019,~~ respectively, in thousands.

Three Months Ended September 30, Pct. Three Months Ended March 31, Pct.
2020 2019 Change 2021 2020 Change
Gross sales (A) $ 11,897 $ 10,112 18 % $ 13,281 $ 10,551 26 %
Less: Promotional and other allowances (B) 1,335 1,372 -3 % 1,135 1,028 10 %
Net sales $ 10,562 $ 8,740 21 % $ 12,146 $ 9,523 28 %

Cost of goods produced (C) 7,176 6,238 15 %
Cost of goods sold 8,293 6,653 25 %
% of Gross sales 60 % 62 % 62 % 63 %
% of Net sales 68 % 71 % 68 % 70 %
Gross profit $ 3,386 $ 2,502 35 % $ 3,853 $ 2,870 34 %
% of Net sales 32 % 29 % 32 % 30 %

Expenses
Delivery and handling $ 2,207 $ 1,902 16 % $ 3,286 $ 1,263 160 %
% of Net sales 21 % 22 % 27 % 13 %
Dollar per case ($) 3.5 3.5 4.4 2.3
Selling and marketing 1,872 2,508 -25 % 2,215 1,925 15 %
% of Net sales 18 % 29 % 18 % 20 %
General and administrative 1,583 2,470 -36 % 2,603 1,932 35 %
% of Net sales 15 % 28 % 21 % 20 %
Total Operating expenses 5,662 6,880 -18 %
Total operating expenses 8,103 5,120 58 %

Loss from operations $ (2,276 ) $ (4,378 ) -45 % $ (4,251 ) $ (2,250 ) 89 %

Interest expense and other expense (314 ) (187 ) 68 % $ (256 ) $ (330 ) -22 %

Net loss $ (2,590 ) $ (4,565 ) -43 % $ (4,507 ) $ (2,580 ) 75 %

Loss per share – basic and diluted $ (0.04 ) $ (0.14 ) -70 % $ (0.05 ) $ (0.05 ) 0 %

Weighted average shares outstanding - basic & diluted 62,940,091 33,716,359 87 % 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 ~~are used internally by management~~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 ~~including sales performance~~ of ~~particular~~ products ~~salesperson performance, product growth or declines~~ and ~~overall Company performance. The use of gross sales allows evaluation of sales performance~~salespersons before the effect of any promotional ~~items,~~or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We ~~therefore~~ believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. 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. ~~In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.~~

(B) ~~Although~~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. ~~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.~~ 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

(C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
Sales, Cost of Sales, and Gross Margins

The following chart sets forth key statistics for the transition of the Company’s top line activity ~~through~~from the ~~third~~first quarter of 2020 ~~and 2019.~~through the first quarter of 2021.

2020 2019 Q3 Per Case Sept YTD Per Case 2021 2020 Q1 Per Case
Q1 Q2 Q3 YTD Q3 vs PY YTD vs PY Q1 Q2 Q3 YTD 2020 2019 vs PY 2020 2019 vs PY Q1
vs
PY
Q1 Q2 Q3 Q4 FY 2021 2020 vs PY
Cases:
Reed’s 288 335 314 937 32 % 24 % 238 281 238 757 Reed’s 395 37 % 288 335 314 317 1,254
Virgil’s 262 308 319 889 6 % 4 % 257 296 302 855 Virgil’s 339 29 % 262 308 319 315 1,204
Total Core 550 643 633 1,826 17 % 13 % 495 577 540 1,612 Total Core 734 33 % 550 643 633 632 2,458
Non Core 2 - - 2 -95 % -92 % 20 2 4 26 Non Core - -100 % 2 - - - 2
Candy 8 8 5 21 -10 % -11 % 9 9 6 24 Candy 8 0 % 8 8 5 5 26
Total 560 651 639 1,850 16 % 11 % 524 588 550 1,662 Total 742 33 % 560 651 638 637 2,486

Gross Sales:
Core $ 10,175 $ 11,940 $ 11,622 $ 33,737 18 % 15 % $ 9,098 $ 10,455 $ 9,809 $ 29,362 $ 18.4 $ 18.2 1 % $ 18.5 $ 18.2 1 % Core $ 12,955 27 % $ 10,175 $ 11,940 $ 11,622 $ 11,587 $ 45,324 $ 17.6 $ 18.5 -5 %
Non Core 102 33 74 209 -44 % -39 % 181 29 131 341 $ 350.1 $ 32.8 969 % 94.4 13.1 619 % Non Core 33 -68 % 102 33 74 347 556 - 51.0 -100 %
Candy 274 256 201 731 17 % 6 % 241 274 172 687 $ 37.3 $ 28.7 30 % 34.2 28.6 19 % Candy 293 7 % 274 256 201 190 921 36.7 34.3 7 %
Total $ 10,551 $ 12,229 $ 11,897 $ 34,677 18 % 14 % $ 9,520 $ 10,758 $ 10,112 $ 30,390 $ 18.6 $ 18.4 1 % 18.7 18.3 3 % Total $ 13,281 26 % $ 10,551 $ 12,229 $ 11,897 $ 12,124 $ 46,801 17.9 19.0 -6 %

Discounts: Total $ (1,028 ) $ (1,376 ) $ (1,335 ) $ (3,739 ) -3 % 0 % $ (1,071 ) $ (1,278 ) $ (1,372 ) $ (3,721 ) $ (2.1 ) $ (2.5 ) -16 % $ (2.0 ) $ (2.2 ) -10 % Total $ (1,135 ) 10 % $ (1,028 ) $ (1,376 ) $ (1,335 ) $ (1,447 ) $ (5,186 ) $ (1.5 ) $ (2.3 ) -33 %

COGS:
Core $ (6,414 ) $ (7,674 ) $
(7,031
) $ (21,119 ) 15 % 15 % $ (5,469 ) $ (6,843 ) $ (6,094 ) $ (18,406 ) $ (11.1 ) $ (11.3 ) -2 % $ (11.6 ) $ (11.1 ) 4 % Core $ (8,122 ) 27 % $ (6,414 ) $ (7,674 ) $ (7,032 ) $ (7,019 ) $ (28,139 ) $ (11.1 ) $ (11.1 ) - %
Non Core (59 ) (15 ) (15 ) (89 ) -59 % -62 % (167 ) (28 ) (38 ) (233 ) (73.2 ) (9.5 ) 672 % (40.4 ) (9.0 ) 351 % Non Core (6 ) -89 % (59 ) (15 ) (15 ) (21 ) (110 ) - - -
Candy (180 ) (176 ) (129 ) (485 ) 22 % 10 % (159 ) (177 ) (106 ) (442 ) (24.0 ) (17.6 ) 36 % (22.7 ) (18.4 ) 23 % Candy (165 ) -8 % (180 ) (176 ) (129 ) (115 ) (600 ) (20.6 ) (23.0 ) -10 %
Idle Plant - -- - - -100 % (150 ) (159 ) - (309 ) - - 0 % - (0.2 ) -100 % Total $ (8,293 ) 25 % $ (6,653 ) $ (7,865 ) $ (7,176 ) $ (7,155 ) $ (28,849 ) $ (11.2 ) $ (11.2 ) -1 %
Total $ (6,653 ) $ (7,865 ) $ (7,176 ) $ (21,694 ) 15 % 12 % $ (5,945 ) $ (7,207 ) $ (6,238 ) $ (19,390 ) $ (11.2 ) $ (11.3 ) -2 % $ (11.7 ) $ (11.7 ) 0 %

Gross Margin: $ 2,870 $ 2,988 $ 3,386 $ 9,244 35 % 27 % $ 2,504 $ 2,273 $ 2,502 $ 7,279 $ 5.3 $ 4.5 17 % $ 5.0 $ 4.4 15 % $ 3,853 34 % $ 2,870 $ 2,988 $ 3,386 $ 3,522 $ 12,766 $ 5.2 $ 5.5 -6 %
as % Net Sales 30 % 28 % 32 % 30 % 30 % 24 % 29 % 27 % 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 ~~2019~~2020 consist primarily of slower selling discontinued Reed’s and Virgil’s SKUs.
~~Sales~~

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 ~~quarter~~three months ended ~~September 30, 2020,~~March 31, 2021, represents 98% of all beverage volume.

Core brand gross revenue increased by ~~18%~~27% to ~~$11,622~~$12,955 compared to the same period last year, driven by Reed’s volume growth of ~~32%~~37% and Virgil’s volume growth of 29%. The result is an increase in total gross revenue of ~~18%~~26%, to ~~$11,896~~$13,281 in the three months ended March 31, 2021, from ~~$10,112~~$10,551 during the ~~same period last year.~~three months ended March 31, 2020. Price on our core brands ~~increased $0.19~~decreased 5% to $17.65 per case ~~or 1% year over year, while volume grew 17% as compared~~due to ~~the same period last year.~~a shift in mix to lower priced, higher margin products.
3

Discounts as a percentage of gross sales decreased to ~~11% in the third quarter of 2020~~9% from ~~14%~~10% in the same period last year. As a result, net sales revenue grew ~~21%~~28% in the ~~third quarter of 2020~~three months ended March 31, 2021 to ~~$10,562,~~$12,146, compared to ~~$8,740~~$9,523 in the same period last year.

Cost of Goods Sold ~~and Produced~~

Cost of goods sold increased ~~$938~~$1,640 during the ~~third quarter of 2020~~three months ended March 31, 2021 as compared to the same period last year. As a percentage of net sales, cost of goods sold infor the ~~third quarter of 2020 improved to~~three months ended March 31, 2021 was 68% as compared to ~~71%~~70% for the same period last year.
The total cost of goods per case decreased to ~~$11.24~~$11.18 per case in the ~~third quarter of 2020~~three months ended March 31, 2021 from ~~$11.34~~$11.23 per case for the same period last year. The cost of goods sold per case on core brands was ~~$11.11~~$11.07 during the ~~third quarter of 2020,~~year months ended March 31, 2021, compared to ~~$11.29 and~~$11.11 for the ~~third quarter of 2019.~~same period last year.
Gross Margin
Gross margin increased to 32% for the ~~third quarter of 2020,~~three months ended March 31, 2021, compared to ~~29% during~~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 ~~$306~~$2,023 in the ~~third quarter of 2020~~three months ended March 31, 2021 to ~~$2,207~~$3,286 from ~~$1,902~~$1,263 in the same period last year, driven by increased ~~volumes.~~volumes, ecommerce fulfillment costs, and increasing freight rates due to Covid-19. Delivery costs in the ~~third quarter of 2020~~three months ended March 31, 2021 were ~~21%~~27% of net sales and ~~$3.45~~$4.43 per case, compared to ~~22%~~13% of net sales and ~~$3.46~~$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 ~~$1,872~~$2,215 during the ~~third quarter of 2020,~~three months ended March 31, 2021, compared to ~~$2,508~~$1,925 during the same period last year. As a percentage of net sales, selling and marketing costs decreased to 18% during the ~~third quarter of 2020,~~three months ended March 31, 2021, as compared to ~~29%~~20% during the same period last year. The ~~decrease represents a lapping of the “Fooled Your Mom” campaign~~increase was driven by an increase in ~~the third quarter of 2019~~sales force headcount and aconsumer facing marketing costs partially offset by reduced expenditures on trade shows and sponsorships and lower ~~level of digital advertising, event sampling and agency fees. In addition, personnel and travel related costs declined.~~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 ~~decreased~~increased in the ~~third quarter~~three months ended March 31, 2021 to $2,603 from $1,932, an increase of ~~2020 to $1,583 from $2,470, a decrease of $887~~$671 over the same period last year. ~~Decrease~~The increase was driven by ~~a $643 decrease in severance expense, $214 decrease in stock option expense,~~legal settlements, employee costs, consulting fees, public company and ~~a $74 decrease in professional and consulting fees,~~licensing costs, partially offset by ~~a $44 increase in other general and administrative expenses.~~lower stock compensation.

Loss from Operations

The loss from operations was ~~$2,276~~$4,251 for the ~~third quarter of 2020,~~three months ended March 31, 2021, as compared to a loss of ~~$4,378~~$2,250 in the same period last year driven by ~~increase~~increased gross profit ~~and reductions~~offset by increases in operating expenses discussed above.
4

Interest and Other Expense

Interest and other expense for the ~~third quarter of 2020,~~three months ended March 31, 2021, consisted of ~~$322~~$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 ~~$8. During the same period last year, interest and other expense consisted of $318 of interest expense offset by the change in fair value of our warrant liability of $131.~~$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 ~~September 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited; in thousands):

Three Months Ended September 30, Three Months Ended March 31
2020 2019 2021 2020
Net loss $ (2,590 ) $ (4,565 ) $ (4,507 ) $ (2,580 )

Modified EBITDA adjustments:
Depreciation and amortization 59 38 56 49
Interest expense 322 318 256 336
Stock option and other noncash compensation 263 368 398 780
Change in fair value of warrant liability (8 ) (131 ) - 6
Severance - 643
Legal settlements 353 -
Total EBITDA adjustments $ 636 $ 1,236 $ 1,063 $ 1,171

Modified EBITDA $ (1,954 ) $ (3,329 ) $ (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.

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~~Results of Operations – Nine months ended September 30, 2020~~
~~The following table sets forth key statistics for the nine months ended September 30, 2020 and 2019, respectively, in thousands.~~
Nine Months Ended September 30, Pct.
2020 2019 Change
Gross sales (A) $ 34,677 $ 30,391 14 %
Less: Promotional and other allowances (B) 3,739 3,721 - %
Net sales $ 30,938 $ 26,669 16 %

Cost of goods produced (C) 21,694 19,081 14 %
% of Gross sales 63 % 63 %
% of Net sales 70 % 72 %
Cost of goods sold – idle capacity (D) - 309 -100 %
% of Net sales - % 1 %
Gross profit $ 9,244 $ 7,279 27 %
% of Net sales 30 % 27 %

Expenses
Delivery and handling $ 4,950 $ 4,369 13 %
% of Net sales 16 % 16 %
Dollar per case ($) 2.7 2.6
Selling and marketing 5,382 7,718 -30 %
% of Net sales 17 % 29 %
General and administrative 4,872 6,557 -26 %
% of Net sales 16 % 25 %

Total Operating expenses 15,204 18,644 -18 %

Loss from operations $ (5,960 ) $ (11,365 ) -48 %

Interest expense and other expense (960 ) (924 ) 4 %

Net loss $ (6,920 ) $ (12,289 ) -44 %

Loss per share – basic and diluted $ (0.12 ) $ (0.38 ) -68 %

Weighted average shares outstanding - basic & diluted 56,706,141 32,179,119 76 %
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(A) Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. 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. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.
(B) Although 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. 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. 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.
(C) Cost of goods produced: Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer costs. Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated plant costs. Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
(D) Cost of goods sold – idle capacity: Cost of goods sold – idle capacity consists of direct production costs in excess of charges allocated to our finished goods in production. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Plant costs include labor costs, production supplies, repairs and maintenance, and inventory write-off. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Cost goods sold – idle capacity is not a measure that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.
~~Sales, Cost of Sales, and Gross Margins~~
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 2019 consist primarily of slower selling discontinued Reed’s and Virgil’s SKUs.
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~~Sales~~
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 first nine months of 2020, represents 98% of all beverage volume.
Core brand gross revenue increased by 15% to $33,737 compared to the same period last year, driven by Reed’s volume growth of 24%. The result is an increase in total gross revenue of 14%, to $34,677 from $30,391 during the same period last year. Price on our core brands increased $0.26 per case or 1% year over year, while volume grew 13% as compared to the same period last year.
Discounts as a percentage of gross sales decreased to 11% in the first nine months of 2020 from 12% in the same period last year. The decrease in our promotions was driven by lower promotional activity primarily due to the impacts of COVID-19 as promotional execution became a lower priority at retail. As a result, net sales revenue grew 16% in the first nine months of 2020 to $30,938, compared to $26,669 in the same period last year.
~~Cost of Goods Sold and Produced~~
Cost of goods sold increased $2,304 during the first nine months of 2020 as compared to the same period last year. As a percentage of net sales, cost of goods sold in the first nine months of 2020 improved to 70% as compared to 73% for the same period last year.

The total cost of goods per case increased to $11.73 per case in the first nine months of 2020 from $11.67 per case in the same period last year. The increase is driven by utilization of higher costed inventory remaining from 2019 in the first quarter and a $198 reserve recorded related to packaging material from transition to the FDA mandated nutritional fact requirements disclosure. The cost of goods sold per case on core brands increased to $11.57 during the first nine months of 2020, from the $11.42 for the same period last year. We are continuing to work with suppliers and co-packers to improve our processes and maximize cost efficiencies.
~~Gross Margin~~
~~Gross margin increased to 30% for the first nine months of 2020, compared to 27% during 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 $581 in the first nine months of 2020 to $4,950 from $4,369 in the same period last year, driven by increased volumes. Delivery costs in the nine months of 2020 were 16% of net sales and $2.68 per case, compared to 16% of net sales and $2.63 per case during the same period last year. The per case rate increase was driven by market forces impacted by COVID-19.
~~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 $5,382 during the first nine months of 2020, compared to $7,718 during the same period last year. As a percentage of net sales, selling and marketing costs decreased to 17% during the first nine months of 2020, as compared to 29% during the same period last year. The decrease represents a lapping of the “Fooled Your Mom” campaign which ran in the second quarter of 2019 as well as the Catalina retail register coupon program, which has yet to be used in 2020 and a lower level of digital advertising, event sampling and agency fees. In addition, personnel and travel related costs declined.
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~~General and Administrative Expenses~~
General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses decreased in the first nine months of 2020 to $4,872 from $6,557, a decrease of $1,685 over the same period last year. The decrease was driven by lower severance of $682, forfeiture/expiration of options in the amount of $580, the lapping of a $220 one-time final transition cost incurred in 2019 related to our plant sale and a reduction professional fees and consultants of $70, and lower personnel and travel related costs.
~~Loss from Operations~~
The loss from operations was $5,960 for the first nine months of 2020, as compared to a loss of $11,365 in the same period last year driven by increase gross profit and reductions in operating expenses discussed above.
~~Interest and Other Expense~~
Interest and other expense for the first nine months of 2020, consisted of $961 of interest expense offset by the change in fair value of our warrant liability of $1. During the same period last year, interest and other expense consisted of $947 of interest expense offset by the change in fair value of our warrant liability of $23.
~~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, 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 nine months ended September 30, 2020 and 2019 (unaudited; in thousands):~~
Nine Months Ended September 30,
2020 2019
Net loss $ (6,920 ) $ (12,289 )

Modified EBITDA adjustments:
Depreciation and amortization 145 108
Interest expense 961 947
Stock option and other noncash compensation 1,007 1,597
Change in fair value of warrant liability (1 ) (23 )
Severance - 682
Total EBITDA adjustments $ 2,112 $ 3,311

Modified EBITDA $ (4,808 ) $ (8,978 )
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We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:
● ~~Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;~~
● ~~Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs;~~
● ~~Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and~~
● Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

Liquidity and Capital Resources

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

For the ~~nine~~three months ended ~~September 30, 2020,~~March 31, 2021, the Company recorded a net loss of ~~$6,920~~$4,507 and used cash in operations of ~~$6,768.~~$5,059. As of ~~September 30, 2020,~~March 31, 2021, we had a cash balance of ~~$875~~$155 with borrowing capacity of ~~$3,037,~~$2,513, a stockholder’s equity of ~~$558~~$6,770 and a ~~negative~~ working capital of ~~$207,~~$5,698, compared to a cash balance of ~~$913~~$595 with borrowing capacity of ~~$3,235,~~$5,166, stockholders’ equity of ~~$1,147~~$10,404 and a working capital of ~~$4,885~~$9,528 at December 31, ~~2019.~~
~~In April 2020,~~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 ~~conducted~~as a ~~public offering of 15,333,334 shares of its common stock~~going concern for at ~~$0.375 per share, resulting in net proceeds to the Company of $5,310.~~
On April 20, 2020, the Company received loan proceeds in the amount of $770 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”) (see Note 8).
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. We applied ASC 470, ~~Debt~~~~, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds~~least one year 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 intends to use the entire loan amount for qualifying expenses. Under the termsdate of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. 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. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of September 30, 2020.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.
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Critical Accounting Policies and Estimates

Use of ~~estimates~~
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 ~~inventory obsolescence, depreciable lives of property and equipment, analysis of impairments~~receivables, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, ~~realization of~~the valuation allowance for deferred tax assets, accruals for potential liabilities, ~~and~~ assumptions made in valuing stock instruments issued for ~~services.~~services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity.

~~Revenue Recognition~~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.

~~The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606,~~ ~~Revenue from Contracts with Customers~~Inventory. ~~(“ASC 606”). The underlying principle of ASC 606~~Inventory is ~~to recognize revenue to depict the transfer of goods or services to customers~~stated at the ~~amount expected~~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 ~~be collected. ASC 606 creates~~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 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 obligationsreduction in the ~~contract~~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 ~~agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations,~~overstated provision required for excess and ~~(5) recognizing revenue as each performance obligation is satisfied.~~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. 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~~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 ~~Company’s products are offered for sale~~award is measured on the date of grant and recognized as ~~finished goods only, and there are no performance obligations required post-shipment for customers to derive~~compensation expense on the ~~expected~~straight-line basis over the vesting period. The Company recognizes the fair value ~~from them.~~of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered.

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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.
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 such term is~~(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities ~~and~~ Exchange Act of 1934, ~~Rules 13a-15(f)~~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 ~~not~~ effective as of ~~September 30, 2020. As of September 30, 2020, management’s assessment identified the following material weaknesses~~March 31, 2021, to provide reasonable assurance that information required to be disclosed in the ~~Company’s internal control over financial reporting:~~
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~~Outsourced IT Service Providers~~ ~~- The Company relies upon a variety of outsourced Information Technology (IT) service providers for key elements of~~reports that we file or submit under the ~~technology infrastructure impacting its financial reporting process. Certain of these outsourced IT service providers could not provide System~~Exchange Act is recorded, processed, summarized and ~~Organization Controls (SOC) reports. The Company did not have controls designed~~reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to ~~assess the design~~our management, including our Chief Executive Officer and ~~operation of internal controls pertaining~~Chief Financial Officer, as appropriate, to these outsourced IT service providers over the period of reliance. Given that management did not effectively assess the design and operation of certain outsourced IT service providers’ internal controls, certain of the Company’s controls over IT systems and business processes were also ineffective, to the extent that they rely upon information that was subject to the outsourced IT service providers’ control environment.
~~Segregation of Duties~~ - The Company did not maintain effective policies to ensure adequate segregation of duties within its accounting processes. Specifically, due to the size of the Company and the smaller nature of department teams, opportunities are limited to segregate duties, resulting in inabilities to soundly manage segregation of job responsibilities.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 ~~September 30, 2020~~March 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Remediation Plans~~
As disclosed in the section titled “Risk Factors” in Part II, Item 1A of this Quarterly Report, we have begun, with the oversight of senior management and our audit committee, to implement measures to remediate the identified material weakness. The execution of our remediation is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Management expects to complete its remediation plan by the end of 2020.
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, ~~2019~~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”.
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~~COVID-19 and other pandemics, epidemics, or outbreaks of a contagious illness may adversely affect our operating results, cash flows and financial condition.~~
COVID-19 coronavirus outbreak and other pandemics, epidemics, or outbreaks of a contagious illness, and similar events, may cause harm to us, our employees, our customers, our vendors and supply chain partners, and financial institutions, which could have a material adverse effect on our results of operations, financial condition and cash flows. The impacts may include, but would not be limited to:
● Decreased availability and increased cost of supplies due to increased demand around food and food-related products due to increased global demand and disruptions along the global supply chains of these manufactures and distributors;
● ~~Disruption to operations due to the unavailability of employees due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce;~~
● ~~Elevated employee turnover which may increase payroll expense and recruiting-related expenses; and~~
● ~~Significant disruption of global financial markets, which could have a negative impact on us or our customers’ ability to access capital in the future.~~
In addition, we have taken and will continue to take temporary precautionary measures intended to help minimize the risk of COVID-19 to our employees, including requiring administrative and other groups of our employees to work remotely, suspending non-essential travel and restricting attendance at industry events and in-person work-related meetings. Such measures could have a material adverse effect on our business.
The further spread of COVID-19, and the requirements to take action to help limit the spread of the virus, could impact the resources required to carry out our business as usual and may have a material adverse effect on our results of operations, financial condition and cash flows. The extent to which COVID-19 will impact our business and our financial results will depend on future developments, which are highly uncertain and cannot be predicted. Such developments may include the ongoing geographic spread of the virus, the severity of the disease, the duration of the outbreak and the type and duration of actions that may be taken by various governmental authorities in response to the outbreak and the impact on the United States and the global economy. Any of these developments, individually or in aggregate, could materially impact our business and our financial results and condition.
We have identified material weaknesses in our disclosure controls and procedures and internal control over financial reporting. If not remediated, our failure to establish and maintain effective disclosure controls and procedures and internal control over financial reporting could result in material misstatements in our financial statements and a failure to meet our reporting and financial obligations, each of which could have a material adverse effect on our financial condition and the trading price of our common stock.
Maintaining effective internal control over financial reporting and effective disclosure controls and procedures are necessary for us to produce reliable financial statements. As discussed in Part I, Item 4 – “Controls and Procedures” of this Quarterly Report on Form 10-Q, we have re-evaluated our internal control over financial reporting and our disclosure controls and procedures and concluded that they were not effective as of September 30, 2020.
A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses we identified are (1) ineffective controls over outsourced IT systems and business processes and (2) inadequate segregation of duties within accounting processes. We identified these material weaknesses initially as of December 31, 2019. The execution of our remediation commenced in the first fiscal quarter of 2020 and entails splitting activities where inadequate segregation of duties existed and seeking an outsourced IT provider that can provide effective controls over outsourced IT systems and business processes. This activity is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. Management expects to complete its remediation plan during its fourth fiscal quarter ending December 31, 2020. Implementation of the Company’s remediation plans is being overseen by senior management and the audit committee.
We cannot assure you that we can effectively remediate our reported weaknesses or that other significant deficiencies or material weaknesses in our internal control over financial reporting will not be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations regarding disclosure controls and the effectiveness of our internal control over financial reporting required under Section 404 and the SEC’s rules. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to timely meet our reporting obligations, and cause investors to lose confidence in our reported financial information. Continued determinations that there are material weaknesses in our internal controls could also reduce our ability to obtain financing or increase the cost of any financing we obtain and require additional expenditures of both money and our management’s time to comply with applicable requirements.

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.

13
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.~~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~~
~~No.~~
~~Description~~
~~31.1~~ Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
~~31.2~~ Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
~~32.1~~ Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
~~32.2~~ Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
~~101.INS~~ XBRL Instance Document*
~~101.SCH~~ XBRL Taxonomy Extension Schema Document*
~~101.CAL~~ XBRL Taxonomy Extension Calculation Linkbase Document*
~~101.DEF~~ XBRL Taxonomy Extension Definition Linkbase Document*
~~101.LAB~~ XBRL Taxonomy Extension Label Linkbase Document*
~~101.PRE~~ XBRL Taxonomy Extension Presentation Linkbase Document*

*filed herewith
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.
14
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: ~~November 9, 2020~~May 17, 2021 /s/ Norman E. Snyder, Jr.
Norman E. Snyder, Jr.
Chief Executive Officer
(Principal Executive Officer)

Date: ~~November 9, 2020~~May 17, 2021 /s/ Thomas J. Spisak
Thomas J. Spisak
Chief Financial Officer
(Principal Financial Officer)

15 9

	Common Stock Shares		Common Stock Amount		Preferred Stock Shares		Preferred Stock Amount		Common Stock Issuable Shares		Common Stock Issuable Amount		Additional Paid In Capital		Accumulated Deficit			Total Stockholders’ Equity (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, June 30, 2020		62,928,540	$	6		9,411	$	94		350,000	$	285	$	83,364	$	(80,883	)	$	2,866
Fair value of vested options				-				-				-		263					263
Common shares issued on exercise of options		27,500		-										14					14
Issuance of shares for dividends on Series A Convertible Preferred Stock		4,530		-				-						5		-			5
Fair value of vested restricted shares granted to officers for services
Fair value of vested restricted shares granted to officers for services, shares
Common shares issued pursuant to the rights offering, net of offering costs
Common shares issued pursuant to the rights offering, net of offering costs, shares
Shares granted to Directors for services
Shares granted to Directors for services, shares
Exercise of warrants		-				-		-
Net Loss																(2,590	)		(2,590	)
Balance, September 30, 2020		62,960,570	$	6		9,411	$	94		350,000	$	285	$	83,646	$	(83,473	)	$	558

	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				-				-						722					722
Fair value of vested restricted shares granted to officers				-				-		350,000		285							285
Dividends on Series A Convertible Preferred Stock		4,530		-				-						5		(5	)		-
Common shares issued on exercise of options		27,500		-										14					14
Common shares issued pursuant to the rights offering, net of offering costs		15,333,334		1				-				-		5,309		-			5,310
Exercise of warrants		-
Net Loss																(6,920	)		(6,920	)
Balance, September 30, 2020		62,960,570	$	6		9,411	$	94		350,000	$	285	$	83,646	$	(83,473	)	$	558

	September 30, 2020			September 30, 2019			March 31, 2021			March 31, 2020
Cash flows from operating activities:
Net loss	$	(6,920	)	$	(12,289	)	$	(4,507	)	$	(2,580	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		56			12			32			12
(Gain)/loss on sale of property & equipment		-			(30	)
(Gain)/loss on termination of leases		(6	)		2
Gain on sale on termination of leases								(3	)		-
Amortization of debt discount		290			225			162			96
Amortization of prepaid financing costs								25			-
Amortization of right of use assets		89			96			24			37
Fair value of vested options		722			1,077			292			495
Fair value of vested restricted shares granted to officers		285			520			106			285
Decrease in allowance for doubtful accounts		(181	)		(400	)		(69	)		(93	)
Decrease (increase) in inventory reserve		(422	)		325
Decrease in inventory reserve								(20	)		(384	)
Change in fair value of warrant liability		(1	)		(23	)		-			(6	)
Accrual of interest on convertible note to a related party		439			390			-			142
Lease liability		(18	)		(10	)		(8	)		(7	)
Changes in operating assets and liabilities:
Accounts receivable		(2,367	)		(1,121	)		(244	)		(1,826	)
Inventory		1,495			(2,520	)		(1,306	)		2,902
Prepaid expenses and other assets		(318	)		(339	)		(484	)		(365	)
Accounts payable		(100	)		(196	)		1,387			(1,038	)
Accrued expenses		189			(347	)		(446	)		(22	)
Net cash used in operating activities		(6,768	)		(14,628	)		(5,059	)		(2,352	)
Cash flows from investing activities:
Trademark costs		(37	)		-
Proceeds from sale of property and equipment		-			30
Patent costs								(2	)		-
Purchase of property and equipment		(121	)		(273	)		(95	)		(22	)
Net cash used in investing activities		(158	)		(243	)		(97	)		(22	)
Cash flows from financing activities:
Borrowings on line of credit		34,645			42,179			16,154			9,188
Repayments of line of credit		(33,710	)		(42,175	)		(11,898	)		(7,677	)
Capitalization of financing costs		(130	)		(130	)
Proceeds from note payable		770			-
Repayment of amounts due to/from officers		-			195
Amounts from related party								459			-
Principal repayments on capital lease obligation		(11	)		(38	)		(2	)		(22	)
Exercise of options		14			-			3			-
Exercise of warrants		-			365
Proceeds from sale of common stock		5,310			14,867
Net cash provided by financing activities		6,888			15,263			4,716			1,489

Net increase in cash		(38	)		392
Net increase (decrease) in cash								(440	)		(885	)
Cash at beginning of period		913			624			595			913
Cash at end of period	$	875		$	1,016		$	155		$	28

Supplemental disclosures of cash flow information:
Cash paid for interest	$	231		$	408		$	70		$	98

Non Cash Investing and Financing Activities
Dividends on Series A Convertible Preferred Stock	$	5		$	5

	September 30, 2020		September 30, 2019		March 31, 2021		March 31, 2020
Convertible note to a related party		2,266,667		2,266,667		-		2,266,667
Warrants		6,413,782		6,413,782		3,362,241		6,413,782
Common stock equivalent of Series A Convertible Preferred stock		37,644		37,644		37,644		37,644
Common stock issuable		350,000		-				350,000
Unvested restricted common stock		244,740		610,609		309,082		150,000
Options		4,716,357		4,373,566		11,028,322		4,683,380
Total		14,029,190		13,702,268		14,737,289		13,901,473

	September 30, 2020		December 31, 2019		March 31, 2021		December 31, 2020
Raw materials and packaging	$	6,354	$	4,261	$	7,746	$	6,793
Finished products		3,082		6,247		4,699		4,326
Total	$	9,436	$	10,508	$	12,445	$	11,119

	September 30, 2020			December 31, 2019
Line of Credit	$	4,596		$	3,661
Capitalized finance costs		(324	)		(484	)
Net balance	$	4,272		$	3,177

	September 30, 2020		December 31, 2019
12% Convertible Note Payable	$	3,400	$	3,400
Accrued Interest		1,728		1,289
Total obligation	$	5,128	$	4,689

Years Ending December 31,	Sep, 30
Remainder of 2020	$	67
2021		221
2022		222
2023		226
2024		221
Total payments		957
Less: Amount representing interest		(251	)
Present value of net minimum lease payments		706
Less: Current portion		(114	)
Non-current portion	$	592

	September 30, 2020			December 31, 2019

Stock Price	$	0.93		$	0.91
Risk free interest rate		0.80	%		1.95	%
Expected volatility		119.51	%		83.36	%
Expected life in years		0.67			1.42
Expected dividend yield		0	%		0	%
Number of Warrants containing fundamental transaction provisions		138,762			138,762
Fair Value of Warrants	$	7		$	8

	September 30, 2020			September 30, 2019
Beginning Balance	$	8		$	38
Change in fair value		(1	)		(23	)
Ending balance	$	7		$	15

	Unvested Shares			Issuable Shares		Fair Value at Date of Issuance			Weighted Average Grant Date Fair Value		Unvested Shares			Issuable Shares			Fair Value at Date of Issuance			Weighted Average Grant Date Fair Value
Balance, December 31, 2019		-			-	$	-			-
Balance, December 31, 2020												150,000			-		$	92			0.89
Granted		594,740			-		508			0.85		245,900			-			226			0.92
Vested		(350,000	)		350,000		(285	)		-		(84,809	)		84,809			-			-
Forfeited												(2,009	)								0.89
Issued		-			-		-			-		-			(84,809	)		(98	)		-
Balance, September 30, 2020		244,740			350,000	$	223		$	0.85
Balance, March 31, 2021												309,082			-		$	220		$	0.89

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value
Outstanding at December 31, 2019		3,265,580		$	2.19		7.09	$	6
Granted		2,067,800		$	0.67
Exercised		(34,500	)	$	0.50
Unvested forfeited or expired		(394,480	)	$	1.93
Vested forfeited or expired		(188,043	)	$	4.20
Outstanding at September 30, 2020		4,716,357		$	1.48		8.17	$	505
Exercisable at September 30, 2020		2,169,690		$	1.47		7.46	$	338

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)		Aggregate Intrinsic Value

Outstanding at December 31, 2019		6,413,782	$	2.06		1.52	$	-
Exercised		-		-
Forfeited or expired		-		-
Outstanding at September 30, 2020		6,413,782	$	2.06		0.77	$	-
Exercisable at September 30, 2020		6,413,782	$	2.06		0.77	$	-

	Three Months Ended September 30,						Pct.			Three Months Ended March 31,						Pct.
	2020			2019			Change			2021			2020			Change
Gross sales (A)	$	11,897		$	10,112			18	%	$	13,281		$	10,551			26	%
Less: Promotional and other allowances (B)		1,335			1,372			-3	%		1,135			1,028			10	%
Net sales	$	10,562		$	8,740			21	%	$	12,146		$	9,523			28	%

Cost of goods produced (C)		7,176			6,238			15	%
Cost of goods sold											8,293			6,653			25	%
% of Gross sales		60	%		62	%					62	%		63	%
% of Net sales		68	%		71	%					68	%		70	%
Gross profit	$	3,386		$	2,502			35	%	$	3,853		$	2,870			34	%
% of Net sales		32	%		29	%					32	%		30	%

Expenses
Delivery and handling	$	2,207		$	1,902			16	%	$	3,286		$	1,263			160	%
% of Net sales		21	%		22	%					27	%		13	%
Dollar per case ($)		3.5			3.5						4.4			2.3
Selling and marketing		1,872			2,508			-25	%		2,215			1,925			15	%
% of Net sales		18	%		29	%					18	%		20	%
General and administrative		1,583			2,470			-36	%		2,603			1,932			35	%
% of Net sales		15	%		28	%					21	%		20	%
Total Operating expenses		5,662			6,880			-18	%
Total operating expenses											8,103			5,120			58	%

Loss from operations	$	(2,276	)	$	(4,378	)		-45	%	$	(4,251	)	$	(2,250	)		89	%

Interest expense and other expense		(314	)		(187	)		68	%	$	(256	)	$	(330	)		-22	%

Net loss	$	(2,590	)	$	(4,565	)		-43	%	$	(4,507	)	$	(2,580	)		75	%

Loss per share – basic and diluted	$	(0.04	)	$	(0.14	)		-70	%	$	(0.05	)	$	(0.05	)		0	%

Weighted average shares outstanding - basic & diluted		62,940,091			33,716,359			87	%		86,631,304			47,595,206			82	%

		2020																		2019												Q3 Per Case									Sept YTD Per Case										2021						2020															Q1 Per Case
		Q1			Q2			Q3			YTD			Q3 vs PY			YTD vs PY			Q1			Q2			Q3			YTD			2020			2019			vs PY			2020			2019			vs PY				Q1			vs PY			Q1			Q2			Q3			Q4			FY			2021			2020			vs PY
Cases:
	Reed’s		288			335			314			937			32	%		24	%		238			281			238			757																				Reed’s		395			37	%		288			335			314			317			1,254
	Virgil’s		262			308			319			889			6	%		4	%		257			296			302			855																				Virgil’s		339			29	%		262			308			319			315			1,204
	Total Core		550			643			633			1,826			17	%		13	%		495			577			540			1,612																				Total Core		734			33	%		550			643			633			632			2,458
	Non Core		2			-			-			2			-95	%		-92	%		20			2			4			26																				Non Core		-			-100	%		2			-			-			-			2
	Candy		8			8			5			21			-10	%		-11	%		9			9			6			24																				Candy		8			0	%		8			8			5			5			26
	Total		560			651			639			1,850			16	%		11	%		524			588			550			1,662																				Total		742			33	%		560			651			638			637			2,486

Gross Sales:
	Core	$	10,175		$	11,940		$	11,622		$	33,737			18	%		15	%	$	9,098		$	10,455		$	9,809		$	29,362		$	18.4		$	18.2			1	%	$	18.5		$	18.2			1	%	Core	$	12,955			27	%	$	10,175		$	11,940		$	11,622		$	11,587		$	45,324		$	17.6		$	18.5			-5	%
	Non Core		102			33			74			209			-44	%		-39	%		181			29			131			341		$	350.1		$	32.8			969	%		94.4			13.1			619	%	Non Core		33			-68	%		102			33			74			347			556			-			51.0			-100	%
	Candy		274			256			201			731			17	%		6	%		241			274			172			687		$	37.3		$	28.7			30	%		34.2			28.6			19	%	Candy		293			7	%		274			256			201			190			921			36.7			34.3			7	%
	Total	$	10,551		$	12,229		$	11,897		$	34,677			18	%		14	%	$	9,520		$	10,758		$	10,112		$	30,390		$	18.6		$	18.4			1	%		18.7			18.3			3	%	Total	$	13,281			26	%	$	10,551		$	12,229		$	11,897		$	12,124		$	46,801			17.9			19.0			-6	%

Discounts:	Total	$	(1,028	)	$	(1,376	)	$	(1,335	)	$	(3,739	)		-3	%		0	%	$	(1,071	)	$	(1,278	)	$	(1,372	)	$	(3,721	)	$	(2.1	)	$	(2.5	)		-16	%	$	(2.0	)	$	(2.2	)		-10	%	Total	$	(1,135	)		10	%	$	(1,028	)	$	(1,376	)	$	(1,335	)	$	(1,447	)	$	(5,186	)	$	(1.5	)	$	(2.3	)		-33	%

COGS:
	Core	$	(6,414	)	$	(7,674	)	$	(7,031	)	$	(21,119	)		15	%		15	%	$	(5,469	)	$	(6,843	)	$	(6,094	)	$	(18,406	)	$	(11.1	)	$	(11.3	)		-2	%	$	(11.6	)	$	(11.1	)		4	%	Core	$	(8,122	)		27	%	$	(6,414	)	$	(7,674	)	$	(7,032	)	$	(7,019	)	$	(28,139	)	$	(11.1	)	$	(11.1	)		-	%
	Non Core		(59	)		(15	)		(15	)		(89	)		-59	%		-62	%		(167	)		(28	)		(38	)		(233	)		(73.2	)		(9.5	)		672	%		(40.4	)		(9.0	)		351	%	Non Core		(6	)		-89	%		(59	)		(15	)		(15	)		(21	)		(110	)		-			-			-
	Candy		(180	)		(176	)		(129	)		(485	)		22	%		10	%		(159	)		(177	)		(106	)		(442	)		(24.0	)		(17.6	)		36	%		(22.7	)		(18.4	)		23	%	Candy		(165	)		-8	%		(180	)		(176	)		(129	)		(115	)		(600	)		(20.6	)		(23.0	)		-10	%
	Idle Plant		-						--			-			-			-100	%		(150	)		(159	)		-			(309	)		-			-			0	%		-			(0.2	)		-100	%	Total	$	(8,293	)		25	%	$	(6,653	)	$	(7,865	)	$	(7,176	)	$	(7,155	)	$	(28,849	)	$	(11.2	)	$	(11.2	)		-1	%
	Total	$	(6,653	)	$	(7,865	)	$	(7,176	)	$	(21,694	)		15	%		12	%	$	(5,945	)	$	(7,207	)	$	(6,238	)	$	(19,390	)	$	(11.2	)	$	(11.3	)		-2	%	$	(11.7	)	$	(11.7	)		0	%

Gross Margin:		$	2,870		$	2,988		$	3,386		$	9,244			35	%		27	%	$	2,504		$	2,273		$	2,502		$	7,279		$	5.3		$	4.5			17	%	$	5.0		$	4.4			15	%		$	3,853			34	%	$	2,870		$	2,988		$	3,386		$	3,522		$	12,766		$	5.2		$	5.5			-6	%
as % Net Sales			30	%		28	%		32	%		30	%								30	%		24	%		29	%		27	%																					32	%					30	%		28	%		32	%		33	%		31	%

	Three Months Ended September 30,						Three Months Ended March 31
	2020			2019			2021			2020
Net loss	$	(2,590	)	$	(4,565	)	$	(4,507	)	$	(2,580	)

Modified EBITDA adjustments:
Depreciation and amortization		59			38			56			49
Interest expense		322			318			256			336
Stock option and other noncash compensation		263			368			398			780
Change in fair value of warrant liability		(8	)		(131	)		-			6
Severance		-			643
Legal settlements								353			-
Total EBITDA adjustments	$	636		$	1,236		$	1,063		$	1,171

Modified EBITDA	$	(1,954	)	$	(3,329	)	$	(3,444	)	$	(1,409	)

	●	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.

	Nine Months Ended September 30,						Pct.
	2020			2019			Change
Gross sales (A)	$	34,677		$	30,391			14	%
Less: Promotional and other allowances (B)		3,739			3,721			-	%
Net sales	$	30,938		$	26,669			16	%

Cost of goods produced (C)		21,694			19,081			14	%
% of Gross sales		63	%		63	%
% of Net sales		70	%		72	%
Cost of goods sold – idle capacity (D)		-			309			-100	%
% of Net sales		-	%		1	%
Gross profit	$	9,244		$	7,279			27	%
% of Net sales		30	%		27	%

Expenses
Delivery and handling	$	4,950		$	4,369			13	%
% of Net sales		16	%		16	%
Dollar per case ($)		2.7			2.6
Selling and marketing		5,382			7,718			-30	%
% of Net sales		17	%		29	%
General and administrative		4,872			6,557			-26	%
% of Net sales		16	%		25	%

Total Operating expenses		15,204			18,644			-18	%

Loss from operations	$	(5,960	)	$	(11,365	)		-48	%

Interest expense and other expense		(960	)		(924	)		4	%

Net loss	$	(6,920	)	$	(12,289	)		-44	%

Loss per share – basic and diluted	$	(0.12	)	$	(0.38	)		-68	%

Weighted average shares outstanding - basic & diluted		56,706,141			32,179,119			76	%

	●	~~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.

	●	Decreased availability and increased cost of supplies due to increased demand around food and food-related products due to increased global demand and disruptions along the global supply chains of these manufactures and distributors;
	●	~~Disruption to operations due to the unavailability of employees due to illness, quarantines, risk of illness, travel restrictions or factors that limit our existing or potential workforce;~~
	●	~~Elevated employee turnover which may increase payroll expense and recruiting-related expenses; and~~
	●	~~Significant disruption of global financial markets, which could have a negative impact on us or our customers’ ability to access capital in the future.~~

~~Exhibit~~ ~~No.~~		~~Description~~
~~31.1~~		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
~~31.2~~		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
~~32.1~~		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
~~32.2~~		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
~~101.INS~~		XBRL Instance Document*
~~101.SCH~~		XBRL Taxonomy Extension Schema Document*
~~101.CAL~~		XBRL Taxonomy Extension Calculation Linkbase Document*
~~101.DEF~~		XBRL Taxonomy Extension Definition Linkbase Document*
~~101.LAB~~		XBRL Taxonomy Extension Label Linkbase Document*
~~101.PRE~~		XBRL Taxonomy Extension Presentation Linkbase Document*

	Reed’s, Inc. (Registrant)

Date: ~~November 9, 2020~~May 17, 2021	/s/ Norman E. Snyder, Jr.
	Norman E. Snyder, Jr.
	Chief Executive Officer
	(Principal Executive Officer)

Date: ~~November 9, 2020~~May 17, 2021	/s/ Thomas J. Spisak
	Thomas J. Spisak
	Chief Financial Officer
	(Principal Financial Officer)