What changed in this filing

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Item 1. Financial Statements

2020-08-10 compared with 2020-05-12 · 480 added, 691 removed, 199 unchanged (85% of the section changed)

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in thousands, except share amounts)

December 31, 2019

Current assets:

Accounts receivable, net of allowance for doubtful accounts and returns and discounts of $282 and $375, respectively

Accounts receivable, net of allowance

for doubtful accounts and returns and discounts of $ 259

Receivable from related party

Inventory, net of reserve for obsolescence of $262 and $646, respectively

Prepaid expenses and other current assets

Inventory, net of reserve for obsolescence

Prepaid expenses

and other current assets

Total current assets

Property and equipment, net of accumulated depreciation of $520 and $482, respectively

Equipment held for sale, net of impairment reserves of $96 and $96, respectively

Property and equipment, net of accumulated

depreciation of $ 501

Equipment held for sale, net of impairment

reserves of $ 96 and

Intangible assets

LIABILITIES AND STOCKHOLDERS’

EQUITY (DEFICIT)

LIABILITIES AND STOCKHOLDERS’

Current liabilities:

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Revolving line of credit

Current portion of leases payable

Current portion of note payable

Convertible note to a related party

Current portion

of leases payable

Total current liabilities

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Warrant liability

Total liabilities

Stockholders’

equity (deficit):

Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding

Common stock, $.0001 par value, 100,000,000 and 100,000,000 shares authorized, respectively;

47,595,206 and 47,595,206 shares issued and outstanding, respectively

Common stock issuable, 350,000 shares at March 31, 2020

Stockholders’

Series A Convertible Preferred stock,

value, 500,000 shares

authorized, 9,411 shares

issued and outstanding

Common stock, $ .0001

par value, 100,000,000

and 100,000,000

shares authorized, respectively;

and 47,595,206

shares issued and outstanding, respectively

Common stock issuable, 350,000

shares at June 30, 2020

Additional paid in capital

Accumulated deficit

Total stockholders’

equity (deficit)

Total liabilities and stockholders’

equity (deficit)

stockholders’ equity

liabilities and stockholders’ equity

accompanying notes are an integral part of these condensed financial statements.

REED’S,

STATEMENTS OF OPERATIONS

the Three months Ended March 31, 2020 and 2019

the Three and Six Months Ended June 30, 2020 and 2019

in thousands, except share and per share amounts)

Three Months Ended

Cost of goods sold

Months Ended June 30,

Cost of goods

Operating expenses:

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General and administrative expense

Gain on sale of assets

Total operating expenses

operating expenses

Loss from operations

Interest expense

Change in fair value of warrant liability

Net loss per share –

basic and diluted

Weighted average number of shares outstanding –

basic and diluted

Change in fair

value of warrant liability

on Series A Convertible Preferred Stock

Loss Attributable to Common Stockholders

per share – basic and diluted

Weighted average number of shares outstanding – basic and

accompanying notes are an integral part of these condensed financial statements.

REED’S,

STATEMENTS OF CHANGES IN STOCKHOLDERS’

EQUITY (DEFICIT)

the Three months Ended March 31, 2020 and 2019

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

the Three and Six months Ended June 30, 2020 and 2019

in thousands except share amounts)

Preferred Stock

Common Stock Issuable

Additional Paid

Stockholders’

Balance, December 31, 2019

Stock Issuable Shares

Stock Issuable Amount

Paid In Capital

Stockholders’ Equity (Deficit)

Stock Issuable

Stockholders’ Equity

Balance, March 31, 2020

Fair value of vested options

Dividends on Series A Convertible Preferred

Common shares issued pursuant to the

rights offering, net of offering costs

Shares granted to Directors for services

Shares granted to Directors for services, shares

Fair value of vested restricted shares granted to an

officer for services

Fair value of vested restricted shares granted to an

officer for services, shares

Fair value of vested restricted shares granted to officers

Fair value of vested restricted shares granted to an

officer for services, shares

Dividends on Series A Convertible Preferred Stock, shares

Exercise of warrants

Exercise of warrants, shares

Balance, June

Stockholders’

Balance, December 31, 2019

Fair value of vested options

Fair value of vested restricted shares

granted to officers

Dividends on Series A Convertible Preferred

Common shares issued pursuant to the

rights offering, net of offering costs

Balance, June

Stockholders’

Balance, March 31, 2019

Preferred Stock

Common Stock Issuable

Additional Paid

Stockholders’

Fair value of vested options

Shares granted to Directors for services

Dividends on Series A Convertible Preferred

Fair value of vested restricted shares

granted to an officer for services

Exercise of warrants

Balance, June 30, 2019

Stockholders’

Balance, December 31, 2018

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Shares granted to Directors for services

Fair value of vested restricted shares granted to an officer

Common shares issued pursuant to the rights offering, net of offering

Fair value of vested restricted shares

granted to an officer for services

Dividends on Series A Convertible Preferred

Common shares issued pursuant to the

rights offering, net of offering costs

Exercise of warrants

Balance, March 31, 2019

Balance, June

accompanying notes are an integral part of these condensed financial statements.

REED’S,

STATEMENTS OF CASH FLOWS

the Three months Ended March 31, 2020 and 2019

the Six months Ended June 30, 2020 and 2019

in thousands)

March 31, 2020

March 31, 2019

Cash flows from operating activities:

Adjustments to reconcile net loss to net cash used in operating activities:

Gain on sale of property & equipment

Amortization of debt discount

Amortization of right of use assets

Cash flows from

operating activities:

Adjustments to reconcile

net loss to net cash used in operating activities:

(Gain)/loss on sale

of property & equipment

(Gain)/loss on termination

Amortization of

debt discount

Amortization of

right of use assets

Fair value of vested options

Fair value of vested restricted shares granted to officers

Common stock issued for services

Decrease in allowance for doubtful accounts

Decrease in inventory reserve

Change in fair value of warrant liability

Accrual of interest on convertible note to a related party

Fair value of vested

restricted shares granted to officers

Common stock issued

Decrease in allowance

for doubtful accounts

Decrease (increase)

in inventory reserve

Change in fair value

of warrant liability

Accrual of interest

on convertible note to a related party

Lease liability

Changes in operating assets and liabilities:

Changes in operating

assets and liabilities:

Accounts receivable

Prepaid expenses and other assets

Prepaid expenses

and other assets

Accounts payable

Accrued expenses

Net cash used in operating activities

Cash flows from investing activities:

Proceeds from sale of property and equipment

Purchase of property and equipment

Net cash used in investing activities

Cash flows from financing activities:

Borrowings on line of credit

cash used in operating activities

Cash flows from

investing activities:

Trademark costs

Proceeds from sale

of property and equipment

cash used in investing activities

Cash flows from

financing activities:

Borrowings on line

Repayments of line of credit

Repayment of amounts due to/from officers

Principal repayments on capital lease obligation

Proceeds from note

Repayment of amounts

due to/from officers

Principal repayments

on capital lease obligation

Exercise of warrants

Proceeds from sale of common stock

Net cash provided by financing activities

Net increase (decrease) in cash

from sale of common stock

cash provided by financing activities

Net increase in cash

Cash at beginning of period

Cash at end of period

Supplemental disclosures of cash flow information:

Supplemental disclosures

of cash flow information:

Cash paid for interest

Non Cash Investing

and Financing Activities

Dividends on Series

A Convertible Preferred Stock

accompanying notes are an integral part of these condensed financial statements.

REED’S,

TO CONDENSED FINANCIAL STATEMENTS

months Ended March 31, 2020 and 2019 (Unaudited)

and Six months Ended June 30, 2020 and 2019 (Unaudited)

thousands, except share and per share amounts)

Basis of Presentation and Liquidity

accompanying interim condensed financial statements of Reed’s, Inc.

(the “Company”, “we”, “us”,

or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments,

necessary to present fairly our financial position at March 31, 2020 and the results of operations and cash flows for the three

months ended March 31, 2020 and 2019.

The balance sheet as of December 31, 2019 is derived from the Company’s audited financial

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 June 30, 2020 and the results of operations and cash flows for the three

and six months ended June 30, 2020 and 2019.

The balance sheet as of December 31, 2019 is derived from the Company’s audited

financial statements.

information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting

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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, as filed with the Securities and Exchange Commission on March 18, 2020 and amended on April 8, 2020.

results of operations for the three months ended March 31, 2020 are not necessarily indicative of the results of operations to

be expected for the full fiscal year ending December 31, 2020.

In March 2020 the World Health Organization

declared coronavirus COVID-19 a global pandemic.

This contagious disease outbreak, which has continued to spread, has adversely

affected workforces, customers, economies, and financial markets globally.

It has also disrupted the normal operations of many

businesses, including ours.

This outbreak could decrease spending, adversely affect demand for our product and harm our business

and results of operations.

It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak

and its effects on our business or results of operations at this time.

results of operations for the six months ended June 30, 2020 are not necessarily indicative of the results of operations to be

expected for the full fiscal year ending December 31, 2020.

Considerations

the quarter ended June 30, 2020, the COVID-19 pandemic did not have a material net impact on our operating results.

In the future,

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.

ability to operate without significant 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 the three months ended June 30, 2020, 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.

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

June 30, 2020, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date.

to customers in the second quarter were up 16% from the first quarter of the year.

Through June 30, 2020, 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.

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.

accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern.

assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

the three months ended March 31, 2020, the Company recorded a net loss of $2,580 and used cash in operations of $2,352.

As of March 31, 2020, we had a cash balance of $28 with borrowing capacity of $2,961, a stockholder’s deficit of $653 and

a working capital of $3,173, compared to a cash balance of $913 with borrowing capacity of $3,235, stockholders’

of $1,147 and a working capital of $4,885 at December 31, 2019.

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 $5,362, after deducting underwriting discounts and commissions and other offering expenses.

Proceeds from

the offering will provide capital for working capital, and general corporate purposes.

On April 29, 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”), which was enacted on March 27, 2020.

the six months ended June 30, 2020, the Company recorded a net loss of $ 4,330

and used cash in operations of $ 5,028 .

As of June 30, 2020, we had a cash balance of $ 1,112

with borrowing capacity of $ 6,704 ,

a stockholder’s equity of $ 2,866 and

a working capital of $ 2,257 ,

compared to a cash balance of $ 913

with borrowing capacity of $ 3,235 ,

stockholders’ equity of $ 1,147 and

a working capital of $ 4,885 at

December 31, 2019.

April 2020, the Company conducted a public offering of 15,333,334 shares of its common stock at $ 0.375 per share, resulting in

net proceeds to the Company of $ 5,310 .

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).

Historically,

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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

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 tangibl e

and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing

stock instruments issued for services.

Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”).

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.

Company recognizes revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606), (“ASC 606”).

The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount

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generally occurs upon shipment from our facilities.

The Company’s performance obligations are satisfied at that time.

of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required

The Company’s performance obligations are satisfied at that time.

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.

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Potential common shares are excluded from the computation when their effect is antidilutive.

the periods ended March 31, 2020 and 2019, the calculations of basic and diluted loss per share are the same because potential

the periods ended June 30, 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:

March 31, 2020

March 31, 2019

Schedule of Potentially Dilutive Securities

June 30, 2020

June 30, 2019

Convertible note to a related party

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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

The Company accounts for such grants issued and vesting based on ASC 718, whereby the value of the award is measured on

the date of grant and recognized as compensation expense on the straight-line basis over the vesting period.

The Company recognizes

the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of

the services rendered.

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.

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 $302 and $307 for the three months ended March

31, 2020 and 2019, respectively.

Compensation Expense

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, whereby the value

of the award is measured on the date of grant and recognized as compensation expense on the straight-line basis over the vesting

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.

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.

costs are expensed as incurred and are included in selling and marketing expense.

Advertising costs for the three months ended

June 30, 2020 and 2019, aggregated $ 303 and $ 1,227 , respectively.

Advertising costs for the six months ended June 30, 2020 and

2019, aggregated $ 606 and $ 1,533 , respectively.

Concentrations

During the three months

ended March 31, 2020, the Company’s two largest customers accounted for 22% and 14% of gross sales,

respectively.

During the three months ended March 31, 2019, the Company’s two largest customers accounted for

25% and 9% of gross sales, respectively.

No other customers exceeded 10% of sales in either period.

Accounts receivable.

As of March 31,

2020, the Company had accounts receivable from three customers which comprised 18%, 14%, and 10% of its gross

accounts receivable, respectively.

As of December 31, 2019, the Company had accounts receivable from one customer which

comprised 14% of its gross accounts receivable.

During the three months ended June 30, 2020, two customers accounted for 26 % and 13 % of gross sales, respectively,

and during the six months ended June 30, 2020, two customers accounted for 25 % and 14 % of gross sales, respectively.

three months ended June 30, 2019, two customers accounted for 29 % and 14 % of gross sales, respectively, and during the six months

ended June 30, 2019, two customers accounted for 28 % and 12 % of gross sales, respectively.

No other customers exceeded 10 % of

sales in either period.

As of June 30, 2020, the Company had accounts receivable from one customer which comprised 23 % of its gross accounts

As of December 31, 2019, the Company had accounts receivable from one customer which comprised 14 % of its gross accounts

from vendors.

During the three months ended March 31, 2020, the Company’s largest vendor accounted for approximately

10% of all purchases.

During the three months ended March 31, 2019, the Company’s two largest vendors accounted

for approximately 17% and 13% of all purchases, respectively.

No other customers exceeded 10% of all purchases in either periods.

As of March 31, 2020, the Company’s two largest vendors accounted for 16% and 10% of the total accounts payable,

respectively.

As of December 31, 2019, the Company’s largest three vendors accounted for 19%, 15% and 14% of the total accounts

payable, respectively.

During the three months ended June 30, 2020, no vendor exceeded 10 % of all purchases.

During the six months

ended June 30, 2020, one vendor accounted for 11 % of all purchases.

During the three months ended June 30, 2019, each of the Company’s

two largest vendors accounted for approximately 10 % of all purchases.

During the six months ended June 30, 2019, one vendor accounted

for 13 % of all purchases and another accounted for 10 % of all purchases.

No other vendors exceeded 10 % of all purchases in either

As of June 30, 2020, of the Company’s three largest vendors, two each accounted for 12 %,of the total accounts

payable and the third, 11 %.

As of December 31, 2019, of the Company’s largest three vendors, one accounted for 19 % of the

total accounts payable, the second, 15 %, and the third, 14 %.

Value of Financial Instruments

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ASC 820 defines the following levels of subjectivity associated with the inputs:

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

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

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

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

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

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

carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank

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because interest rates on these obligations are based on prevailing market interest rates.

of March 31, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair

of June 30, 2020, and December 31, 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair

value of warrant liabilities aggregating $ 15 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.

Accounting Pronouncements

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.

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.

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.

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.

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):

December 31, 2019

Schedule of Inventory

Raw materials and packaging

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Company has recorded a reserve for slow moving and potentially obsolete inventory.

The reserve at March 31, 2020, and December

The reserve at June 30, 2020, and December

31, 2019, was $ 437 and $ 646 , respectively.

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

December 31, 2019

Right-of-use assets under operating leases

Schedule of Property and

Right-of-use assets under

operating leases

Right-of-use assets under finance leases

Computer hardware and software

Accumulated depreciation and amortization

Machinery and

Accumulated depreciation

and amortization

Net book value

expense for the three months ended March 31, 2020 and 2019 was $12 and $13, respectively.

expense for the three months ended June 30, 2020 and 2019 was $ 12 and $ 12 , respectively.

Depreciation expense for the six months

then June 30, 2020 and 2019 was $ 24 and $ 25 , respectively.

During the six months ended June 30, 2020, the Company disposed of

right-of-use assets under finance leases with a net book value of $ 45 , and terminated $ 51 of related finance leases (see Note

9), resulting in a gain on sale of assets of $ 6 .

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

December 31, 2019

Schedule of Equipment Held for Sale

Equipment held for sale

Net book value

balance as of March 31, 2020, and December 31, 2019, consists of residual manufacturing equipment, at estimated net realizable

balance as of June 30, 2020, and December 31, 2019, consists of residual manufacturing equipment, at estimated net realizable

value, which management anticipates selling during 2020.

Intangible Assets

assets are comprised of brand names acquired, specifically Virgil’s.

They have been assigned an indefinite life, as we currently

anticipate that they will contribute cash flows to the Company perpetually.

These indefinite-lived intangible assets are not amortized

but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful life remains appropriate.

We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired.

If further testing

is necessary, we compare the estimated fair value of our asset with its book value.

If the carrying amount of the asset exceeds

its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized

in an amount equal to that excess.

Based on management’s measurement, there were no indications of impairment at March 31,

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.

carrying amount of the asset exceeds its fair value, as determined by the discounted cash flows expected to be generated by the

asset, an impairment loss is recognized in an amount equal to that excess.

Based on management’s measurement, there were

no indications of impairment at June 30, 2020.

assets consists of the following (in thousands):

Summary of Intangible Assets

Line of Credit

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

December 31, 2019

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

Schedule of Amount Outstanding Under Credit Facilities

Line of Credit

Capitalized finance costs

Capitalized finance

October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc.

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a maximum borrowing capacity of $ 13,000 .

Borrowings are based on a formula of eligible accounts receivable and inventories (the

“permitted borrowings”) plus advances (an “over-advance”) of up to $4,000 in excess of permitted borrowings.

At March 31, 2020, the unused borrowing capacity under the financing agreement was $2,961.

The line of credit matures on April

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 June 30, 2020, the unused borrowing capacity under the financing agreement was $ 6,704 .

The line of credit matures on March

under the Rosenthal financing agreement bear interest at the greater of prime or 4.75 %, plus an additional 2 % to 3.5 % depending

upon whether the borrowing is based upon receivables, inventory or is an over-advance.

The effective interest rate as of March

on whether the borrowing is based upon receivables, inventory or is an over-advance.

The effective interest rate as of June

30, 2020 on outstanding borrowings was 6.8 %.

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fees, and aggregate minimum monthly fees (including interest) of $ 4 .

line of credit is secured by substantially all of the assets excluding intellectual property of the Company.

Additionally,

any over-advance is guaranteed by an irrevocable stand-by letter of credit in the amount of $1,500, issued by Daniel J.

III and the Daniel J.

Doherty, III 2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV LLC (“Raptor”).

over-advance is secured by all of Reed’s intellectual property collateral.

Raptor beneficially owns 11.6% of the Company’s

outstanding common stock as of March 31, 2020.

Doherty is a member of the Company’s Board of Directors.

of a default under the financing agreement, Raptor has a put option to purchase from Rosenthal the entire amount of any outstanding

over-advance plus accrued interest, prior to Rosenthal declaring an event of default under the financing agreement.

exercises the option, Rosenthal will release its first priority security interest on all intellectual property collateral of the

Company to Raptor and terminate the letter of credit.

part of the financing agreement in 2018, the Company amended and restated a subordinated convertible non-redeemable secured note

to Raptor, to provide for additional advances of up to $4,000 in the event that Raptor exercises its put option described above

(see Note 7).

Consequently, the exercise price of 750,000 of Raptor’s outstanding warrants to purchase the Company’s

common stock was reduced from $1.50 to $1.10, resulting in an increase in the fair value of the warrants of $161.

has been reflected as a capitalized finance cost and is being amortized over the life of the financing agreement.

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 is guaranteed by an irrevocable stand-by letter of credit in the amount of

$ 1,500 , issued by Daniel J.

Doherty III and the Daniel J.

Doherty, III 2002 Family Trust, affiliates of Raptor/Harbor Reeds SPV

LLC (“Raptor”).

As of June 30, 2020, Raptor beneficially owns 11.6 % of the Company’s outstanding common stock

Doherty is a member of the Company’s Board of Directors.

In the event of a default under the financing agreement,

Raptor has a put option to purchase from Rosenthal the entire amount of any outstanding over-advance plus accrued interest, prior

to Rosenthal declaring an event of default under the financing agreement.

financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions,

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the end of each quarter.

We were in compliance with the terms of our agreement with Rosenthal as of March 31, 2020.

2018, the Company incurred $882 of direct costs in conjunction with the initial financing agreement, consisting primarily of broker,

bank and legal fees, and $161 cost of warrant modification.

The Company annually incurs an additional $130 of fees from the bank,

which is equal to 1% of the $13,000 borrowing limit.

These costs have been capitalized and recorded as a debt discount and are

being amortized over the 2.5 year life of the Rosenthal agreement.

Amortization of debt discount was $96 and $75 for the three

months ended March 31, 2020 and 2019, respectively.

We were in compliance with the terms of our agreement with Rosenthal as of June 30, 2020.

of debt discount was $ 193 and $ 150 for the six months ended June 30, 2020 and 2019, respectively.

Convertible Note to a Related Party

Convertible Note to a Related Party consists of the following (in thousands):

March 31, 2020

December 31, 2019

Schedule of Convertible Notes

12 % Convertible Note Payable

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Total obligation

April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable

note in the principal amount of $3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock.

The purchaser, Raptor/Harbor Reeds SPV LLC (“Raptor”), beneficially owned approximately 11.6% and 14.9% of the Company’s

common stock at March 31, 2020 and December 31, 2019, respectively.

Raptor Note bears interest at a rate of 12% per annum, compounded monthly.

It is secured by the Company’s assets, subordinate

to the first priority security interest of Rosenthal & Rosenthal (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.

warrant will expire on April 21, 2022 and has an adjusted exercise price of $1.50 per share.

The note and warrant contain customary

anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have

been registered on Form S-3.

The investor was also granted the right to participate in future financing transactions of the Company

for a term of two years.

October 4, 2018, in connection with the execution of the Rosenthal financing agreement, the Company amended and restated the subordinated

convertible non-redeemable secured note to Raptor, to provide for additional advances of up to $4,000.

In consideration therefore,

the exercise price of 750,000 of Raptor’s outstanding warrants was reduced from $1.50 to $1.10, resulting in an increase

in the fair value of the warrants, determined in accordance with the Black-Scholes-Merton option pricing model, of $161.

amount was recorded as a debt discount to the Rosenthal line of credit and is being amortized as interest expense over the life

of the financing agreement (See Note 6).

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 11.6 % and 14.9 % of the Company’s common stock at

June 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.

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.

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 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 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 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 June 30, 2020.

Leases Payable

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and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments.

As a result, we recorded right-of-use assets aggregating $862 as of October 1, 2018, utilizing a discount rate of 12.6%.

amount consists of new leases on the Company’s Norwalk office and certain office equipment of $730, and existing capitalized

leases reclassified to right of use assets of $132.

The Company leases its Norwalk 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.

2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is

allocated over the lease term, generally on a straight-line basis.

During the three months ended March 31, 2020, the Company reflected

amortization of right of use asset of $32 related to these leases, resulting in a net asset balance of $661 as of March 31, 2020.

accordance with ASU 2016-02, the right-of-use assets are being amortized over the life of the underlying leases.

During the six months ended June 30, 2020, the Company disposed

of right-of-use assets of $ 45 , and reflected amortization of right of use asset of $ 62 related to these leases, resulting in a

net asset balance of $ 590 as of June 30, 2020.

of December 31, 2019, liabilities recorded under finance leases and operating leases were $ 89 and $ 697 , respectively.

three months ended March 31, 2020, the Company made payments of $22 towards finance lease liability and $7 towards operating lease

As of March 31, 2020, liability under finance lease amounted to $67 and liability under operating lease amounted to

$690, of which $66 and $29 were reflected as current due, under finance leases and operating leases, respectively.

of March 31, 2020, the weighted average remaining lease terms for operating lease and finance lease are 4.76 years and 0.75 years,

six months ended June 30, 2020, the Company terminated $ 51 of finance leases, and made payments of $ 5 towards finance lease liability

and $ 13 towards operating lease liability.

As of June 30, 2020, liability under finance lease amounted to $ 33 and liability under

operating lease amounted to $ 684 , of which $ 56 and $ 33 were reflected as current due, under finance leases and operating leases,

respectively.

of June 30, 2020, the weighted average remaining lease terms for operating lease and finance lease are 4.51 years and 0.50 years,

respectively.

The weighted average discount rate for operating lease is 12.6 % and 9.0 % for finance lease.

Warrant Liability

stock sales 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

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.

fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at March 31, 2020 and December

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.

fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at June 30, 2020 and December

31, 2019, using the following assumptions:

December 31, 2019

Warrant Liability Using Assumptions

Risk free interest rate

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Expected dividend yield

Number of Warrants containing fundamental transaction provisions

Number of Warrants containing fundamental

transaction provisions

Fair Value of Warrants

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following table sets forth a summary of the changes in the estimated fair value of the warrant liability during the three months

ended March 31, 2020 and 2019:

ended June 30, 2020 and 2019:

Schedule of Warrant Liability

Beginning Balance

Change in fair value

Change in fair

Ending balance

Stock-Based Compensation

following table summarizes restricted stock activity during the three months ended March 31, 2020:

stock issuance

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

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.

Share-based payments

following table summarizes restricted stock activity during the six months ended June 30, 2020:

Summary of Non-vested Restricted Stock Activity

Balance, December 31,

Balance, March 31, 2020

the three months ended March 31, 2020, the Company issued 500,000 shares of restricted stock to a director and two executive employees.

June 30, 2020

the six months ended June 30, 2020, the Company issued 500,000 shares of restricted stock to a director and two executive employees.

350,000 of these shares vested immediately, 75,000 shares will vest in increments of 18,750 each over four years from the date

4 unchanged sentences

grants and is amortized as shares vest.

The total fair value of restricted common stock vesting during the three months ended

March 31, 2020 and 2019 was $285 and $150, respectively, and is included in general and administrative expenses in the accompanying

The total fair value of restricted common stock vesting during the six months ended June

30, 2020 and 2019 was $ 285 and $ 331 , respectively, and is included in general and administrative expenses in the accompanying

statements of operations.

As of March 31, 2020, the amount of unvested compensation related to issuances of restricted common

stock was $133, which will be recognized as an expense in future periods as the shares vest.

As of June 30, 2020, the amount of unvested compensation related to issuances of restricted common stock

was $ 133 , which will be recognized as an expense in future periods as the shares vest.

When calculating basic loss per share,

2 unchanged sentences

income per share, these shares are included in weighted average common shares outstanding as of their grant date.

following table summarizes stock option activity during the three months ended March 31, 2020:

following table summarizes stock option activity during the six months ended June 30, 2020:

Schedule of Stock Option Activity

Exercise Price

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Unvested forfeited or expired

Vested Forfeited or expired

Outstanding at March 31, 2020

Exercisable at March 31, 2020

the three months ended March 31, 2020, the Company approved options exercisable into 1,617,800 shares to be issued pursuant to

Reed’s 2017 Incentive Compensation Plan.

1,282,800 options were issued to employees including 582,800 options that vested

immediately, 350,000 options vesting annually over a four-year vesting period, and 350,000 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.

The stock options are exercisable at a price

ranging from $0.44 to $0.89 per share and expire in ten years.

The total fair value of these options at grant date was approximately

Vested forfeited

Outstanding at June 30, 2020

Exercisable at June 30, 2020

the six months ended June 30, 2020, the Company approved options exercisable into 2,067,800 shares to be issued pursuant to Reed’s

2017 Incentive Compensation Plan.

1,732,800 options were issued to employees including 582,800 options that vested immediately,

575,000 options vesting annually over a four-year vesting period , and 575,000 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.

stock options are exercisable at a price ranging from $ 0.44

per share and expire in ten years .

total fair value of these options at grant date was approximately $ 1,168 ,

which was determined using a Black-Scholes-Merton option pricing model with the following average assumption:

ranging from $0.44 to $0.89 per share, expected term of seven years, volatility of 120%, dividend rate of 0%, and risk-free interest

rate ranging from 0.56% to 1.63%.

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;

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 $896 will be amortized as the options vest in future

periods through March 28, 2024.

During the three months ended March 31, 2020

and 2019, the Company recognized $495 and $412 of compensation expense relating to vested stock options.

31, 2020, the aggregate amount of unvested compensation related to stock options was approximately $1,875 which will be

recorded as an expense in future periods as the options vest.

of March 31, 2020, the outstanding options have no intrinsic value.

The aggregate intrinsic value was calculated as the difference

between the closing market price as of March 31, 2020, which was $0.48, and the exercise price of the outstanding stock options.

stock price ranging

from $0.44 to $0.89 per share, expected term of seven

years , volatility of 120 %,

dividend rate of 0 %,

and risk-free interest rate ranging from 0.56 %

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

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

the six months ended June 30, 2020 and 2019, the Company recognized $ 459 and $ 854 of compensation expense relating to vested stock

As of June 30, 2020, the aggregate amount of unvested compensation related to stock options was approximately $ 1,851

which will be recorded as an expense in future periods as the options vest.

of June 30, 2020, the outstanding options have an intrinsic value of $ 588 .

The aggregate intrinsic value was calculated as the

difference between the closing market price as of June 30, 2020, which was $ 0.96 , and the exercise price of the outstanding stock

Stock Warrants

of March 31, 2020, the Company has issued warrants to purchase an aggregate of 6,413,782 shares of common stock.

The Company’s

warrant activity during the three months ended March 31, 2020 is as follows:

Average Exercise Price

Average Remaining Contractual Terms (Years)

Aggregate Intrinsic Value

of June 30, 2020, the Company has issued warrants to purchase an aggregate of 6,413,782 shares of common stock.

The Company’s

warrant activity during the six months ended June 30, 2020 is as follows:

Schedule of Warrant Activity

Exercise Price

Remaining Contractual Terms (Years)

Outstanding at December 31, 2019

Forfeited or expired

Outstanding at March 31, 2020

Exercisable at March 31, 2020

were no warrant transactions during the three months ended March 31, 2020.

As of March 31, 2020, the outstanding warrants have

no intrinsic value.

The intrinsic value was calculated as the difference between the closing market price as of March 31, 2020,

which was $0.48, and the exercise price of the Company’s warrants to purchase common stock.

Outstanding at June 30, 2020

Exercisable at June 30, 2020

were no warrant transactions during the six months ended June 30, 2020.

As of June 30, 2020, the outstanding warrants have no

intrinsic value.

The intrinsic value was calculated as the difference between the closing market price as of June 30, 2020, which

was $ 0.96 , and the exercise price of the Company’s warrants to purchase common stock.

Related Party Activities

December 31, 2018, the Company completed the sale of its Los Angeles manufacturing plant to CCB, an entity owned by Chris Reed,

a related party.

The sale included substantially all machinery, equipment, furniture and fixtures of the manufacturing plant.

CCB assumed the monthly payments on our lease obligation effective immediately upon closing of the sale.

Our release from the

obligation by the lessor, however, is dependent upon CCB’s deposit of $1,200 of security with the lessor.

As of March 31,

2020, $800 has been deposited with the lessor and Mr.

Reed has placed approximately 363,000 shares of the Company’s common

stock valued at $174 that he owns into escrow with the lessor.

Reed expects to deposit the proceeds from the sale of the shares

with the lessor in 2020, at which time we expect to be released from the lease obligation.

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.

For the year ended December 31, 2019, the Company

recorded royalty revenue from CCB of $128 which is recorded as a receivable.

In addition, at December 31, 2019, the Company has

outstanding receivable from CCB of $228 consisting of inventory advances to CCB.

a related party, and CCB assumed the monthly payments on our lease obligation for the Los Angeles manufacturing plant.

from the obligation by the lessor, however, is dependent upon CCB’s deposit of $ 1,200 of security with the lessor.

June 30, 2020, $ 800 has been deposited with the lessor and Mr.

Reed has placed approximately 363,000 shares of the Company’s

common stock valued at $ 348 that he owns into escrow with the lessor.

Reed expects to deposit the proceeds from the sale of

the shares with the lessor in 2020, at which time we expect to be released from the lease obligation.

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 six months ended June 30, 2020, the Company

recorded royalty revenue from CCB of $ 5 .

During the six months ended June 30, 2019, the Company did not record any royalty revenue

December 31, 2019, the Company had royalty revenue receivable from CCB of $ 128 .

In addition, at December 31, 2019, 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 three months ended March 31, 2020, the Company received payment of $126, leaving a receivable balance

of $230 at March 31, 2020.

During the six months ended June 30, 2020, the Company received payment of $ 126 , leaving an aggregate receivable

balance of $ 230 at June 30, 2020.

Subsequent Events

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

The net proceeds to the Company from this offering are $5,362, after deducting underwriting discounts and commissions

and other offering expenses.

Proceeds from the offering will provide capital for working capital, and general corporate purposes.

On April 29, 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”), which was enacted on March 27, 2020.

April 9, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department notifying the Company

that the bid price of our common stock had closed at less than $1.00 per share over the previous 30 consecutive business

days, and, as a result, did not comply with Listing Rule 5550(a)(2), the continued listing bid price rule.

was provided 180 calendar days to regain compliance with the continued listing bid price rule.

Subsequently, in response

to the COVID-19 pandemic and related extraordinary market conditions, Nasdaq announced that the compliance period for any company

previously notified about non-compliance with the continued listing bid price rule will be suspended and resume on July 1, 2020.

If, at any time during the extended compliance period, the bid price of our common stock closes at $1.00 per share

or more for a minimum of 10 consecutive business days, Nasdaq staff will provide written notification that the Company has achieved

compliance with the continued listing bid price rule.

If we fail to regain compliance with the continued listing bid

price rule during this period but meet all of the other applicable standards for initial listing on the Nasdaq Capital Market

with the exception of the continued listing bid price rule, we may be eligible for additional time.

we would be required to meet the continued listing requirement for market value of publicly held shares and all other initial

listing standards for the Nasdaq Capital Market, with the exception of the continued listing bid price rule, and would

need to provide written notice of our intention to cure the deficiency during the second compliance period, by effecting a reverse

stock split, if necessary.

April 20, 2020, the Company received a notification letter from the Nasdaq Listing Qualifications department that, based upon

review of Nasdaq Listing Rule 5550(b)(2) which requires the Company to maintain a minimum Market Value of Listed Securities (the

“MVLS Rule”) of $35 million, the Company’s MVLS for the last 30 consecutive business days no longer

meets this requirement.

Consequently, a deficiency exists with regard to the MVLS Rule.

Nasdaq listing Rule 5810(c)(3)(C) provides

Reed’s a compliance period of 180 calendar days, or through October 19, 2020, during which to regain compliance.

any time during the compliance period the MVLS closes at $35 million or more for a minimum of ten consecutive business days, the

Nasdaq Listing Qualifications Department will provide the Company written confirmation of compliance with the MVLS Rule and this

matter will be closed.

If we fail to regain compliance with the MVLS Rule during the compliance period, we will receive written

notification that our securities will be subject to delisting.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

first quarter of 2020 the Company fully utilized their expanded network of co-packers and implemented an upgraded set of quality

We also launched our Reed’s Really Real Ginger Ale and Reed’s Wellness Shots.

In addition to our traditional

sales channels, the Company is utilizing their ecommerce platform that includes their branded web sites and Amazon to offer its

line of shots, ginger candy and drinks packaged in cans.

public equity offering, which closed on April 20, 2020, provided the Company with funds for working capital and general corporate

These funds will provide the support necessary to execute our 2020 strategy that includes driving growth while strategically

reducing operating costs.

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.

In March 2020 the World Health Organization

declared coronavirus COVID-19 a global pandemic.

This contagious disease outbreak, which has continued to spread, has adversely

affected workforces, customers, economies, and financial markets globally.

It has also disrupted the normal operations of many

businesses, including ours.

This outbreak could decrease spending, adversely affect demand for our product and harm our business

and results of operations.

It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak

and its effects on our business or results of operations at this time.

of Operations –

Three months ended March 31, 2020 as compared to March 31, 2019

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

Three Months Ended March 31,

Gross sales (A)

Promotional and other allowances (B)

Cost of goods produced (C)

% of Gross sales

% of Net sales

Cost of goods sold –

idle capacity (D)

% of Net sales

Delivery and handling

% of Net sales

Dollar per case ($)

Selling and marketing

% of Net sales

General and administrative

% of Net sales

Gain on sale of assets

Total Operating expenses

Loss from operations

Interest expense and other expense

Loss per share –

basic and diluted

Weighted average shares outstanding - basic & diluted

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.

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.

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

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.

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

Cost of goods produced is used internally by management to measure the direct costs of goods sold, aside from unallocated

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.

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.

Cost of Sales, and Gross Margins

following chart sets forth key statistics for the transition of the Company’s top line activity from the first quarter of

2019 through the first quarter of 2020.

Virgil’s

Gross Margin:

as % Net Sales

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, discontinued brands such as China Cola and Sonoma

Sparklers, as well private label SKUs which were sold to California Custom Beverage as part of the plant sale on December 31,

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 ended March 31, 2020, represents

98% of all beverage volume.

brand gross revenue increased by 12% to $10,175 compared to the same period last year, driven by Reed’s volume growth of

This increase was slightly reduced as sales of discontinued and private label sales, which are no longer part of our portfolio

The result is an increase in total gross revenue of 11%, to $10,551 from $9,520 during the same period last

On a 12-ounce case basis, price on our core brands increased $0.10 per 12-ounce case or 1% year over year, while volume

grew 11% as compared to the same period last year.

as a percentage of gross sales decreased to 10% in the first quarter of 2020 from 11% in the same period last year.

in our promotions was driven by lower promotional activity primarily due to the impacts of COVID-19 as promotional execution took

less of a priority in the marketplace.

As a result, net sales revenue grew 13% in the first quarter of 2020 to $9,523,

compared to $8,449 in the same period last year.

of Goods Sold and Produced

of goods sold increased $708 during the first quarter of 2020 as compared to the same period last year.

As a percentage of net

sales, cost of goods sold remained steady at 70% for both the first quarter of 2020, and the same period last year.

total cost of goods per case increased to $11.9 per case in the first quarter of 2020 from $11.3 per case in the first quarter

of 2019 as higher costed inventory remaining from 2019 was sold.

The cost of goods sold per case on core brands decreased to $11.7

during the first quarter of 2020, from the $13.3 experienced in the preceding quarter (fourth quarter of 2019).

We are continuing

to work with suppliers and co-packers to improve our processes and maximize cost efficiencies.

Gross margin increased 50 bps to 30.1%

for the first quarter of 2020, compared to 29.6% during the same period last year.

and Handling Expenses

and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after

Delivery and handling expenses increased by $233 in the first quarter of 2020 to $1,263 from $1,030 in the same period

last year, driven by increased volumes.

Delivery costs in the first quarter of 2020 were 13% of net sales and $2.3 per case, compared

to 12% of net sales and $2.0 per case during the same period last year as a result of increased costs due to market forces impacted

and Marketing Expenses

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.

selling and marketing expenses were $1,925 during the first quarter of 2020, compared to $2,015 during the same period last year.

As a percentage of net sales, selling and marketing costs decreased to 20% during the three months ended March 31, 2020, as compared

to 24% during the same period last year.

The decrease represents a lapping of the Catalina retail register coupon program, which

was not implemented in the first quarter of 2020.

and Administrative Expenses

and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional

General and administrative expenses decreased in the first quarter of 2020 to $1,932 from $2,371, a decrease of $439

over the same period last year.

Our general and administrative expense reduction was largely driven by the lapping of a $220

one-time final transition cost incurred in 2019 related to our plant sale and a reduction in temp staffing of $90.

from Operations

loss from operations was $2,250 for the three months ended March 31, 2020, as compared to a loss of $2,882 in the same period

last year driven by increase gross profit and reductions in operating expenses discussed above.

and Other Expense

Interest and other expense for the three months

ended March 31, 2020 consisted of $336 of interest expense offset by the change in fair value of our warrant liability

During the same period last year, interest expense was $335, and expense related to the change in fair value of our warrant

liability was $47.

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.

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.

forth below is a reconciliation of net loss to Modified EBITDA for the three months ended March 31, 2020 and 2019 (unaudited;

in thousands):

Three Months Ended March 31

Modified EBITDA adjustments:

Depreciation and amortization

Interest expense

Stock option and other noncash compensation

Change in fair value of warrant liability

Total EBITDA adjustments

Modified EBITDA

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.

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

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.

and Capital Resources