REED'S, INC. 10-K

Item 8. Financial Statements Report of Independent Registered Public Accounting Firm F-1 Financial Statements: Balance Sheets as of December 31, 2020 and December 31, 2019 F-2 Statements of Operations for the years ended December 31, 2020 and 2019 F-3 Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-4 Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-5 Notes to Financial Statements for the years ended December 31, 2020 and 2019 F-6 41 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Reed’s, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Reed’s, Inc. (the “Company”) as of December 31, 2020 and 2019, the related statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Inventory Reserves As described in Notes 2 and 3 to the financial statements, the Company’s inventories are valued at the lower of cost or net realizable value, determined on first-in, first-out (“FIFO”) basis. The Company also determines a reserve for slow moving and potentially obsolete inventory equal to the difference between the cost of the inventory and the estimated net realizable value of the inventory based on estimated reserve percentages, which consider historical usage, known trends, inventory age, and market conditions. At December 31, 2020, the balance of inventory and inventory reserves were $11.3 million and $0.2, respectively We identified the reserve for slow moving and potentially obsolete inventory as a critical audit matter, because of the significant judgment by management in estimating the slow moving and potentially obsolete inventory reserve, and the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the reasonableness of the significant assumptions used in developing the reserve. The primary procedures we performed to address this critical audit matter included: ● We evaluated the reasonableness of the significant assumptions used by management including those related to forecasted inventory usage by considering historic sales activity and sales forecast ● We tested the completeness, accuracy, and relevance of the underlying data used in management’s estimates of slow-moving and potentially obsolete inventory. ● We tested the calculations and application of management’s methodologies related to the valuation estimates of slow-moving and potentially obsolete inventory. ● We developed an independent expectation of the excess and potentially obsolete inventory reserve using historic inventory activity and compared our independent expectation to the amount recorded in the financial statements. ● We evaluated management’s ability to accurately estimate the reserve by comparing actual write-off activity in the current year to the excess and potentially obsolete reserve estimated by the Company in the prior year. ● We tested inventory write-off activity subsequent to December 31, 2020 to discern whether there were any indications that the reserve for excess and potentially obsolete inventory may be understated. Evaluation of Liquidity As described in Note 1 to the financial statements, Management believes, based on the Company’s operating plan, that projected cash from operations and available line of credit financing is sufficient to fund operations for at least one year from the date the Company’s December 31, 2020, financial statements are issued. We identified management’s evaluation of the Company’s liquidity as a critical audit matter due to the significant judgments required by management in developing assumptions in preparing the Company’s forecasted cash flows. Addressing the matter involved especially challenging auditor judgment and effort in performing procedures and evaluating evidence supporting management’s funding requirements. The primary procedures we performed to address this critical audit matter included: ● Consideration of positive and negative evidence impacting management’s forecasts, including market and industry trends. ● Consideration of the Company’s historical ability to raise capital. ● Testing the completeness and accuracy of the underlying data used by management in preparing the forecasted cash flows by comparison to prior period forecasts to actual results. ● Evaluating the sufficiency of the Company’s liquidity disclosure. We have served as the Company’s auditor since 2004. /s/ Weinberg & Company, P.A. Los Angeles, California March 30, 2021 F- 1 REED’S INC. BALANCE SHEETS (Amounts in thousands, except share amounts) December 31, 2020 December 31, 2019 ASSETS Current assets: Cash $ 595 $ 913 Accounts receivable, net of allowance of $ 234 and $ 375 , respectively 4,718 2,099 Receivable from related party 682 356 Inventory, net of reserve for obsolescence of $ 194 and $ 646 , respectively 11,119 10,508 Prepaid expenses and other current assets 1,341 420 Total current assets 18,455 14,296 Property and equipment, net of accumulated depreciation of $ 361 and $ 482 , respectively 920 1,053 Equipment held for sale, net of impairment reserves of $96 and $96, respectively 67 67 Intangible assets 615 576 Total assets $ 20,057 $ 15,992 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 6,746 $ 5,357 Payable to related party 557 182 Accrued expenses 895 646 Revolving line of credit - 3,177 Current portion of note payable 599 - Current portion of lease liabilities 130 49 Total current liabilities 8,927 9,411 Lease liabilities, less current portion 555 737 Note payable, less current portion 171 Convertible note to a related party - 4,689 Warrant liability - 8 Total liabilities 9,653 14,845 Stockholders’ equity: Series A Convertible Preferred stock, $ 10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding 94 94 Common stock, $ .0001 par value, 120,000,000 and 100,000,000 shares authorized, respectively; 86,317,096 and 47,595,206 shares issued and outstanding, respectively 9 5 Additional paid in capital 97,031 77,596 Accumulated deficit ( 86,730 ) ( 76,548 ) Total stockholders’ equity 10,404 1,147 Total liabilities and stockholders’ equity $ 20,057 $ 15,992 The accompanying notes are an integral part of these financial statements. F- 2 REED’S, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2020 and 2019 (Amounts in thousands, except share and per share amounts) 2020 2019 Year Ended December 31, 2020 2019 Net Sales $ 41,615 $ 33,820 Cost of goods sold 28,849 25,944 Gross profit 12,766 7,876 Operating expenses: Delivery and handling expense 6,856 5,993 Selling and marketing expense 7,503 9,188 General and administrative expense 7,023 7,551 Total operating expenses 21,382 22,732 Loss from operations ( 8,616 ) ( 14,856 ) Loss on extinguishment of debt ( 262 ) - Interest expense ( 1,307 ) ( 1,286 ) Change in fair value of warrant liability 8 30 Net loss ( 10,177 ) ( 16,112 ) Dividends on Series A Convertible Preferred Stock ( 5 ) ( 5 ) Net loss attributable to common stockholders $ ( 10,182 ) $ ( 16,117 ) Loss per share – basic and diluted $ ( 0.17 ) $ ( 0.46 ) Weighted average number of shares outstanding – basic and diluted 60,644,842 35,058,004 The accompanying notes are an integral part of these financial statements. F- 3 REED’S, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) For the Years Ended December 31, 2020 and 2019 (Amounts in thousands except share amounts) Shares Amount Shares Amount Capital Deficit Total Common Stock Preferred Stock Additional Paid In Accumulated Total Stockholders’ Equity 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 - - - - 790 - 790 Fair value of vested restricted shares granted to Directors for services 46,035 - - - 132 - 132 Fair value of vested restricted shares granted to a former officer for services 442,002 - - - 374 - 374 Fair value of vested restricted shares granted to Directors and officers for services Fair value of vested restricted shares granted to Directors and officers for services, shares Dividends on Series A Convertible Preferred Stock 4,254 - - - 5 ( 5 ) - Common shares issued pursuant to the rights offerings, net of offering costs 21,150,417 2 - - 22,339 - 22,341 Exercise of warrants 223,037 - - - 365 - 365 Fair value of warrants issued on extinguishment of debt Common shares issued on conversion of note payable Common shares issued on conversion of note payable, shares Exercise of options Exercise of options, shares Net Loss - - - - - ( 16,112 ) ( 16,112 ) Balance, December 31, 2019 47,595,206 5 9,411 94 77,596 ( 76,548 ) 1,147 Balance, December 31, 2019 47,595,206 5 9,411 94 77,596 ( 76,548 ) 1,147 Fair value of vested options - - - - 1,176 - 1,176 Fair value of vested restricted shares granted to Directors and officers for services 444,740 - - - 416 - 416 Fair value of warrants issued on extinguishment of debt - - - - 402 - 402 Dividends on Series A Convertible Preferred Stock 4,530 - - - 5 ( 5 ) - Common shares issued pursuant to the rights offerings, net of offering costs 36,895,834 4 - - 16,560 - 16,564 Common shares issued on conversion of note payable 1,339,286 857 857 Exercise of options 37,500 - - - 19 - 19 Net Loss - - - - - ( 10,177 ) ( 10,177 ) Balance, December 31, 2020 86,317,096 $ 9 9,411 $ 94 $ 97,031 $ ( 86,730 ) $ 10,404 The accompanying notes are an integral part of these financial statements. F- 4 REED’S, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2020 and 2019 (Amounts in thousands) December 31, 2020 December 31, 2019 Cash flows from operating activities: Net loss $ ( 10,177 ) $ ( 16,112 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 88 61 Gain on sale of property & equipment - ( 45 ) Loss on termination of leases - 8 Loss on extinguishment of debt 262 Amortization of debt discount 452 323 Amortization of right of use assets 116 91 Fair value of vested options 1,176 790 Fair value of vested restricted shares granted to directors and officers for services 416 506 Decrease in accounts receivable allowance ( 141 ) ( 248 ) Increase (decrease) in inventory reserve ( 452 ) 449 Decrease in fair value of warrant liability ( 8 ) ( 30 ) Accrual of interest on convertible note to a related party 558 528 Lease liability ( 28 ) - Changes in operating assets and liabilities: Accounts receivable ( 2,478 ) 757 Inventory ( 159 ) ( 3,575 ) Prepaid expenses and other assets ( 759 ) ( 645 ) Accounts payable 1,390 ( 182 ) Accrued expenses 248 ( 837 ) Net cash used in operating activities ( 9,496 ) ( 18,161 ) Cash flows from investing activities: Intangible asset trademark costs ( 39 ) Proceeds from sale of property and equipment - 45 Purchase of property and equipment ( 122 ) ( 322 ) Net cash used in investing activities ( 161 ) ( 277 ) Cash flows from financing activities: Borrowings under revolving line of credit 50,975 54,831 Repayments of revolving line of credit ( 54,636 ) ( 58,827 ) Capitalization of financing costs ( 130 ) ( 130 ) Proceeds from loan payable 770 - Amounts from related party 49 195 Repayment of convertible note payable ( 4,250 ) - Principal repayments on finance lease obligation ( 22 ) ( 48 ) Exercise of options 19 - Exercise of warrants - 365 Proceeds from sale of common stock 16,564 22,341 Net cash provided by financing activities 9,339 18,727 Net increase (decrease) in cash ( 318 ) 289 Cash at beginning of period 913 624 Cash at end of period $ 595 $ 913 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,740 $ 498 Non-cash investing and financing activities: Offset accounts receivable related party and accounts payable related party $ 153 $ - Dividends on Series A Convertible Preferred Stock $ 5 $ 5 The accompanying notes are an integral part of these financial statements. F- 5 REED’S, INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2020 and 2019 (In thousands, except share and per share amounts) 1. Operations and Liquidity Reed’s Inc. (the “Company”) is the owner and maker of both Reed Craft Ginger Beer and Reed’s Real Ginger Ale and Virgil’s Handcrafted Sodas. Established in 1989, Reed’s is America’s best-selling Ginger Beer brand and has been the leader and innovator in the ginger beer category for decades. Virgil’s is America’s best-selling independent, full line of natural craft sodas. The Reed’s Inc. portfolio is sold in over 40,000 retail stores nationwide. Reed’s Ginger Beers are unique due to the proprietary process of using fresh ginger root combined with a Jamaican inspired recipe of natural spices and fruit juices. Reed’s uses this same handcrafted approach in its Reed’s Real Ginger Ale and Virgil’s line of great tasting, bold flavored craft sodas, including its award-winning Virgil’s Root Beer. COVID-19 Considerations During the year ended December 31, 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. Our 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. Since the inception of the COVID-19 pandemic and through the year ended December 31, 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. 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 December 31, 2020, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Net sales for the year ended December 31, 2020 were up 23% from the prior year period. Through December 31, 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. 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 year ended December 31, 2020, the Company recorded a net loss of $ 10,177 and used cash in operations of $ 9,496 . As of December 31, 2020, we had a cash balance of $ 595 with borrowing capacity of $ 5,166 , stockholders’ equity of $ 10,404 and a working capital of $ 9,528 . Notwithstanding the net loss for 2020, management projects adequate cash from operations and available line of credit in 2021 to ensure continuation of the Company as a going concern for at least one year from the date the Company’s 2020 financial statements are issued. During 2020, the Company conducted public offerings and sold 36.9 million of its common shares and received net proceeds of $ 16,564 (see Note 11). 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. F- 6 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 receivables, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity. Accounts Receivable Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. 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 allowance for accounts receivable is established through a provision reducing the carrying value of receivables. At December 31, 2020 and 2019, the allowance was $ 234 and $ 375 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. 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 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 reduction in the 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 overstated provision required for excess and obsolete inventory. At December 31, 2020 and 2019, the reserve for inventory obsolescence aggregated $ 194 and $ 646 , respectively. Property and Equipment Property and equipment is stated at cost. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows: Schedule of Estimated Useful Lives of Property and Equipment and Related Depreciation Property and Equipment Type Years of Depreciation Computer hardware and software 3 - 7 years Machinery and equipment 5 years F- 7 Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2020 and 2019, the Company determined there were no indicators of impairment of its property and equipment. Intangible Assets Intangible assets are comprised of indefinite-lived brand names acquired, so classified because we anticipate that these brand names will contribute cash flows to the Company perpetually. Indefinite-lived intangible assets are not amortized but are assessed for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired, and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment test, we first assess qualitative factors to determine whether it is more likely than not 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 its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. For the years ended December 31, 2020 and 2019, the Company determined there was no impairment of its indefinite-lived brand names. Warrant Liabilities Various 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 holders in the event that a fundamental transaction occurs (such as a merger or change in control of the Company) and such cash payment is elected by the holder. 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 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 the amount of expense recorded in future periods. 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. F- 8 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. 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. Cost of Goods Sold Cost of goods sold is comprised of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs. Additionally, cost of goods sold includes direct production costs in excess of charges allocated to finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, depreciation, direct inventory write-off charges and adjustments to the inventory reserve. Charges for labor and overhead allocated to finished goods are determined on a market cost basis, which may be lower than the actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Expenses not related to the production of our products are classified as operating expenses. Delivery and Handling Expense Shipping and handling costs are comprised of purchasing and receiving, inspection, warehousing, transfer freight, and other costs associated with product distribution after manufacture and are included as part of operating expenses. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $ 1,518 and $ 2,570 for the years ended December 31, 2020 and 2019, respectively. 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. F- 9 Income Taxes The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. For the years ended December 31, 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 December 31, 2020 December 31, 2019 Convertible note to a related party - 2,266,667 Warrants 3,362,241 6,413,782 Common stock equivalent of Series A Convertible Preferred Stock 37,644 37,644 Unvested restricted common stock 150,000 - Options 9,417,898 3,265,580 Total 12,967,783 11,983,673 The Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4. Fair Value of Financial Instruments The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3—Unobservable inputs based on the Company’s assumptions. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. As of December 31, 2020, and 2019, the Company’s balance sheets included Level 2 liabilities comprised of the fair value of warrant liabilities aggregating $ 0 and $ 8 , respectively (see Note 10). Segments The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements. F- 10 Concentrations The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $ 250 . Generally, the Company’s policy is to minimize borrowing costs by immediately applying cash receipts to borrowings against its credit facility. From time to time, however, the Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the FDIC limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. Gross sales. During the year ended December 31, 2020, the Company’s largest two customers accounted for 25 % and 12 % of gross sales, respectively. During the year ended December 31, 2019, the Company’s largest two customers accounted for 12 % and 11 % of gross sales, respectively. Accounts receivable. 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 14 % of its gross accounts receivable. During the years ended December 31, 2020 and 2019, respectively, the Company utilized six and four, respectively, separate, co-packers for most its production and bottling of beverage products in the United States. With the December 31, 2018 sale of its manufacturing plant, the Company no longer conducts a manufacturing operation, accordingly it utilizes co-packers to produce 100 % of its products as of those dates. The Company has long-standing relationships with two different co-packers, and in conjunction with the sale of its manufacturing plant we entered into a third co-packing agreement with California Custom Beverage LLC (“CCB”), the purchaser of the plant (see Note 15). CCB is 100 % owned by Chris Reed, founder of the Company and current Chief Information Officer and director. Although there are other packers, a change in co-packers may cause a delay in the production process, which could ultimately affect operating results. Purchases from vendors. During the year ended December 31, 2020, the Company’s largest two vendors accounted for approximately 12 % and 11 % of all purchases, respectively. During the year ended December 31, 2019, the Company’s largest three vendors accounted for approximately 12 %, 11 %, and 10 % of all purchases, respectively. Accounts payable. As of December 31, 20120 the Company’s largest two vendors accounted for 12 % 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. 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. In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “ 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 the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from 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 for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company January 1, 2024. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the 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. F- 11 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. 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 December 31, 2020 December 31, 2019 Raw materials and packaging $ 6,793 $ 4,261 Finished products 4,326 6,247 Total $ 11,119 $ 10,508 The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at December 31, 2020 and 2019 was $ 194 and $ 646 , respectively. 4. Property and Equipment Property and equipment is comprised of the following (in thousands): Schedule of Property and Equipment December 31, 2020 December 31, 2019 Right-of-use assets under operating leases $ 724 $ 730 Right-of-use assets under finance leases 54 179 Computer hardware and software 400 543 Machinery and equipment 103 83 Total cost 1,281 1,535 Accumulated depreciation and amortization ( 361 ) ( 482 ) Net book value $ 920 $ 1,053 Depreciation expense for the years ended December 31, 2020 and 2019 was $ 88 and $ 24 , respectively, and amortization of right-of-use assets for the years ended December 31, 2020 and 2019 was $ 116 and $ 91 , respectively. During the year ended December 31, 2020, the Company disposed of right-of-use assets under finance leases with a net book value of $ 51 and terminated $ 51 of related finance leases (see Note 9). Additionally, during the year ended December 31, 2020, the Company reclassified $ 6 of right-of-use assets under operating leases to right-of-use assets under finance leases and disposed of fully depreciated computer hardware and software of $ 244 with zero net book value. Equipment held for sale consists of the following (in thousands): Schedule of Equipment Held for Sale December 31, 2020 December 31, 2019 Equipment held for sale $ 163 $ 163 Reserve ( 96 ) ( 96 ) Net book value $ 67 $ 67 The balance as of December 31, 2020 and 2019 consists of residual manufacturing equipment, at estimated net realizable value, which management anticipates selling during 2021. F- 12 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 assessment, there were no indications of impairment at December 31, 2020. During the year ended December 31, 2020, the Company capitalized costs of $ 39 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 December 31, 2020 December 31, 2019 Brand names $ 576 $ 576 Trademarks 39 - Total $ 615 $ 576 6. Line of Credit Amounts outstanding under the Company’s credit facilities are as follows (in thousands): Schedule of Amount Outstanding Under Credit Facilities December 31, 2020 December 31, 2019 Line of Credit $ - $ 3,661 Capitalized finance costs - ( 484 ) Net balance $ - $ 3,177 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 December 31, 2020, the unused borrowing capacity under the financing agreement was $ 5,166 . The line of credit matures 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. Additionally, the line of credit is subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $ 4 . 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 December 31, 2020, Raptor beneficially owns 7.4 % of the Company’s outstanding common stock. 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. 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 December 31, 2020. F- 13 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 amortized over the remaining life of the Rosenthal agreement. Amortization of debt discount was $ 452 and $ 323 for the year ended December 31, 2020 and 2019, respectively. On December 31, 2020, the remaining unamortized debt discount of $ 162 is included in prepaid expense and other current assets on the balance sheet. 7. Convertible Note to a Related Party The Convertible Note to a Related Party consists of the following (in thousands): Schedule of Convertible Notes December 31, 2020 December 31, 2019 12% Convertible Note Payable $ - $ 3,400 Accrued Interest - 1,289 Total obligation $ - $ 4,689 On April 21, 2017, pursuant to a Securities Purchase Agreement, the Company issued a secured, convertible, subordinated, non-redeemable note in the principal amount of $ 3,400 (the “Raptor Note”) and warrants to purchase 1,416,667 shares of common stock. The 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 . The warrant will expire on April 21, 2022 and has an adjusted exercise price of $ 1.50 per share. The note and warrant contain customary anti-dilution provisions, and the shares of common stock issuable upon conversion of the note and exercise of the warrant have been registered on Form S-3. The investor was also granted the right to participate in future financing transactions of the Company for a term of two years. On December 11, 2020, the Company entered into a Satisfaction, Settlement and Release Agreement with Raptor satisfying all of its obligations to Raptor as its junior secured lender. In full satisfaction of the Raptor Note, including release of collateral, and termination of related junior lender documentation, the Company (a) paid Raptor $ 4,250 in cash, (b) issued to Raptor a 5 -year warrant with a fair value of $ 402 to purchase 1,000,000 shares of the Company common stock with an exercise price of $ 0.64 4 per share, and (c) issued to Raptor 1,339,286 shares of Common Stock with a fair value of $ 857 upon conversion of $ 750 of the Raptor Note at a reduced per share conversion price of $ 0.56 per share. The aggregate amount of the cash paid, the fair value of the warrants issued, and the fair value of shares issued upon conversion of the Raptor Note was approximately $ 5,509 . The carrying amount of the balance of the Raptor note, including accrued interest, was approximately $ 5,247 , resulting in a loss on extinguishment of debt of $ 262 recorded on the statements of operations during the year ended December 31, 2020. 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. 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. We applied ASC 470, Debt , to account for the PPP loan. 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 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 was in compliance with the terms of the PPP loan as of December 31, 2020. F- 14 If the conditions outlined in the PPP loan program are adhered to 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 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. However, the Company cannot provide any assurance whether the PPP loan will ultimately be forgiven by the SBA. 9. Leases Liabilities The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its headquarters office , and certain office equipment and automobiles. Leases with an initial term of 12 months or less are not included on the balance sheets. During the years ended December 31, 2020 and 2019, lease costs totaled $ 181 and $ 181 , respectively. As of December 31, 2018, lease liabilities totaled $ 852 , made up of finance leases liabilities of $ 133 and operating lease liabilities of $ 719 . During the year ended December 31, 2019, the Company made payments of $ 44 towards its finance lease liability and $ 22 towards its operating lease liability. As of December 31, 2019, the Company’s lease liabilities totaled $ 786 , made up of finance lease liabilities of $ 89 and operating lease liabilities of $ 697 . During the year ended December 31, 2020, the Company terminated $ 51 of finance leases, and made payments of $ 22 towards its finance lease liability and $ 28 towards its operating lease liability. As of December 31, 2020, lease liabilities totaled $ 685 , made up of finance lease liabilities of $ 16 and operating lease liabilities of $ 669 . As of December 31, 2020, the weighted average remaining lease terms for operating lease and finance lease are 4.00 years and 0.28 years, respectively. As of December 31, 2020, the weighted average discount rate for operating lease is 12.60 % and 6.03 % for finance lease. Future minimum lease payments under the leases are as follows (in thousands): Schedule of Future Minimum Lease Payments Under Leases Dec 31, 2020 Years Ending December 31, 2021 $ 209 2022 222 2023 226 2024 221 2025 - Total payments 878 Less: Amount representing interest ( 193 ) Present value of net minimum lease payments 685 Less: Current portion ( 130 ) Non-current portion $ 555 F- 15 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. The fair value of the warrant liability was determined using the Black-Scholes-Merton option pricing model at December 31, 2020 and December 31, 2019, using the following assumptions: Schedule of Warrant Liability Using Assumptions December 31, 2020 December 31, 2019 Stock Price $ 0.59 $ 0.91 Risk free interest rate 0.48 % 1.95 % Expected volatility 76.35 % 83.36 % Expected life in years 0.42 1.42 Expected dividend yield 0 % 0 % Number of Warrants containing fundamental transaction provisions 138,762 138,762 Fair Value of Warrants $ - $ 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 year ended December 31, 2020 and 2019: Schedule of Warrant Liability December 31, 2020 December 31, 2019 Beginning Balance $ 8 $ 38 Change in fair value ( 8 ) ( 30 ) Ending balance $ - $ 8 11. Stockholders’ Equity Series A Convertible Preferred Stock Series A Convertible Preferred Stock (the “Preferred Stock”) consists of $ 10 par value, 5 % non-cumulative, non-voting, participating preferred stock, with a liquidation preference of $ 10.00 per share. 500,000 shares are authorized. As of December 31, 2020, and 2019, there were 9,411 shares outstanding. Each share of Preferred Stock can be converted into four shares of the Company’s common stock. Dividends are payable at the rate of 5 % annually, pro-rata and non-cumulative. The dividend can be paid in cash or, at the discretion of our board of directors, in shares of common stock based on its then fair market value. The Company cannot declare or pay any dividend on shares of our common stock until the holders of the Preferred Stock have received their annual dividend. In addition, the holders of the Preferred Stock are entitled to receive pro rata distributions of dividends on an “as converted” basis with the holders of our common stock. F- 16 In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event as defined, the holders of the Preferred Stock are entitled to receive, prior to distributions to the holders of common stock, $10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets are distributed pro rata among all security holders. Since June 30, 2008, the Company has the right, but not the obligation, to redeem all or any portion of the Preferred Stock at $10.00 per share, the original issue price, plus all accrued and unpaid dividends. The Preferred Stock may be converted at any time, at the option of the holder, into four shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification, and similar transactions. The Company is obligated to reserve authorized but unissued shares of common stock sufficient to affect the conversion of all outstanding shares of Preferred Stock. Except as provided by law, the holders of the Preferred Stock do not have the right to vote on any matters, including the election of directors. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the approval of a majority of the preferred stockholders, authorize or issue any equity security having a preference over the Preferred Stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any senior preferred stock. During the years ended December 31, 2020 and 2019, the Company paid dividends on the Preferred Stock through the issuance of 4,530 and 4,254 shares of its common stock, respectively, which based upon the then-current market price of the stock equated to dividends of $ 5 in each of the years. No shares of Series A preferred stock were converted into common stock in 2020 and 2019. Common Stock The Company’s common stock has a par value of $ .0001 . On December 21, 2020, our shareholders approved an increase in the authorized number of common shares from 100,000,000 to 120,000,000 . As of December 31, 2020, there were 120,000,000 shares authorized with 86,317,096 outstanding. As of December 31, 2019, there were 100,000,000 shares authorized, and 47,595,206 shares of common stock outstanding. Common Stock Issuance In November 2020, the Company conducted a public offering of 21,562,500 shares of its common shares at a public offering price of $ 0.56 per share. The net proceeds to the Company from this offering are $ 11,254 , after deducting underwriting discounts and commissions and other offering expenses. 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. In October 2019, the Company conducted a public offering of 13,416,667 shares of its common shares at a public offering price of $ 0.60 per share. The net proceeds to the Company from this offering are $ 7,474 , after deducting underwriting discounts and commissions and other offering expenses. In February 2019, the Company conducted a public offering of 7,733,750 shares of its common shares at a public offering price of $ 2.10 per share. The net proceeds to the Company from this offering are $ 14,867 , after deducting underwriting discounts and commissions and other offering expenses. 12. Share-Based Payments Management believes that the ability to issue equity compensation, in order to incentivize performance by employees, directors, and consultants, is essential to the Company’s growth strategy. On September 29, 2017, the 2017 Compensation Plan (the “2017 Plan”) was approved by our shareholders. Initially it provided for the issuance of up to 3,000,000 shares. On December 13, 2018 our shareholders approved a 3,500,000 share increase in the number of shares issuable under the 2017 Plan. Options issued and forfeited under the 2017 Plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2020 and 2019, shares issuable under the 2017 Plan were 1,168,258 and 3,436,864 , respectively. With the shareholder approval of the 2020 Equity Incentive Plan on December 21, 2020, no further shares will be issued from the 2017 Compensation Plan. F- 17 On December 21, 2020, the 2020 Equity Incentive Plan (the “2020 Plan”) was approved by our shareholders. The 2020 Plan provides for the issuance of up to 8,500,000 shares. Options issued and forfeited under the 2020 plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2020, shares issuable under the 2020 Plan were 3,874,048 . The 2020 Plan permits the grant of options and stock awards to our employees, directors and consultants. The options may constitute either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code or “non-qualified stock options”. The Plan is currently administered by the board of directors. The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date of the grant of the option. Options may not be granted under the plan on or after the tenth anniversary of the adoption of the plan. Incentive stock options granted to a person owning more than 10% of the combined voting power of the common stock cannot be exercisable for more than five years. When an option is exercised, the purchase price of the underlying stock is received in cash, except that the plan administrator may permit the exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise determined by the plan administrator. Restricted common stock The following table summarizes restricted stock activity during the years ended December 31, 2020 and 2019: Summary of Non-vested Restricted Stock Activity Unvested Shares Issuable Shares Fair Value at Date of Issuance Weighted Average Grant Date Fair Value Balance, December 31, 2018 598,370 - $ 592 $ 1.63 Granted 46,035 - 132 2.88 Vested ( 488,037 ) 488,037 - - Forfeited ( 156,368 ) - ( 218 ) 1.60 Issued - ( 488,037 ) ( 506 ) - Balance, December 31, 2019 - - - - Balance, December 31, 2019 - - - - Granted 594,740 - 508 0.85 Vested ( 444,740 ) 444,740 - - Issued - ( 444,740 ) ( 416 ) - Balance, December 31, 2020 150,000 - $ 92 $ 0.89 During the year ended December 31, 2020, the Company issued 594,740 shares of restricted stock to a director and two executive employees. 350,000 of these shares vested immediately, 94,740 shares vested in increments of 47,370 each over a two-month period of October 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. The aggregate fair value of the stock awards was $ 508 based on the market price of our common stock price which ranged from $ 0.81 to $ 0.95 per share on the dates of grants and is amortized as shares vest. The total fair value of restricted common stock vesting during the year ended December 31, 2020 and 2019 was $ 416 and $ 506 , respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of December 31, 2020, the amount of unvested compensation related to issuances of restricted common stock was $ 92 , 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. F- 18 In 2018, the Company awarded an aggregate of 784,004 shares of restricted common stock to Valentin Stalowir, former Chief Executive Officer of the Company, pursuant to his employment agreement with the Company. The 784,004 restricted shares had an aggregate fair value of $ 1,291 based on the market price of our common stock on the dates of grant. Of the 784,004 restricted shares, 185,634 shares vested and were issued during 2018. On October 31, 2019, the Company entered into a Separation, Settlement and Release of Claims Agreement with Mr. Stalowir in connection with his resignation as Chief Executive Officer and the subsequent termination of his employment. As part of the Agreement, 442,002 shares of restricted common stock issued in 2018 vested and were issued, and the balance of 156,368 unvested shares of restricted common stock issued to Mr. Stalowir in 2018 were forfeited. During the year ended December 31, 2019, the Company recognized $ 374 as compensation expense related to the fair value of vested restricted shares. During the year ended December 31, 2019, the Company issued 46,035 shares of restricted stock to members of the board of directors. 17,652 shares vested immediately and the balance of 28,383 shares vested throughout 2019. The aggregate fair value of the stock awards was $ 132 based on the market price of our common stock on the dates of grant. During the year ended December 31, 2019, the total of 46,035 shares vested and were issued, and $ 132 was recognized as compensation expense. During the year ended December 31, 2019, the Company recognized a total $ 506 as compensation expense related to vesting of shares of restricted common stock. Stock Options As of December 31, 2020, the Company has issued stock options to purchase an aggregate of 9,417,898 shares of common stock. The Company’s stock option activity during the years ended December 31, 2020 and 2019 is as follows: Schedule of Stock Option Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2018 3,674,286 $ 2.16 8.53 $ 1,026 Granted 1,431,840 2.48 Exercised - - Unvested forfeited or expired ( 1,571,794 ) 2.25 Vested forfeited or expired ( 268,702 ) 3.07 Outstanding at December 31, 2019 3,265,630 $ 2.19 7.09 $ 6 Outstanding at December 31, 2019 3,265,630 $ 2.19 7.09 6 Granted 6,893,752 0.87 Exercised ( 37,500 ) 0.50 Unvested forfeited or expired ( 515,941 ) 2.10 Vested forfeited or expired ( 188,043 ) 4.20 Outstanding at December 31, 2020 9,417,898 $ 1.19 8.55 $ 78 Exercisable at December 31, 2020 2,266,440 $ 1.45 6.09 $ 78 During the year ended December 31, 2020, the Company approved options exercisable into 4,625,952 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan, and 2,267,800 shares to be issued pursuant to Reed’s 2017 Incentive Compensation Plan. 6,558,752 options were issued to employees including 3,279,376 options that vest annually over a four -year vesting period, and 3,279,376 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. F- 19 The stock options are exercisable at a weighted average price $ 0.87 per share and expire in ten years. The total fair value of these options at grant date was approximately $ 3,561 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: average stock price of $0.87 per share, weight average expected term of 5.91 years, weighted average volatility ranging from 76 %, dividend rate of 0 %, and weighted average risk-free interest rate of 0.48 %. The fair value of the options of $3,561 will be amortized as the options vest over a weighted average period of 2.67 years. During the year ended December 31, 2019, the Company approved options to be issued pursuant to Reed’s 2017 Incentive Compensation Plan to certain current employees totaling 1,258,000 shares. One half of these options vest annually over a four -year vesting period; the other half of these options will vest based on performance criteria to be established by the board. In addition, during the year ended December 31, 2019, the Company granted options to purchase 113,330 shares of common stock to new board members. Options granted to consultants, former employees, and board members vest at various periods. On September 11, 2019, the Company granted options to purchase 60,510 shares of common stock to certain consultants. None of the options granted to the consultants to purchase 60,510 shares of common stock vested and were forfeited, resulting in no compensation expense. The stock options are exercisable at a price ranging from $ 2.33 to $ 3.37 per share and expire in ten years. Total fair value of these options at grant date was approximately $ 911 , which was determined using the Black-Scholes-Merton option pricing model with the following average assumption: stock price ranging from $2.33 to $3.37 per share, expected term of seven years, volatility of 61 %, dividend rate of 0 % and risk-free interest rate ranging from 1.39 % to 2.60 %. In the measurement of stock options granted in 2020 and 2019, 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. During the year ended December 31, 2020 and 2019, the Company recognized $ 1,176 and $ 790 of compensation expense relating to vested stock options. As of December 31, 2020, the aggregate amount of unvested compensation related to stock options was approximately $ 3,561 which will be recorded as an expense in future periods as the options vest. As of December 31, 2020, the outstanding options have an intrinsic value of $ 78 . The aggregate intrinsic value was calculated as the difference between the closing market price as of December 31, 2020, which was $ 0.59 , and the exercise price of the outstanding stock options. Additional information regarding options outstanding and exercisable as of December 31, 2020, is as follows: Schedule of Information Regarding Stock Options Options Outstanding Options Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 0.50 - $ 0.88 1,860,300 $ 0.66 9.05 860,300 $ 0.50 $ 0.89 - $ 1.34 4,975,952 0.95 9.70 - - $ 2.49 - $ 3.74 1,899,605 1.74 5.96 1,060,240 1.72 $ 2.49 - $ 3.74 582,091 2.78 6.92 245,950 2.69 $ 5.01 - $ 5.01 99,950 3.74 1.05 99,950 3.74 9,417,898 $ 1.19 8.55 2,266,440 $ 1.45 F- 20 13. Stock Warrants As of December 31, 2020, the Company has issued warrants to purchase an aggregate of 3,362,241 shares of common stock. The Company’s warrant activity during the years ended December 31, 2020 and 2019 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, 2018 6,897,277 $ 2.06 2.42 $ 1,447 Granted - - Exercised ( 283,495 ) 2.09 Forfeited or expired ( 200,000 ) 5.60 Outstanding at December 31, 2019 6,413,782 2.06 1.52 $ - Outstanding at December 31, 2019 6,413,782 2.06 1.52 $ - Granted 1,000,000 0.64 Exercised - - Forfeited or expired ( 4,051,541 ) 2.03 Outstanding at December 31, 2020 3,362,241 $ 1.56 2.49 $ - Exercisable at December 31, 2020 3,362,241 $ 1.56 2.49 $ - On December 11, 2020, the Company issued to Raptor a 5 -year warrant to purchase 1,000,000 shares of the Company common stock with an exercise price of $ 0.64 (see Note 7). The fair value of the warrants granted was determined to be $ 402 . The fair value of the warrant was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $ 0.64 ; exercise price of $ 0.64 ; expected life of 5 years; volatility of 79 %; dividend rate of 0 % and discount rate of 0.51 %. During the year ended December 31, 2020, warrants to acquire 4,051,541 shares of common stock expired. As of December 31, 2020, the outstanding warrants have no intrinsic value. During the year ended December 31, 2019, a total of 283,495 warrants were exercised, including 87,485 warrants that were exercised on a cashless basis, resulting in the issuance of 223,037 shares of our common stock. Aggregate proceeds to the Company were $ 365 . During the year ended December 31, 2019, warrants to acquire 200,000 shares of common stock expired. Additional information regarding warrants outstanding and exercisable as of December 31, 2020, is as follows: Schedule of Warrants Outstanding and Exercisable Warrants Outstanding Warrants Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 0.64 - $ 1.55 2,560,194 $ 1.17 2.92 2,560,194 $ 1.17 $ 2.00 - $ 4.25 802,047 2.82 1.11 802,047 2.82 3,362,241 $ 1.56 2.49 3,362,241 $ 1.56 14. Income Taxes At December 31, 2020 and 2019, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal purposes the amounts available were approximately $ 66,000 and $ 58,000 , respectively. For state purposes approximately $ 42,000 and $ 34,000 was available at December 31, 2020 and 2019, respectively. The Federal carryforward for NOLs arising in years prior to 2018 is approximately $ 33,000 , which expires on various dates through 2037 . NOLs for 2018, 2019 and 2020 of approximately 33,000 , can be carried forward indefinitely, but are only able to offset 80% of taxable income in future years. The state carryforward expires on various dates through 2040 . Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. F- 21 Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may be limited as a result of changes in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitation. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2020 and 2019, the Company did not have a liability for unrecognized tax benefits. The Company recognizes as income tax expense, interest and penalties on uncertain tax provisions. As of December 31, 2020 and 2019, the Company has not accrued interest or penalties related to uncertain tax positions. Tax years 2016 through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the NOLs and will recognize the appropriate deferred tax asset at that time. Significant components of the Company’s deferred tax assets and liabilities are as follows: Schedule of Deferred Income Tax Assets December 31, 2020 December 31, 2019 Deferred income tax asset: Net operating loss carryforwards $ 15,641 $ 12,776 Disqualified corporate interest expense 857 581 Stock-based compensation 1,260 942 Accounts receivable allowances 61 98 Inventory reserves 51 168 Operating lease liability 179 181 Reserve for asset impairment 58 58 Gross deferred tax assets 18,107 14,804 Valuation allowance ( 17,903 ) ( 14,488 ) Total deferred tax assets 203 316 Deferred tax liabilities: Operating lease right-of-use asset ( 203 ) ( 190 ) Deferred finance costs - ( 126 ) Total deferred tax liabilities ( 203 ) ( 316 ) Net deferred tax asset (liability) $ - $ - Reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: Schedule of Reconciliation of Effective Income Tax Rate to U.S. Statutory Rate December 31, 2020 December 31, 2019 Federal statutory tax rate ( 21 )% ( 21 )% State rate, net of federal benefit ( 5 )% ( 5 )% ( 26 )% ( 26 )% Effect of change in tax rate - % - % Valuation allowance 26 % 26 % Effective tax rate $ - $ - F- 22 15. Related Party Transactions 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 December 31, 2020, $ 800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $ 338 that remain in escrow with the lessor. 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 year ended December 31, 2020 and 2019, the Company recorded royalty revenue from CCB of $ 98 and $ 128 , respectively. At 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 year ended December 31, 2020, the Company recorded royalty revenue receivable of $98, advanced inventory and equipment of $ 381 , and reduced CCB receivable by $ 153 by offsetting CCB payable of $ 153 , leaving an aggregate receivable balance of $ 682 at December 31, 2020. At December 31, 2020 and December 31, 2019, the Company had accounts payable due to CCB of $ 557 and $ 182 , respectively. Lindsay Martin, daughter of a director of the Company, was employed as Vice President of Marketing during the years ended December 31, 2020 and 2019. Ms. Martin was paid approximately $ 215 and $ 161 , respectively, for her services during the years ended December 31, 2020 and 2019, respectively. 16. Commitments and Contingencies From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations. 17. Subsequent Events On March 11, 2021, the Company entered into an amendment to that certain Financing Agreement (see Note 6) dated October 4, 2018, as amended or supplemented with its senior secured lender, Rosenthal & Rosenthal, Inc. (“Rosenthal”) releasing that irrevocable standby letter of credit by Daniel J. Doherty, III and Daniel J. Doherty, III 2002 Family Trust in the amount of $ 1.5 million, which served as financial collateral for certain obligations of Reed’s under the Rosenthal credit facility, with a $ 2 million dollar pledge of securities to Rosenthal by John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust, under trust agreement dated December 3, 2012, evidenced by that certain Pledge Agreement to Rosenthal (the “Bello Pledge”). John 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 Bello Pledge, Mr. Bello received 400,000 shares of Reed’s restricted stock. The Nasdaq Listing Qualifications Department notified the Company on December 2, 2020 that the bid price of our common stock has closed at less than $ 1 per share over the previous 30 consecutive business days, and, as a result, did not comply with Listing Rule 5550(a)(2) (“Bid Price Rule”). On February 22, 2021, Nasdaq Listing Qualifications notified the Company, that for 10 consecutive business days, from February 5, 2021 to February 19, 2021, the closing bid price of Reed’s common stock was $ 1.00 per share or greater. Accordingly, Reed’s regained compliance with Listing Rule 550(a)(2) and the matter is now closed. On January 26, 2021, the 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 and granted Restricted Stock Awards consisting of 49,180 shares of common stock to each of its non-employee directors. The Restricted Stock Awards will vest in four equal increments on a quarterly basis on each of February 1, 2021, May 1, 2021, August 1, 2021 and November 1, 2021, in accordance with the company’s policies for non-employee director compensation. Subsequent to December 31, 2020, the Company issued 86,225 shares of common comprised of 6,000 shares issued on the exercise of stock options, 61,475 shares of restricted stock issued to directors, and 18,750 shares of restricted stock issued to an executive on vesting. F- 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.