REED'S, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. In addition to our GAAP results, the following discussion includes Modified EBITDA as a supplemental measure of our performance. We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA 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. The following discussion also includes the use of gross billing, a key performance indicator and metric. Gross billing represents invoiced amounts to distributors and retailers, excluding sales adjustments. Gross billing may include deductions from MSRP or “list price”, where applicable, and excludes promotional costs of generating such sales. Management utilizes gross billing to monitor operating performance of products and salespersons, which performance can be masked by the effect of promotional or other allowances. Management believes that the presentation of gross billing provides a useful measure of Reed’s operating performance. Overview During the second quarter of 2021, the Company fully utilized their expanded network of co-packers and continues to adhere to strict set of quality protocols. In addition to our traditional sales channels, the Company is expanding in the club, drug, convenience and ecommerce channels including their branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans. The Company remains focused on driving sales growth and improving margin. The sales growth focus is on channel expansion, new product introduction and improved sales execution. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs. However, the Company experienced elevated raw material and transportation costs over the prior year and anticipates these costs to remain elevated for the balance of the year. Plans have been developed to mitigate the impact of these costs. COVID-19 Considerations During the period ended June 30, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued impact for the balance of the year. In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products. Through June 30, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up with demand. The Company believes that costs will continue to increase throughout the year. In addition, the Company experienced increases in the pricing of several of its raw materials and delays in procuring several of these items. However, mitigation plans are being implemented to manage this risk. 1 Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through June 30, 2021, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. Net sales for the six months ended June 30, 2021 were up 15% from the prior year period. Through June 30, 2021, we continue to generate cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets. We have also not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. Results of Operations – Three months ended June 30, 2021 The following table sets forth key statistics for the three months ended June 30, 2021 and 2020, respectively, in thousands. Three Months Ended June 30, Pct. 2021 2020 Change Gross billing (A) $ 12,626 $ 12,229 3 % Less: Promotional and other allowances (B) 1,356 1,376 -1 % Net sales $ 11,270 $ 10,853 4 % Cost of goods sold 8,001 7,865 2 % % of Gross billing 63 % 64 % % of Net sales 71 % 72 % Gross profit $ 3,269 $ 2,988 9 % % of Net sales 29 % 28 % Expenses Delivery and handling $ 2,508 $ 1,480 70 % % of Net sales 22 % 14 % Dollar per case ($) 3.53 2.27 Selling and marketing 2,634 1,585 66 % % of Net sales 23 % 15 % General and administrative 1,836 1,357 35 % % of Net sales 16 % 12 % Total operating expenses 6,978 4,422 58 % Loss from operations $ (3,709 ) $ (1,434 ) 159 % Interest expense and other income (expense) 568 (316 ) -279 % Net loss $ (3,141 ) $ (1,750 ) 80 % Loss per share – basic and diluted $ (0.03 ) $ (0.03 ) 18 % Weighted average shares outstanding - basic & diluted 90,801,842 59,514,620 53 % (A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing has been defined by our internal reporting practices . 2 (B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. 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. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. Sales, Cost of Sales, and Gross Margins The following chart sets forth key statistics for the transition of the Company’s top line activity from the second quarter of 2020 through the second quarter of 2021. 2021 2020 Q2 Per Case H1 Per Case Q1 Q2 H1 Q2 vs PY H1 vs PY Q1 Q2 H1 2021 2020 vs PY 2021 2020 vs PY Cases: Reed’s 395 353 748 5 % 20 % 288 335 623 Virgil’s 339 347 686 13 % 20 % 262 308 570 Total Core 734 700 1,434 9 % 20 % 550 643 1,193 Non Core - 2 2 - % 0 % 2 - 2 Candy 8 8 16 0 % 0 % 8 8 16 Total 742 710 1,452 9 % 20 % 560 651 1,211 Gross billing: Core $ 12,955 $ 12,200 $ 25,155 2 % 14 % $ 10,175 $ 11,940 $ 22,115 $ 17.4 $ 18.6 -6 % $ 17.5 $ 18.5 -5 % Non Core 33 140 173 324 % 28 % 102 33 135 70.0 - - % 86.4 67.5 28 % Candy 294 286 580 12 % 9 % 274 256 530 35.7 32.0 12 % 36.2 33.1 9 % Total $ 13,281 $ 12,626 $ 25,907 3 % 14 % $ 10,551 $ 12,229 $ 22,780 $ 17.8 18.8 -5 % 17.8 18.8 -5 % Discounts: Total $ (1,135 ) $ (1,356 ) $ (2,491 ) -1 % 4 % $ (1,028 ) $ (1,376 ) $ (2,404 ) $ (1.9 ) $ (2.1 ) -9 % $ (1.7 ) $ (2.0 ) -13 4 % COGS: Core $ (8,122 ) $ (7,849 ) $ (15,971 ) 2 % 13 % $ (6,414 ) $ (7,674 ) $ (14,088 ) $ (11.2 ) $ (11.9 ) -6 % $ (11.1 ) $ (11.8 ) -6 % Non Core (6 ) (6 ) (13 ) -57 % -83 % (59 ) (15 ) (74 ) (3.2 ) - - % (6.4 ) (37.0 ) -83 % Candy (165 ) (143 ) (308 ) -19 % -14 % (180 ) (176 ) (356 ) (17.8 ) (22.0 ) -19 % (19.2 ) (22.3 ) -14 % Total $ (8,293 ) $ (7,998 ) $ (16,291 ) 2 % 12 % $ (6,653 ) $ (7,865 ) $ (14,518 ) $ (11.3 ) $ (12.1 ) -8 % $ (11.2 ) $ (12.0 ) -7 % Gross Profit: $ 3,853 $ 3,260 $ 7,113 9 % 21 % $ 2,870 $ 2,988 $ 5,858 $ 4.6 $ 4.6 0 % $ 4.9 $ 4.8 1 % as % Net Sales 32 % 29 % 30 % 30 % 28 % 29 % 3 Sales, Cost of Sales, and Gross Margins As part of the Company’s ongoing initiative to simplify and streamline operations, 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. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs. Core beverage volume for the three months ended June 30, 2021, represents 99% of all beverage volume. Core brand gross billing increased by 2% to $12,200 compared to the same period last year, driven by Reed’s volume growth of 5% and Virgil’s volume growth of 13%. The result is an increase in total gross billing of 3%, to $12,626 in the three months ended June 30, 2021, from $12,229 during the three months ended June 30, 2020. Price on our core brands decreased 6% to $17.43 per case due to a shift in mix to lower priced, higher margin products. Discounts as a percentage of gross billing were 11% for the three months ended June 30, 2021 and 2020. Net sales revenue grew 4% in the three months ended June 30, 2021 to $11,270, compared to $10,853 in the same period last year. Cost of Goods Sold Cost of goods sold increased $136 during the three months ended June 30, 2021 as compared to the same period last year. As a percentage of net sales, cost of goods sold for the three months ended June 30, 2021 was 71% as compared to 72% for the same period last year. The total cost of goods per case decreased to $11.27 per case in the three months ended June 30, 2021 from $12.08 per case for the same period last year. The cost of goods sold per case on core brands was $11.22 during the three months ended June, 2021, compared to $11.93 for the same period last year. Gross Margin Gross margin increased to 29% for the three months ended June 30, 2021, compared to 28% for the same period last year. Operating Expenses Delivery and Handling Expenses Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses increased by $1,028 in the three months ended June 30, 2021 to $2,508 from $1,480 in the same period last year, driven by increased volumes, ecommerce fulfilment costs, and increasing freight rates due to Covid-19. Delivery costs in the three months ended June 30, 2021 were 22% of net sales and $3.53 per case, compared to 14% of net sales and $2.27 per case during the same period last year. Selling and Marketing Expenses Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses were $2,634 during the three months ended June 30, 2021, compared to $1,585 during the same period last year. As a percentage of net sales, selling and marketing costs increased to 23% during the three months ended June 30, 2021, as compared to 15% during the same period last year. The increase was driven by an increase in sales force headcount and stock compensation. General and Administrative Expenses General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the three months ended June 30, 2021 to $1,836 from $1,357, an increase of $479 over the same period last year. The increase was primarily driven by higher employee costs and stock compensation. 4 Loss from Operations The loss from operations was $3,709 for the three months ended June 30, 2021, as compared to a loss of $1,434 in the same period last year driven by increased gross profit offset by increases in operating expenses discussed above. Interest and Other Income (Expense) Interest and other income for the three months ended June 30, 2021, consisted of $202 of interest expense offset by $770 gain on forgiveness of debt. During the same period last year, interest and other expense consisted of $303 of interest expense and by the change in fair value of our warrant liability of $13. Modified EBITDA In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. Set forth below is a reconciliation of net loss to Modified EBITDA for the three months ended June 30, 2021 and 2020 (unaudited; in thousands): Three Months Ended June 30, 2021 2020 Net loss $ (3,141 ) $ (1,750 ) Modified EBITDA adjustments: Depreciation and amortization 61 37 Interest expense 202 303 Stock option and other noncash compensation 599 (36 ) Change in fair value of warrant liability - 13 Gain on forgiveness of PPP note payable (770 ) - Legal settlements (8 ) - Total EBITDA adjustments $ 84 $ 317 Modified EBITDA $ (3,057 ) $ (1,433 ) 5 We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following: ● Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; ● Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs; ● Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and ● Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements. Results of Operations – Six months ended June 30, 2020 The following table sets forth key statistics for the six months ended June 30, 2021 and 2020, respectively, in thousands. Six Months Ended June 30, Pct. 2021 2020 Change Gross billing (A) $ 25,907 $ 22,781 14 % Less: Promotional and other allowances (B) 2,491 2,405 4 % Net sales $ 23,416 $ 20,376 15 % Cost of goods sold 16,294 14,518 12 % % of Gross billing 63 % 64 % % of Net sales 70 % 71 % Gross profit $ 7,122 $ 5,858 22 % % of Net sales 30 % 29 % Expenses Delivery and handling $ 5,795 $ 2,743 111 % % of Net sales 25 % 13 % Dollar per case ($) 3.99 2.47 Selling and marketing 4,849 3,510 38 % % of Net sales 21 % 17 % General and administrative 4,439 3,289 35 % % of Net sales 19 % 16 % Total operating expenses 15,083 9,542 58 % Loss from operations $ (7,961 ) $ (3,684 ) 116 % Interest expense and other income (expense) 312 (646 ) -148 % Net loss $ (7,649 ) $ (4,330 ) 77 % Loss per share – basic and diluted $ (0.09 ) $ (0.08 ) 13 % Weighted average shares outstanding - basic & diluted 88,751,896 53,554,913 66 % (A) We define gross billing as the total sales for the Company unadjusted for costs related to generating those sales. Management utilizes gross billing as an indicator of and to monitor operating performance of products and salespersons before the effect of any promotional or other allowances, which are determined in accordance with GAAP, and can mask certain performance issues. We believe that the presentation of gross billing provides a useful measure of our operating performance. Additionally, gross billing may not be comparable to similarly titled measures used by other companies, as gross billing have been defined by our internal reporting practices . 6 (B) We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales. Management utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer agreements. We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. The expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. Promotional and other allowances constitute a material portion of our marketing activities. The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through separate agreements in the ordinary course of business. These agreements generally provide for one or more of the arrangements described above and are of varying durations, ranging from one week to one year. Sales, Cost of Sales, and Gross Margins As part of the Company’s ongoing initiative to simplify and streamline operations 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. Non-core products consist primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs. Core beverage volume for the six months ended June 30, 2021, represents 99% of all beverage volume. Core brand gross billing increased by 14% to $25,155 compared to the same period last year, driven by Reed’s volume growth of 20% and Virgil’s volume growth of 20%. The result is an increase in total gross billing of 14%, to $25,907 in the six months ended June 30, 2021, from $22,781 during the six months ended June 30, 2020. Price on our core brands decreased 5% to $17.54 per case due to a shift in mix to lower priced, higher margin products. Discounts as a percentage of gross billing decreased to 10% from 11% in the same period last year. As a result, net sales revenue grew 15% in the six months ended June 30, 2021 to $23,416, compared to $20,376 in the same period last year. Cost of Goods Sold Cost of goods sold increased $1,776 during the six months ended June 30, 2021 as compared to the same period last year. As a percentage of net sales, cost of goods sold for the six months ended June 30, 2021 was 70% as compared to 71% for the same period last year. The total cost of goods per case decreased to $11.22 per case in the six months ended June 30, 2021 from $11.99 per case for the same period last year. The cost of goods sold per case on core brands was $11.14 during the six months ended June 30, 2021, compared to $11.81 for the same period last year. Gross Margin Gross margin was 30% for the six months ended June 30, 2021, compared to 29% for the same period last year. 7 Operating Expenses Delivery and Handling Expenses Delivery and handling expenses consist of delivery costs to customers and warehousing costs incurred for handling our finished goods after production. Delivery and handling expenses increased by $3,052 in the six months ended June 30, 2021 to $5,795 from $2,743 in the same period last year, driven by increased volumes, ecommerce fulfilment costs, and increasing freight rates due to Covid-19. Delivery costs in the six months ended June 30, 2021 were 25% of net sales and $3.99 per case, compared to 13% of net sales and $2.27 per case during the same period last year. Selling and Marketing Expenses Marketing expenses consist of direct marketing, marketing labor, and marketing support costs. Selling expenses consist of all other selling-related expenses including personnel and contractor support. Total selling and marketing expenses increased $1,339 to $4,849 during the six months ended June 30, 2021, compared to $3,510 during the same period last year. As a percentage of net sales, selling and marketing costs increased to 21% during the six months ended June 30, 2021, as compared to 17% during the same period last year. The increase was driven by an increase in sales force headcount and stock compensation. General and Administrative Expenses General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased in the six months ended June 30, 2021 to $4,439 from $3,289 an increase of $1,150 over the same period last year. The increase was driven by legal settlements, employee costs, stock compensation, consulting fees, and public company costs. Loss from Operations The loss from operations was $7,961 for the six months ended June 30, 2021, as compared to a loss of $3,684 in the same period last year driven by increased gross profit offset by increases in operating expenses discussed above. Interest and Other Income (Expense) Interest and other income for the six months ended June 30, 2021, consisted of $458 of interest expense offset by $770 gain on forgiveness of debt. During the same period last year, interest and other expense consisted of $639 of interest expense and the change in fair value of our warrant liability of $7. Modified EBITDA In addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance. However, Modified EBITDA is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity. We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment. Management considers our core operating performance to be that which our managers can affect in any particular period through their management of the resources that affect our underlying revenue and profit generating operations during that period. Non-GAAP adjustments to our results prepared in accordance with GAAP are itemized below. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in this presentation. Our presentation of Modified EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. 8 Set forth below is a reconciliation of net loss to Modified EBITDA for the six months ended June 30, 2021 and 2020 (unaudited; in thousands): Six Months Ended June 30, 2021 2020 Net loss $ (7,649 ) $ (4,330 ) Modified EBITDA adjustments: Depreciation and amortization 118 86 Interest expense 458 639 Stock option and other noncash compensation 997 744 Change in fair value of warrant liability - 7 Gain on forgiveness of PPP note payable (770 ) - Legal settlements 345 - Total EBITDA adjustments $ 1,148 $ 1,476 Modified EBITDA $ (6,501 ) $ (2,854 ) We present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan; in analyzing the effectiveness of our business strategies in evaluating potential acquisitions; making compensation decisions; and in communications with our board of directors concerning our financial performance. Modified EBITDA has limitations as an analytical tool, which includes, among others, the following: ● Modified EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments; ● Modified EBITDA does not reflect changes in, or cash requirements for, our working capital needs; ● Modified EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on our debts; and ● Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Modified EBITDA does not reflect any cash requirements for such replacements. Liquidity and Capital Resources The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the six months ended June 30, 2021, the Company recorded a net loss of $7,649 and used cash in operations of $10,309. As of June 30, 2021, we had a cash balance of $654 with borrowing capacity of $4,343, a stockholder’s equity of $11,566 and a working capital of $10,470, compared to a cash balance of $595 with borrowing capacity of $5,166, stockholders’ equity of $10,404 and a working capital of $9,528 at December 31, 2020. Notwithstanding the net loss for the six months ended June 30, 2021, management projects adequate cash from operations and available line of credit to ensure continuation of the Company as a going concern for at least one year from the date of this quarterly report. 9 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. Critical Accounting Policies and Estimates Use of Estimates and Assumptions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts 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 recorded at the invoiced amounts. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. Inventory. Inventory is stated at the lower of cost or net realizable value. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to 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. Revenue Recognition . Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer. 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 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. Recent Accounting Pronouncements See Note 2 of the Notes to Condensed Financial Statements for a discussion of recent accounting pronouncements. Item 3. Quantitative and Qualitative Disclosures About Market Risk. A smaller reporting company is not required to provide the information required by this Item. 10