REED'S, INC. 10-Q

Item 1. Financial Statements REED’S INC. CONDENSED BALANCE SHEETS (Amounts in thousands, except share amounts) September 30, 2021 December 31, 2020 (Unaudited) ASSETS Current assets: Cash $ 941 $ 595 Accounts receivable, net of allowance of $ 140 and $ 234 , respectively 6,945 4,718 Receivable from related party 826 682 Inventory, net of reserve of $ 130 and $ 194 , respectively 15,514 11,119 Prepaid expenses and other current assets 1,995 1,341 Total current assets 26,221 18,455 Property and equipment, net of accumulated depreciation of $ 498 and $ 361 , respectively 824 920 Equipment held for sale, net of impairment reserves of $ 96 and $ 96 , respectively 67 67 Intangible assets 621 615 Total assets $ 27,733 $ 20,057 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 8,870 $ 6,746 Payable to related party 856 557 Accrued expenses 983 895 Revolving line of credit 8,255 - Current portion of note payable - 599 Current portion of lease liabilities 155 130 Total current liabilities 19,119 8,927 Lease liabilities, less current portion 437 555 Note payable, less current portion - 171 Total liabilities 19,556 9,653 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 shares authorized, 93,667,855 and 86,317,096 shares issued and outstanding, respectively 9 9 Additional paid in capital 106,345 97,031 Accumulated deficit ( 98,271 ) ( 86,730 ) Total stockholders’ equity 8,177 10,404 Total liabilities and stockholders’ equity $ 27,733 $ 20,057 The accompanying notes are an integral part of these condensed financial statements. F- 1 REED’S, INC. CONDENSED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) (Amounts in thousands, except share and per share amounts) 2021 2020 2021 2020 Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net Sales $ 13,402 $ 10,562 $ 36,818 $ 30,938 Cost of goods sold 9,530 7,176 25,824 21,694 Gross profit 3,872 3,386 10,994 9,244 Operating expenses: Delivery and handling expense 3,093 2,207 8,888 4,950 Selling and marketing expense 2,644 1,872 7,493 5,382 General and administrative expense 1,788 1,583 6,227 4,872 Total operating expenses 7,525 5,662 22,608 15,204 Loss from operations ( 3,653 ) ( 2,276 ) ( 11,614 ) ( 5,960 ) Interest expense ( 234 ) ( 322 ) ( 692 ) ( 961 ) Gain on extinguishment of PPP note payable - - 770 - Change in fair value of warrant liability - 8 - 1 Net loss ( 3,887 ) ( 2,590 ) ( 11,536 ) ( 6,920 ) Dividends on Series A Convertible Preferred Stock - - ( 5 ) ( 5 ) Net Loss Attributable to Common Stockholders $ ( 3,887 ) $ ( 2,590 ) $ ( 11,541 ) $ ( 6,925 ) Loss per share – basic and diluted $ ( 0.04 ) $ ( 0.04 ) $ ( 0.13 ) $ ( 0.12 ) Weighted average number of shares outstanding – basic and diluted 93,644,935 62,940,091 90,400,832 56,706,141 The accompanying notes are an integral part of these condensed financial statements. F- 2 REED’S, INC. CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) For the Three and Nine Months Ended September 30 and 2020 (Unaudited) (Amounts in thousands except share amounts) Shares Amount Shares Amount Shares Equity Capital Deficit Equity Common Stock Preferred Stock Common Stock Issuable Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Equity Capital Deficit Equity Balance, June 30, 2021 93,601,380 $ 9 9,411 $ 94 - $ - $ 105,847 $ ( 94,384 ) $ 11,566 Fair value of vested options - - - 436 436 Fair value of vested restricted shares granted to an officer for services 61,475 65 65 Dividends on Series A Convertible Preferred Stock Dividends on Series A Convertible Preferred Stock , shares Issuance of shares for dividends on Series A Convertible Preferred Stock Issuance of shares for dividends on Series A Convertible Preferred Stock , shares Repurchase of common stock Repurchase of common stock , shares Common shares issued on exercise of stock options 5,000 3 3 Common shares issued for financing costs Common shares issued for financing costs , shares Common shares issued pursuant to the rights offering, net of offering costs - - - - ( 6 ) - ( 6 ) Common shares issued pursuant to the rights offering, net of offering costs, shares Net Loss - ( 3,887 ) ( 3,887 ) Balance, September 30, 2021 93,667,855 $ 9 9,411 $ 94 - $ - $ 106,345 $ ( 98,271 ) $ 8,177 Shares Amount Shares Amount Shares Equity Capital Deficit Equity Common Stock Preferred Stock Common Stock Issuable Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Equity Capital Deficit Equity Balance, December 31, 2020 86,317,096 $ 9 9,411 $ 94 - $ - $ 97,031 $ ( 86,730 ) $ 10,404 Fair value of vested options - - 1,264 1,264 Fair value of vested restricted shares granted to officers 221,252 - - 234 234 Issuance of shares for dividends on Series A Convertible Preferred Stock - - - ( 5 ) ( 5 ) Repurchase of common stock ( 13,493 ) ( 15 ) ( 15 ) Common shares issued on exercise of options 63,000 - 32 32 Common shares issued for financing costs 400,000 472 472 Common shares issued pursuant to the rights offering, net of offering costs 6,680,000 - - - 7,327 - 7,327 Net Loss - - ( 11,536 ) ( 11,536 ) Balance, September 30, 2021 93,667,855 $ 9 9,411 $ 94 - $ - $ 106,345 $ ( 98,271 ) $ 8,177 F- 3 Shares Amount Shares Amount Shares Equity Capital Deficit Equity Common Stock Preferred Stock Common Stock Issuable Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Equity Capital Deficit Equity Balance, June 30, 2020 62,928,540 $ 6 9,411 $ 94 350,000 $ 285 $ 83,364 $ ( 80,883 ) $ 2,866 Fair value of vested options - - - 263 263 Common shares issued on exercise of options 27,500 - - 14 14 Issuance of shares for dividends on Series A Convertible Preferred Stock 4,530 - - - - 5 - 5 Net Loss ( 2,590 ) ( 2,590 ) Balance, September 30, 2020 62,960,570 $ 6 9,411 $ 94 350,000 $ 285 $ 83,646 $ ( 83,473 ) $ 558 Common Stock Preferred Stock Common Stock Issuable Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Shares Equity Capital Deficit Equity Balance, December 31, 2019 47,595,206 $ 5 9,411 $ 94 - $ - $ 77,596 $ ( 76,548 ) $ 1,147 Fair value of vested options - - 722 722 Fair value of vested restricted shares granted to officers - - 350,000 285 285 Dividends on Series A Convertible Preferred Stock 4,530 - - - 5 ( 5 ) - Common shares issued on exercise of options 27,500 - - 14 14 Common shares issued pursuant to the rights offering, net of offering costs 15,333,334 1 - - - 5,309 - 5,310 Net Loss ( 6,920 ) ( 6,920 ) Balance, September 30, 2020 62,960,570 $ 6 9,411 $ 94 350,000 $ 285 $ 83,646 $ ( 83,473 ) $ 558 The accompanying notes are an integral part of these condensed financial statements. F- 4 REED’S, INC. CONDENSED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2021 and 2020 (Unaudited) (Amounts in thousands) September 30, 2021 September 30, 2020 Cash flows from operating activities: Net loss $ ( 11,536 ) $ ( 6,920 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 106 56 Gain on termination of leases ( 2 ) ( 6 ) Gain on extinguishment of PPP note payable ( 770 ) - Amortization of debt discount 162 290 Amortization of prepaid financing costs 147 - Amortization of right of use assets 74 89 Fair value of vested options 1,264 722 Fair value of vested restricted shares granted to officers 234 285 Decrease in allowance for doubtful accounts ( 95 ) ( 181 ) Decrease (increase) in inventory reserve ( 64 ) ( 422 ) Change in fair value of warrant liability - ( 1 ) Accrual of interest on convertible note to a related party - 439 Lease liability ( 78 ) ( 18 ) Changes in operating assets and liabilities: Accounts receivable ( 2,132 ) ( 2,367 ) Inventory ( 4,332 ) 1,495 Prepaid expenses and other assets ( 491 ) ( 318 ) Accounts payable 2,126 ( 100 ) Accrued expenses 82 189 Net cash used in operating activities ( 15,305 ) ( 6,768 ) Cash flows from investing activities: Trademark costs ( 6 ) ( 37 ) Purchase of property and equipment ( 95 ) ( 121 ) Net cash used in investing activities ( 101 ) ( 158 ) Cash flows from financing activities: Borrowings on line of credit 49,940 34,645 Repayments of line of credit ( 41,685 ) ( 33,710 ) Capitalization of financing costs - ( 130 ) Proceeds from note payable - 770 Repayment of amounts due to/from officers 155 - Principal repayments on capital lease obligation ( 2 ) ( 11 ) Exercise of options 32 14 Repurchase of common stock ( 15 ) - Proceeds from sale of common stock 7,327 5,310 Net cash provided by financing activities 15,752 6,888 Net increase in cash 346 ( 38 ) Cash at beginning of period 595 913 Cash at end of period $ 941 $ 875 Supplemental disclosures of cash flow information: Cash paid for interest $ 258 $ 231 Non-Cash Investing and Financing Activities Dividends on Series A Convertible Preferred Stock $ 5 $ 5 The accompanying notes are an integral part of these condensed financial statements. F- 5 REED’S, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Three and Nine Months Ended September 30, 2021 and 2020 (Unaudited) (In thousands, except share and per share amounts) 1. Basis of Presentation and Liquidity The accompanying interim condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly our financial position at September 30, 2021, and the results of operations and cash flows for the three and nine months ended September 30, 2021, and 2020. The balance sheet as of December 31, 2020, is derived from the Company’s audited financial statements. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, as filed with the Securities and Exchange Commission on March 30, 2021. The results of operations for the nine months ended September 30, 2021, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021. COVID-19 Considerations During the period ended September 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 September 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. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to benefit from strong demand for and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company anticipates a continued impact through mid-2022. 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 September 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 nine-month period ended September 30, 2021, were up 19% from the prior year period. Through September 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. F- 6 Liquidity The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. For the nine months ended September 30, 2021, the Company recorded a net loss of $ 11,536 and used cash in operations of $ 15,305 . As of September 30, 2021, we had a cash balance of $ 941 with borrowing capacity of $ 1,293 , a stockholder’s equity of $ 8,177 and a working capital of $ 7,102 , 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 nine months ended September 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 these financial statements are issued. Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. We have taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts, and restructuring our selling prices. 2. Significant Accounting Policies Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock compensation expense. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which include (1) identifying the contract or agreement with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer. Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfilment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis. F- 7 Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. For the periods ended September 30, 2021, and 2020, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: Schedule of Potentially Dilutive Securities September 30, 2021 September 30, 2020 Unvested restricted common stock 172,639 244,740 Options 11,260,876 4,716,357 Warrants 3,098,479 6,413,782 Common stock equivalent of Series A Convertible Preferred stock 37,644 37,644 Convertible note to a related party - 2,266,667 Common stock issuable - 350,000 Total 14,569,638 14,029,190 The Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4. Stock Compensation Expense The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs for the three months ended September 30, 2021, and 2020, aggregated $ 347 and $ 536 , respectively. Advertising costs for the nine months ended September 30, 2021, and 2020, aggregated $ 1,050 and $ 1,141 , respectively. Concentrations Sales. During the three months ended September 30, 2021, one customer accounted for 24 % of gross billing, and during the nine months ended September 30, 2021, two customers accounted for 21 % and 11 % of gross billing, respectively. During the three months ended September 30, 2020, two customers accounted for 24 % and 12 % of gross sales, respectively, and during the nine months ended September 30, 2020, two customers accounted for 25 % and 13 % of gross sales, respectively. No other customers exceeded 10 % of sales in either period. F- 8 Accounts receivable. As of September 30, 2021, the Company had accounts receivable from one customer which comprised 27 % of its gross accounts receivable. As of December 31, 2020, the Company had accounts receivable from one customer which comprised 23 % of its gross accounts receivable. No other customers exceeded 10 % of gross accounts receivable in either period. Purchases from vendors. During the three months ended September 30, 2021, two vendors accounted for 13 % and 12 % of all purchases, respectively. During the nine months ended September 30, 2021, two vendors accounted for 12 % and 12 % of all purchases, respectively. During the three months ended September 30, 2020, two vendors accounted for 13 % and 11 % of all purchases. During the nine months ended September 30, 2020, two vendors accounted for 11 % and 11 % of all purchases. No other vendors exceeded 10 % of all purchases in either period. Accounts payable. As of September 30, 2021, the Company’s three largest vendors accounted for 13 %, 10 % and 10 % of the total accounts payable, respectively. As of December 31, 2020, the Company’s largest two vendors accounted for 12 % and 10% of the total accounts payable, respectively. No other vendors exceeded 10 % of gross accounts payable in either period. Fair Value of Financial Instruments The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. ASC 820 defines the following levels of subjectivity associated with the inputs: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3—Unobservable inputs based on the Company’s assumptions. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. 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).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related disclosures. F- 9 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 September 30, 2021 December 31, 2020 Raw materials and packaging $ 10,068 $ 6,793 Finished products 5,446 4,326 Total $ 15,514 $ 11,119 The Company has recorded a reserve for slow moving and potentially obsolete inventory. The reserve at September 30, 2021, and December 31, 2020, was $ 130 and $ 194 , respectively. 4. Property and Equipment Property and equipment is comprised of the following (in thousands): Schedule of Property and Equipment September 30, 2021 December 31, 2020 Right-of-use assets under operating leases $ 724 $ 724 Right-of-use assets under finance leases - 54 Computer hardware and software 400 400 Machinery and equipment 198 103 Total cost 1,322 1,281 Accumulated depreciation and amortization ( 498 ) ( 361 ) Net book value $ 824 $ 920 Depreciation expense for the nine months ended September 30, 2021, and 2020 was $ 106 and $ 56 , respectively, and amortization of right-of-use assets for the nine months ended September 30, 2021, and 2020 was $ 74 and $ 89 , respectively. During the nine months ended September 30, 2021, the Company disposed of right-of-use assets under finance leases with a cost of $ 48 and accumulated amortization of $ 38 and terminated $ 13 of related finance leases payable (see Note 8). Equipment held for sale consists of the following (in thousands): Schedule of Equipment Held for Sale September 30, 2021 December 31, 2020 Equipment held for sale $ 163 $ 163 Reserve ( 96 ) ( 96 ) Net book value $ 67 $ 67 The balance as of September 30, 2021, and December 31, 2020, consists of residual manufacturing equipment, at estimated net realizable value, which management anticipates selling during 2021. F- 10 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 September 30, 2021. During the nine months ended September 30, 2021, the Company capitalized costs of $ 6 pertaining to legal and other fees incurred in applying for international trademarks for Reeds and Virgil’s brands. Intangible assets consist of the following (in thousands): Summary of Intangible Assets September 30, 2021 December 31, 2020 Brand names $ 576 $ 576 Trademarks 45 39 Total $ 621 $ 615 6. Line of Credit Amounts outstanding under the Company’s credit facilities are as follows (in thousands): Schedule of Amount Outstanding Under Credit Facilities September 30, 2021 December 31, 2020 Line of credit $ 8,255 $ - On October 4, 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”). The financing agreement provides a maximum borrowing capacity of $ 13,000 . Borrowings are based on a formula of eligible accounts receivable and inventories (the “permitted borrowings”) plus advances (an “over-advance” of up to $ 4,000 ) in excess of permitted borrowings. At September 30, 2021, the unused borrowing capacity under the financing agreement was $ 1,293 . The line of credit automatically renews each year until terminated. The line of credit matured on March 30, 2021 , and was automatically renewed to mature on March 30, 2022. 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 was 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”). On March 11, 2021, the Company entered into an amendment to the financing agreement, releasing that irrevocable standby letter of credit of $1,500 by Raptor with a $2,000 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. John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party. He is also a greater than 5 % beneficial owner of Reed’s common stock. As consideration for the collateral support, Mr. Bello received 400,000 shares of Reed’s restricted stock. The Company determined the fair value of the 400,000 restricted stock to be $ 472 which was recorded as a prepaid financing costs and included in prepaid expenses and other current assets on the condensed balance sheet at September 30, 2021. The prepaid financing fee is to be amortized over a twelve-month period. During the nine months ended September 30, 2021, the company amortized $ 272 of the prepaid financing costs to interest expense. F- 11 The financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions, including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of September 30, 2021. 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. On December 31, 2020, the remaining unamortized debt discount of $ 162 is included in prepaid expense and other current assets on the balance sheet. Amortization of debt discount was $ 162 and $ 290 for the nine months ended September 30, 2021, and 2020, respectively. On September 30, 2021, no remaining unamortized debt discount remained. 7. 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. During the nine months ended September 30, 2021, the Company was notified that its PPP loan forgiveness application was approved. The Company recorded the loan forgiveness as a gain on forgiveness of debt of $ 770 , which is included in other income, leaving no remaining balance owed at September 30, 2021. 8. Leases Liabilities The Company accounts for leases under ASC 842, Leases . The standard requires a lessee to record a right-of-use asset and a corresponding lease liability at the inception of the lease, initially measured at the present value of the lease payments. ASC 842 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. During the nine months ended September 30, 2021, the Company reflected amortization of right of use asset of $ 74 related to these leases, resulting in a net asset balance of $ 448 as of September 30, 2021. In accordance with ASC 842, the right-of-use assets are being amortized over the life of the underlying leases. As of December 31, 2020, lease liabilities totaled $ 685 , made up of finance lease liabilities of $ 16 and operating lease liabilities of $ 669 . During the nine months ended September 30, 2021, the Company terminated $ 13 of finance leases, and made payments of $ 2 towards its finance lease liability and $ 78 towards its operating lease liability. As of September 30, 2021, operating lease liabilities totaled $ 592 . As of September 30, 2021, the weighted average remaining lease terms for operating leases are 3.25 years. The weighted average discount rate for operating leases is 12.6 %. 9. Common Stock Common stock issuance On May 5, 2021, the Company entered into a placement agency agreement with Roth Capital Partners, LLC (the “Placement Agent”) and a securities purchase agreement with a certain purchaser for the purchase of shares of the Company’s common stock, par value $ 0.0001 per share, in an offering of securities registered under an effective registration statement filed with the Securities and Exchange Commission (“SEC”). In the offering, the Company sold 6,680,000 shares of common stock, at a price of $ 1.18 per share. The offering closed on May 7, 2021, and total proceeds received, net of fees, were $ 7,327 . The Placement Agent was paid a total cash fee at the closing of the Offering equal to 6.5% of the gross cash proceeds received by the Company from the sale of the shares of common stock in the offering. F- 12 Common stock repurchases During the nine months ended September 30, 2021, the Company repurchased 13,493 shares of common stock from an officer for $ 15 based on the market value of share on the date repurchased. The Company retired the shares. 10. Stock-Based Compensation Restricted common stock The following table summarizes restricted stock activity during the nine months ended September 30, 2021: 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, 2020 150,000 - $ 92 0.89 Granted 245,900 - 226 0.92 Vested ( 221,252 ) 221,252 - - Forfeited ( 2,009 ) 0.89 Issued - ( 221,252 ) ( 236 ) - Balance, September 30, 2021 172,639 - $ 82 $ 0.89 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. In addition, the Company granted 245,900 restricted stock awards to five non-employee directors. 61,475 of these restricted stock awards vested on February 1, 2021, May 1, 2021, August 1, 2021. The remaining 61,475 restricted stock awards will vest equally on November 1, 2021. The aggregate fair value of the stock awards was $ 226 based on the market price of our common stock price which was $ 0.92 per share on the date of grants and is amortized as shares vest. The total fair value of vested restricted common stock vesting during the nine months ended September 30, 2021, and 2020 was $ 226 and $ 285 , respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of September 30, 2021, the amount of unvested compensation related to issuances of restricted common stock was $ 82 , which will be recognized as an expense in future periods as the shares vest. When calculating basic loss per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date. Stock options The following table summarizes stock option activity during the nine months ended September 30, 2021: Schedule of Stock Option Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 9,417,898 $ 1.19 6.09 $ 78 Granted 3,386,882 $ 1.05 Exercised ( 63,000 ) $ 0.50 Unvested forfeited ( 1,330,397 ) $ 1.28 Vested forfeited ( 150,507 ) $ 3.01 Outstanding at September 30, 2021 11,260,876 $ 1.12 8.30 $ 80 Exercisable at September 30, 2021 3,637,523 $ 1.24 6.95 $ 80 F- 13 During the nine months ended September 30, 2021, the Company received proceeds of $ 32 and issued 63,000 shares of common shares on the exercise of stock options. During the nine months ended September 30, 2021, the Company approved options exercisable into 3,386,882 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 3,386,882 options were issued to employees, 1,693,441 options vesting annually over a four -year vesting period, and 1,693,441 options that will vest based on performance criteria to be established by the board of directors The stock options are exercisable at prices ranging from $ 0.98 to $ 1.18 per share and expire in ten years . The total fair value of these options at grant date was approximately $ 2,345 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 1.06 per share, expected term of six years , volatility of 79 %, dividend rate of 0 %, and weighted average risk-free interest rate of 0.98 %. 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 nine months ended September 30, 2021, and 2020, the Company recognized $ 1,264 and $ 722 of compensation expense relating to vested stock options. As of September 30, 2021, the aggregate amount of unvested compensation related to stock options was approximately $ 3,683 which will be recognized as an expense as the options vest in future periods through March 28, 2025. As of September 30, 2021, the outstanding and exercisable options have an intrinsic value of $ 80 and $ 80 , respectively. The aggregate intrinsic value was calculated as the difference between the closing market price as of September 30, 2021, which was $ 0.60 , and the exercise price of the outstanding stock options. 11. Stock Warrants The following table summarizes stock warrant activity during the nine months ended September 30, 2021: Schedule of Warrant Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 3,362,241 $ 1.56 2.49 $ - Exercised - - Forfeited ( 263,762 ) $ 4.04 Outstanding at September 30, 2021 3,098,479 $ 1.35 1.92 $ - Exercisable at September 30, 2021 3,098,479 $ 1.35 1.92 $ - There were no warrant transactions during the nine months ended September 30, 2021. As of September 30, 2021, the outstanding and exercisable warrants have no intrinsic value. The intrinsic value was calculated as the difference between the closing market price as of September 30, 2021, which was $ 0.60 , and the exercise price of the Company’s warrants to purchase common stock. F- 14 12. Related Party Activities On December 31, 2018, the Company completed the sale of its Los Angeles manufacturing plant to California Custom Beverage, LLC (“CCB”), an entity owned by Christopher J. Reed, a related party, and CCB assumed the monthly payments on our lease obligation for the Los Angeles manufacturing plant. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $ 1,200 of security with the lessor. The deposit is secured by Mr. Reed’s pledge of common stock to the lessor and guaranteed personally by Mr. Reed and his wife. As of September 30, 2021, $ 800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $ 218 that remain in escrow with the lessor. Beginning in 2019, we receive a 5 % royalty on CCB’s private label sales to existing customers for three years and a 5 % referral fee on CCB’s private label sales to referred customers for three years. During the nine months ended September 30, 2021, and 2020, the Company recorded royalty revenue from CCB of $ 4 and $ 26 , respectively. At December 31, 2020, the Company had an aggregate receivable balance from CCB of $ 682 at December 31, 2020. During the nine months ended September 30, 2021, the Company recorded royalty revenue receivable of $ 4 , and advanced expenses of $ 140 , leaving an aggregate receivable balance of $ 826 at September 30, 2021. At September 30, 2021, and December 31, 2020, the Company had accounts payable due to CCB of $ 856 and $ 577 , respectively. Any over-advance on the Company’s line of credit with Rosenthal was 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”). On March 11, 2021, the Company entered into an amendment to the financing agreement, releasing that irrevocable standby letter of credit of $1,500 by Raptor with a $2,000 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. John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party. He is also a greater than 5 % beneficial owner of Reed’s common stock. As consideration for the collateral support, Mr. Bello received 400,000 shares of Reed’s restricted stock (see Note 6). Lindsay Martin, daughter of a director of the Company, is employed as Vice President of Marketing. Ms. Martin was paid approximately $ 178 and $ 129 , respectively, for her services during the nine months ended September 30, 2021, and 2020, respectively. 13. Subsequent Events Subsequent to September 30, 2021, the Company issued 61,475 shares of common stock on the vesting of restricted stock awards. F- 15