What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-04-15 compared with 2021-03-30 · 247 added, 251 removed, 56 unchanged (90% of the section changed)

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

following discussion and analysis of our financial condition and results of operations should be read in conjunction with our

financial statements and the related notes appearing elsewhere in this Annual Report.

This discussion and analysis may contain

forward-looking statements based on assumptions about our future business.

Our actual results could differ materially from those

anticipated in these forward-looking statements as a result of certain factors, including but not limited to those set forth under

“Risk Factors” and elsewhere in this Annual Report.

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 Annual Report.

This discussion and analysis may contain forward-looking

statements based on assumptions about our future business.

Our actual results could differ materially from those anticipated in these

forward-looking statements as a result of certain factors, including but not limited to those set forth under “Risk Factors”

and elsewhere in this Annual Report.

presented in the discussion below are in thousands, except share and per share amounts.

of Operations

the year ended December 31, 2020, the Company fully utilized its expanded network of co-packers and implemented an upgraded

set of quality protocols.

In addition to our traditional sales channels, the Company is utilizing its ecommerce platform

that includes their branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans.

public equity offerings which closed during the year ended December 31, 2020, provided the Company with funds for working capital

and general corporate purposes.

These funds enabled us to initiate the implementation of our 2020 strategy that included driving

growth while strategically reducing operating costs.

the year ended December 31, 2021, the Company expanded its retail footprint outside of grocery and natural channels that

historically represent the majority of our products sold.

The Company continued to expand growth in its 12-ounce can product line

led by Ginger Ale and Ginger Beer growth, fully utilizing its expanded network of co-packers to support this

In addition to our traditional sales channels, the Company is utilizing its ecommerce platform that includes their

branded web sites and Amazon to offer its line of shots, ginger candy and drinks packaged in cans.

public equity offering which closed during the year ended December 31, 2021, provided the Company with funds for working capital and

general corporate purposes.

These funds enabled us to initiate the implementation of our 2021 strategy that included driving growth while

strategically reducing operating costs.

Company remains focused on driving sales growth and improving margin.

The sales growth focus is on channel expansion, new product

introduction and improved sales execution.

The margin enhancement initiative is driven by co-packer upgrades, better leveraged

purchasing and improved efficiency.

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

Underpinning these initiatives is a focus on strategically reducing operating costs.

Considerations

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.

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 year ended December 31, 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.

December 31, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up with

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.

anticipates a continued impact throughout 2022.

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 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.

December 31, 2020, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date.

Since the inception of the COVID-19 pandemic and through December 31, 2021, we maintained

the consistency of our operations during the onset of the COVID-19 pandemic.

We will continue to innovate in managing our business, coordinating

with our employees and suppliers to do our part in the infection prevention and remain flexible in responding to our customers and suppliers.

However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for

example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our

sales for the year ended December 31, 2021, were up 19% from the prior year period.

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following table sets forth key statistics for the years ended December 31, 2021 and 2020, in thousands:

Ended December 31,

Year Ended December 31,

Gross billing (A)

Promotional and other allowances (B)

of goods produced (C)

of Gross sales

of goods sold – idle capacity (D)

and marketing

and administrative

Operating expenses

from operations

expense and other expense

per share – basic and diluted

Weighted average

shares outstanding - basic & diluted

Gross sales are used internally by management as an indicator of and to monitor operating performance, including sales performance

of particular products, salesperson performance, product growth or declines and overall Company performance.

The use of gross

sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues.

We therefore believe that the presentation of gross sales provides a useful measure of our operating performance.

are not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined

in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales.

Additionally,

gross sales may not be comparable to similarly titled measures used by other companies, as gross sales have been defined by our

internal reporting practices.

In addition, gross sales may not be realized in the form of cash receipts as promotional payments

and allowances may be deducted from payments received from certain customers.

Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure

thereof does not conform to GAAP presentation requirements.

Additionally, our definition of promotional and other allowances may

not be comparable to similar items presented by other companies.

Promotional and other allowances primarily include consideration

given to the Company’s distributors or retail customers including, but not limited to the following:

(i) reimbursements

given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf

space allowances and other fees for both new and existing products;

(ii) the Company’s agreed share of fees given to distributors

and/or directly to retailers for in-store marketing and promotional activities;

(iii) the Company’s agreed share of slotting,

shelf space allowances and other fees given directly to retailers;

(iv) incentives given to the Company’s distributors and/or

retailers for achieving or exceeding certain predetermined sales goals;

Cost of goods sold

% of Gross billing

% of Net sales

Delivery and handling

% of Net sales

Dollar per case ($)

Selling and marketing

% of Net sales

General and administrative

% of Net sales

Total Operating expenses

Loss from operations

Interest expense and other expense

Loss per share – basic and diluted

Weighted average shares outstanding - basic & diluted

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 .

We define promotional and other allowances as costs deducted from gross billing which are associated with generating those sales.

utilizes promotional and other allowances as an indicator of and to monitor operating performance of products, salespersons, and customer

We believe that the presentation of promotional and other allowances provides a useful measure of our operating performance.

The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and

the spending levels incurred or correlated with such sales.

The expenditures described in this line item are determined in accordance

with GAAP and meet GAAP requirements, the disclosure thereof does not conform to GAAP presentation requirements.

Additionally, our definition

of promotional and other allowances may not be comparable to similar items presented by other companies.

Promotional and other allowances

primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following:

(i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including

slotting, shelf space allowances and other fees for both new and existing products;

(ii) the Company’s agreed share of fees given

to distributors and/or directly to retailers for in-store marketing and promotional activities;

(iii) the Company’s agreed share

of slotting, shelf space allowances and other fees given directly to retailers;

(iv) incentives given to the Company’s distributors

and/or retailers for achieving or exceeding certain predetermined sales goals;

and (v) discounted or free products.

The presentation

of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending

levels incurred or correlated with such sales.

Promotional and other allowances constitute a material portion of our marketing

The Company’s promotional allowance programs with its numerous distributors and/or retailers are executed through

separate agreements in the ordinary course of business.

These agreements generally provide for one or more of the arrangements

described above and are of varying durations, ranging from one week to one year.

Cost of goods produced:

Cost of goods produced consists of the costs of raw materials and packaging utilized in the manufacture

of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments, as well as certain internal transfer

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

Cost of goods produced is not a measure that is recognized under GAAP and should not be considered as an alternative

to cost of goods sold, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating

performance in place of cost of goods sold.

Cost of goods sold – idle capacity:

Cost of goods sold – idle capacity consists of direct production costs in excess

of charges allocated to our finished goods in production.

Plant costs in excess of production allocations are expensed in the

period incurred rather than added to the cost of finished goods produced.

Plant costs include labor costs, production supplies,

repairs and maintenance, and inventory write-off.

Our charges for labor and overhead allocated to our finished goods are determined

on a market cost basis, which is lower than our actual costs incurred.

Cost of goods sold – idle capacity is not a measure

that is recognized under GAAP and should not be considered as an alternative to cost of goods sold, which is determined in accordance

with GAAP, and should not be used alone as an indicator of operating performance in place of cost of goods sold.

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.

Cost of Sales, and Gross Margins

following chart sets forth key statistics for the transition of the Company’s top line activity through the years ended

December 31, 2020.

part of the Company’s ongoing initiative to simplify and streamline operations by reducing the number of SKUs, the Company

has identified core products on which to place its strategic focus.

These core products consist of Reed’s and Virgil’s

branded beverages.

Beginning in 2020, our Wellness Shots are captured in Non-core products.

Non-core products for 2019 consist

primarily of slower selling discontinued Reed’s and Virgil’s SKUs.

a result of our decision to focus on the core Reed’s and Virgil’s beverage brands and simplify operations by reducing

the overall number of SKUs that we offer, the Company’s core beverage volume for the year ended December 31, 2020, represents

98% of all beverage volume.

brand gross revenue increased by 20% to $45,324 compared to the same period last year, driven by Reed’s volume growth of

The result is an increase in total gross revenue of 19%, to $46,801 in the year ended December 31, 2020, from $39,300

during the same period last year.

Price on our core brands remained flat from the prior year, while volume grew 20% as compared

to the same period last year.

as a percentage of gross sales decreased to 11% from 14% in the same period last year.

As a result, net sales revenue grew 23%

in the year ended December 31, 2020 to $41,615, compared to $33,820 in the same period last year.

of Goods Sold and Produced

following chart sets forth key statistics for the transition of the Company’s top line activity through the years ended December

Gross Billing:

Gross Margin:

as % Net Sales

Cost of Sales, and Gross Margins

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.

beverage volume for the year ended December 31, 2021, represents 99% of all beverage volume.

brand gross billing increased by 18% to $53,263 compared to the same period last year, driven by Reed’s volume growth of

28% and Virgil’s volume growth of 15%.

The result is an increase in total gross billing of 17%, to $54,658 in the year ended

December 31, 2021, from $46,801 during the year ended December 31, 2020.

Price on our core brands decreased 3% to $17.80 per case due

to a shift in mix to lower priced, higher margin products.

as a percentage of gross billing decreased to 9% from 11% in the same period last year.

As a result, net sales revenue grew 19% in the

year ended December 31, 2021, to $49,599, compared to $41,615 in the same period last year.

of Goods Sold

of goods sold increased $7,152 during the year ended December 31, 2021, as compared to the same period last year.

As a percentage

of net sales, cost of goods sold in the year ended December 31, 2020 improved to 69% as compared to 77% for the same period last

total cost of goods per case decreased to $11.60 per case in the year ended December 31, 2020 from $12.24 per case for the same

period last year.

The cost of goods sold per case on core brands was $11.45 during the year ended December 31, 2020, compared

to $11.83 for the same period last year.

Improvements in COGS have been driven by cost savings initiatives on core brands.

margin increased to 31% for the year ended December 31, 2020, compared to 23% for the same period last year.

The improvements

in gross margin have been driven by reduced discount spend and cost savings initiatives.

As a percentage of

net sales, cost of goods sold for the year ended December 31, 2021, was 73% as compared to 69% for the same period last year.

total cost of goods per case increased to $11.91 per case in the year ended December 31, 2021, from $11.60 per case for the same period

The cost of goods sold per case on core brands was $11.63 during the year ended December 31, 2021, compared to $11.45 for

the same period last year.

margin was 27% for the year ended December 31, 2021, compared to 31% for the same period last year.

and Handling Expenses

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

Delivery and handling expenses increased by $863 in the year ended December 31, 2020 to $6,856 from $5,993 in the

same period last year, driven by increased volumes.

Delivery costs in the year ended December 31, 2020 were 16% of net sales and

$2.76 per case, compared to 18% of net sales and $2.83 per case during the same period last year.

The improvement was driven

by a reduction in cross country shipments but this savings was negatively impacted by increasing freight rates due to Covid-19.

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 $5,083 in the years ended December 31, 2021, to $11,939 from $6,856 in the

same period last year, driven by increased volumes, ecommerce fulfilment costs, and increasing freight rates due to market conditions.

Delivery costs in the year ended December 31, 2021, were 24% of net sales and $3.95 per case, compared to 16% of net sales and $2.76

per case during the same period last year.

and Marketing Expenses

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expenses including personnel and contractor support.

selling and marketing expenses were $7,503 during the year ended December 31, 2020, compared to $9,188 during the same period

As a percentage of net sales, selling and marketing costs decreased to 18% during the year ended December 31, 2020,

as compared to 27% during the same period last year.

The decrease was driven by the lapping of the “Fooled Your Mom”

campaign from 2019, and reduced expenditures on trade shows and sponsorships, partially offset by an increase in stock

compensation and market research.

Total selling and marketing expenses increased $2,162 to $9,665 during the year

ended December 31, 2021, compared to $7,503 during the same period last year.

As a percentage of net sales, selling and marketing costs

increased to 19% during the year ended December 31, 2021, as compared to 18% during the same period last year.

The increase was driven

by staffing costs, stock compensation, and distributor buyout.

and Administrative Expenses

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

General and administrative expenses decreased in the year ended December 31, 2020 to $7,023 from $7,551, a decrease of $528

over the same period last year.

The decrease was driven by a $638 decrease in severance expense, and a $147 decrease in professional

and consulting fees, partially offset by a $76 increase in stock option expense and $181 increase in other general and administrative

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

as professional fees.

General and administrative expenses increased in the year ended December 31, 2021, to $7,965 from $7,023

an increase of $942 over the same period last year.

The increase was driven by higher legal settlements, liquor licensing fees,

loss on sale of assets, recycling fees, postage, public company costs, travel expenses, depreciation, and bad debt, partially

offset by lower stock compensation.

from Operations

loss from operations was $15,971 for the year ended December 31, 2021, as compared to a loss of $8,616 in the same period last

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

and Other Expense

and other expense for the year ended December 31, 2020, consisted of $262 loss on extinguishment of debt, $1,307 of interest expense

offset by the change in fair value of our warrant liability of $8.

During the same period last year, interest and other expense

consisted of $1,286 of interest expense offset by the change in fair value of our warrant liability of $30.

year driven by increased gross profit offset by increases in operating expenses discussed above.

and Other Income (Expense)

and other income for the year ended December 31, 2021, consisted of $1,201 of interest expense offset by $770 gain on forgiveness of

During the same period last year, interest and other expense consisted of $1,307 of interest expense, loss on extinguishment of

debt of $262, offset by the change in fair value of our warrant liability of $8.

addition to our GAAP results, we present Modified EBITDA as a supplemental measure of our performance.

However, Modified EBITDA

is not a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations

or any other performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities

as a measure of liquidity.

We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization,

stock-based compensation, changes in fair value of warrant expense, and one-time restructuring-related costs including employee

severance and asset impairment.

considers our core operating performance to be that which our managers can affect in any particular period through their management

of the resources that affect our underlying revenue and profit generating operations during that period.

Non-GAAP adjustments

to our results prepared in accordance with GAAP are itemized below.

You are encouraged to evaluate these adjustments and the reasons

we consider them appropriate for supplemental analysis.

In evaluating Modified EBITDA, you should be aware that in the future

we may incur expenses that are the same as or similar to some of the adjustments in this presentation.

Our presentation of Modified

EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

However, Modified EBITDA is not

a recognized measurement under GAAP and should not be considered as an alternative to net income, income from operations or any other

performance measure derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of liquidity.

We define Modified EBITDA as net income (loss), plus interest expense, depreciation and amortization, stock-based compensation, changes

in fair value of warrant expense, and one-time restructuring-related costs including employee severance and asset impairment.

considers our core operating performance to be that which our managers can affect in any particular period through their management of

the resources that affect our underlying revenue and profit generating operations during that period.

Non-GAAP adjustments to our results

prepared in accordance with GAAP are itemized below.

You are encouraged to evaluate these adjustments and the reasons we consider them

appropriate for supplemental analysis.

In evaluating Modified EBITDA, you should be aware that in the future we may incur expenses that

are the same as or similar to some of the adjustments in this presentation.

Our presentation of Modified EBITDA should not be construed

as an inference that our future results will be unaffected by unusual or non-recurring items.

forth below is a reconciliation of net loss to Modified EBITDA for the year ended December 31, 2021 and 2020 (in thousands):

Ended December 31,

Year Ended December 31,

Modified EBITDA adjustments:

2 unchanged sentences

Stock option and other noncash compensation

Gain on extinguishment of debt

Legal settlement

Loss on extinguishment of debt

Change in fair value of warrant liability

Impairment and

severance costs

EBITDA adjustments

Impairment and severance costs

Total EBITDA adjustments

Modified EBITDA

present Modified EBITDA because we believe it assists investors and analysts in comparing our performance across reporting periods

on a consistent basis by excluding items that we do not believe are indicative of our core operating performance.

we use Modified EBITDA in developing our internal budgets, forecasts and strategic plan;

in analyzing the effectiveness of our

business strategies in evaluating potential acquisitions;

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:

and in communications with our board of directors concerning our financial

Modified EBITDA has limitations as an analytical tool, which includes, among others, the following:

EBITDA does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments,

on our debts;

depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced

in the future, and Modified EBITDA does not reflect any cash requirements for such replacements.

and Capital Resources

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

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

the year ended December 31, 2020, the Company recorded a net loss of $10,177 and used cash in operations of $9,496.

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, compared to a cash balance of $913, stockholders’ equity of $1,147 and working

capital of $4,885 at December 31, 2019.

Notwithstanding the 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.

April 2020, the Company conducted a public offering of 15,333,334 shares of its common shares at a public offering price of $0.375

The net proceeds to the Company from this offering are $5,310, after deducting underwriting discounts and commissions

and other offering expenses.

November 2020, the Company conducted a public offering of 21,562,500 shares of its common shares at a public offering price of

$0.523 per share.

The net proceeds to the Company from this offering are $11,254, after deducting underwriting discounts and commissions

and other offering expenses.

EBITDA does not reflect future interest expense, or the cash requirements necessary to service interest or principal payments, on

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.

Capital Resources and Going Concern

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

year from the date these financial statements are issued.

Such assumption contemplates the realization of assets and

satisfaction of liabilities in the normal course of business.

For the year ended December 31, 2021, the

Company recorded a net loss of $16,402 and used cash in operations of $17,589.

These conditions raise substantial doubt

regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial

In addition the Company’s independent registered public accounting firm, in their report on the Company’s December 31, 2021,

audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

2021, the Company conducted public offerings and sold 6.7 million of its common shares and received net proceeds of $7,327.

On March 10, 2022, the

Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with certain institutional and accredited investors

(the “Purchasers”) pursuant to which the Purchasers agreed to purchase, and the Company agreed to issue and sell to the Purchasers

in a private placement, an aggregate of 18,594,571 shares (“Shares”) of the Company’s common stock, $0.0001 par value

(“Common Stock”), and warrants (“Warrants”) to purchase an aggregate of 9,297,289 shares of Common Stock (the

“Private Placement”).

The purchase price per share of common stock and associated warrant was $0.28 for the investors (other

than officers and directors of the Company) and $0.3502 for the officers and directors of the Company in compliance with the rules of

the Nasdaq Stock Market.

Each whole warrant entitles the holder to purchase one share of common stock at an exercise price of $0.2877

The warrants are exercisable at a per share exercise price of $0.2877 for a period of five years commencing six months from

the closing date.

Officers and directors of the Company purchased approximately $1.1 million of the securities in the offering.

The gross proceeds to the Company, after deducting placement agent fees and other offering expenses, are approximately $5.1 million.

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.

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.

is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity,

mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial

institutions.

In addition, 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.

Accounting Policies and Estimates

1 unchanged sentence

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.

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

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.

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 are recorded at the invoiced amounts.

The Company evaluates the collectability of its

trade accounts receivable based on a number of factors.

In circumstances where the Company becomes aware of a specific customer’s

inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which

reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected.

In addition to specific

customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and

an overall assessment of past due trade accounts receivable outstanding.

The Company 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 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.

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.

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.

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.

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.

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.

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.

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.

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.

Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis