REED'S, INC. 10-K

Item 8. Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 572 ) F-2 Financial Statements: Balance Sheets as of December 31, 2021 and December 31, 2020 F-3 Statements of Operations for the years ended December 31, 2021 and 2020 F-4 Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021 and 2020 F-5 Statements of Cash Flows for the years ended December 31, 2021 and 2020 F-6 Notes to Financial Statements for the years ended December 31, 2021 and 2020 F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Reed’s, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Reed’s, Inc. (the “Company”) as of December 31, 2021 and 2020, the related statements of operations, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended December 31, 2021, the Company incurred a net loss and utilized cash in operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to alleviate these conditions are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Inventory Valuation As described in Notes 2 and 3 to the financial statements, the Company’s inventories are valued at the lower of cost or net realizable value, determined on first-in, first-out (“FIFO”) basis. Management considers historical usage, forecasted demand in relation to inventory on hand, market conditions, and other factors when estimating net realizable value. We identified management’s estimation of the net realizable value of inventory as a critical audit matter, because of the significant judgments made by management in estimating future demand and market conditions which are used to arrive at the net realizable value. This required a high degree of auditor judgment and increased auditor effort in auditing such assumptions. The primary procedures we performed to address this critical audit matter included: ● We obtained an understanding of management’s process for estimating net realizable value. ● We assessed the reasonableness of management’s forecasted product demand and tested the completeness and accuracy of the underlying data used in the analyses and whether they were consistent with the historical data and evidence obtained in other areas of the audit. ● We evaluated management’s product demand forecast for reasonableness considering historical sales by product, comparing prior period estimates to actual results of the same period, and considering trends within the industry that could impact the movement of the products provided by the Company. ● We developed an independent expectation of the net realizable value of inventory using historic inventory activity and compared our independent expectation to the amount recorded in the financial statements. We have served as the Company’s auditor since 2004. /s/ Weinberg & Company, P.A. Los Angeles, California April 15, 2022 F- 2 REED’S, INC, BALANCE SHEETS (Amounts in thousands, except share amounts) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash $ 49 $ 595 Accounts receivable, net of allowance of $ 215 and $ 234 , respectively 5,183 4,718 Receivable from related party 933 682 Inventory 17,049 11,119 Prepaid expenses and other current assets 1,491 1,341 Total current assets 24,705 18,455 Property and equipment, net of accumulated depreciation of $ 561 and $ 361 , respectively 992 920 Equipment held for sale - 67 Intangible assets 624 615 Total assets $ 26,321 $ 20,057 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 10,434 $ 6,746 Accrued expenses 286 895 Revolving line of credit 10,229 - Payable to related party 614 557 Current portion of note payable - 599 Current portion of lease liabilities 161 130 Total current liabilities 21,724 8,927 Lease liabilities, less current portion 394 555 Note payable, less current portion - 171 Total liabilities 22,118 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, 180,000,000 and 120,000,000 shares authorized, respectively; 93,733,975 and 86,317,096 shares issued and outstanding, respectively 9 9 Additional paid in capital 107,237 97,031 Accumulated deficit ( 103,137 ) ( 86,730 ) Total stockholders’ equity 4,203 10,404 Total liabilities and stockholders’ equity $ 26,321 $ 20,057 The accompanying notes are an integral part of these financial statements. F- 3 REED’S, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2021 and 2020 (Amounts in thousands, except share and per share amounts) 2021 2020 Year Ended December 31, 2021 2020 Net Sales $ 49,599 $ 41,615 Cost of goods sold 36,001 28,849 Gross profit 13,598 12,766 Operating expenses: Delivery and handling expense 11,939 6,856 Selling and marketing expense 9,665 7,503 General and administrative expense 7,965 7,023 Total operating expenses 29,569 21,382 Loss from operations ( 15,971 ) ( 8,616 ) Loss on extinguishment of debt - ( 262 ) Gain on extinguishment of PPP note payable 770 - Interest expense ( 1,201 ) ( 1,307 ) Change in fair value of warrant liability - 8 Net loss ( 16,402 ) ( 10,177 ) Dividends on Series A Convertible Preferred Stock ( 5 ) ( 5 ) Net loss attributable to common stockholders $ ( 16,407 ) $ ( 10,182 ) Loss per share – basic and diluted $ ( 0.18 ) $ ( 0.17 ) Weighted average number of shares outstanding – basic and diluted 91,234,406 60,644,842 The accompanying notes are an integral part of these financial statements. F- 4 REED’S, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2021 and 2020 (Amounts in thousands except share amounts) Shares Amount Shares Amount Capital Deficit (Deficit) Common Stock Preferred Stock Additional Paid In Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital Deficit (Deficit) Balance, December 31, 2019 47,595,206 $ 5 9,411 $ 94 $ 77,596 $ ( 76,548 ) $ 1,147 Fair value of vested options - - - - 1,176 - 1,176 Fair value of warrants issued as financing costs Fair value of vested restricted shares granted to officers Fair value of vested restricted shares granted to officers, shares Fair value of vested restricted shares granted to Directors for services 444,740 - - - 416 - 416 Fair value of warrants issued on extinguishment of debt - - - - 402 - 402 Dividends on Series A Convertible Preferred Stock 4,530 - - - 5 ( 5 ) - Repurchase of common stock Repurchase of common stock, shares Common shares issued for financing costs Common shares issued for financing costs, shares Common shares issued pursuant to a rights offerings, net of offering costs 36,895,834 4 - - 16,560 - 16,564 Common shares issued on conversion of note payable 1,339,286 857 857 Exercise of options 37,500 - - - 19 - 19 Net Loss - - - - - ( 10,177 ) ( 10,177 ) Balance, December 31, 2020 86,317,096 9 9,411 94 97,031 ( 86,730 ) 10,404 Beginning balance, value 86,317,096 9 9,411 94 97,031 ( 86,730 ) 10,404 Fair value of vested options - - - - 1,684 - 1,684 Fair value of warrants issued as financing costs - - - - 458 - 458 Fair value of vested restricted shares granted to officers 282,727 - - - 243 - 243 Dividends on Series A Convertible Preferred Stock 4,645 - - - 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 a rights offerings, net of offering costs 6,680,000 - - - 7,327 - 7,327 Net Loss - - - - - ( 16,402 ) ( 16,402 ) Balance, December 31, 2021 93,733,975 $ 9 9,411 $ 94 $ 107,237 $ ( 103,137 ) $ 4,203 Ending balance, value 93,733,975 $ 9 9,411 $ 94 $ 107,237 $ ( 103,137 ) $ 4,203 The accompanying notes are an integral part of these financial statements. F- 5 REED’S, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2021 and 2020 (Amounts in thousands) December 31, 2021 December 31, 2020 Cash flows from operating activities: Net loss $ ( 16,402 ) $ ( 10,177 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 143 88 Loss on disposal of property & equipment 67 - Gain on termination of leases ( 2 ) - Gain on extinguishment of PPP note payable ( 770 ) - Loss on extinguishment of debt - 262 Amortization of debt discount 162 452 Amortization of prepaid financing costs 295 - Fair value of vested options 1,684 1,176 Fair value of vested restricted shares granted to directors and officers for services 243 416 Decrease in accounts receivable allowance ( 19 ) ( 141 ) Inventory write-off ( 59 ) ( 452 ) Decrease in fair value of warrant liability - ( 8 ) Accrual of interest on convertible note to a related party - 558 Lease liability ( 115 ) ( 28 ) Changes in operating assets and liabilities: Accounts receivable ( 446 ) ( 2,478 ) Inventory ( 5,871 ) ( 159 ) Prepaid expenses and other assets 322 ( 759 ) Decrease in right of use assets 100 116 Accounts payable 3,688 1,390 Accrued expenses ( 609 ) 248 Net cash used in operating activities ( 17,589 ) ( 9,496 ) Cash flows from investing activities: Intangible asset trademark costs ( 9 ) ( 39 ) Purchase of property and equipment ( 326 ) ( 122 ) Net cash used in investing activities ( 335 ) ( 161 ) Cash flows from financing activities: Borrowings under revolving line of credit 66,234 50,975 Repayments of revolving line of credit ( 56,005 ) ( 54,636 ) Capitalization of financing costs - ( 130 ) Proceeds from loan payable - 770 Amounts from related party ( 193 ) 49 Repayment of convertible note payable - ( 4,250 ) Principal repayments on finance lease obligation ( 2 ) ( 22 ) Exercise of options 32 19 Repurchase of common stock ( 15 ) - Proceeds from sale of common stock 7,327 16,564 Net cash provided by financing activities 17,378 9,339 Net decrease in cash ( 546 ) ( 318 ) Cash at beginning of period 595 913 Cash at end of period $ 49 $ 595 Supplemental disclosures of cash flow information: Cash paid for interest $ 430 $ 1,740 Non-cash investing and financing activities: Offset accounts receivable related party and accounts payable related party $ - $ 153 Dividends on Series A Convertible Preferred Stock $ 5 $ 5 Fair value of warrant recorded to prepaid expenses $ 458 $ - Common Shares issued for financing costs $ 472 $ - Note Payable principal extinguished $ 770 $ - The accompanying notes are an integral part of these financial statements. F- 6 REED’S, INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2021 and 2020 (In thousands, except share and per share amounts) 1. Operations and Liquidity Reed’s, Inc, (the “Company”) is the owner and maker of both Reed Craft Ginger Beer and Reed’s Real Ginger Ale and Virgil’s Handcrafted Sodas. Reed’s, Inc, The Company was established in 1989 and is incorporated in the state of Delaware. Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, 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 factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. As of December 31, 2021, we had a cash balance of $ 49 with borrowing capacity of $ 109 , stockholders’ equity of $ 4,203 and a working capital of $ 2,981 . On March 10, 2022, the Company issued 18,594,571 shares of common stock and warrants to purchase 9,297,289 shares of common stock in a private placement. The net proceeds to the Company, after deducting placement agent fees and other offering expenses, are approximately $ 5,100 (see Note 15). 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. To alleviate these conditions, management 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. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. We have also 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. COVID-19 Considerations During 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. Through December 31, 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 throughout 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 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 operations. Net sales for the year ended December 31, 2021, were up 19% from the prior year period. Through December 31, 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- 7 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivables, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity. Accounts Receivable Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. The allowance for accounts receivable is established through a provision reducing the carrying value of receivables. At December 31, 2021 and 2020, the allowance was $ 215 and $ 234 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. At December 31, 2021 and 2020, inventory has been reduced by cumulative write-downs for inventory aggregating $ 135 and $ 194 , respectively. F- 8 Property and Equipment Property and equipment is stated at cost. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows: Schedule of Estimated Useful Lives of Property and Equipment and Related Depreciation Property and Equipment Type Years of Depreciation Computer hardware and software 3 - 7 years Machinery and equipment 5 years Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2021 and 2020, the Company determined there were no indicators of impairment of its property and equipment. Intangible Assets Intangible assets are comprised of indefinite-lived brand names acquired, so classified because we anticipate that these brand names will contribute cash flows to the Company perpetually. Indefinite-lived intangible assets are not amortized but are assessed for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment test, we first assess qualitative factors to determine whether it is more likely than not the asset is impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds its fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. For the years ended December 31, 2021 and 2020, the Company determined there was no impairment of its indefinite-lived brand names. 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. Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfillment activity rather than a promised service to the customer. All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfillment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis. Cost of Goods Sold Cost of goods sold is comprised of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs. Additionally, cost of goods sold includes direct production costs in excess of charges allocated to finished goods in production. Charges for labor and overhead allocated to finished goods are determined on a market cost basis, which may be lower than the actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Expenses not related to the production of our products are classified as operating expenses. F- 9 Delivery and Handling Expense Shipping and handling costs are comprised of purchasing and receiving, inspection, warehousing, transfer freight, and other costs associated with product distribution after manufacture and are included as part of operating expenses. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $ 1,418 and $ 1,518 for the years ended December 31, 2021 and 2020, respectively. Stock Compensation Expense The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Income Taxes The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. F- 10 For the years ended December 31, 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 December 31, 2021 December 31, 2020 Warrants 4,538,479 3,362,241 Common stock equivalent of Series A Convertible Preferred Stock 37,644 37,644 Unvested restricted common stock 111,164 150,000 Options 10,522,995 9,417,898 Total 15,210,282 12,967,783 The Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:4. Fair Value of Financial Instruments The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3—Unobservable inputs based on the Company’s assumptions. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. Segments The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics, nature of products and services, and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements. Concentrations The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $ 250 . Generally, the Company’s policy is to minimize borrowing costs by immediately applying cash receipts to borrowings against its credit facility. From time to time, however, the Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the FDIC limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. Gross sales. During the year ended December 31, 2021, the Company’s largest two customers accounted for 19 % and 11 % of gross sales, respectively. During the year ended December 31, 2020, the Company’s largest two customers accounted for 25 % and 12 % of gross sales, respectively. Accounts receivable. As of December 31, 2021, the Company had accounts receivable from one customer which comprised 18 % 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. F- 11 During the years ended December 31, 2021 and 2020, the Company utilized six separate co-packers for most its production and bottling of beverage products in the United States. The Company utilizes co-packers to produce 100 % of its products. The Company has long-standing relationships with two different co-packers, and in conjunction with the sale of its manufacturing plant we entered into a third co-packing agreement with California Custom Beverage LLC (“CCB”), the purchaser of the plant (see Note 13). CCB is 100 % owned by Chris Reed, founder of the Company and formerly Chief Executive Officer, Chairman, director, and most recently, Chief Innovation Officer. Although there are other packers, a change in co-packers may cause a delay in the production process, which could ultimately affect operating results. Purchases from vendors. During the year ended December 31, 2021, the Company’s largest two vendors accounted for approximately 13 % and 10 % of all purchases, respectively. During the year ended December 31, 2020, the Company’s largest two vendors accounted for approximately 12 % and 11 % of all purchases, respectively. Accounts payable. As of December 31, 2021, no vendor accounted for more than 10 % the total accounts payable. As of December 31, 2020, the Company’s largest two vendors accounted for 12 % and 10 % of the total accounts payable, respectively. Recent Accounting Pronouncements In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows. In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40).” 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. 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 is comprised of the following (in thousands): Schedule of Inventory December 31, 2021 December 31, 2020 Raw materials and packaging $ 11,221 $ 6,793 Finished products 5,828 4,326 Total $ 17,049 $ 11,119 F- 12 4. Property and Equipment Property and equipment is comprised of the following (in thousands): Schedule of Property and Equipment December 31, 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 429 103 Total cost 1,553 1,281 Accumulated depreciation and amortization ( 561 ) ( 361 ) Net book value $ 992 $ 920 Depreciation expense for the years ended December 31, 2021 and 2020 was $ 143 and $ 88 , respectively, and amortization of right-of-use assets for the years ended December 31, 2021 and 2020 was $ 100 and $ 116 , respectively. During the year ended December 31, 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). During the year ended December 31, 2020, the Company disposed of right-of-use assets under finance leases with a net book value of $ 51 and terminated $ 51 of related finance leases (see Note 8). Additionally, during the year ended December 31, 2020, the Company reclassified $ 6 of right-of-use assets under operating leases to right-of-use assets under finance leases and disposed of fully depreciated computer hardware and software of $ 244 with zero net book value. Equipment held for sale consists of the following (in thousands): Schedule of Equipment Held for Sale December 31, 2021 December 31, 2020 Equipment held for sale $ - $ 163 Reserve - ( 96 ) Net book value $ - $ 67 During the year ended December 31, 2021, the Company disposed the equipment held for sale and recorded a loss on disposal of $ 67 . 5. Intangible Assets Intangible assets are comprised of brand names acquired, specifically Virgil’s, and costs related to trademarks. They have been assigned an indefinite life, as we currently anticipate that they will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful life remains appropriate. We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized in an amount equal to that excess. Based on management’s assessment, there were no indications of impairment at December 31, 2021. During the year ended December 31, 2021, the Company capitalized costs of $ 9 pertaining to legal and other fees incurred in applying for international trademarks for Reeds and Virgil’s brands. Intangible assets consist of the following (in thousands): Summary of Intangible Assets December 31, 2021 December 31, 2020 Brand names $ 576 $ 576 Trademarks 48 39 Total $ 624 $ 615 F- 13 6. Line of Credit Amounts outstanding under the Company’s credit facilities are as follows (in thousands): Schedule of Amount Outstanding Under Credit Facilities December 31, 2021 December 31, 2020 Line of Credit $ 10,229 $ - 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 December 31, 2021, the unused borrowing capacity under the financing agreement was $ 109 . The line of credit automatically renews each year until terminated. The line of credit matured on March 30, 2022 and was automatically renewed to mature on March 30, 2023 . 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 of which $ 75 remains in prepaid expenses and other current assets on the balance sheet at December 31, 2021. The prepaid financing fee is to be amortized over a twelve-month period. During the year ended December 31, 2021, the company amortized $ 397 of the prepaid financing costs to interest expense. The financing agreement with Rosenthal includes customary restrictions that limit our ability to engage in certain types of transactions, including our ability to utilize tangible and intangible assets as collateral for other indebtedness. Additionally, the agreement contains a financial covenant that requires us to meet certain minimum working capital and tangible net worth thresholds as of the end of each quarter. We were in compliance with the terms of our agreement with Rosenthal as of December 31, 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 $ 452 for the year ended December 31, 2021, and 2020, respectively. On December 31, 2021, the remaining unamortized debt discount of $ 65 is included in prepaid expense and other current assets on the balance sheet. F- 14 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 . During the year ended December 31, 2021, the Company was notified that its PPP loan forgiveness application was approved in full, and the Company recorded the loan forgiveness as a gain on extinguishment of $ 770 . 8. Leases Liabilities The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its headquarters office , and certain office equipment and automobiles. Leases with an initial term of 12 months or less are not included on the balance sheets. During the years ended December 31, 2021 and 2020, lease costs totaled $ 179 and $ 181 , respectively. 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 year ended December 31, 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 December 31, 2021, operating lease liabilities totaled $ 555 . As of December 31, 2021, the weighted average remaining lease terms for an operating lease are 3.00 years. As of December 31, 2021, the weighted average discount rate for operating lease is 12.60 %. Future minimum lease payments under the leases are as follows (in thousands): Schedule of Future Minimum Lease Payments Under Leases Years Ending December 31, Amounts 2022 $ 222 2023 226 2024 221 2025 - 2026 - Total payments 669 Less: Amount representing interest ( 114 ) Present value of net minimum lease payments 555 Less: Current portion ( 161 ) Non-current portion $ 394 F- 15 9. Stockholders’ Equity Series A Convertible Preferred Stock Series A Convertible Preferred Stock (the “Preferred Stock”) consists of $ 10 par value, 5 % non-cumulative, non-voting, participating preferred stock, with a liquidation preference of $ 10.00 per share. 500,000 shares are authorized. As of December 31, 2021, and 2020, there were 9,411 shares outstanding. Each share of Preferred Stock can be converted into four shares of the Company’s common stock. Dividends are payable at the rate of 5 % annually, pro-rata and non-cumulative. The dividend can be paid in cash or, at the discretion of our board of directors, in shares of common stock based on its then fair market value. The Company cannot declare or pay any dividend on shares of our common stock until the holders of the Preferred Stock have received their annual dividend. In addition, the holders of the Preferred Stock are entitled to receive pro rata distributions of dividends on an “as converted” basis with the holders of our common stock. In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event as defined, the holders of the Preferred Stock are entitled to receive, prior to distributions to the holders of common stock, $ 10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets are distributed pro rata among all security holders. Since June 30, 2008, the Company has the right, but not the obligation, to redeem all or any portion of the Preferred Stock at $ 10.00 per share, the original issue price, plus all accrued and unpaid dividends. The Preferred Stock may be converted at any time, at the option of the holder, into four shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification, and similar transactions. The Company is obligated to reserve authorized but unissued shares of common stock sufficient to affect the conversion of all outstanding shares of Preferred Stock. Except as provided by law, the holders of the Preferred Stock do not have the right to vote on any matters, including the election of directors. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the approval of a majority of the preferred stockholders, authorize or issue any equity security having a preference over the Preferred Stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any senior preferred stock. During the year ended December 31, 2020, the Company paid dividends on the Preferred Stock through the issuance of 4,530 shares of its common stock, respectively, which based upon the then-current market price of the stock equated to dividends of $ 5 in each of the years. During the year ended December 31, 2021, the Company accrued dividends on the Preferred Stock of $ 5 and is included in accrued expenses in the accompanying balance sheets. No shares of Series A preferred stock were converted into common stock in 2021 and 2020. Common Stock The Company’s common stock has a par value of $ .0001 . On December 30, 2021, our shareholders approved an increase in the authorized number of common shares from 120,000,000 to 180,000,000 . On December 21, 2020, our shareholders approved an increase in the authorized number of common shares from 100,000,000 to 120,000,000 . As of December 31, 2021, there were 180,000,000 shares authorized, and 93,733,975 shares of common stock outstanding. As of December 31, 2020, there were 120,000,000 shares authorized with 86,317,096 shares of common stock outstanding. F- 16 Common Stock Issuance In May 2021, the Company conducted a public offering of 6,680,000 shares of its common shares at a public offering price of $ 1.18 per share. The net proceeds to the Company from this offering are $ 7,327 , after deducting underwriting discounts and commissions and other offering expenses. In November 2020, the Company conducted a public offering of 21,562,500 shares of its common shares at a public offering price of $ 0.56 per share. The net proceeds to the Company from this offering are $ 11,254 , after deducting underwriting discounts and commissions and other offering expenses. In April 2020, the Company conducted a public offering of 15,333,334 shares of its common shares at a public offering price of $ 0.375 per share. The net proceeds to the Company from this offering are $ 5,310 , after deducting underwriting discounts and commissions and other offering expenses. Common stock repurchases During the year ended December 31, 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. Share-Based Payments Management believes that the ability to issue equity compensation, in order to incentivize performance by employees, directors, and consultants, is essential to the Company’s growth strategy. On September 29, 2017, the 2017 Compensation Plan (the “2017 Plan”) was approved by our shareholders. Initially it provided for the issuance of up to 3,000,000 shares. On December 13, 2018 our shareholders approved a 3,500,000 share increase in the number of shares issuable under the 2017 Plan. Options issued and forfeited under the 2017 Plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2020 and 2019, shares issuable under the 2017 Plan were 1,168,258 and 3,436,864 , respectively. With the shareholder approval of the 2020 Equity Incentive Plan on December 21, 2020, no further shares will be issued from the 2017 Compensation Plan. On December 21, 2020, the 2020 Equity Incentive Plan (the “2020 Plan”) was approved by our shareholders. The 2020 Plan provides for the issuance of up to 8,500,000 shares. Options issued and forfeited under the 2020 plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2021, shares issuable under the 2020 Plan were 3,874,048 . The 2020 Plan permits the grant of options and stock awards to our employees, directors and consultants. The options may constitute either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code or “non-qualified stock options”. The Plan is currently administered by the board of directors. The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date of the grant of the option. Options may not be granted under the plan on or after the tenth anniversary of the adoption of the plan. Incentive stock options granted to a person owning more than 10% of the combined voting power of the common stock cannot be exercisable for more than five years . When an option is exercised, the purchase price of the underlying stock is received in cash, except that the plan administrator may permit the exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise determined by the plan administrator. F- 17 Restricted common stock The following table summarizes restricted stock activity during the years ended December 31, 2021 and 2020: 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, 2019 - - $ - $ - Granted 594,740 - 508 0.85 Vested ( 444,740 ) 444,740 - - Forfeited - - - - Issued - ( 444,740 ) ( 416 ) - Balance, December 31, 2020 150,000 - 92 0.89 Granted 245,900 - 226 0.92 Vested ( 282,727 ) 282,727 - - Forfeited ( 2,009 ) - - 0.89 Issued - ( 282,727 ) ( 264 ) - Balance, December 31, 2021 111,164 - $ 54 $ 0.89 During the year ended December 31, 2021, the Company issued 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, and 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. During the year ended December 31, 2020, the Company issued 594,740 shares of restricted stock to a director and two executive employees. 350,000 of these shares vested immediately, 94,740 shares vested in increments of 47,370 each over a two-month period of October and November 2020, 75,000 shares will vest in increments of 18,750 each over four years from the date of grant, and 75,000 shares will vest over four years based on performance criteria determined by the Board of Directors or Compensation Committee. Unvested shares remain subject to forfeiture if vesting conditions are not met. The aggregate fair value of the stock awards was $ 508 based on the market price of our common stock price which ranged from $ 0.81 to $ 0.95 per share on the dates of grants and is amortized as shares vest. The total fair value of restricted common stock vesting during the year ended December 31, 2021 and 2020 was $ 243 and $ 416 , respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of December 31, 2021, the amount of unvested compensation related to issuances of restricted common stock was $ 54 , which will be recognized as an expense in future periods as the shares vest. When calculating basic loss per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date. F- 18 Stock Options As of December 31, 2021, the Company has issued stock options to purchase an aggregate of 10,522,995 shares of common stock. The Company’s stock option activity during the years ended December 31, 2021 and 2020 is as follows: Schedule of Stock Option Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2019 3,265,630 $ 2.19 7.09 $ 6 Granted 6,893,752 0.87 Exercised ( 37,500 ) 0.50 Unvested forfeited or expired ( 515,941 ) 2.10 Vested forfeited or expired ( 188,043 ) 4.20 Outstanding at December 31, 2020 9,417,898 $ 1.19 8.55 $ 78 Granted 3,386,882 1.05 Exercised ( 63,000 ) 0.50 Unvested forfeited or expired ( 2,052,954 ) 1.22 Vested forfeited or expired ( 165,831 ) 2.83 Outstanding at December 31, 2021 10,522,995 $ 1.12 7.88 $ - Exercisable at December 31, 2021 3,671,949 $ 1.24 6.40 $ - During the year ended December 31, 2021, the Company received proceeds of $ 32 and issued 63,000 shares of common shares on the exercise of stock options. During the year ended December 31, 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 $ 2,412 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 1.05 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 year ended December 31, 2020, the Company approved options exercisable into 4,625,952 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan, and 2,267,800 shares to be issued pursuant to Reed’s 2017 Incentive Compensation Plan. 6,558,752 options were issued to employees including 3,279,376 options that vest annually over a four-year vesting period, and 3,279,376 options that will vest based on performance criteria to be established by the board. In addition, 335,000 options granted to consultants, board members, and former employees vest over various periods. The stock options are exercisable at a weighted average price $ 0.87 per share and expire in ten years. The total fair value of these options at grant date was approximately $ 3,561 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: average stock price of $ 0.87 per share, weight average expected term of 5.91 years, weighted average volatility ranging from 76 %, dividend rate of 0 %, and weighted average risk-free interest rate of 0.48 %. The fair value of the options of $ 3,561 will be amortized as the options vest over a weighted average period of 2.67 years. In the measurement of stock options granted in 2021 and 2020, the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award. During the year ended December 31, 2021 and 2020, the Company recognized $ 1,684 and $ 1,176 of compensation expense relating to vested stock options. As of December 31, 2021, the aggregate amount of unvested compensation related to stock options was approximately $ 2,833 which will be recorded as an expense in future periods as the options vest. F- 19 As of December 31, 2021, the outstanding options have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of December 31, 2021, which was $ 0.36 , and the exercise price of the outstanding stock options. Additional information regarding options outstanding and exercisable as of December 31, 2021, is as follows: Schedule of Information Regarding Stock Options Options Outstanding Options Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 0.50 - $ 0.88 1,749,336 $ 0.66 8.18 1,022,824 $ 0.57 $ 0.89 - $ 1.34 6,718,000 0.99 8.76 1,145,591 0.95 $ 1.60 - $ 2.40 1,609,753 1.73 4.43 1,222,878 1.72 $ 2.44 - $ 3.66 415,906 2.71 6.23 250,656 2.82 $ 3.74 - $ 5.61 30,000 3.74 0.75 30,000 3.74 10,522,995 $ 1.12 7.88 3,671,949 $ 1.12 11. Stock Warrants As of December 31, 2021, the Company has issued warrants to purchase an aggregate of 4,538,479 shares of common stock. The Company’s warrant activity during the years ended December 31, 2021 and 2020 is as follows: Schedule of Warrant Activity Shares Weighted -Average Exercise Price Weighted-Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2019 6,413,782 $ 2.06 1.52 $ - Granted 1,000,000 0.64 Exercised - - Forfeited or expired ( 4,051,541 ) 2.03 Outstanding at December 31, 2020 3,362,241 1.56 2.49 $ - Granted 1,500,000 0.46 Exercised - - Forfeited or expired ( 323,762 ) 4.04 Outstanding at December 31, 2021 4,538,479 $ 1.02 2.77 $ - Exercisable at December 31, 2021 4,538,479 $ 1.02 2.77 $ - On November 24, 2021, the Company granted John Bello, current Chairman, significant shareholder and former Interim Chief Executive Officer of Reed’s, who is a related party, a 5 -year warrant to purchase 1,500,000 shares of the Company common stock with an exercise price of $ 0.46 . The fair value of the warrants granted was determined to be $ 458 and was recorded as a prepaid financing costs. During the year ended December 31, 2021, the Company amortized $ 148 of prepaid financing costs to interest expense, leaving a balance remaining of $ 310 to be amortized through July 2022. The fair value of the warrant was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $ 0.46 ; exercise price of $ 0.44 ; expected life of 5 years; volatility of 84.7 %; dividend rate of 0 % and discount rate of 0.77 %. As of December 31, 2021, the outstanding warrants have no intrinsic value. The risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and does not expect to do so in the foreseeable future. On December 11, 2020, the Company issued to Raptor a 5 -year warrant to purchase 1,000,000 shares of the Company common stock with an exercise price of $ 0.64 . The fair value of the warrants granted was determined to be $ 402 . The fair value of the warrant was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $ 0.64 ; exercise price of $ 0.64 ; expected life of 5 years; volatility of 79 %; dividend rate of 0 % and discount rate of 0.51 %. During the year ended December 31, 2020, warrants to acquire 4,051,541 shares of common stock expired. As of December 31, 2020, the outstanding warrants had no intrinsic value. F- 20 Additional information regarding warrants outstanding and exercisable as of December 31, 2021, is as follows: Schedule of Warrants Outstanding and Exercisable Warrants Outstanding Warrants Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 0.01 - $ 0.99 2,500,000 $ 0.53 4.52 2,500,000 $ 0.53 $ 1.00 - $ 1.99 1,560,194 1.50 0.64 1,560,194 1.50 $ 2.00 - $ 2.99 478,285 2.00 0.54 478,285 2.00 4,538,479 $ 1.02 2.77 4,538,479 $ 1.02 12. Income Taxes For the years ended December 31, 2021 and 2020, a reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: Schedule of Reconciliation of Effective Income Tax Rate to U.S. Statutory Rate December 31, 2021 December 31, 2020 Federal statutory tax rate ( 21 )% ( 21 )% State rate, net of federal benefit ( 5 )% ( 5 )% ( 26 )% ( 26 )% Effect of change in tax rate - % - % Valuation allowance 26 % 26 % Effective tax rate $ - $ - As of December 31, 2021 and 2020, significant components of the Company’s deferred tax assets and liabilities are as follows: Schedule of Deferred Income Tax Assets December 31, 2021 December 31, 2020 Deferred income tax asset: Net operating loss carryforwards $ 18,573 $ 15,641 Disqualified corporate interest expense 1,078 857 Stock-based compensation 1,764 1,260 Accounts receivable allowances 26 61 Inventory reserves 35 51 Operating lease liability 145 179 Reserve for asset impairment 58 58 Gross deferred tax assets 21,679 18,107 Valuation allowance ( 21,490 ) ( 17,903 ) Total deferred tax assets 189 203 Deferred tax liabilities: Operating lease right-of-use asset ( 189 ) ( 203 ) Deferred finance costs - - Total deferred tax liabilities ( 189 ) ( 203 ) Net deferred tax asset (liability) $ - $ - At December 31, 2021 and 2020, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal purposes the amounts available were approximately $ 63,000 and $ 66,000 , respectively. For state purposes approximately $ 36,000 and $ 42,000 was available at December 31, 2021 and 2020, respectively. The Federal carryforward for NOLs arising in years prior to 2019 is approximately $ 44,000 , which expires on various dates through 2038 . NOLs for 2019, 2020 and 2021 of approximately 19,000 , can be carried forward indefinitely, but are only able to offset 80% of taxable income in future years . The state carryforward expires on various dates through 2041. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may be limited as a result of changes in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitation. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2021 and 2020, the Company did not have a liability for unrecognized tax benefits. The Company recognizes as income tax expense, interest and penalties on uncertain tax provisions. As of December 31, 2021 and 2020, the Company has not accrued interest or penalties related to uncertain tax positions. Tax years 2017 through 2021 remain open to examination by the major taxing jurisdictions to which the Company is subject. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the NOLs and will recognize the appropriate deferred tax asset at that time. F- 21 13. Related Party Transactions On December 31, 2018, the Company completed the sale of its Los Angeles manufacturing plant to California Custom Beverage, LLC (“CCB”), an entity owned by Christopher J. Reed, a related party, and CCB assumed the monthly payments on our lease obligation for the Los Angeles manufacturing plant. Our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $ 1,200 of security with the lessor. The deposit is secured by Mr. Reed’s pledge of common stock to the lessor and guaranteed personally by Mr. Reed and his wife. As of December 31, 2021, $ 800 has been deposited with the lessor and Mr. Reed has placed approximately 363,000 pledged shares valued at $ 131 that remain in escrow with the lessor. Beginning in 2019, we are to receive a 5 % royalty on CCB’s private label sales to existing customers for three years and a 5 % referral fee on CCB’s private label sales to referred customers for three years. During the year ended December 31, 2021 and 2020, the Company recorded royalty revenue from CCB of $ 72 and $ 98 , respectively. At December 31, 2020, the Company had an aggregate receivable balance from CCB of $ 682 . During the year ended December 31, 2021, the Company recorded royalty revenue receivable of $ 72 , and advanced expenses of $ 179 , leaving an aggregate receivable balance of $ 933 at December 31, 2021. At December 31, 2021, and December 31, 2020, the Company had accounts payable due to CCB of $ 614 and $ 557 , 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, 2020, 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, significant shareholder and former Interim Chief Executive Officer of Reed’s, is a related party. As consideration for the collateral support, Mr. Bello received 400,000 shares of Reed’s restricted stock. On November 24, 2021, the Bello trust provided additional collateral support securing a $ 2,500,000 over-advance under the Financing Agreement, and John J. Bello also provided a personal guarantee. The additional collateral was released on March 17, 2022 along with the personal guarantee. The initial pledged collateral was released March 30, 2022 with the pay-off of the Rosenthal facility. Lindsay Martin, daughter of a director of the Company, was employed as Vice President of Marketing during the years ended December 31, 2021 and 2020. Ms. Martin was paid approximately $ 181 and $ 215 , respectively, for her services during the years ended December 31, 2021 and 2020, respectively. 14. Commitments and Contingencies From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations. 15. Subsequent Events On March 10, 2022, the Company entered into a Securities Purchase Agreement with certain institutional and accredited investors pursuant to which the investors agreed to purchase 18,594,571 shares of the Company’s common stock and warrants to purchase 9,297,289 shares of common stock in a private placement. The warrants have an exercise price of $ 0.2877 per share for a period of five years commencing six months from the closing date of March 11, 2022. The purchase price per share of common stock and associated warrant was $ 0.28 for certain investors and was $ 0.3502 for investors who are officers and directors of the Company in compliance with the rules of the Nasdaq Stock Market. The net proceeds to the Company, after deducting placement agent fees and other offering expenses, was approximately $ 5.1 million. The officers and directors of the Company purchased approximately $ 1.1 million of the securities in the offering. On March 21, 2022, the Board of Directors of the Company, upon recommendation from its governance committee, expanded the board from six to seven members and appointed Mr. Leon M. Zaltzman to serve as director. Mr. Zaltzman is the founder and managing member of Union Square Park Capital Management, LLC (“USPCM”), and is also the managing member of Union Square Park GP (“USPGP”). USPCM and USPGP serve as the investment manager and general partner to Union Square Park Partners, LP (“USPP Fund”), respectively. Foregoing entities hereinafter collectively referred to as the “Union Square Entities”. USPP Fund participated in the Company’s recent private placement of common stock and it acquired 10,714,286 shares of common stock and warrants to purchase 5,357,143 shares of common stock for $ 3,000 . Prior to the private placement, Mr. Zaltzman and the Union Square Entities beneficially owned approximately 7.79 % of Reed’s common stock. After the private placement, Mr. Zaltzman and the Union Square Entities beneficially owned approximately 14.6 % of Reed’s common stock. On March 28, 2022, the Company entered into a financing agreement with Alterna Capital Solutions (“ACS”), for a line of credit to replace its existing credit facility. The ACS line of credit is for a term of 3 years and provides for borrowings of up to $ 13,000 . Borrowings are based upon eligible accounts receivable and inventory. The line of credit is secured by eligible accounts receivable and inventory of the Company. Inventory collateral is set to a maximum of 100 % of eligible accounts receivable. An overadvance rider is in place which provides for up to $ 400 of additional borrowing beyond those amounts (the “Over Advance”). Borrowings under the ACS financing agreement bear interest of prime plus 4.75% but not less than 8.0% on receivables. Borrowings based on inventory bear an interest of prime plus 5.25% but not less than 8.5%. The additional overadvance rider bears a rate of prime plus 12.75%, but not less than 16.00%. Additionally, the line of credit is subject to monthly monitoring fee of $1 with a minimum usage requirement on the credit facility. A loan balance of less than $ 1,500 will bear interest at a rate in line with account receivables advances plus the monthly monitoring fee of $ 1 . The Company incurred $ 503 of direct costs of the transaction, consisting primarily of broker, bank and legal fees. These costs have been capitalized and are being amortized over the 3 -year life of the ACS agreement. On March 30, 2022, the Company paid in full its outstanding balance on its credit facility with Rosenthal & Rosenthal, Inc. F- 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.