What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-16 compared with 2021-11-09 · 144 added, 290 removed, 130 unchanged (77% of the section changed)

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

Statement Regarding Forward-Looking Statements and Information

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

23 unchanged sentences

the presentation of gross billing provides a useful measure of Reed’s operating performance.

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

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

However, the Company experienced elevated

raw material and transportation costs over the prior year and anticipates these costs to remain elevated for the balance of the year.

Plans have been developed to mitigate the impact of these costs.

During the third quarter of 2021, the Company

increased output through more efficient utilization of their expanded network of co-packers while adhering to strict set of quality protocols.

In addition, the company is implementing several measures to increase capacity and to offset inflationary pressure from increased pricing

of raw material inputs and transportation.

During the first quarter of 2022, the Company

continued to strengthen its supply chain, implement gross margin enhancement initiatives, drive efficiencies in transportation and

warehouse costs and reduce operating expenses.

In addition, it continues to build its innovation pipeline with sustained growth

in Reed’s Real Ginger Ale and Reed’s Classic Mule.

At the end of the quarter, the Company shipped its rebranded Virgil’s

zero sugar line in 12 oz.

sleek cans and produced its new line of hard ginger ale for its pending launch.

As noted above, the Company remains focused

on driving sales growth and improving margin.

The sales growth focus is on channel expansion, new product introduction and improved sales

The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency.

these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses.

the Company experienced elevated transportation costs over the prior year and anticipates these costs to remain elevated for the

balance of 2022.

Plans have been implemented to mitigate the impact of these costs.

Considerations

the period ended September 30, 2021, the COVID-19 pandemic has impacted our operating results and the Company anticipates a continued

impact for the balance of the year.

In addition, the pandemic may cause reduced demand for our products if, for example, the pandemic

During the period ended

March 31, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect

for the balance of the year.

In addition, the pandemic could 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.

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increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products.

September 30, 2021, the Company has experienced higher transportation expenses as the capacity in the freight market has not kept up

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 limiting 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.

Company anticipates a continued impact through mid-2022.

Through March 31, 2022,

the Company was able to lower its freight costs despite a higher transportation market as the capacity in the freight market

has not kept up with demand.

The Company believes these challenges will continue 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 have been 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.

ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our

ability to protect our employees and our supply chain.

The Company has endeavored to follow the recommended actions of government and

health authorities to protect our employees.

Since the inception of the COVID-19 pandemic and through September 30, 2021, we maintained

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

We will continue to innovate in managing our business, coordinating

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

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

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

sales for the nine months ended September 30, 2021, were up 19% from the prior year period.

Through September 30, 2021, we continue to

generate cash flows to meet our short-term liquidity needs, and we expect to maintain access to the capital markets.

We have also not

observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.

of Operations – Three months ended September 30, 2021

following table sets forth key statistics for the three months ended September 30, 2021, and 2020, respectively, in thousands.

Months Ended September 30,

ability to protect our employees and protect 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 March 31, 2022,

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

We will continue to innovate in managing our

business, coordinating with our employees and suppliers to do our part in the infection prevention and remain flexible in responding

to our customers and suppliers.

However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our

workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials)

that could negatively impact our operations.

Through March 31, 2022,

we continued to generate cash flows to meet our short-term liquidity needs, and we expected to maintain access to the capital

We did not observe any material impairments of our assets or a significant change in the fair value of our assets due

to the COVID-19 pandemic.

of Operations – Three Months Ended March 31, 2022, as compared to March 31, 2021

following table sets forth key statistics for the three months ended March 31, 2022 and 2021, respectively, in thousands.

Three Months Ended

Gross billing (A)

Promotional and other allowances (B)

of goods sold

Cost of goods sold

% of Gross billing

and marketing

and administrative

operating expenses

from operations

expense and other income (expense)

per share – basic and diluted

average shares outstanding - basic & diluted

% 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.

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the spending levels incurred or correlated with such sales.

Although the expenditures described in this line item are determined in accordance

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.

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Cost of Sales, and Gross Margins

following chart sets forth key statistics for the transition of the Company’s top line activity through the third quarter of 2021

following chart sets forth key statistics for the transition of the Company’s top line activity from the first quarter of 2021

through the first quarter of 2022.

Gross Billing:

Gross Margin:

as % Net Sales

Cost of Sales, and Gross Margins

4 unchanged sentences

primarily of Wellness Shots, candy and slower selling discontinued Reed’s and Virgil’s SKUs.

beverage volume for the three months ended September 30, 2021, represents 99% of all beverage volume.

brand gross billing increased by 22% to $14,199 compared to the same period last year, driven by Reed’s volume growth of 34% and

Virgil’s volume growth of 16%.

The result is an increase in total gross billing of 22%, to $14,538 in the three months ended September

30, 2021, from $11,897 during the three months ended September 30, 2020.

Price on our core brands decreased 2% to $17.95 per case due

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

as a percentage of gross billing were 8% and 11% for the three months ended September 30, 2021 and 2020, respectively.

Net sales revenue

grew 27% in the three months ended September 30, 2021, to $13,402, compared to $10,562 in the same period last year.

beverage volume for the three months ended March 31, 2022, represents 99% of all beverage volume.

brand gross billing increased by 3% to $13,287 compared to $12,955 during the same period last year, driven by Reed’s volume growth

of 5% offset by Virgil’s volume decline of 11%.

The result is an increase in total gross billing of 3%, to $13,636 during the three

months ended March 31, 2022, from $13,281 in the same period last year.

Price on our core brands increased 5% to $18.54 per case.

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

As a result, net sales revenue increased less than

1% in the three months ended March 31, 2022, to $12,182, compared to $12,146 in the same period last year.

of Goods Sold

of goods sold increased $2,354 during the three months ended September 30, 2021, as compared to the same period last year.

of goods sold increased $957 during the three months ended March 31, 2022, as compared to the same period last year.

As a percentage

of net sales, cost of goods sold for the three months ended September 30, 2021, was 71% as compared to 68% for the same period last year.

The increase is primarily due to increased costs associated with on-going supply chain challenges.

total cost of goods per case increased to $11.97 per case in the three months ended September 30, 2021, from $11.25 per case for the

of net sales, cost of goods sold for the three months ended March 31, 2022, was 76% as compared to 68% for the same period last

total cost of goods per case increased to $12.83 per case in the three months ended March 31, 2022, from $11.18 per case for the

same period last year.

The cost of goods sold per case on core brands was $11.85 during the three months ended September 30, 2021, compared

The cost of goods sold per case on core brands was $12.77 during the year months ended March 31, 2022, compared

to $11.07 for the same period last year.

margin decreased to 29% for the three months ended September 30, 2021, compared to 32% for the same period last year.

This decrease is

primarily related to increased costs associated with on-going supply chain challenges.

margin decreased to 24% for the three months ended March 31, 2022, compared to 32% 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 production.

Delivery and handling expenses increased by $886 in the three months ended September 30, 2021, to $3,093 from $2,207 in the same period

last year, driven by increased volumes, ecommerce fulfilment costs, and increasing freight rates due to on-going supply chain challenges.

Delivery costs in the three months ended September 30, 2021, were 23% of net sales and $3.89 per case, compared to 21% of net sales and

$3.46 per case during the same period last year.

Delivery and handling expenses decreased by $474 in the three months ended March 31, 2022, to $2,812 from $3,286 in the same period

last year, driven by our efforts to mitigate inflationary costs.

Delivery costs in the three months ended March 31, 2022, were

23% of net sales and $3.90 per case, compared to 27% of net sales and $4.43 per case during the same period last year.

and Marketing Expenses

expenses consist of direct marketing, marketing labor, and marketing support costs.

Selling expenses consist of all other selling-related

expenses including personnel and contractor support.

Total selling and marketing expenses were $2,644 during the three months ended September

30, 2021, compared to $1,872 during the same period last year.

As a percentage of net sales, selling and marketing costs increased to

20% during the three months ended September 30, 2021, as compared to 18% during the same period last year.

The increase was driven by

an increase in sales force headcount, distributor buy outs, stock compensation, and travel expenses

Selling expenses consist of all other

selling-related expenses including personnel and contractor support.

Total selling and marketing expenses were $2,178 during the

three months ended March 31, 2022, compared to $2,215 during the same period last year.

As a percentage of net sales, selling and

marketing costs remained flat at 18% during the three months ended March 31, 2022, as compared to the same period last

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 increased in the three months ended September 30, 2021, to $1,788 from $1,583, an increase

General and administrative expenses decreased in the three months ended March 31, 2022, to $2,121 from $2,603, a decrease

of $482 over the same period last year.

The increase was primarily driven by higher employee costs, stock compensation and public company

costs, partially offset by lower professional fees.

from Operations

loss from operations was $3,653 for the three months ended September 30, 2021, as compared to a loss of $2,276 in the same period last

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

and Other Income (Expense)

and other income for the three months ended September 30, 2021, consisted of $234 of interest expense, as compared to $322 of interest

expense in the same period of the last year, and 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.

forth below is a reconciliation of net loss to Modified EBITDA for the three months ended September 30, 2021, and 2020 (unaudited;

Months Ended September 30,

EBITDA adjustments:

and amortization

option and other noncash compensation

in fair value of warrant liability

EBITDA adjustments

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

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

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.

of Operations – Nine months ended September 30, 2020

following table sets forth key statistics for the nine months ended September 30, 2021, and 2020, respectively, in thousands.

Months Ended September 30,

Promotional and other allowances (B)

of goods sold

of Gross billing

and marketing

and administrative

operating expenses

from operations

expense and other income (expense)

per share – basic and diluted

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 have 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.

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

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 nine months ended September 30, 2021, represents 99% of all beverage volume.

brand gross billing increased by 17% to $40,445 compared to the same period last year, driven by Reed’s volume growth of 25% and

Virgil’s volume growth of 19%.

The result is an increase in total gross billing of 17%, to $40,445 in the nine months ended September

30, 2021, from $34,677 during the nine months ended September 30, 2020.

Price on our core brands decreased 4% to $17.99 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

nine months ended September 30, 2021, to $36,818, compared to $30,938 in the same period last year.

of Goods Sold

of goods sold increased $4,130 during the nine months ended September 30, 2021, as compared to the same period last year.

As a percentage

of net sales, cost of goods sold for the nine months ended September 30, 2021, was 70% as compared to 70% for the same period last year.

total cost of goods per case decreased to $11.49 per case in the nine months ended September 30, 2021, from $11.73 per case for the same

period last year.

The cost of goods sold per case on core brands was $11.39 during the nine months ended September 30, 2021, compared

to $11.57 for the same period last year.

margin was 30% for the nine months ended September 30, 2021, compared to 30% 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 production.

Delivery and handling expenses increased by $3,938 in the nine months ended September 30, 2021, to $8,888 from $4,950 in the same period

last year, driven by increased volumes, ecommerce fulfilment costs, and increasing freight rates due to on-going supply chain challenges.

Delivery costs in the nine months ended September 30, 2021, were 24% of net sales and $3.95 per case, compared to 16% of net sales and

$2.68 per case during the same period last year.

and Marketing Expenses

expenses consist of direct marketing, marketing labor, and marketing support costs.

Selling expenses consist of all other selling-related

expenses including personnel and contractor support.

Total selling and marketing expenses increased $2,111 to $7,493 during the nine

months ended September 30, 2021, compared to $5,382 during the same period last year.

As a percentage of net sales, selling and marketing

costs increased to 20% during the nine months ended September 30, 2021, as compared to 17% during the same period last year.

was driven by an increase in sales force headcount, stock compensation, distributor buy outs and travel expenses.

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 increased in the nine months ended September 30, 2021, to $6,227 from $4,872 an increase of

$1,355 over the same period last year.

The increase was driven by, higher employee costs, consulting fees, legal settlements, public

company costs, stock compensation, and travel expenses, partially offset by lower professional fees.

The decrease was driven by lower stock compensation and legal settlements.

from Operations

loss from operations was $11,614 for the nine months ended September 30, 2021, as compared to a loss of $5,960 in the same period last

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

and Other Income (Expense)

and other income for the nine months ended September 30, 2021, consisted of $692 of interest expense offset by $770 gain on forgiveness

During the same period last year, interest and other expense consisted of $961 of interest expense and the change in fair value

of our warrant liability of $1.

loss from operations was $4,179 for the three months ended March 31, 2022, as compared to a loss of $4,251 in the same period last year

driven by decreased gross profit offset by decreases in operating expenses discussed above.

and Other Expense

and other expense for the three months ended March 31, 2022, consisted of $801 of interest expense.

During the same period last year,

interest and other expense consisted of $256 of interest expense.

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

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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.

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

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

8 unchanged sentences

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 nine months ended September 30, 2021, and 2020 (unaudited;

Months Ended September 30,

EBITDA adjustments:

and amortization

option and other noncash compensation

in fair value of warrant liability

on forgiveness of PPP note payable

EBITDA adjustments

forth below is a reconciliation of net loss to Modified EBITDA for the three months ended March 31, 2022 and 2021 (unaudited;

in thousands):

Three Months Ended

Modified EBITDA adjustments:

Depreciation and amortization

Interest expense

Stock option and other noncash compensation

Legal settlements

Total EBITDA adjustments

Modified EBITDA

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

16 unchanged sentences

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

the nine months ended September 30, 2021, the Company recorded a net loss of $11,536 and used cash in operations of $15,305.

As of September

30, 2021, we had a cash balance of $941 with borrowing capacity of $1,293, a stockholder’s equity of $8,177 and a working capital

of $7,102, compared to a cash balance of $595 with borrowing capacity of $5,166, stockholders’ equity of $10,404 and a working

capital of $9,528 at December 31, 2020.

Notwithstanding the net loss for the nine months ended September 30, 2021, management projects

adequate cash from operations and available line of credit to ensure continuation of the Company as a going concern for at least one

year from the date these financial statements are issued.

the three months ended March 31, 2022, the Company recorded a net loss of $4,980 and used cash in operations of $2,207.

31, 2022, we had a cash balance of $122, with no current availability, and $5,100 of additional borrowing capacity, a

stockholder’s equity of $4,616 and a working capital of $3,402, compared to a cash

balance of $49 with borrowing capacity of $109, stockholders’ equity of $4,203 and a working capital of $2,981 at December 31,

Notwithstanding the net loss for the three months ended March 31, 2022, management projects adequate cash from

operations and available line of credit to ensure continuation of the Company as a going concern for at least one year from the date

of this quarterly report.

Historically,

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Accounting Policies and Estimates

of Estimates and Assumptions.

The preparation of financial statements in conformity with generally accepted accounting principles

requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent

assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting

preparation of the Company’s financial statements in conformity with generally accepted accounting principles in the United States

GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities

at the date of the financial statements and the reported amounts of expenses during the reporting period.

Some of those judgments can

be subjective and complex, and therefore, actual results could differ materially from those estimates under different assumptions or

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in

relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments

about the carrying values of assets and liabilities that are not readily apparent from other sources.

Management regularly evaluates

the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances,

historical experience and reasonable assumptions.

After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

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 are recorded at the invoiced amounts.

The Company evaluates the collectability of its trade accounts

receivable based on a number of factors.

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

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

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

In addition to specific customer identification

of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past

due trade accounts receivable outstanding.

Inventory is stated at the lower of cost or net realizable value.

We regularly review our inventory quantities on hand and record

a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the

product(s) concerned.

Demand for our products can fluctuate significantly.

Factors that could affect demand for our products include

unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance

orders or a reduction in the rate of reorders placed by customers.

Additionally, our management’s estimates of future product demand

may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.

Recognition .

Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs

upon shipment from our facilities.

The Company’s performance obligations are satisfied at that time.

The Company does not have

any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or

discounts that could cause revenue to be allocated or adjusted over time.

Shipping and handling activities are performed before the customer

obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer.

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.

Significant estimates include those related to assumptions used in estimates for reserves

of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term

tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing

stock instruments issued for services.

There were no changes to our critical accounting policies described in the consolidated financial

statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, that impacted our condensed consolidated

financial statements and related notes included herein.

Accounting Pronouncements

3 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis