UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number: 001-32501

REED’S, INC.

(Exact name of registrant as specified in its charter)

Delaware		35-2177773
(State of incorporation)		(I.R.S. Employer Identification No.)

201 Merritt 7, Norwalk, CT. 06851

(Address of principal executive offices) (Zip Code)

(800) 997-3337

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Trading Symbol		Names of each exchange on which registered
Common Stock		REED		NASDAQ

There was a total of 112,732,664 shares of Common Stock outstanding as of August 8, 2022.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large Accelerated Filer ☐	Accelerated Filer ☐	Non-Accelerated Filer ☒
Smaller Reporting Company ☒	Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION	F-1

Item 1. Condensed Financial Statements	F-1

Condensed Balance Sheets - June 30, 2022 (Unaudited) and December 31, 2021	F-1

Condensed Statements of Operations for the three and six months ended June 30, 2022 and 2021(Unaudited)	F-2

Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and six months ended June 30, 2022 and 2021(Unaudited)	F-3

Condensed Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (Unaudited)	F-5

Notes to Condensed Financial Statements three and six months ended June 30, 2022 and 2021 (Unaudited)	F-6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1

Item 3. Quantitative and Qualitative Disclosures About Market Risk	9

Item 4. Controls and Procedures	9

PART II – OTHER INFORMATION	10

Item 1. Legal Proceedings	10

Item 1A. Risk Factors	10

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	11

Item 3. Defaults Upon Senior Securities	11

Item 4. Mine Safety Disclosures	11

Item 5. Other Information	11

Item 6. Exhibits	12

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

This Quarterly Report on Form 10-Q (“Quarterly Report”), the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission (“SEC”) and public announcements that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be forward-looking statements. The forward-looking statements included or incorporated by reference in this Quarterly Report and those reports, statements, information and announcements address activities, events or developments that Reed’s, Inc. (hereinafter referred to as “we,” “us,” “our,” the “Company” or “Reed’s”) expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, macroeconomic issues, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements.

The risk factors referred to in this Quarterly Report beginning on page 10 could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made, including, but not limited to, the following risk factors:

● The availability and cost of capital to finance working capital and our operating plans,

● Maintaining the listing of our common stock on the Nasdaq Capital Market or other national securities exchange. We will be subject to delisting if we do not meet the Nasdaq bid price rule.

● Our ability to generate sufficient cash flow to support marketing and product development plans and general operating activities,

● Decreased demand for our products resulting from changes in consumer preferences,

● Competitive products and pricing pressures and our ability to gain or maintain our share of sales in the marketplace,

● The introduction of new products,

● Our being subject to a broad range of evolving federal, state and local laws and regulations including those regarding the labeling and safety of food products, establishing ingredient designations and standards of identity for certain foods, environmental protections, as well as worker health and safety. Changes in these laws and regulations could have a material effect on the way in which we produce and market our products and could result in increased costs,

● Changes in the cost and availability of raw materials and the ability to maintain our supply arrangements and relationships and procure timely and/or adequate production of all or any of our products,

● Our ability to penetrate new markets and maintain or expand existing markets,

● Maintaining existing relationships and expanding the distributor network of our products,

● Decline in global financial markets, economic downturn and business interruptions resulting from effects of the coronavirus COVID-19 global pandemic,

● Our ability to remediate weaknesses we may identify in our disclosure controls and procedures and our internal control over financial reporting in future periods in a timely enough manner to eliminate the risks posed by such material weaknesses,

● The marketing efforts of distributors of our products, most of whom also distribute products that are competitive with our products,

● Decisions by distributors, grocery chains, specialty chain stores, club stores and other customers to discontinue carrying all or any of our products that they are carrying at any time,

● The effectiveness of our advertising, marketing and promotional programs,

● Changes in product category consumption,

● Economic and political changes,

● Consumer acceptance of new products, including taste test comparisons,

● Possible recalls of our products; and

● Economic impact of the war in Ukraine.

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

REED’S, INC.

CONDENSED BALANCE SHEETS

(Amounts in thousands, except share amounts)

	June 30, 2022			December 31, 2021
		(Unaudited)
ASSETS
Current assets:
Cash	$	280		$	49
Accounts receivable, net of allowance of $225 and $215, respectively		7,704			5,183
Inventory		24,193			17,049
Receivable from related party		1,000			933
Prepaid expenses and other current assets		1,440			1,491
Total current assets		34,617			24,705

Property and equipment, net of accumulated depreciation of $668 and $561, respectively		885			992
Intangible assets		624			624
Total assets	$	36,126		$	26,321

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,681		$	10,434
Accrued expenses		737			286
Revolving line of credit, net of capitalized financing costs of $443 and $0, respectively		11,094			10,229
Payable to related party		1,328			614
Current portion of convertible notes payable, net of debt discount of $414 and $0, respectively		1,786			-
Current portion of lease liabilities		174			161
Total current liabilities		27,800			21,724
Convertible note payable, net of debt discount of $769 and $0, respectively, less current portion		8,441
Lease liabilities, less current portion		304			394
Total liabilities		36,545			22,118

Stockholders’ equity (deficit):
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 shares authorized; 112,652,320 and 93,733,975 shares issued and outstanding, respectively		11			9
Additional paid in capital		112,675			107,237
Accumulated deficit		(113,199	)		(103,137	)
Total stockholders’ equity (deficit)		(419	)		4,203
Total liabilities and stockholders’ equity (deficit)	$	36,126		$	26,321

The accompanying notes are an integral part of these condensed financial statements.

F-1

REED’S, INC.

CONDENSED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2022 and 2021

(Unaudited)

(Amounts in thousands, except share and per share amounts)

	2022			2021			2022			2021
	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Net Sales	$	13,725		$	11,270		$	25,907		$	23,416
Cost of goods sold		10,426			8,001			19,676			16,294
Gross profit		3,299			3,269			6,231			7,122

Operating expenses:
Delivery and handling expense		3,832			2,508			6,644			5,795
Selling and marketing expense		2,225			2,634			4,403			4,849
General and administrative expense		1,778			1,836			3,899			4,439
Total operating expenses		7,835			6,978			14,946			15,083

Loss from operations		(4,536	)		(3,709	)		(8,715	)		(7,961	)

Interest expense		(541	)		(202	)		(1,342	)		(458	)
Gain on extinguishment of PPP note payable		-			770			-			770

Net loss		(5,077	)		(3,141	)		(10,057	)		(7,649	)

Dividends on Series A Convertible Preferred Stock		(5	)		(5	)		(5	)		(5	)

Net Loss Attributable to Common Stockholders	$	(5,082	)	$	(3,146	)	$	(10,062	)	$	(7,654	)

Loss per share – basic and diluted	$	(0.05	)	$	(0.03	)	$	(0.10	)	$	(0.09	)

Weighted average number of shares outstanding – basic and diluted		112,615,900			90,801,842			105,038,749			88,751,896

The accompanying notes are an integral part of these condensed financial statements.

F-2

REED’S, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2022 and 2021

(Unaudited)

(Amounts in thousands except share amounts)


	Common Stock				Preferred Stock				Additional Paid In			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity (Deficit)
Balance, March 31, 2022		112,551,890	$	11		9,411	$	94	$	112,628		$	(108,117	)	$	4,616
Fair value of vested options										38						38
Fair value of vested restricted shares granted to officers		100,430								42						42
Issuance of shares for dividends on Series A Convertible Preferred Stock		-		-				-					(5	)		(5	)
Common shares issued for cash, net of offering costs		-		-						(33	)					(33	)
Net loss		-		-		-		-		-			(5,077	)		(5,077	)
Balance, June 30, 2022		112,652,320	$	11		9,411	$	94	$	112,675		$	(113,199	)	$	(419	)

	Common Stock					Preferred Stock				Additional Paid In			Accumulated			Total Stockholders’
	Shares			Amount		Shares		Amount		Capital			Deficit			Equity (Deficit)
Balance, December 31, 2021		93,733,975		$	9		9,411	$	94	$	107,237		$	(103,137	)	$	4,203
Fair value of vested options											263						263
Fair value of vested restricted shares granted to officers		237,024									108						108
Issuance of shares for dividends on Series A Convertible Preferred Stock		-			-				-					(5	)		(5	)
Repurchase of common stock		(13,250	)								(2	)					(2	)
Common shares issued for financing costs		100,000									37						37
Common shares issued for cash, net of offering costs		18,594,571			2						5,032						5,034
Net loss		-			-		-		-		-			(10,057	)		(10,057	)
Balance, June 30, 2022		112,652,320		$	11		9,411	$	94	$	112,675		$	(113,199	)	$	(419	)

F-3

REED’S, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months Ended June 30, 2022 and 2021

(Unaudited)

(Amounts in thousands except share amounts)

	Common Stock					Preferred Stock				Additional Paid In			Accumulated			Total Stockholders’ Equity
	Shares			Amount		Shares		Amount		Capital			Deficit			(Deficit)
Balance, March 31, 2021		86,807,905		$	9		9,411	$	94	$	97,904		$	(91,237	)	$	6,770
Fair value of vested options					-				-		528						528
Fair value of vested restricted shares granted to an officer for services		74,968									71						71
Issuance of shares for dividends on Series A Convertible Preferred Stock		-			-				-					(5	)		(5	)
Repurchase of shares		(13,493	)								(15	)					(15	)
Common shares issued on exercise of stock options		52,000									26						26
Common shares issued pursuant to the rights offering, net of offering costs		6,680,000			-				-		7,333			-			7,333
Net Loss														(3,141	)		(3,141	)
Balance, June 30, 2021		93,601,380		$	9		9,411	$	94	$	105,847		$	(94,384	)	$	11,566

	Common Stock					Preferred Stock				Additional Paid In			Accumulated			Total Stockholders’ Equity
	Shares			Amount		Shares		Amount		Capital			Deficit			(Deficit)
Balance, December 31, 2020		86,317,096		$	9		9,411	$	94	$	97,031		$	(86,730	)	$	10,404
Fair value of vested options					-				-		828						828
Fair value of vested restricted shares granted to officers		159,777			-				-		169						169
Issuance of shares for dividends on Series A Convertible Preferred Stock		-			-				-					(5	)		(5	)
Repurchase of common stock		(13,493	)								(15	)					(15	)
Common shares issued on exercise of options		58,000			-						29						29
Common shares issued for financing costs		400,000									472						472
Common shares issued pursuant to the rights offering, net of offering costs		6,680,000			-				-		7,333			-			7,333
Net Loss														(7,649	)		(7,649	)
Balance, June 30, 2021		93,601,380		$	9		9,411	$	94	$	105,847		$	(94,384	)	$	11,566

The accompanying notes are an integral part of these condensed financial statements.

F-4

REED’S, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Six Months Ended June 30, 2022 and 2021

(Unaudited)

(Amounts in thousands)

	June 30, 2022			June 30, 2021
Cash flows from operating activities:
Net loss	$	(10,057	)	$	(7,649	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		51			69
Gain on termination of leases		-			(2	)
Gain on extinguishment of PPP note payable		-			(770	)
Amortization of debt discount		164			162
Amortization of prepaid financing costs		431			147
Fair value of vested options		263			828
Fair value of vested restricted shares granted to officers		108			169
Common shares issued as financing costs		37			-
Change in allowance for doubtful accounts		10			(83	)
Inventory write-downs		(3	)		(30	)
Accrued interest on convertible note		160			-
Changes in operating assets and liabilities:
Accounts receivable		(2,532	)		258
Inventory		(7,141	)		(2,552	)
Prepaid expenses and other assets		(495	)		(483	)
Decrease in right of use assets		56			48
Accounts payable		2,249			(200	)
Accrued expenses		446			(178	)
Lease liability		(77	)		(43	)
Net cash used in operating activities		(16,330	)		(10,309	)
Cash flows from investing activities:
Trademark costs		-			(6	)
Purchase of property and equipment		-			(95	)
Net cash used in investing activities		-			(101	)
Cash flows from financing activities:
Proceeds from line of credit		29,292			33,798
Payments on line of credit		(27,934	)		(30,859	)
Payment of debt issuance costs		(483	)		-
Proceeds from sale of common stock		5,034			7,334
Proceeds from convertible note payable, net of expenses		10,008			-
Amounts from related party, net		646			184
Payments on capital lease obligation		-			(2	)
Proceeds from exercise of options		-			29
Repurchase of common stock		(2	)		(15	)
Net cash provided by financing activities		16,561			10,469

Net increase in cash		231			59
Cash at beginning of period		49			595
Cash at end of period	$	280		$	654

Supplemental disclosures of cash flow information:
Cash paid for interest	$	621		$	149
Non -cash investing and financing activities
Dividends on Series A Convertible Preferred Stock	$	5		$	5

The accompanying notes are an integral part of these condensed financial statements.

F-5

REED’S, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Three and Six Months Ended June 30, 2022 and 2021 (Unaudited)

(In thousands, except share and per share amounts)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. These condensed financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on April 15, 2022. The accompanying condensed financial statements are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position as of June 30, 2022, and the results of its operations and its cash flows for the six months ended June 30, 2022 and 2021. The balance sheet as of December 31, 2021 is derived from the Company’s audited financial statements.

The results of operations for the six months ended June 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.

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 six months ended June 30, 2022, the Company recorded a net loss of $10,057 and used cash in operations of $16,330. 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. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2021, financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. 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 June 30, 2022, we had a cash balance of $280, with $969 of current availability, and $1,361 of additional borrowing capacity.

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.

During the first six months 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.

F-6

As noted above, the Company remains focused on driving sales growth, improving margin, and reducing freight costs. The sales growth focus is on channel expansion, new product introduction and improved sales execution resulting in increased sales velocity. The margin enhancement initiative is driven by co-packer upgrades, better leveraged purchasing and improved efficiency. Underpinning these initiatives is a focus on strategically reducing operating costs particularly delivery and handling expenses. During 2021, 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.

Recent Trends - Market Conditions

During the period ended June 30, 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. 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.

Although the U.S. economy continued to grow during the first quarter of 2022, the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout the remainder of 2022.

Through June 30, 2022, the Company experienced elevated freight costs as a result of 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.

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 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 June 30, 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.

We have 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.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, inventory obsolescence, depreciable lives of property and equipment, analysis of impairments of recorded long-term tangible and intangible assets, realization of deferred tax assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). 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. 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.

F-7

The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfilment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis.

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, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. 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. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive.

For the periods ended June 30, 2022 and 2021, 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:

	June 30, 2022		June 30, 2021
Warrants		13,107,469		3,088,479
Options		9,801,201		12,173,607
Convertible Note Payable		22,457,782		-
Unvested restricted common stock		275,860		234,114
Series A Convertible Preferred stock		37,644		37,644
Total		45,679,956		15,533,844

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.

F-8

Advertising Costs

Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs for the three months ended June 30, 2022 and 2021, aggregated $111 and $353, respectively. Advertising costs for the six months ended June 30, 2022 and 2021, aggregated $423 and $702, respectively.

Concentrations

Net sales. During the three months ended June 30, 2022, three customers accounted for 23%, 11%, and 10% of gross billing, respectively, and during the six months ended June 30, 2022, three customers accounted for 21%, 11%, and 10% of gross billing, respectively. During the three months ended June 30, 2021, two customers accounted for 19% and 12% of gross billing, respectively, and during the six months ended June 30, 2021, two customers accounted for 20% and 12% of gross billing, respectively. No other customers exceeded 10% of sales in either period.

Accounts receivable. As of June 30, 2022, the Company had accounts receivable from two customers which comprised 29% and 10% of its gross accounts receivable. As of December 31, 2021, the Company had accounts receivable from one customer which comprised 18% of its gross accounts receivable. No other customers exceeded 10% of gross accounts receivable in either period.

Purchases from vendors. During the three months ended June 30, 2022, one vendor accounted for 14% of all purchases. During the six months ended June 30, 2022, one vendor accounted for 14% of all purchases. During the three months ended June 30, 2021, two vendors accounted for 13% and 12% of all purchases, respectively. During the six months ended June 30, 2021, two vendors accounted for 13% and 12% of all purchases, respectively. No other vendors exceeded 10% of all purchases in either period.

Accounts payable. As of June 30, 2022, the Company’s had one vendor which comprised 11% of total accounts payable. As of December 31, 2021, no vendor accounted for more than 10% the total accounts payable. No other vendors exceeded 10% of gross accounts payable in either period.

Fair Value of Financial Instruments

The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. ASC 820 defines the following levels of subjectivity associated with the inputs:

Level 1—Quoted prices in active markets for identical assets or liabilities.

Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

SEC Form 10-Q filed by Reeds Inc.