10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

[  ] 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.)

13000 South Spring St. Los Angeles, Ca. 90061

(Address of principal executive offices) (Zip Code)

(310) 217-9400

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes [X] No [  ]

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

Large Accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ]	Smaller reporting company [X]

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were a total of 13,184,331 shares of Common Stock outstanding as of May 9, 2016.

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

2

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements	F-1
Condensed Balance Sheets - March 31, 2016 (unaudited) and December 31, 2015	F-1
Condensed Statements of Operations for the three month periods ended March 31, 2016 and 2015 (unaudited)	F-2
Condensed Statement of Changes in Stockholders’ Equity (Deficiency) for the three month period ended March 31, 2016 (unaudited)	F-3
Condensed Statements of Cash Flows for the three month periods ended March 31, 2016 and 2015 (unaudited)	F-4
Notes to Condensed Financial Statements (unaudited)	F-5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	4
Item 3. Quantitative and Qualitative Disclosures About Market Risk	10
Item 4. Controls and Procedures	10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	11
Item 1A. Risk Factors	11
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	11

3

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

REED’S, INC.

CONDENSED BALANCE SHEETS

	March 31, 2016			December 31, 2015
	(Unaudited)
ASSETS
Current assets:
Cash	$	648,000		$	1,816,000
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $263,000 and $356,000, respectively		2,675,000			2,894,000
Inventory, net of reserve for obsolescence of $220,000 and $290,000, respectively		8,186,000			7,927,000
Prepaid inventory		203,000			47,000
Prepaid and other current assets		456,000			769,000
Total Current Assets		12,168,000			13,453 ,000
Property and equipment, net of accumulated depreciation of $4,416,000 and $4,216,000, respectively		5,788,000			5,369,000
Brand names		1,029,000			1,029,000
Total assets	$	18,985,000		$	19,851,000
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable	$	7,721,000		$	7,458,000
Accrued expenses		183,000			168,000
Line of credit		4,250,000			4,443,000
Current portion of long term financing obligations		167,000			160,000
Current portion of capital leases payable		151,000			153,000
Current portion of term loans		341,000			341,000
Total current liabilities		12,813,000			12,723,000
Long term financing obligation, less current portion, net of discount of $907,000 and $953,000, respectively		1,427,000			1,443,000
Capital leases payable, less current portion		536,000			490,000
Capital expansion loan		1,896,000			1,542,000
Term loan, less current portion, net of discount $106,000 and $132,000, respectively		2,894,000			2,868,000
Total Liabilities		19,566,000			19,066,000
Commitments and contingencies
Stockholders’ equity (deficiency):
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding		94,000			94,000
Common stock, $.0001 par value, 19,500,000 shares authorized, 13,184,331 and 13,160,860 shares issued and outstanding, respectively		1,000			1,000
Additional paid in capital		27,613,000			27,399,000
Accumulated deficit		(28,289,000	)		(26,709,000	)
Total stockholders’ equity (deficiency)		(581,000)			785,000
Total liabilities and stockholders’ equity (deficiency)	$	18,985,000		$	19,851,000

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

 F-1

REED’S, INC.

CONDENSED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2016 and 2015

(Unaudited)

	Three months ended March 31,
	2016		2015
Sales	$	10,004,000	$	10,672,000
Cost of goods sold		8,111,000		7,413,000
Gross profit		1,893,000		3,259,000
Operating expenses:
Delivery and handling expenses		849,000		1,169,000
Selling and marketing expense		1,041,000		1,193,000
General and administrative expense		1,205,000		914,000
Total operating expenses		3,095,000		3,276,000
Loss from operations		(1,202,000)		(17,000	)
Interest expense		(378,000)		(254,000	)
Net loss	$	(1,580,000)	$	(271,000	)
Loss per share – basic and diluted	$	(0.12)	$	(0.02	)
Weighted average number of shares outstanding – basic and diluted		13,184,331		13,068,675

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

 F-2

REED’S, INC.

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIENCY)

For the Three Months Ended March 31, 2016

(Unaudited)

					Series A				Additional					Total
	Common Stock				Preferred Stock				Paid-In		Accumulated			Stockholders’
	Shares		Amount		Shares		Amount		Capital		Deficit			Equity(Deficiency)
Balance, January 1, 2015		13,160,860	$	1,000		9,411	$	94,000	$	27,399,000	$	(26,709,000	)	$	785,000
Common shares issued upon exercise of warrants		16,260								45,000					45,000
Common shares issued upon exercise of options		7,211								-					-
Fair value vesting of options issued to employees										169,000					169,000
Net loss												(1,580,000	)		(1,580,000	)
Balance, March 31, 2016		13,184,331	$	1,000		9,411	$	94,000	$	27,613,000	$	(28,289,000	)	$	(581,000	)

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

 F-3

REED’S, INC.

CONDENSED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2016 and 2015

(Unaudited)

	Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net loss	$	(1,580,000	)	$	(271,000	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		261,000			213,000
Fair value of stock options issued to employees		169,000			212,000
(Decrease) increase in allowance for doubtful accounts		(93,000)			1,000
Changes in assets and liabilities:
Accounts receivable		313,000			(479,000	)
Inventory		(259,000	)		(2,054,000	)
Prepaid Inventory		(156,000	)		474,000
Prepaid expenses and other current assets		312,000			168,000
Accounts payable		263,000			1,267,000
Accrued expenses		15,000			11,000
Net cash used in operating activities		(755,000	)		(458,000	)
Cash flows from investing activities:
Purchase of property and equipment		(186,000	)		(351,000	)
Net cash used in investing activities		(186,000	)		(351,000	)
Cash flows from financing activities:
Proceeds from warrant exercises		45,000			31,000
Principal repayments on long term financing obligation		(37,000)			(31,000	)
Principal repayments on capital lease obligation		(42,000	)		(33,000	)
Net draw down (repayment) on line of credit		(193,000	)		1,104,000
Net cash (used in) provided by financing activities		(227,000	)		1,071,000
Net increase (decrease) in cash		(1,168,000	)		262,000
Cash at beginning of period		1,816,000			959,000
Cash at end of period	$	648,000		$	1,221,000
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	364,000		$	201,000
Non Cash Investing and Financing Activities
Property and equipment acquired through capital expansion loan	$	354,000		$	311,000
Property and equipment acquired through capitalized leases		86,000			250,000

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

 F-4

REED’S, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Three Months Ended March 31, 2016 and 2015 (Unaudited)

1. Basis of Presentation and Liquidity

The accompanying interim condensed financial statements are unaudited, but in the opinion of management of Reed’s, Inc. (the “Company”), contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at March 31, 2016 and the results of operations and cash flows for the three months ended March 31, 2016 and 2015. The balance sheet as of December 31, 2015 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 23, 2016.

The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2016.

Liquidity

As of March 31, 2016, we had a stockholders deficit of $581,000 and working capital deficit of $645,000 compared to stockholders equity of $785,000 and working capital of $730,000 at December 31, 2015.

We believe that the Company currently has the necessary working capital to support existing operations until the revolver becomes due in December of this year. Consistent with past refinancing practices regarding the Line of Credit, the Company believes that we will be successful in renewing the Line of Credit for another time frame similar to the past for a two year time frame. There are no assurances that this refinancing will be completed. Our primary capital source will be positive cash flow from operations. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs and can be managed to maintain positive cash flow from operations. Historically, we have financed our operations primarily through private sales of common stock, preferred stock, convertible debt, a line of credit from a financial institution and cash generated from operations.

We may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion and marketing and product development plans. In addition, our losses may increase in the future as we expand our manufacturing capabilities and fund our marketing plans and product development. These losses, among other things, have had and may continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock would decline and there would be a material adverse effect on our financial condition.

If we suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures could be significantly limited.

2. Significant Accounting Policies

Income (Loss) per Common Share

Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stock holders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing the net income applicable to common stock holders 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.

The Company had potentially dilutive securities that consisted of:

	March 31, 2016		March 31, 2015
Warrants		325,000		267,271
Series A Preferred Stock		37,644		37,644
Options		965,000		1,013,333
Total		1,327,644		1,318,248

 F-5

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 and 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 intangibles, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

Recent Accounting Pronouncements

There were recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the “SEC”), such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. On August 12, 2015, FASB delayed the required implementation to fiscal years ending after December 15, 2017 but now permitted organizations such a Reeds to adopt earlier. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has determined to adopt ASU 2014-09 in Fiscal 2017 and has not determined the effect of the standard on our ongoing financial reporting.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures beginning in 2016.

Other recent accounting pronouncements issued by the FASB, including 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 consolidated financial statements.

 F-6

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amounts of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company had cash balances in excess of $250,000 during the three months ended March 31, 2016.

During the three months ended March 31, 2016, the Company had two customers that accounted for 25% and 10% of gross sales. During the months ended March 31, 2015, the company had two customers that accounted for 30% and 15% of sales respectively. As of March 31, 2016, the Company had accounts receivable due from two customers who comprised 23% and 11% of its total accounts receivable and as of December 31, 2015 the Company had accounts receivable due from two customers who comprised 24% and 12% of its total accounts receivable.

During the three months ended March 31, 2016, the Company had one vendor which accounted for approximately 17% of all purchases, and in the three months ended March 31, 2015 one vendor who accounted for approximately 30% of all purchases. No other vendor accounted for more than 10% of all purchases in either period. As of March 31, 2016, the Company had two vendors which accounted for approximately 20% and 10% of total accounts payable and as of December 31, 2015, the Company had two vendors which accounted for approximately 31% and 11% of total accounts payable.

Fair Value of Financial Instruments

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

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 Company had no such assets or liabilities recorded to be valued on the basis above at March 31, 2016 or December 31, 2015.

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 due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

3. Inventory

Inventory is valued at the lower of cost (first-in, first-out or market) and, net of reserves, is comprised of the following as of:

	March 31, 2016		December 31, 2015
Raw Materials and packaging	$	4,676,000		4,364,000
Finished Goods		3,510,000		3,563,000
	$	8,186,000		7,927,000

4. Property and Equipment

Property and equipment are comprised of the following as of:

	March 31, 2016			December 31, 2015
Land	$	1,107,000		$	1,107,000
Building		1,875,000			1,875,000
Vehicles		500,000			500,000
Machinery and equipment		3,794,000			3,800,000
Equipment under capital leases		944,000			857,000
Office equipment		469,000			469,000
Construction in Progress		1,515,000			977,000
		10,204,000			9,585,000
Accumulated depreciation		(4,416,000	)		(4,216,000	)
	$	5,788,000		$	5,369,000

Depreciation expense for the three months ended March 31, 2016 and 2015 was $200,000 and $191,000, respectively.

 F-7

5. Intangible Assets and Impairment Policy

Intangible assets are comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names 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 is appropriate. As part of our impairment test, we first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If further testing is necessary, we compare the estimated fair value of our indefinite-lived intangible asset with its book value. If the carrying amount of the indefinite-lived intangible 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, 2015 and 2014, the Company did not recognize any impairment charges for its indefinite-lived intangible assets.

6. Notes Payable

Line of Credit

On November 9, 2011, the Company entered into a Loan and Security Agreement with PMC Financial Services Group, LLC (PMC), which was amended and extended for two years on December 5, 2014, that provides a $6,000,000 revolving line of credit. The Amended Agreement extends and amends the Revolving Loan and Term Loan (see discussion below) and adds a new Capital Expansion Loan (the “Capex Loan”) (see discussion below). At March 31, 2016 and December 31, 2015, the aggregate amount outstanding under the line of credit was $4,250,000 and $4,443,000 respectively.

The revolving line of credit is based on 85% of accounts receivable and 60% of eligible inventory and is secured by substantially all of the Company’s assets. The interest rate on the Revolving Loan was the prime rate plus .35% (9% at March 31, 2016). However, the interest rate has been adjusted as described below in term loans. The monthly management fee is .45% of the average monthly loan balance. As of March 31, 2016, the Company had a maximum borrowing availability of $1,750,000 under the line of credit agreement.

The line of credit matures on December 5, 2016 and is subject to a 1% prepayment penalty for prepayment prior to the first anniversary of the effective date.

Term Loans

The Company has the following term loans outstanding with PMC Financial Services Corporation;

	March 31, 2016			December 31, 2015
Term Loans	$	3,000,000		$	3,000,000
Valuation discount		(106,000	)		(132,000	)
Long term portion	$	2,894,000		$	2,868,000

In connection with the Loan and Security Agreement with PMC, the Company entered into a Term Loan. The loan was $750,000, and was secured by all of the unencumbered assets of the Company. Effective December 5, 2014 the Term Loan’s outstanding principal balance was increased to $1,500,000 and the annual interest rate was revised to prime plus 5.75% (currently 9%) subject to adjustment as described below.

Effective September 1, 2015 the Company entered into an additional Term Loan with a principal balance of $1,500,000 at prime plus 11.60% (currently 14.85%) with PMC. As of March 31, 2016 and December 31, 2015, the aggregate amount under the Term Loans outstanding was $3,000,000.

The interest rate on the line of credit and Term loans described above were modified on September 1, 2015 and are subject to adjustment as follows:

Under the new conditions, the rate charge will be calculated on a sliding scale based on the trailing 6 month EBITDA. If the EBITDA measuring point stays below $1,000,000 where it is now, the rate will rise to 12% from the current rate of 9%. If EBITDA rises to $1,500,000 then the rate will be reduced to 9%.

Notwithstanding the other borrowing terms above, if Excess Borrowing Availability under the $6 million Revolving line of credit remains more than $1,500,000 at all times during the preceding month (currently Reed’s Borrowing Availability is zero) the Interest Rate shall remain unchanged for the asset based lending that includes the Revolving working capital loan, CAPEX capital improvement loan and Term Loan A. The six month Term Loan B rates will remain the same at 14.85%.

On November 9, 2015, the Company completed a restructuring of Term Loans with PMC. The aggregated amount of the principal for affected term loans is $3,000,000. Under the new agreement, the maturity of both loans will be due in lump sum on April 1, 2017 under the same rates and conditions as before. In connection with the agreement, the Company granted PMC 125,000 warrants at an exercise price of $4.50 per share with a term of five years and six months. The 125,000 warrants were valued at $141,000 using the Black Scholes Merton option pricing model and were recorded as a valuation discount. The following assumptions were made in valuing the 125,000 warrants; term of 5.5 years, volatility of 56.04%, expected dividends 0% and discount rate of 0.68%. The warrants value of $141,000 is being amortized over the remaining 16 months of the term loans. During the three months ending March 31, 2016, $26,000 of valuation discount was amortized resulting in an unamortized balance of $106,000 at March 31, 2016.

 F-8

Capital Expansion (“CAPEX”) Loan

In connection with the loan and security agreement with PMC, the Company entered into a CAPEX loan in the aggregate outstanding amount not to exceed $3,000,000. The CAPEX loan will finance new asset purchases for modernization and improvement of the beverage bottling equipment in the Los Angeles plant. Interest only on the CAPEX loan shall be paid from time to time until the end of each fiscal quarter, at which time the principal amounts of each outstanding CAPEX loan will be aggregated and repaid in 48 equal monthly installments of principal plus accrued but unpaid interest beginning July 31, 2016, or if earlier, the revolver maturity of December 2016. The interest rate on the CAPEX loan is the prime rate plus 5.75% (9.25% at March 31, 2016). At March 31, 2016 and December 31,2015, the balance on the CAPEX loan balance was $2,237,000 and $1,883,000 respectively and as of March 31, 2016, the Company had future borrowing availability of $908,000. On June 30, 2016, the loan funding will close and the Company will begin repayments in July, 2016.

In conjunction with this loan the Company has placed equipment with a cost of $341,000 at a co-packing facility to enable the co-packer to manufacture our products. Should the Company be unable to secure access to the equipment in the event of failure of the co-packer, the amount will become due and payable by the Company immediately.

7. Obligations under Capital Leases

The Company leases equipment for its brewery operations with an aggregate value of $944,000 under six non-cancelable capital leases. Most of the leases are personally guaranteed by the Company’s chief executive officer. Monthly payments range from $341 to $10,441 per month, including interest, at interest rates ranging from 6.51% to 17.31% per annum. At March 31, 2016, monthly payments under these leases aggregated $16,000. The leases expire at various dates through 2020.

Future minimum lease payments under capital leases are as follows:

Years Ending December 31,
2016	$	168,000
2017		213,000
2018		217,000
2019		169,000
2020		49,000
Total payments		816,000
Less: Amount representing interest		(129,000	)
Present value of net minimum lease payments		687,000
Less: Current portion		(151,000	)
Non-current portion	$	536,000

 F-9

8. Long-term Financing Obligation

On June 15, 2009, the Company closed escrow on the sale of its two buildings and its brewery equipment and concurrently entered into a long-term lease agreement for the same property and equipment. In connection with the lease the Company has the option to repurchase the buildings and brewery equipment from 12 months after the commencement date to the end of the lease term at the greater of the fair market value or an agreed upon amount. Since the lease contains a buyback provision and other related terms, the Company determined it had continuing involvement that did not warrant the recognition of a sale; therefore, the transaction has been accounted for as a long-term financing. The proceeds from the sale, net of transaction costs, have been recorded as a financing obligation in the amount of $3,056,000. Monthly payments under the financing agreement are recorded as interest expense and a reduction in the financing obligation at an implicit rate of 9.9%. The financing obligation was personally guaranteed up to a limit of $150,000 by the principal shareholder and Chief Executive Officer, Christopher J. Reed.

In connection with the financing obligation, the Company issued an aggregate of 400,000 warrants to purchase its common stock at $1.20 per share for five years. The 400,000 warrants were valued at $752,000 and reflected as a debt discount, using the Black Scholes Merton option pricing model. The following assumptions were utilized in valuing the 400,000 warrants: strike price of $2.10 to $2.25; term of 5 years; volatility of 91.36% to 110.9%; expected dividends 0%; and discount rate of 2.15% to 2.20%. The 400,000 warrants were recorded as valuation discount and are being amortized over 15 years, the term of the purchase option.

Effective October 1, 2014, the Company executed Amendment #1 to the Long-term Financing Obligation. In exchange for a release from the $150,000 personal guarantee by the principal shareholder and Chief Executive Office, and a release of the brewery equipment which was collateral for the lease agreement, the Company issued 200,000 warrants to purchase its common stock for $5.60 per share with a term of five years. The 200,000 warrants were valued at $584,000 using the Black Scholes Merton option pricing model and were recorded as a valuation discount. The following assumptions were made in valuing the 200,000 warrants; term of 5 years, volatility of 59.53%, expected dividends 0% and discount rate of 1.25%. The warrants value of $584,000 is being amortized over the remaining term of the purchase option. Amortization of valuation discount was $28,000 and $14,000 during the three months ended March 31, 2016 and 2015.

Long term financing obligation is comprised of the following as of:

	March 31, 2016			December 31, 2015
Financing obligation	$	2,501,000			2,538,000
Valuation discount		(907,000	)		(935,000	)
		1,594,000			1,603,000
Less current portion		(167,000	)		(160,000	)
Long term financing obligation	$	1,427,000			1,443,000

 F-10

9. Stock Based Activity

Stock Options

Stock options granted under our equity incentive plans generally vest over 3 years from the date of grant, at 33% per year or over 4 years at 25% per year and expire 5 years from the date of grant. The following table summarizes stock option activity for the three months ended March 31, 2016:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		980,000		$	4.51
Granted		0
Exercised		(15,000	)	$	2.43
Forfeited or expired		0
Outstanding at March 31, 2016		965,000		$	4.21		$	374,000
Exercisable at March 31, 2016		411,333					$	354,000

During the three months ended March 31, 2016, the Company did not grant any stock options to any employee or other party.

The aggregate intrinsic value was calculated as the difference between the closing market price, which was $4.67, and the exercise price of the Company’s stock options as of March 31, 2016. Stock-based compensation recognized on the Company’s statement of operations for the three months ended March 31, 2016 and 2015 was $169,000 and $212,000, respectively. During the three months ended March 31, 2016, the Company issued 7,211 shares of the Company’s common stock upon exercise of 15,000 stock options on a cashless basis.

Stock Warrants

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		341,261	$	3.74
Granted
Exercised		16,260	$	2.77
Forfeited or expired		1
Outstanding at March 31, 2016		325,000	$	5.18		$	21,250
Exercisable at March 31, 2016		200,000	$	5.60		$	0

The intrinsic value was calculated as the difference between the closing market price, which was $4.67, and the exercise price of the Company’s warrants common stock, as of March 31, 2016.

 F-11

10. Subsequent Events

On April 29, 2016 the Board of Directors approved an extension of the Line of Credit (see Note 6) with PMC Financial Services Group, LLC (PMC) to include prepaid inventory that normally would be excluded from the lending base. The Line of Credit maximum of $6,000,000 and the rates remained unchanged.

In consideration, the Company will issue to PMC 10,000 warrants at a strike price of $4.50 to be accounted for as a financing cost in the second quarter of 2016.

 F-12

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes appearing elsewhere in this report. This discussion and analysis may contain forward-looking statements based on assumptions about our future business.

Overview

The results for our first quarter of 2016 reflect the operations meeting demand, margins stabilizing and continued cost containment. We experienced decreasing resistance from long time loyal retailers in restocking our full line of beverage offerings. Our ginger products grew year over year and our flagship Virgils flavor, root beer, continued its growth. We believe that as all of our customers realize our commitment to keeping them in stock for our core beverages, that the retailers will begin repurchasing items as they have in the past.

We have included below detailed information on our products from a sales perspective with the associated cost of goods sold and production. The information is presented in the industry standard of eight ounce serving equivalents.

We continued work on upgrading our Los Angeles plant equipment in 2016 and on increasing its capacity. The Idle Plant costs decreased by $395,000 over the same period last year even while we begin installation of the new equipment. The new plant will provide the Company capacity to expand volume without incurring time delays or cost increases and will continue the downward trend in freight costs.

Cost containment activity led to delivery expense returning to historic norms of 8.5% in the period as compared 11.0% in the same period in 2015. Further cost containment efforts led to a reductions in sales expenses of $152,000 over the same period in the prior year, while G&A expenses increased by $291,000 with the largest increase due to bad debt expense.

4

Results of Operations

The following table sets forth key statistics for the three months ended March 31, 2016 and 2015, respectively.

	Three Months Ended
	March 31,						Pct.
	2016			2015			Change
Gross sales, net of discounts & returns *		$10,777,000			$11,351,000			(5.0%	)
Less: Promotional and other allowances**		773,000			679,000			13.8%
Net sales		10,004,000			10,672,000			(6.3%	)
Cost of tangible goods sold		7,838,000			6,745,000
As a percentage of:
Gross sales		73	%		59	%
Net sales		78	%		63	%
Cost of goods sold – idle capacity		273,000			668,000			(59.1%	)
As a percentage of net sales		3	%		6	%
Gross profit		$1,893,000			3,259,000			(41.9%	)
Gross profit margin as a percentage of net sales		18.9	%		30.5	%
Expenses
Delivery and handling		$849,000			$1,169,000			(27.4%)
Selling and marketing		1,041,000			1,193,000			(12.7%)
General and administrative		1,205,000			915,000			9.4%
Total operating expenses		3,095,000			3,277,000			(5.5%)
Income from operations		($1,202,000	)		($18,000	)
Interest Expense		(378,000	)		(254,000	)
Net loss to stockholders		($1,580,000	)		($272,000	)
Shares outstanding		13,184,000			13,068,000
Net income (loss) per share		($0.12	)		($0.02	)

* Gross sales is used internally by management as an indicator of and to monitor operating performance, including sales performance of particular products, salesperson performance, product growth or declines and overall Company performance. The use of gross sales allows evaluation of sales performance before the effect of any promotional items, which can mask certain performance issues. We therefore believe that the presentation of gross sales provides a useful measure of our operating performance. Gross sales is not a measure that is recognized under GAAP and should not be considered as an alternative to net sales, which is determined in accordance with GAAP, and should not be used alone as an indicator of operating performance in place of net sales. Additionally, gross sales may not be comparable to similarly titled measures used by other companies, as gross sales has been defined by our internal reporting practices. In addition, gross sales may not be realized in the form of cash receipts as promotional payments and allowances may be deducted from payments received from certain customers.

** Although the expenditures described in this line item are determined in accordance with GAAP and meet GAAP requirements, the disclosure thereof does not conform with GAAP presentation requirements. Additionally, our definition of promotional and other allowances may not be comparable to similar items presented by other companies. Promotional and other allowances primarily include consideration given to the Company’s distributors or retail customers including, but not limited to the following: (i) reimbursements given to the Company’s distributors for agreed portions of their promotional spend with retailers, including slotting, shelf space allowances and other fees for both new and existing products; (ii) the Company’s agreed share of fees given to distributors and/or directly to retailers for in-store marketing and promotional activities; (iii) the Company’s agreed share of slotting, shelf space allowances and other fees given directly to retailers; (iv) incentives given to the Company’s distributors and/or retailers for achieving or exceeding certain predetermined sales goals; and (v) discounted or free products. The presentation of promotional and other allowances facilitates an evaluation of their impact on the determination of net sales and the spending levels incurred or correlated with such sales. Promotional and other allowances constitute a material portion of our marketing 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.

5

Three months ended March 31, 2016 Compared to Three months ended March 31, 2015

Metrics

	8 Ounce Volume							8 Ounce Gross Sales Revenue
	2016		2015		Change			2016			2015			Change
Gross Sales
Reeds Beverages		489,688		464,932		5.3	%	$	5,457,510		$	5,170,413			5.6	%
Virgils		281,791		318,337		-11.5	%		3,352,837			3,773,642			-11.2	%
Kombucha		33,296		36,987		-10.0	%		796,429			963,423			-17.3	%
All Other Reeds Beverages		14,827		21,031		-29.5	%		199,898			289,639			-31.0	%
Private Label		52,042		72,599		-28.3	%		546,444			533,476			2.4	%
Reeds Candy									381,549			548,434			-30.4	%
All Other Non-Beverages									44,076			72,126			-38.9	%
Total Gross Sales		871,643		913,887		-4.6	%	$	10,778,744		$	11,351,152			-5.0	%
Sales Discounts Unallocated to Specific SKU’s						(774,358	)		(679,156	)		14.0	%
Net Sales		871,643		913,887		-4.6	%	$	10,004,386		$	10,671,996			-6.3	%
Gross Sales per 8 ounce								$	12.37		$	12.42			-0.4	%
Net Sales per 8 ounce								$	11.48		$	11.68			-1.7	%
Cost of Goods Sold
Reeds Beverages		489,688		464,932		5.3	%	$	3,617,098		$	3,371,984			7.3	%
Virgils		281,791		318,337		-11.5	%		2,140,341			2,082,252			2.8	%
Kombucha		33,296		36,987		-10.0	%		432,218			488,267			-11.5	%
All Other Reeds Beverages		14,827		21,031		-29.5	%		138,397			168,308			-17.8	%
Private Label		52,042		72,599		-28.3	%		414,226			310,204			33.5	%
Costs Unallocated to Specific SKU’s									705,211			(97,998	)		819.6	%
Reeds Candy									281,732			341,023			-17.4	%
All Other Non-Beverages									108,575			81,493			33.2	%
Cost of Goods Sold		871,643		913,887		-4.6	%	$	7,837,800		$	6,745,534			16.2	%
Additional Cost of Goods Produced
Idle Plant									273,594			667,822			-59.0	%
Cost of Goods produced and Sold									8,111,394			7,413,356			9.4	%
Cost of Goods Sold per 8 ounce								$	8.99		$	7.38			21.8	%
Cost of Goods Produced Per 8 ounce								$	9.31		$	8.11			14.7	%
Gross Margin including Idle Plant									18.9	%		30.5	%		-38.0	%

Sales

Gross sales decreased in 2016 to $10,777,000 from $11,351,000 in the same period in 2015. On an 8 ounce serving basis, net sales decreased $0.05 per 8 ounce serving or 0.4% year over year. The main driver of the decrease was a 11.2% decrease in Virgils as retailers were slower than expected in replenishing their shelves with a the full line of Virgil’s stock keeping units (SKUs).

Net sales decreased in 2016 to $10,004,000 from $10,672,000 in the same period in 2015. On an 8 ounce serving basis, net sales decreased $0.20 per 8 ounce serving or 1.7% year over year. The main driver of the decrease was a 13.7% increase in promotional costs combined with a lower sales volume. Candy sales continued to be negatively impacted by the California lawsuit regarding specific resourcing locations in the first quarter. Candy sales were down $59,000 over the same period in 2015. A new supplier has been identified and sales of the affected lines will begin again in late second quarter.

6

Cost of Goods Sold and Produced

Cost of tangible goods sold consists of the costs of raw materials utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, inventory adjustments and internal transfer costs. Idle capacity consists of direct production costs of our Los Angeles plant in excess of charges allocated to our finished goods in production. Plant costs include labor costs, production supplies, repairs and maintenance, and depreciation. Our charges for labor and overhead allocated to our finished goods are determined on a market cost basis, which is lower than our actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced.

Cost of goods sold increased in 2016 to $7,838,000 from $6,745,000 in the same period in 2015. On an 8 ounce serving basis, cost of goods sold increased $1.61 per 8 ounce serving or 21.8% year over year. The main driver of an increase in costs unallocated to specific SKUs was comprised primarily of inventory adjustments.

Cost of goods produced increased in 2016 to $8,111,000 from $7,413,000 in the same period in 2015. On an 8 ounce serving basis, cost of goods sold increased $1.20 per 8 ounce serving or 14.7% year over year. The main driver of the increase is the costs unallocated to specific SKUs in the cost of goods sold discussed earlier. The increase was partially offset by an improvement in LA Plant Idle Plant costs. Idle Plant costs decreased to $273,000 from $668,000 over the same period in 2015.

Gross Margin

Gross margin declined to 18.9% from 30.5% as costs unallocated to specific SKU's in sales increased to $774,000 from $679,000 or $95,000 on a lower volume base. In addition, costs unallocated to specific SKU's in production also increased to $705,000 from ($98,000) or $803,000. These increases are primarily due to sales discounts and inventory adjustments respectively.

Delivery and Handling Expenses

Delivery and handling expenses consist of delivery costs to customers and warehouse costs incurred for handling our finished goods after production. Delivery and handling costs decreased by 27.4% to $849,000 in the three months ended March 31, 2016 compared to $1,169,000 over the same period in 2015. The decrease is due to lower sales volume of 4.6% and a rate and utilization mix reduction of 22.5%. As percentage of net sales, the decrease to 8.5% for the first quarter of 2016 is comparable to historic rates.

Selling and Marketing Expenses

Selling and marketing expenses consist primarily of direct charges for staff compensation costs, advertising, sales promotion, marketing and trade shows. Selling and marketing costs decreased $152,000 overall to $1,041,000 in the three months ended March 31, 2016 from $1,193,000 in 2015. This decrease over last year is primarily due to reductions in public relations, advertising, promotions, professional fees and brokers fees. Employee compensation, travel and entertainment and trade show expenses were flat vs. same period in prior year.

General and Administrative Expenses

General and administrative expenses consist primarily of the cost of executive, administrative, and finance personnel, as well as professional fees. General and administrative expenses increased $291,000 to $1,205,000 during the three months ended March 31, 2016 from $915,000 in the same period of 2015. The increase was due to increases in bad debt expense of $120,000, compensation related expenses of $72,000 amortization of certain fees of $40,000, increased filing fees of $26,000 and upgrades to IT functions of $17,000.

Loss from Operations

The loss from operations was ($1,202,000) in the three months ended March 31, 2016, as compared to a loss of $(17,000) in the same period of 2015. The loss was comprised of decreases in sales volume of $668,000, cost of goods sold increases of $1,094,000 that were partially offset by lower idle plant costs of $395,000 and lower expenses of $180,000.

Interest Expense

Interest expense and bank related charges increased $124,000 to $378,000 in the three months ended March 31, 2016, compared to expenses of $254,000 in the same period of 2015. The increase is primarily due to increased borrowing on our revolving line of credit, an additional term loan and new capital expansion loan.

Recap of current quarterly interest and bank fees.

Quarterly Interest
Working Capital	$	151,772	15.4	%
Capex		49,134	9.4	%
Term Loan*		89,812	12.0	%
Equipment Leases		16,317	10.6	%
Equipment Sale Leaseback*		62,331	9.9	%
Bank Fees		8,364
	$	377,730	12.2	%
* Does not include amortized fees

7

Modified EBITDA

The Company defines modified EBITDA (a non-GAAP measurement) as net loss before interest, taxes, depreciation and amortization, and non-cash expense for securities. Other companies may calculate modified EBITDA differently. Management believes that the presentation of modified EBITDA provides a measure of performance that approximates cash flow before interest expense, and is meaningful to investors.

MODIFIED EBITDA SCHEDULE

	Three Months Ended March 31,
	2016			2015
Net loss	$	($1,580,000	)	$	(271,000	)
Modified EBITDA adjustments:
Depreciation and amortization		261,000			213,000
Interest expense		378,000			200,000
Stock option compensation		169,000			212,000
Total EBITDA adjustments		808,000			625,000
Modified EBITDA income from operations	$	(772,000	)	$	354,000

The $1,126,000 decrease in modified EBITDA for the three months resulted from the increases in the EBITDA adjustments totaling $183,000 for the quarter ended March 31, 2016 plus the $1,309,000 increase in the net loss. The $32,000 increase in Depreciation and amortization was due to the raised asset base, the increase in Interest expense was due to the increased loan balances and Stock option compensation decrease was due to no new options granted.

Liquidity and Capital Resources

As of March 31, 2016, we had a stockholders deficit of $581,000 and working capital deficit of $645,000 compared to stockholders equity of $785,000 and working capital of $730,000 at December 31, 2015.

Our cash and cash equivalents at March 31, 2016 decreased by $1,168,000 to $648,000 at March 31, 2016 compared to $1,816,000 at December 31, 2015. Net cash used in operating activities of $755,000 for the three months ended March 31, 2016. Investing activities included $186,000 used to purchase machinery in the Los Angeles plant. A total of $227,000 in financing activities was used pay down leases and the line of credit.

Our Loan and Security Agreement with PMC Financial Services Group, LLC provides a $6 million revolving line of credit and a $1,500,000 term loan and a new $3 million Capital Expansion loan. The revolving line of credit is based on 85% of eligible accounts receivable and 50% of eligible inventory. Effective December 5, 2014 the interest rate was revised to prime plus 5.75% which is currently 9% on all three loans. At March 31, 2016, the revolving line of credit balance was $4,250,000 the term loan balance was $3,000,000 and the Capital Expansion loan balance was $2,237,000.

On April 25, 2016, PMC Financial Services Group, LLC modified the $6 million revolving line of credit to include certain prepaid inventory in the definition of inventory. (See Note 10).

We believe that the Company currently has the necessary working capital to support existing operations until the revolver becomes due in December of this year. Consistent with past refinancing practices regarding the Line of Credit, the Company believes that we will be successful in renewing the Line of Credit for another time frame similar to the past for a two year time frame. There are no assurances that this refinancing will be completed. Our primary capital source will be positive cash flow from operations. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs and can be managed to maintain positive cash flow from operations. Historically, we have financed our operations primarily through private sales of common stock, preferred stock, convertible debt, a line of credit from a financial institution and cash generated from operations.

We may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion and marketing and product development plans. In addition, our losses may increase in the future as we expand our manufacturing capabilities and fund our marketing plans and product development. These losses, among other things, have had and may continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock would decline and there would be a material adverse effect on our financial condition.

If we suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures could be significantly limited.

8

Critical Accounting Policies and Estimates

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. GAAP requires us to make estimates and assumptions that affect the reported amounts in our financial statements including various allowances and reserves for accounts receivable and inventories, the estimated lives of long-lived assets and trademarks and trademark licenses, as well as claims and contingencies arising out of litigation or other transactions that occur in the normal course of business. The following summarize our most significant accounting and reporting policies and practices:

Revenue Recognition. Revenue is recognized on the sale of a product when the product is shipped, which is when the risk of loss transfers to our customers, and collection of the receivable is reasonably assured. A product is not shipped without an order from the customer and credit acceptance procedures performed. The allowance for returns is regularly reviewed and adjusted by management based on historical trends of returned items. Amounts paid by customers for shipping and handling costs are included in sales. The Company reimburses its wholesalers and retailers for promotional discounts, samples and certain advertising and promotional activities used in the promotion of the Company’s products. The accounting treatment for the reimbursements for samples and discounts to wholesalers results in a reduction in the net revenue line item. Reimbursements to wholesalers and retailers for certain advertising activities are included in selling and marketing expenses.

Long-Lived Assets. Our management regularly reviews property, equipment and other long-lived assets, including identifiable amortizing intangibles, for possible impairment. This review occurs quarterly or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If there is indication of impairment of property and equipment or amortizable intangible assets, then management prepares an estimate of future cash flows (undiscounted and without interest charges) 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. The fair value is estimated at the present value of the future cash flows discounted at a rate commensurate with management’s estimates of the business risks. Quarterly, or earlier, if there is indication of impairment of identified intangible assets not subject to amortization, management compares the estimated fair value with the carrying amount of the asset. An impairment loss is recognized to write down the intangible asset to its fair value if it is less than the carrying amount. Preparation of estimated expected future cash flows is inherently subjective and is based on management’s best estimate of assumptions concerning expected future conditions. No impairments were identified during the three months ended March 31, 2016.

Management believes that the accounting estimate related to impairment of our long lived assets, including our trademark license and trademarks, is a “critical accounting estimate” because: (1) it is highly susceptible to change from period to period because it requires management to estimate fair value, which is based on assumptions about cash flows and discount rates; and (2) the impact that recognizing an impairment would have on the assets reported on our balance sheet, as well as net income, could be material. Management’s assumptions about cash flows and discount rates require significant judgment because actual revenues and expenses have fluctuated in the past and we expect they will continue to do so.

Recent Accounting Pronouncements

 See Note 2 of the financial statements for a discussion of recent accounting pronouncements.

9

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Interim Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Securities and Exchange Act of 1934 Rules 13a-15(f). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2016.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

10

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to various legal proceedings from time to time in the ordinary course of business, none of which are required to be disclosed under this Item 1.

Item 1A. Risk Factors

A smaller reporting company is not required to provide the information required by this Item.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Item 6. Exhibits

Exhibit No.	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

*filed herewith

In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.

Furnished herewith, XBRL (Extensive Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

11

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Reed’s, Inc. (Registrant)
Date: May 11, 2016	/s/ Christopher J. Reed
	Christopher J. Reed
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: May 11, 2016	/s/ Daniel V. Miles
	Daniel V. Miles
	Chief Financial Officer
	(Principal Financial Officer)

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EX-10.1

NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.

COMMON STOCK PURCHASE WARRANT

REED’S INC.

Warrant Shares: 125,000	Initial Exercise Date: May 9, 20161
	Issue Date: November 9, 2015

THIS CERTIFIES that, for value received, Reed’s Inc., a Delaware corporation (the “Company”), upon the surrender of this Warrant to the Company at the address specified herein, at any time during the Exercise Period (as defined below) will upon receipt of the Exercise Price (as defined below), sell and deliver to PMC Financial Services Group, LLC (the “Holder”) up to the number of duly authorized, validly issued and fully paid and non-assessable shares of common stock of the Company designated Reed’s Inc. Common Stock, par value $0.0001 per share, set forth above. The term “Common Stock” shall mean the aforementioned common stock of the Company together with any other equity securities that may be issued by the Company in connection therewith or in substitution therefor, as provided herein. The “Exercise Period” shall begin on May 9, 2016 and shall end on May 9, 2021, the fifth annual anniversary of the commencement date. During the Exercise Period, the Holder may purchase such number of shares of Common Stock at a purchase price per share equal to no higher than $5.05, to be set at the lowest closing price of the Common Stock on the NYSE between the Issue Date and December 31, 2015, as appropriately adjusted pursuant to Section G hereof (the “Exercise Price”). Following the expiration of the Exercise Period, the Holder shall have no right to purchase all or any portion of the Warrant Shares.

The number of shares of Common Stock to be received upon the exercise of this Warrant and the price to be paid for a share of Common Stock are subject to adjustment from time to time as hereinafter set forth. The shares of Common Stock deliverable upon such exercise, as adjusted from time to time, are hereinafter sometimes referred to as “Warrant Shares.”

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This Warrant is being issued as consideration for the Term Loan Amendment Agreement dated November 9, 2015, attached hereto as Appendix A.

SECTION A. EXERCISE OF WARRANT. This Warrant may be exercised in whole or in part, at any time or from time to time, during the Exercise Period by presentation and surrender hereof to the Company at its principal place of business (or at such other address as the Company or its agent may hereafter designate in writing to the Holder), or at the office of its warrant agent, with the Notice of Exercise Form contained herein duly executed and accompanied by a wire transfer of immediately available funds, cash or a certified or official bank check drawn to the order of “Reed’s Inc.” in the amount of the Exercise Price multiplied by the number of Warrant Shares specified in such form. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant, promptly execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable hereunder. Upon receipt by the Company during the Exercise Period of this Warrant and such Notice of Exercise Form, in proper form for exercise, together with proper payment of the Exercise Price, at such office, or by the warrant agent of the Company at its office, the Holder shall be deemed to be the holder of record of the number of Warrant Shares specified in such form; PROVIDED, HOWEVER, that if the date of such receipt by the Company or its agent is a date on which the stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding business day on which the stock transfer books of the Company are open. The Company shall pay any and all documentary, stamp or similar issue or transfer taxes payable in respect of the issue or delivery of such Warrant Shares. Any new or substitute Warrant issued under this Section A or any other provision of this Warrant shall be dated the date of this Warrant. Upon exercise of this Warrant, the Company or its warrant agent shall, within 3 trading days, cause to be issued and shall promptly deliver upon written order of the Holder of this Warrant, and in such name or names as such Holder may designate, a certificate or certificates for the Warrant Shares. If the Company’s transfer agent is a participant in the DTC FAST system, then such Warrant Shares may be delivered electronically by crediting the broker account designated by the Holder pursuant to the DWAC system, subject to applicable securities laws. Notwithstanding the foregoing, this Warrant may also be exercised at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a certificate for the number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) = the closing bid price on the business day immediately preceding the date of such election as reported by Bloomberg, L.P.;

(B) = the Exercise Price of this Warrant, as adjusted; and

(X) = the number of Warrant Shares issuable upon exercise of this Warrant in accordance with the terms of this Warrant by means of a cash exercise rather than a cashless exercise.

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If the Company fails to deliver to the Holder a certificate or certificates representing the Warrant Shares pursuant to this Section A by the 3rd trading day after exercise hereof, then the Holder will have the right to rescind such exercise. In addition to any other rights available to the Holder, if the Company fails to cause its transfer agent to transmit to the Holder a certificate or certificates representing the Warrant Shares pursuant to an exercise on or before the 3rd trading day following a Warrant exercise, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares which the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (1) pay in cash to the Holder the amount by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (A) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue by (B) the price at which the sell order giving rise to such purchase obligation was executed, and (2) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (1) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In, together with applicable confirmations and other evidence reasonably requested by the Company. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver certificates representing shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof. If the Company or its warrant agent fails to transmit a certificate or certificates representing the Warrant Shares pursuant to Section A by the expiration of the 3 trading day period set forth above, then, the Holder will have the right to rescind such exercise.

SECTION B. WARRANT REGISTER. This Warrant will be registered in a register (the “Warrant Register”) to be maintained by the Company or its agent at its principal office in the name of the recordholder hereof, from time to time. Subject to Section D below, the Company may deem and treat the registered holder of this Warrant as the absolute owner thereof (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise thereof or any distribution to the holder thereof and for all other purposes.

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SECTION C. AUTHORIZED SHARES. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the trading market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof. Issuance of the certificates for Warrant Shares shall be made without charge to the holder for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the Holder or in the name or names as may be directed by the Holder; provided, however, that in the event certificates for Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder.

Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.

Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.

SECTION D. TRANSFER OF WARRANT. Subject to compliance with applicable federal and state securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder hereof (except for transfer taxes, if any), upon surrender of this Warrant with the Form of Assignment attached hereto duly completed and properly endorsed.

SECTION E. LOST, MUTILATED OR MISSING WARRANT. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification (which shall not include posting of any bond), and upon surrender and cancellation of this Warrant, if mutilated, the Company, at its expense, shall execute and deliver a new Warrant of like tenor and date.

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SECTION F. RIGHTS OF THE HOLDER. Subject to applicable law and except as otherwise provided in this Warrant, the Holder shall not, by virtue hereof, be entitled to any voting or other rights including, without limitation, notice of meetings, or other actions or receipt of dividends or subject to any obligation or liability of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in this Warrant.

SECTION G. ADJUSTMENTS. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows:

1. STOCK DIVIDEND, SPLIT OR SUBDIVISION OF SHARES. If the number of shares of Common Stock outstanding at any time after the date hereof is increased by a stock dividend payable to all holders of Common Stock in shares of Common Stock or by a subdivision or split-up of shares of Common Stock, then, following the record date fixed for the determination of holders of Common Stock entitled to receive such stock dividend, subdivision or split-up, the Exercise Price shall be appropriately decreased and the number of shares of Common Stock issuable on exercise of each Warrant shall be increased in proportion to such increase in outstanding shares.

2. COMBINATION OF SHARES. If, at any time after the date hereof, the number of shares of Common Stock outstanding is decreased by a combination or consolidation of the outstanding shares of Common Stock, by reclassification, reverse stock split or otherwise, then, following the record date for such combination, the Exercise Price shall be appropriately increased and the number of shares of Common Stock issuable on exercise of each Warrant shall be decreased in proportion to such decrease in outstanding shares.

3. CALCULATIONS. All calculations under this Section shall be made to the nearest one-tenth of a cent ($.001), or to the nearest one-tenth of a share, as the case may be.

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4. MERGER AND CONSOLIDATION. If, at any time while this Warrant is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another person or entity, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another person or entity) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another person or entity whereby such other person or entity acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other person or entity or other persons or entities making or party to, or associated or affiliated with the other persons or entities making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent exercise of this Warrant, the Holder shall have the right to receive, for each Warrant Share that would have been issuable upon such exercise immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder, the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such Fundamental Transaction. For purposes of any such exercise, the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any exercise of this Warrant following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction that is (1) an all cash transaction, (2) a “Rule 13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act, or (3) a Fundamental Transaction involving a person or entity not traded on a national securities exchange, the Company or any Successor Entity (as defined below) shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase this Warrant from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unexercised portion of this Warrant on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of this Warrant based on the Black and Scholes Option Pricing Model obtained from the “OV” function on Bloomberg, L.P. (“Bloomberg”) determined as of the day of consummation of the applicable Fundamental Transaction for pricing purposes and reflecting (A) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the termination date, (B) an expected volatility equal to the greater of 100% and the 100 day volatility obtained from the HVT function on Bloomberg as of the trading day immediately following the public announcement of the applicable Fundamental Transaction, (C) the underlying price per share used in such calculation shall be the sum of the price per share being offered in cash, if any, plus the value of any non-cash consideration, if any, being offered in such Fundamental Transaction and (D) a remaining option time equal to the time between the date of the public announcement of the applicable Fundamental Transaction and the termination date. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Warrant in accordance with the provisions of this Section G(4) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Warrant, deliver to the Holder in exchange for this Warrant a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Warrant which is exercisable for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon exercise of this Warrant (without regard to any limitations on the exercise of this Warrant) prior to such Fundamental Transaction, and with an exercise price which applies the exercise price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such exercise price being for the purpose of protecting the economic value of this Warrant immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Warrant referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Warrant with the same effect as if such Successor Entity had been named as the Company herein.

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5. CALCULATIONS. All calculations under this Section G shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section G, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.

6. CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each adjustment or readjustment pursuant to this Section G, the Company, at its own expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to each Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a certificate setting forth: (a) such adjustments and readjustments; (b) the Exercise Price at the time in effect; and (c) the number of shares and the amount, if any of other property that at the time would be received upon the exercise of the Warrant.

7. NOTICE TO ALLOW EXERCISE BY HOLDER. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, (E) the Company shall enter into a Fundamental Transaction, or (F) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 20 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights, warrants or actions, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer, share exchange or Fundamental Transaction is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, share exchange or Fundamental Transaction. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice.

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SECTION H. FRACTIONAL SHARES. No fractional shares of the Company’s Common Stock will be issued in connection with any purchase hereunder but in lieu of such fractional shares the Company shall make a cash refund therefore equal in amount to the product of the applicable fraction multiplied by the Exercise Price paid by the Holder for one Warrant Share upon such exercise.

SECTION I. SUCCESSORS. All the provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its respective successors and assigns.

SECTION J. HEADINGS. The headings of sections of this Warrant have been inserted for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof.

SECTION K. AMENDMENTS. The terms and provisions of this Warrant may not be modified or amended, or any provisions hereof waived, temporarily or permanently, except by written consent of the Company and the Holder hereof.

SECTION L. NOTICES. Unless otherwise provided in this Warrant, all notices, requests, consents and other communications hereunder shall be in writing, shall be sent by U.S. Mail or a nationally recognized overnight express courier postage prepaid, and shall be deemed given one day after being so sent, or if delivered by hand shall be deemed given on the date of such delivery to such party, or if sent to such party (in the case of a Holder) at its address in the Warrant Register that will be maintained by the Company or its agent in accordance with Section B hereof or (in the case of the Company) at its principal place of business, Attention: Chief Financial Officer, or to such other address as is designated by written notice, similarly given to each other party hereto. The initial address of Holder which shall be recorded in the Warrant Register shall be 3816 E. La Palma, Anaheim, CA 92807, Attention: Tim Rafanello.

SECTION M. GOVERNING LAW. This Warrant shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be construed in accordance with the laws of said State as applied to contracts made and to be performed in Delaware between Delaware residents.

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SECTION N. LIMITATION OF LIABILITY. No provision hereof, in the absence of any affirmative action by Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of Holder, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

SECTION O. REMEDIES. The Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive and not to assert the defense in any action for specific performance that a remedy at law would be adequate.

SECTION P. SEVERABILITY. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

[Signature page follows]

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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.

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Signature Page to Amendment Number Ten to Loan and Security Agreement

APPENDIX A

TERM LOAN AMENDMENT AGREEMENT

For consideration of the 125,000 5-year warrants granted, PMC Financial Services Group, LLC agrees to the terms of the Amendment #10 to the Loan and Security Agreement dated November 9, 2015.

NOTICE OF EXERCISE

TO: REED’S INC.

(1) The undersigned hereby elects to purchase_________________ Warrant Shares of the Company pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full for such Warrant Shares.

(2) Payment shall take the form of (check applicable box):

[  ] in lawful money of the United States; or

[ ] the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section A, to exercise this Warrant with respect to the number of Warrant Shares purchased pursuant to this Notice of Exercise.

(3) Please issue a certificate or certificates representing said Warrant Shares in the name of the undersigned or in such other name as is specified below:

The Warrant Shares shall be delivered to the following DWAC Account Number or by physical delivery of a certificate to:

(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.

[SIGNATURE OF HOLDER]

Name of Investing Entity:

Signature of Authorized Signatory of Investing Entity:

Name of Authorized Signatory:

Title of Authorized Signatory:

Date:

ASSIGNMENT FORM

(To assign the foregoing warrant, execute

this form and supply required information.

Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, [__________ ] all of or [__________ ] shares of the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_____________________________ whose address is___________________________________________________.

_____________________________________________________________________________________________

 Dated: ____________, ____

Holder’s Signature:	_______________________
Holder’s Address:	_______________________
	_______________________

Signature Guaranteed: __________________________

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever.

Signature Page to Amendment Number Ten to Loan and Security Agreement

EX-10.3

 

 

 

 

 

 

 

 

 

 

 

 

 

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Christopher J. Reed, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Reed’s, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2016	/s/ Christopher J. Reed
	Christopher J. Reed
	Chief Executive Officer
	(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

I, Daniel V. Miles, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Reed’s, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
	a.	All significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
	b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2016	/s/ Daniel V. Miles
	Daniel V. Miles
	Interim Chief Financial Officer
	(Principal Financial Officer)

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Reed’s, Inc., a Delaware corporation (the “Company”) for the period ending March 31, 2016 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), Christopher J. Reed, Chief Executive Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	REED’S, INC.
Date: May 11, 2016	By:	/s/ Christopher J. Reed
		Christopher J. Reed
		Chief Executive Officer
		(Principal Executive Officer)

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Reed’s, Inc., a Delaware corporation (the “Company”) for the period ending March 31, 2016 as filed with the U.S. Securities and Exchange Commission on the date hereof (the “Report”), Daniel V. Miles, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge and belief:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	REED’S, INC.
Date: May 11, 2016	By:	/s/ Daniel V. Miles
		Daniel V. Miles
		Chief Financial Officer
		(Principal Financial Officer)

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Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2016	May. 09, 2016
Document And Entity Information
Entity Registrant Name	REED'S, INC.
Entity Central Index Key	0001140215
Document Type	10-Q
Document Period End Date	Mar. 31, 2016
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		13,184,331
Trading Symbol	REED
Document Fiscal Period Focus	Q1
Document Fiscal Year Focus	2016

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Condensed Balance Sheets - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Current assets:
Cash	$ 648,000	$ 1,816,000
Trade accounts receivable, net of allowance for doubtful accounts and returns and discounts of $263,000 and $356,000, respectively	2,675,000	2,894,000
Inventory, net of reserve for obsolescence of $220,000 and $290,000, respectively	8,186,000	7,927,000
Prepaid inventory	203,000	47,000
Prepaid and other current assets	456,000	769,000
Total Current Assets	12,168,000	13,453,000
Property and equipment, net of accumulated depreciation of $4,416,000 and $4,216,000, respectively	5,788,000	5,369,000
Brand names	1,029,000	1,029,000
Total assets	18,985,000	19,851,000
Current Liabilities:
Accounts payable	7,721,000	7,458,000
Accrued expenses	183,000	168,000
Line of credit	4,250,000	4,443,000
Current portion of long term financing obligations	167,000	160,000
Current portion of capital leases payable	151,000	153,000
Current portion of term loans	341,000	341,000
Total current liabilities	12,813,000	12,723,000
Long term financing obligation, less current portion, net of discount of $907,000 and $953,000, respectively	1,427,000	1,443,000
Capital leases payable, less current portion	536,000	490,000
Capital expansion loan	1,896,000	1,542,000
Term loan, less current portion, net of discount $106,000 and $132,000, respectively	2,894,000	2,868,000
Total Liabilities	$ 19,566,000	$ 19,066,000
Commitments and contingencies
Stockholders' equity (deficiency):
Series A Convertible Preferred stock, $10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding	$ 94,000	$ 94,000
Common stock, $.0001 par value, 19,500,000 shares authorized, 13,184,331 and 13,160,860 shares issued and outstanding, respectively	1,000	1,000
Additional paid in capital	27,613,000	27,399,000
Accumulated deficit	(28,289,000)	(26,709,000)
Total stockholders' equity (deficiency)	(581,000)	785,000
Total liabilities and stockholders' equity (deficiency)	$ 18,985,000	$ 19,851,000

XML

Condensed Balance Sheets (Parenthetical) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Statement of Financial Position [Abstract]
Trade accounts receivable, allowance for doubtful accounts, returns and discounts	$ 263,000	$ 356,000
Inventory, reserve for obsolescence net	220,000	290,000
Property and equipment, accumulated depreciation	4,416,000	4,216,000
Long term financing obligation, net of discount	907,000	953,000
Term loan net of discount	$ 106,000	$ 132,000
Series A Convertible Preferred stock, par value	$ 10	$ 10
Series A Convertible Preferred stock, shares authorized	500,000	500,000
Series A Convertible Preferred stock, shares issued	9,411	9,411
Series A Convertible Preferred stock, shares outstanding	9,411	9,411
Common stock, par value	$ .0001	$ .0001
Common stock, shares authorized	19,500,000	19,500,000
Common stock, shares issued	13,184,331	13,160,860
Common stock, shares outstanding	13,184,331	13,160,860

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Condensed Statements of Operations (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Income Statement [Abstract]
Sales	$ 10,004,000	$ 10,672,000
Cost of goods sold	8,111,000	7,413,000
Gross profit	1,893,000	3,259,000
Operating expenses:
Delivery and handling expenses	849,000	1,169,000
Selling and marketing expenses	1,041,000	1,193,000
General and administrative expense	1,205,000	914,000
Total operating expenses	3,095,000	3,276,000
Loss from operations	(1,202,000)	(17,000)
Interest expense	(378,000)	(254,000)
Net loss	$ (1,580,000)	$ (271,000)
Loss per share - basic and diluted	$ (0.12)	$ (0.02)
Weighted average number of shares outstanding - basic and diluted	13,184,331	13,068,675

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Condensed Statement of Changes in Stockholders' Equity (Deficiency) (Unaudited) - 3 months ended Mar. 31, 2016 - USD ($)	Common Stock [Member]	Series A Preferred Stock [Member]	Additional Paid-In Capital [Member]	Accumulated Deficit [Member]	Total
Balance at Dec. 31, 2015	$ 1,000	$ 94,000	$ 27,399,000	$ (26,709,000)	$ 785,000
Balance, Shares at Dec. 31, 2015	13,160,860	9,411
Common shares issued upon exercise of warrants			$ 45,000		$ 45,000
Common shares issued upon exercise of warrants, shares	16,260
Common shares issued upon exercise of options
Common shares issued upon exercise of options, Shares	7,211				7,211
Fair value vesting of options issued to employees			$ 169,000		$ 169,000
Net loss				(1,580,000)	(1,580,000)
Balance at Mar. 31, 2016	$ 1,000	$ 94,000	$ 27,613,000	$ (28,289,000)	$ (581,000)
Balance, Shares at Mar. 31, 2016	13,184,331	9,411

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Condensed Statements of Cash Flows (Unaudited) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Cash flows from operating activities:
Net loss	$ (1,580,000)	$ (271,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	261,000	213,000
Fair value of stock options issued to employees	169,000	212,000
(Decrease) increase in allowance for doubtful accounts	(93,000)	1,000
Changes in assets and liabilities:
Accounts receivable	313,000	(479,000)
Inventory	(259,000)	(2,054,000)
Prepaid Inventory	(156,000)	474,000
Prepaid expenses and other current assets	312,000	168,000
Accounts payable	263,000	1,267,000
Accrued expenses	15,000	11,000
Net cash used in operating activities	(755,000)	(458,000)
Cash flows from investing activities:
Purchase of property and equipment	(186,000)	(351,000)
Net cash used in investing activities	(186,000)	(351,000)
Cash flows from financing activities:
Proceeds from warrant exercises	45,000	31,000
Principal repayments on long term financing obligation	(37,000)	(31,000)
Principal repayments on capital lease obligation	(42,000)	(33,000)
Net draw down (repayment) on line of credit	(193,000)	1,104,000
Net cash (used in) provided by financing activities	(227,000)	1,071,000
Net increase (decrease) in cash	(1,168,000)	262,000
Cash at beginning of period	1,816,000	959,000
Cash at end of period	648,000	1,221,000
Supplemental disclosures of cash flow information:
Interest	364,000	201,000
Non Cash Investing and Financing Activities
Property and equipment acquired through capital expansion loan	354,000	311,000
Property and equipment acquired through capitalized leases	$ 86,000	$ 250,000

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Basis of Presentation and Liquidity

3 Months Ended

Mar. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation and Liquidity

1. Basis of Presentation and Liquidity

The accompanying interim condensed financial statements are unaudited, but in the opinion of management of Reed’s, Inc. (the “Company”), contain all adjustments, which include normal recurring adjustments necessary to present fairly the financial position at March 31, 2016 and the results of operations and cash flows for the three months ended March 31, 2016 and 2015. The balance sheet as of December 31, 2015 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission on March 23, 2016.

The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2016.

Liquidity

As of March 31, 2016, we had a stockholders deficit of $581,000 and working capital deficit of $645,000 compared to stockholders equity of $785,000 and working capital of $730,000 at December 31, 2015. 

We believe that the Company currently has the necessary working capital to support existing operations until the revolver becomes due in December of this year. Consistent with past refinancing practices regarding the Line of Credit, the Company believes that we will be successful in renewing the Line of Credit for another time frame similar to the past for a two year time frame. There are no assurances that this refinancing will be completed. Our primary capital source will be positive cash flow from operations. If our sales goals do not materialize as planned, we believe that the Company can reduce its operating costs and can be managed to maintain positive cash flow from operations. Historically, we have financed our operations primarily through private sales of common stock, preferred stock, convertible debt, a line of credit from a financial institution and cash generated from operations.

We may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we eventually may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion and marketing and product development plans. In addition, our losses may increase in the future as we expand our manufacturing capabilities and fund our marketing plans and product development. These losses, among other things, have had and may continue to have an adverse effect on our working capital, total assets and stockholders’ equity. If we are unable to achieve profitability, the market value of our common stock would decline and there would be a material adverse effect on our financial condition.

If we suffer losses from operations, our working capital may be insufficient to support our ability to expand our business operations as rapidly as we would deem necessary at any time, unless we are able to obtain additional financing. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to pursue our business objectives and would be required to reduce our level of operations, including reducing infrastructure, promotions, personnel and other operating expenses. These events could adversely affect our business, results of operations and financial condition. If adequate funds are not available or if they are not available on acceptable terms, our ability to fund the growth of our operations, take advantage of opportunities, develop products or services or otherwise respond to competitive pressures could be significantly limited.

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Significant Accounting Policies

3 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Significant Accounting Policies

2. Significant Accounting Policies

Income (Loss) per Common Share

Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stock holders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing the net income applicable to common stock holders 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.

The Company had potentially dilutive securities that consisted of:

	March 31, 2016		March 31, 2015
Warrants		325,000		267,271
Series A Preferred Stock		37,644		37,644
Options		965,000		1,013,333
Total		1,327,644		1,318,248

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 and 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 intangibles, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

Recent Accounting Pronouncements

There were recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the “SEC”), such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. On August 12, 2015, FASB delayed the required implementation to fiscal years ending after December 15, 2017 but now permitted organizations such a Reeds to adopt earlier. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has determined to adopt ASU 2014-09 in Fiscal 2017 and has not determined the effect of the standard on our ongoing financial reporting.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures beginning in 2016.

Other recent accounting pronouncements issued by the FASB, including 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 consolidated financial statements.

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amounts of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company had cash balances in excess of $250,000 during the three months ended March 31, 2016.

During the three months ended March 31, 2016, the Company had two customers that accounted for 25% and 10% of gross sales. During the months ended March 31, 2015, the company had two customers that accounted for 30% and 15% of sales respectively. As of March 31, 2016, the Company had accounts receivable due from two customers who comprised 23% and 11% of its total accounts receivable and as of December 31, 2015 the Company had accounts receivable due from two customers who comprised 24% and 12% of its total accounts receivable.

During the three months ended March 31, 2016, the Company had one vendor which accounted for approximately 17% of all purchases, and in the three months ended March 31, 2015 one vendor who accounted for approximately 30% of all purchases. No other vendor accounted for more than 10% of all purchases in either period. As of March 31, 2016, the Company had two vendors which accounted for approximately 20% and 10% of total accounts payable and as of December 31, 2015, the Company had two vendors which accounted for approximately 31% and 11% of total accounts payable.

Fair Value of Financial Instruments

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

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 Company had no such assets or liabilities recorded to be valued on the basis above at March 31, 2016 or December 31, 2015.

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 due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

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Inventory

3 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

Inventory

3. Inventory

Inventory is valued at the lower of cost (first-in, first-out or market) and, net of reserves, is comprised of the following as of:

	March 31, 2016		December 31, 2015
Raw Materials and packaging	$	4,676,000		4,364,000
Finished Goods		3,510,000		3,563,000
	$	8,186,000		7,927,000

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Property and Equipment

3 Months Ended

Mar. 31, 2016

Property, Plant and Equipment [Abstract]

Property and Equipment

4. Property and Equipment

Property and equipment are comprised of the following as of:

	March 31, 2016			December 31, 2015
Land	$	1,107,000		$	1,107,000
Building		1,875,000			1,875,000
Vehicles		500,000			500,000
Machinery and equipment		3,794,000			3,800,000
Equipment under capital leases		944,000			857,000
Office equipment		469,000			469,000
Construction in Progress		1,515,000			977,000
		10,204,000			9,585,000
Accumulated depreciation		(4,416,000	)		(4,216,000	)
	$	5,788,000		$	5,369,000

Depreciation expense for the three months ended March 31, 2016 and 2015 was $200,000 and $191,000, respectively.

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Intangible Assets and Impairment Policy

3 Months Ended

Mar. 31, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Intangible Assets and Impairment Policy

5. Intangible Assets and Impairment Policy

Intangible assets are comprised of indefinite-lived brand names acquired and have been assigned an indefinite life as we currently anticipate that these brand names 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 is appropriate. As part of our impairment test, we first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If further testing is necessary, we compare the estimated fair value of our indefinite-lived intangible asset with its book value. If the carrying amount of the indefinite-lived intangible 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, 2015 and 2014, the Company did not recognize any impairment charges for its indefinite-lived intangible assets.

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Notes Payable

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Notes Payable

6. Notes Payable

Line of Credit

On November 9, 2011, the Company entered into a Loan and Security Agreement with PMC Financial Services Group, LLC (PMC), which was amended and extended for two years on December 5, 2014, that provides a $6,000,000 revolving line of credit. The Amended Agreement extends and amends the Revolving Loan and Term Loan (see discussion below) and adds a new Capital Expansion Loan (the “Capex Loan”) (see discussion below). At March 31, 2016 and December 31, 2015, the aggregate amount outstanding under the line of credit was $4,250,000 and $4,443,000 respectively.

The revolving line of credit is based on 85% of accounts receivable and 60% of eligible inventory and is secured by substantially all of the Company’s assets. The interest rate on the Revolving Loan was the prime rate plus .35% (9% at March 31, 2016). However, the interest rate has been adjusted as described below in term loans. The monthly management fee is .45% of the average monthly loan balance. As of March 31, 2016, the Company had a maximum borrowing availability of $1,750,000 under the line of credit agreement.

The line of credit matures on December 5, 2016 and is subject to a 1% prepayment penalty for prepayment prior to the first anniversary of the effective date.

Term Loans

The Company has the following term loans outstanding with PMC Financial Services Corporation;

	March 31, 2016			December 31, 2015
Term Loans	$	3,000,000		$	3,000,000
Valuation discount		(106,000	)		(132,000	)
Long term portion	$	2,894,000		$	2,868,000

In connection with the Loan and Security Agreement with PMC, the Company entered into a Term Loan. The loan was $750,000, and was secured by all of the unencumbered assets of the Company. Effective December 5, 2014 the Term Loan’s outstanding principal balance was increased to $1,500,000 and the annual interest rate was revised to prime plus 5.75% (currently 9%) subject to adjustment as described below.

Effective September 1, 2015 the Company entered into an additional Term Loan with a principal balance of $1,500,000 at prime plus 11.60% (currently 14.85%) with PMC. As of March 31, 2016 and December 31, 2015, the aggregate amount under the Term Loans outstanding was $3,000,000.

The interest rate on the line of credit and Term loans described above were modified on September 1, 2015 and are subject to adjustment as follows:

Under the new conditions, the rate charge will be calculated on a sliding scale based on the trailing 6 month EBITDA. If the EBITDA measuring point stays below $1,000,000 where it is now, the rate will rise to 12% from the current rate of 9%. If EBITDA rises to $1,500,000 then the rate will be reduced to 9%.

Notwithstanding the other borrowing terms above, if Excess Borrowing Availability under the $6 million Revolving line of credit remains more than $1,500,000 at all times during the preceding month (currently Reed’s Borrowing Availability is zero) the Interest Rate shall remain unchanged for the asset based lending that includes the Revolving working capital loan, CAPEX capital improvement loan and Term Loan A. The six month Term Loan B rates will remain the same at 14.85%.

On November 9, 2015, the Company completed a restructuring of Term Loans with PMC. The aggregated amount of the principal for affected term loans is $3,000,000. Under the new agreement, the maturity of both loans will be due in lump sum on April 1, 2017 under the same rates and conditions as before. In connection with the agreement, the Company granted PMC 125,000 warrants at an exercise price of $4.50 per share with a term of five years and six months. The 125,000 warrants were valued at $141,000 using the Black Scholes Merton option pricing model and were recorded as a valuation discount. The following assumptions were made in valuing the 125,000 warrants; term of 5.5 years, volatility of 56.04%, expected dividends 0% and discount rate of 0.68%. The warrants value of $141,000 is being amortized over the remaining 16 months of the term loans. During the three months ending March 31, 2016, $26,000 of valuation discount was amortized resulting in an unamortized balance of $106,000 at March 31, 2016.

Capital Expansion (“CAPEX”) Loan

In connection with the loan and security agreement with PMC, the Company entered into a CAPEX loan in the aggregate outstanding amount not to exceed $3,000,000. The CAPEX loan will finance new asset purchases for modernization and improvement of the beverage bottling equipment in the Los Angeles plant. Interest only on the CAPEX loan shall be paid from time to time until the end of each fiscal quarter, at which time the principal amounts of each outstanding CAPEX loan will be aggregated and repaid in 48 equal monthly installments of principal plus accrued but unpaid interest beginning July 31, 2016, or if earlier, the revolver maturity of December 2016. The interest rate on the CAPEX loan is the prime rate plus 5.75% (9.25% at March 31, 2016). At March 31, 2016 and December 31,2015, the balance on the CAPEX loan balance was $2,237,000 and $1,883,000 respectively and as of March 31, 2016, the Company had future borrowing availability of $908,000. On June 30, 2016, the loan funding will close and the Company will begin repayments in July, 2016.

In conjunction with this loan the Company has placed equipment with a cost of $341,000 at a co-packing facility to enable the co-packer to manufacture our products. Should the Company be unable to secure access to the equipment in the event of failure of the co-packer, the amount will become due and payable by the Company immediately.

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Obligations Under Capital Leases

3 Months Ended

Mar. 31, 2016

Leases [Abstract]

Obligations Under Capital Leases

7. Obligations under Capital Leases

The Company leases equipment for its brewery operations with an aggregate value of $944,000 under six non-cancelable capital leases. Most of the leases are personally guaranteed by the Company’s chief executive officer. Monthly payments range from $341 to $10,441 per month, including interest, at interest rates ranging from 6.51% to 17.31% per annum. At March 31, 2016, monthly payments under these leases aggregated $16,000. The leases expire at various dates through 2020.

Future minimum lease payments under capital leases are as follows:

Years Ending December 31,
2016	$	168,000
2017		213,000
2018		217,000
2019		169,000
2020		49,000
Total payments		816,000
Less: Amount representing interest		(129,000	)
Present value of net minimum lease payments		687,000
Less: Current portion		(151,000	)
Non-current portion	$	536,000

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Long Term Financing Obligation

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Long Term Financing Obligation

8. Long-term Financing Obligation

On June 15, 2009, the Company closed escrow on the sale of its two buildings and its brewery equipment and concurrently entered into a long-term lease agreement for the same property and equipment. In connection with the lease the Company has the option to repurchase the buildings and brewery equipment from 12 months after the commencement date to the end of the lease term at the greater of the fair market value or an agreed upon amount. Since the lease contains a buyback provision and other related terms, the Company determined it had continuing involvement that did not warrant the recognition of a sale; therefore, the transaction has been accounted for as a long-term financing. The proceeds from the sale, net of transaction costs, have been recorded as a financing obligation in the amount of $3,056,000. Monthly payments under the financing agreement are recorded as interest expense and a reduction in the financing obligation at an implicit rate of 9.9%. The financing obligation was personally guaranteed up to a limit of $150,000 by the principal shareholder and Chief Executive Officer, Christopher J. Reed.

In connection with the financing obligation, the Company issued an aggregate of 400,000 warrants to purchase its common stock at $1.20 per share for five years. The 400,000 warrants were valued at $752,000 and reflected as a debt discount, using the Black Scholes Merton option pricing model. The following assumptions were utilized in valuing the 400,000 warrants: strike price of $2.10 to $2.25; term of 5 years; volatility of 91.36% to 110.9%; expected dividends 0%; and discount rate of 2.15% to 2.20%. The 400,000 warrants were recorded as valuation discount and are being amortized over 15 years, the term of the purchase option.

Effective October 1, 2014, the Company executed Amendment #1 to the Long-term Financing Obligation. In exchange for a release from the $150,000 personal guarantee by the principal shareholder and Chief Executive Office, and a release of the brewery equipment which was collateral for the lease agreement, the Company issued 200,000 warrants to purchase its common stock for $5.60 per share with a term of five years. The 200,000 warrants were valued at $584,000 using the Black Scholes Merton option pricing model and were recorded as a valuation discount. The following assumptions were made in valuing the 200,000 warrants; term of 5 years, volatility of 59.53%, expected dividends 0% and discount rate of 1.25%. The warrants value of $584,000 is being amortized over the remaining term of the purchase option. Amortization of valuation discount was $28,000 and $14,000 during the three months ended March 31, 2016 and 2015.

Long term financing obligation is comprised of the following as of:

	March 31, 2016			December 31, 2015
Financing obligation	$	2,501,000			2,538,000
Valuation discount		(907,000	)		(935,000	)
		1,594,000			1,603,000
Less current portion		(167,000	)		(160,000	)
Long term financing obligation	$	1,427,000			1,443,000

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Stock Based Activity

3 Months Ended

Mar. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Based Activity

9. Stock Based Activity

Stock Options

Stock options granted under our equity incentive plans generally vest over 3 years from the date of grant, at 33% per year or over 4 years at 25% per year and expire 5 years from the date of grant. The following table summarizes stock option activity for the three months ended March 31, 2016:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		980,000		$	4.51
Granted		0
Exercised		(15,000	)	$	2.43
Forfeited or expired		0
Outstanding at March 31, 2016		965,000		$	4.21		$	374,000
Exercisable at March 31, 2016		411,333					$	354,000

During the three months ended March 31, 2016, the Company did not grant any stock options to any employee or other party.

The aggregate intrinsic value was calculated as the difference between the closing market price, which was $4.67, and the exercise price of the Company’s stock options as of March 31, 2016. Stock-based compensation recognized on the Company’s statement of operations for the three months ended March 31, 2016 and 2015 was $169,000 and $212,000, respectively. During the three months ended March 31, 2016, the Company issued 7,211 shares of the Company’s common stock upon exercise of 15,000 stock options on a cashless basis.

Stock Warrants

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		341,261	$	3.74
Granted
Exercised		16,260	$	2.77
Forfeited or expired		1
Outstanding at March 31, 2016		325,000	$	5.18		$	21,250
Exercisable at March 31, 2016		200,000	$	5.60		$	0

The intrinsic value was calculated as the difference between the closing market price, which was $4.67, and the exercise price of the Company’s warrants common stock, as of March 31, 2016.

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Subsequent Events

3 Months Ended

Mar. 31, 2016

Subsequent Events [Abstract]

Subsequent Events

10. Subsequent Events

On April 29, 2016 the Board of Directors approved an extension of the Line of Credit (see Note 6) with PMC Financial Services Group, LLC (PMC) to include prepaid inventory that normally would be excluded from the lending base. The Line of Credit maximum of $6,000,000 and the rates remained unchanged.

In consideration, the Company will issue to PMC 10,000 warrants at a strike price of $4.50 to be accounted for as a financing cost in the second quarter of 2016.

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Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 2016

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Income (Loss) per Common Share

Income (Loss) per Common Share

Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stock holders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share is computed by dividing the net income applicable to common stock holders 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.

The Company had potentially dilutive securities that consisted of:

	March 31, 2016		March 31, 2015
Warrants		325,000		267,271
Series A Preferred Stock		37,644		37,644
Options		965,000		1,013,333
Total		1,327,644		1,318,248

Use of Estimates

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 and 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 intangibles, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

There were recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the “SEC”), such pronouncements are not believed by management to have a material impact on the Company’s present or future financial statements.

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. On August 12, 2015, FASB delayed the required implementation to fiscal years ending after December 15, 2017 but now permitted organizations such a Reeds to adopt earlier. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has determined to adopt ASU 2014-09 in Fiscal 2017 and has not determined the effect of the standard on our ongoing financial reporting.

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

In August 2014, the FASB issued Accounting Standards Update No. 2014-15 (ASU 2014-15), Presentation of Financial Statements - Going Concern (Subtopic 205-10). ASU 2014-15 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company will adopt ASU 2014-15 on the Company’s financial statement presentation and disclosures beginning in 2016.

Other recent accounting pronouncements issued by the FASB, including 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 consolidated financial statements.

Concentrations

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amounts of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company had cash balances in excess of $250,000 during the three months ended March 31, 2016.

During the three months ended March 31, 2016, the Company had two customers that accounted for 25% and 10% of gross sales. During the months ended March 31, 2015, the company had two customers that accounted for 30% and 15% of sales respectively. As of March 31, 2016, the Company had accounts receivable due from two customers who comprised 23% and 11% of its total accounts receivable and as of December 31, 2015 the Company had accounts receivable due from two customers who comprised 24% and 12% of its total accounts receivable.

During the three months ended March 31, 2016, the Company had one vendor which accounted for approximately 17% of all purchases, and in the three months ended March 31, 2015 one vendor who accounted for approximately 30% of all purchases. No other vendor accounted for more than 10% of all purchases in either period. As of March 31, 2016, the Company had two vendors which accounted for approximately 20% and 10% of total accounts payable and as of December 31, 2015, the Company had two vendors which accounted for approximately 31% and 11% of total accounts payable.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The Company uses various inputs in determining the fair value of its investments and measures these assets on a recurring basis. Financial assets recorded at fair value in the balance sheets are categorized by the level of objectivity associated with the inputs used to measure their fair value. Authoritative guidance provided by the FASB defines the following levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these financial assets:

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 Company had no such assets or liabilities recorded to be valued on the basis above at March 31, 2016 or December 31, 2015.

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 due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

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Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 2016

Accounting Policies [Abstract]

Schedule of Potentially Dilutive Securities

The Company had potentially dilutive securities that consisted of:

	March 31, 2016		March 31, 2015
Warrants		325,000		267,271
Series A Preferred Stock		37,644		37,644
Options		965,000		1,013,333
Total		1,327,644		1,318,248

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Inventory (Tables)

3 Months Ended

Mar. 31, 2016

Inventory Disclosure [Abstract]

Schedule of Inventory

Inventory is valued at the lower of cost (first-in, first-out or market) and, net of reserves, is comprised of the following as of:

	March 31, 2016		December 31, 2015
Raw Materials and packaging	$	4,676,000		4,364,000
Finished Goods		3,510,000		3,563,000
	$	8,186,000		7,927,000

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Property and Equipment (Tables)

3 Months Ended

Mar. 31, 2016

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment are comprised of the following as of:

	March 31, 2016			December 31, 2015
Land	$	1,107,000		$	1,107,000
Building		1,875,000			1,875,000
Vehicles		500,000			500,000
Machinery and equipment		3,794,000			3,800,000
Equipment under capital leases		944,000			857,000
Office equipment		469,000			469,000
Construction in Progress		1,515,000			977,000
		10,204,000			9,585,000
Accumulated depreciation		(4,416,000	)		(4,216,000	)
	$	5,788,000		$	5,369,000

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Notes Payable (Tables)

3 Months Ended

Mar. 31, 2016

Notes Payable [Abstract]

Schedule of Term Loans Outstanding

The Company has the following term loans outstanding with PMC Financial Services Corporation;

	March 31, 2016			December 31, 2015
Term Loans	$	3,000,000		$	3,000,000
Valuation discount		(106,000	)		(132,000	)
Long term portion	$	2,894,000		$	2,868,000

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Obligations under Capital Leases (Tables)

3 Months Ended

Mar. 31, 2016

Leases [Abstract]

Schedule of Future Minimum Lease Payments under Capital Leases

Future minimum lease payments under capital leases are as follows:

Years Ending December 31,
2016	$	168,000
2017		213,000
2018		217,000
2019		169,000
2020		49,000
Total payments		816,000
Less: Amount representing interest		(129,000	)
Present value of net minimum lease payments		687,000
Less: Current portion		(151,000	)
Non-current portion	$	536,000

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Long Term Financing Obligation (Tables)

3 Months Ended

Mar. 31, 2016

Debt Disclosure [Abstract]

Schedule of Long Term Financing Obligation

Long term financing obligation is comprised of the following as of:

	March 31, 2016			December 31, 2015
Financing obligation	$	2,501,000			2,538,000
Valuation discount		(907,000	)		(935,000	)
		1,594,000			1,603,000
Less current portion		(167,000	)		(160,000	)
Long term financing obligation	$	1,427,000			1,443,000

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Stock Based Activity (Tables)

3 Months Ended

Mar. 31, 2016

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Schedule of Stock Option Activity

The following table summarizes stock option activity for the three months ended March 31, 2016:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		980,000		$	4.51
Granted		0
Exercised		(15,000	)	$	2.43
Forfeited or expired		0
Outstanding at March 31, 2016		965,000		$	4.21		$	374,000
Exercisable at March 31, 2016		411,333					$	354,000

Schedule of Stock Warrants Activity

Stock Warrants

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Terms (Years)	Aggregate Intrinsic Value
Outstanding at January 1, 2016		341,261	$	3.74
Granted
Exercised		16,260	$	2.77
Forfeited or expired		1
Outstanding at March 31, 2016		325,000	$	5.18		$	21,250
Exercisable at March 31, 2016		200,000	$	5.60		$	0

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Basis of Presentation and Liquidity (Details Narrative) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Stockholders equity (deficit)	$ (581,000)	$ 785,000
Working capital deficit	$ 645,000	$ 730,000

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Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended		12 Months Ended
	Mar. 31, 2016	Mar. 31, 2015	Dec. 31, 2015
Maximum cash deposit guaranteed by federal deposit insurance corporation	$ 250,000
Cash balances in excess during period	$ 250,000
Customer One [Member] | Sales Revenue, Net [Member]
Percentage of sale accounted to customer	25.00%	30.00%
Customer One [Member] | Accounts Receivable [Member]
Percentage of sale accounted to customer	23.00%		24.00%
Customer Two [Member] | Sales Revenue, Net [Member]
Percentage of sale accounted to customer	10.00%	15.00%
Customer Two [Member] | Accounts Receivable [Member]
Percentage of sale accounted to customer	11.00%		12.00%
Vendor One [Member]
Percentage of sale accounted to customer	17.00%	30.00%
Vendor One [Member] | Accounts Payable [Member]
Percentage of sale accounted to customer	20.00%		31.00%
No Other Vendor [Member] | Maximum [Member]
Percentage of sale accounted to customer	10.00%
Vendor Two [Member] | Accounts Payable [Member]
Percentage of sale accounted to customer	10.00%		11.00%

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Significant Accounting Policies - Schedule of Potentially Dilutive Securities (Details) - shares	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Potentially dilutive securities	1,327,644	1,318,248
Warrants [Member]
Potentially dilutive securities	325,000	267,271
Series A Preferred Stock [Member]
Potentially dilutive securities	37,644	37,644
Options [Member]
Potentially dilutive securities	965,000	1,013,333

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Inventory - Schedule of Inventory (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Inventory Disclosure [Abstract]
Raw Materials and Packaging	$ 4,676,000	$ 4,364,000
Finished Goods	3,510,000	3,563,000
Inventory, total	$ 8,186,000	$ 7,927,000

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 200,000	$ 191,000

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Property and Equipment - Schedule of Property and Equipment (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Property, Plant and Equipment [Abstract]
Land	$ 1,107,000	$ 1,107,000
Building	1,875,000	1,875,000
Vehicles	500,000	500,000
Machinery and equipment	3,794,000	3,800,000
Equipment under capital leases	944,000	857,000
Office equipment	469,000	469,000
Construction In Progress	1,515,000	977,000
Property and equipment, gross	10,204,000	9,585,000
Accumulated depreciation	(4,416,000)	(4,216,000)
Property and equipment, net	$ 5,788,000	$ 5,369,000

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Notes Payable (Details Narrative)					1 Months Ended	3 Months Ended
	Nov. 09, 2015 USD ($) $ / shares shares	Sep. 01, 2015 USD ($)	Dec. 05, 2014 USD ($)	Nov. 09, 2011 USD ($)	Sep. 01, 2015 USD ($)	Mar. 31, 2016 USD ($) Installments	Dec. 31, 2015 USD ($)
Line of credit current						$ 4,250,000	$ 4,443,000
Percentage of borrowing based on accounts receivable						85.00%
Percentage of borrowing based on eligible inventory						60.00%
Revolving Loan, effective interest rate						9.00%
Percentage of monthly management fee as average monthly loan balance						0.45%
Line of credit borrowing availability						$ 1,750,000
Percentage of prepayment penalty for prepayment prior to the first anniversary						1.00%
Term loan outstanding						$ 2,894,000	2,868,000
Warrants value						141,000
Future borrowing availability						908,000
Equipment loan cost						341,000
Capex Loan [Member]
Excess of outstanding amount						$ 3,000,000
Number of monthly installments | Installments						48
Capex loan interest rate						9.25%
Loan balance amount						$ 2,237,000	$ 1,883,000
Term Loans [Member]
Revolving Loan, effective interest rate					14.85%
Term loan outstanding principal balance		$ 1,500,000			$ 1,500,000
Loan balance amount		$ 3,000,000			$ 3,000,000
Six Month Term Loan B [Member] | Capex Loan [Member]
Line of credit current						$ 6,000,000
Revolving Loan, effective interest rate						14.85%
Term loan amount						$ 1,500,000
Valuation discount amortized during the period						$ 26,000
Below $1,000,000 [Member] | Term Loans [Member]
Revolving Loan, effective interest rate						12.00%
Term loan outstanding principal balance						$ 1,000,000
Rises To $1,500,000 [Member] | Term Loans [Member]
Revolving Loan, effective interest rate						9.00%
Term loan outstanding principal balance						$ 1,500,000
Prime Rate [Member]
Revolving Loan, effective interest rate						0.35%
Prime Rate [Member] | Capex Loan [Member]
Capex loan interest rate						5.75%
Prime Rate [Member] | Term Loans [Member]
Revolving Loan, effective interest rate		11.60%
PMC Financial Services Group, LLC [Member]
Line of credit current				$ 6,000,000
Extended line of credit period				2 years
PMC Financial Services Group, LLC [Member] | Term Loans [Member]
Revolving Loan, effective interest rate			9.00%
Term loan amount						$ 750,000
Term loan outstanding principal balance			$ 1,500,000
Loan bears interest, description			Term Loan’s outstanding principal balance was increased to $1,500,000 and the annual interest rate was revised to prime plus 5.75% (currently 9%) subject to adjustment as described below.
Excess of outstanding amount	$ 3,000,000
Warrants granted | shares	125,000
Warrants value	$ 141,000
Warrants term	5 years 6 months
Volatility rate	56.04%
Expected dividends	0.00%
Discount rate	0.68%
Warrants amortized period	16 months
Loan balance amount						$ 106,000
PMC Financial Services Group, LLC [Member] | Term Loans [Member] | 5 Year and 6 Months [Member]
Warrants exercise per share | $ / shares	$ 4.50
PMC Financial Services Group, LLC [Member] | Prime Rate [Member] | Term Loans [Member]
Revolving Loan, effective interest rate			5.75%

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Notes Payable - Schedule of Term Loans Outstanding (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Term Loans	$ 341,000	$ 341,000
Long term portion	2,894,000	2,868,000
PMC Financial Services Corporation [Member]
Term Loans	3,000,000	3,000,000
Valuation discount	(106,000)	(132,000)
Long term portion	$ 2,894,000	$ 2,868,000

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Obligations Under Capital Leases (Details Narrative)	3 Months Ended
	Mar. 31, 2016 USD ($) Units
Equipment held under capital leases	$ 944,000
Number of non-cancelable capital leases | Units	6
Payment of lease amount	$ 16,000
Lease expire year	2020
Minimum [Member]
Payment of lease range per month	$ 341
Percentage of interest for lease amount	6.51%
Maximum [Member]
Payment of lease range per month	$ 10,441
Percentage of interest for lease amount	17.31%

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Obligations Under Capital Leases - Schedule of Future Minimum Lease Payments under Capital Leases (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Leases [Abstract]
2016	$ 168,000
2017	213,000
2018	217,000
2019	169,000
2020	49,000
Total payments	816,000
Less: Amount representing interest	(129,000)
Present value of net minimum lease payments	687,000
Less: Current portion	(151,000)	$ (153,000)
Non-current portion	$ 536,000	$ 490,000

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Long Term Financing Obligation (Details Narrative) - USD ($)		3 Months Ended
	Oct. 02, 2014	Mar. 31, 2016	Mar. 31, 2015
Proceeds from sale of transaction cost		$ 3,056,000
Percentage of interest expense and reduction in the financing obligation at implicit rate		9.90%
Chief Executive Officer [Member]
Proceeds financial obligation limit guaranteed by related party	$ 150,000
Warrants [Member]
Warrants exercise per share		$ 4.67
Amortization of valuation discount		$ 28,000	$ 14,000
Warrants [Member] | Financing Obligation [Member]
Number of warrants issued to purchase of common stock	200,000	400,000
Warrants exercise per share	$ 5.60	$ 1.20
Warrants term	5 years	5 years
Warrants issued during period value	$ 584,000	$ 752,000
Warrants expected term	5 years	5 years
Warrants volatility rate	59.53%
Warrants expected dividends	0.00%	0.00%
Warrants discount rate	1.25%
Amortization of warrant, term		15 years
Warrants [Member] | Financing Obligation [Member] | Minimum [Member]
Warrants strike price		$ 2.10
Warrants volatility rate		91.36%
Warrants discount rate		2.15%
Warrants [Member] | Financing Obligation [Member] | Maximum [Member]
Warrants strike price		$ 2.25
Warrants volatility rate		110.90%
Warrants discount rate		2.20%
Chief Executive Officer [Member]
Proceeds financial obligation limit guaranteed by related party		$ 150,000

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Long Term Financing Obligation - Schedule of Long Term Financing Obligation (Details) - USD ($)	Mar. 31, 2016	Dec. 31, 2015
Valuation discount	$ (907,000)	$ (953,000)
Less current portion	167,000	160,000
Long term financing obligation	1,427,000	1,443,000
Long Term Financing Obligation [Member]
Financing obligation	2,501,000	2,538,000
Valuation discount	(907,000)	(935,000)
Net obligation	1,594,000	1,603,000
Less current portion	(167,000)	(160,000)
Long term financing obligation	$ 1,427,000	$ 1,443,000

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Stock Based Activity (Details Narrative) - USD ($)	3 Months Ended
	Mar. 31, 2016	Mar. 31, 2015
Stock options granted shares	0
Exercise price per share	$ 4.67
Option expire term	5 years
Stock based compensation	$ 168,000	$ 212,000
Stock options exercised	7,211
Number of option issued under cash-less exercise	15,000
Warrants [Member]
Warrant exercise price per share	$ 4.67
3 Years [Member]
Share based compensation cost amortized option vest period	3 years
Percentage of stock options granted under equity incentive plan	33.00%
4 Years [Member]
Share based compensation cost amortized option vest period	4 years
Percentage of stock options granted under equity incentive plan	25.00%

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Stock Based Activity - Schedule of Stock Option Activity (Details)	3 Months Ended
	Mar. 31, 2016 USD ($) $ / shares shares
Shares, Granted	0
Shares, Exercised	(7,211)
Options [Member]
Shares Outstanding, Beginning balance	980,000
Shares, Granted	0
Shares, Exercised	(15,000)
Shares, Forfeited or expired	0
Shares Outstanding, Ending balance	965,000
Shares Exercisable	472,000
Weighted-Average Exercise Price, Outstanding, Beginning | $ / shares	$ 4.51
Weighted-Average Exercise Price, Exercised | $ / shares	2.43
Weighted-Average Exercise Price, Outstanding, Ending | $ / shares	$ 4.21
Weighted-Average Remaining Contractual Terms (Years), Outstanding	0 years
Weighted-Average Remaining Contractual Terms (Years), Exercisable	0 years
Aggregate Intrinsic Value, Share Outstanding, Ending | $	$ 374,000
Aggregate Intrinsic Value, Share Exercisable | $	$ 354,000

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Stock Based Activity - Schedule of Stock Warrants Activity (Details) - Warrants [Member]	3 Months Ended
	Mar. 31, 2016 USD ($) $ / shares shares
Shares Outstanding, Beginning Balance	341,261
Shares Granted
Shares Exercised	16,260
Shares Forfeited Or Expired	1
Shares Outstanding, Ending Balance	325,000
Warrants Exercisable	200,000
Weighted Average Exercise Price, Outstanding, Beginning | $ / shares	$ 3.74
Weighted Average Exercise Price, Exercised | $ / shares	2.77
Weighted Average Exercise Price, Outstanding, Ending | $ / shares	5.18
Weighted Average Exercise Price, Exercisable | $ / shares	$ 5.60
Weighted Average Remaining Contractual Terms (Years), Outstanding Beginning	0 years
Weighted Average Remaining Contractual Terms (Years), Outstanding Ending	0 years
Weighted Average Remaining Contractual Terms (Years), Exercisable	0 years
Aggregate Intrinsic Value, Outstanding, Ending | $	$ 21,250
Aggregate Intrinsic Value, Exercisable | $	$ 0

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Subsequent Events (Details Narrative) - USD ($)	Apr. 29, 2016	Mar. 31, 2016
Warrants [Member]
Warrants at a strike price		$ 4.67
Subsequent Event [Member] | PMC Financial Services Group, LLC [Member]
Line of Credit maximum	$ 6,000,000
Subsequent Event [Member] | PMC Financial Services Group, LLC [Member] | Warrants [Member]
Number of warrants issued during period	10,000
Warrants at a strike price	$ 4.50