REED'S, INC. 10-K

Item 8. Financial Statements Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 572 ) F-2 Financial Statements: Balance Sheets as of December 31, 2022 and December 31, 2021 F-3 Statements of Operations for the years ended December 31, 2022 and 2021 F-4 Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2022 and 2021 F-5 Statements of Cash Flows for the years ended December 31, 2022 and 2021 F-6 Notes to Financial Statements for the years ended December 31, 2022 and 2021 F-7 F- 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Reed’s, Inc. Opinion on the Financial Statements We have audited the accompanying balance sheets of Reed’s, Inc. (the “Company”) as of December 31, 2022 and 2021, the related statements of operations, changes in stockholders’ equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended December 31, 2022, the Company incurred a net loss and utilized cash in operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans to alleviate these conditions are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Inventory Valuation As described in Notes 2 and 3 to the financial statements, the Company’s inventories are stated at the lower of cost or net realizable value, determined on first-in, first-out (“FIFO”) basis. As of December 31, 2022, the Company held inventories of $16.2 million. In determining net realizable value, management considers historical usage, forecasted demand in relation to inventory on hand, market conditions, and other factors. We identified the evaluation of management’s estimate of the net realizable value of certain inventory as a critical audit matter, because of the significant judgments made by management in estimating future demand and market conditions which are used to arrive at the net realizable value. This required a high degree of auditor judgment and increased auditor effort in auditing such assumptions. The primary procedures we performed to address this critical audit matter included: ● We evaluated management’s product demand forecast for reasonableness considering historical sales by product, and whether they were consistent with the historical data and evidence obtained in other areas of the audit. ● We developed an independent expectation of the net realizable value of inventory using historic inventory activity and compared our independent expectation to the amount recorded in the financial statements. Accounts payable to former related party As described in Note 13 to the financial statements, as of December 31, 2022, the Company has an arrangement with California Custom Beverage, LLC (“CCB”), a former related party and one of its one copackers. In the opinion of management, the arrangement allows for the cost of certain services provided by CCB to be offset to certain amounts due the Company. As of December 31, 2022, the Company recorded a net payable of $1,248 due to CCB. We identified the net payable to CCB as a critical audit matter because of the significant judgements made by management in estimating net payable to CCB including the Company’s determination that a right of offset exists related to amounts payable to and amounts receivable from CCB. This required a high degree of auditor judgement to assess the reasonableness of management’s conclusions. The primary procedures we performed related to the net payable to CCB included: ● We inquired of management and external legal counsel to gain an understanding of the relevant facts and circumstances related to the net payable to CCB. ● We obtained and read the contract, as amended, related to transactions between the Company and CCB. ● We agreed amounts to a schedule of accumulated costs and offsets. ● We evaluated the reasonableness of management’s conclusions regarding the net payable to CCB. ● We assessed the sufficiency of management’s disclosures related to the net payable to CCB. We have served as the Company’s auditor since 2004. /s/ Weinberg & Company, P.A . Los Angeles, California May 15, 2023 F- 2 REED’S, INC, BALANCE SHEETS (Amounts in thousands, except share amounts) December 31, 2022 December 31, 2021 ASSETS Current assets: Cash $ 533 $ 49 Accounts receivable, net of allowance of $ 252 and $ 215 , respectively 5,671 5,183 Inventory, net 16,175 17,049 Receivable from former related party 777 933 Prepaid expenses and other current assets 939 1,491 Total current assets 24,095 24,705 Property and equipment, net of accumulated depreciation of $ 787 and $ 561 , respectively 766 992 Intangible assets 626 624 Total assets $ 25,487 $ 26,321 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 9,805 $ 10,434 Accrued expenses 233 286 Revolving line of credit, net of capitalized financing costs of $ 363 and $ 0 , respectively 10,974 10,229 Payable to former related party 2,025 614 Current portion of convertible notes payable, net of debt discount of $ 414 and $ 0 , respectively 2,434 - Current portion of lease liabilities 187 161 Total current liabilities 25,658 21,724 Convertible note payable, net of debt discount of $ 562 and $ 0 , respectively, less current portion 8,092 Lease liabilities, less current portion 207 394 Total liabilities 33,957 22,118 Stockholders’ equity (deficit): Series A Convertible Preferred stock, $ 10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding 94 94 Common stock, $ .0001 par value, 180,000,000 shares authorized; 2,519,485 and 1,874,866 shares issued and outstanding, respectively - - Additional paid in capital 114,635 107,246 Accumulated deficit ( 123,199 ) ( 103,137 ) Total stockholders’ equity (deficit) ( 8,470 ) 4,203 Total liabilities and stockholders’ equity (deficit) $ 25,487 $ 26,321 The accompanying notes are an integral part of these financial statements. F- 3 REED’S, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2022 and 2021 (Amounts in thousands, except share and per share amounts) 2022 2021 Year Ended December 31, 2022 2021 Net Sales $ 53,041 $ 49,599 Cost of goods sold 40,929 36,001 Gross profit 12,112 13,598 Operating expenses: Delivery and handling expense 11,603 11,939 Selling and marketing expense 7,316 9,665 General and administrative expense 7,489 7,965 Provision for receivable with former related party 538 - Total operating expenses 26,946 29,569 Loss from operations ( 14,834 ) ( 15,971 ) Gain on extinguishment of PPP note payable - 770 Interest expense ( 5,223 ) ( 1,201 ) Net loss ( 20,057 ) ( 16,402 ) Dividends on Series A Convertible Preferred Stock ( 5 ) ( 5 ) Net loss attributable to common stockholders $ ( 20,062 ) $ ( 16,407 ) Loss per share – basic and diluted $ ( 9.07 ) $ ( 8.99 ) Weighted average number of shares outstanding – basic and diluted 2,211,319 1,824,688 The accompanying notes are an integral part of these financial statements. F- 4 REED’S, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY For the Years Ended December 31, 2022 and 2021 (Amounts in thousands except share amounts) Shares Amount Shares Amount Capital Deficit (Deficit) Common Stock Preferred Stock Additional Paid In Accumulated Total Stockholders’ Equity Shares Amount Shares Amount Capital Deficit (Deficit) Balance, December 31, 2020 1,726,526 $ - 9,411 $ 94 $ 97,040 $ ( 86,730 ) $ 10,404 Fair value of vested options - - - - 1,684 - 1,684 Fair value of warrants issued as financing costs - - - - 458 - 458 Fair value of vested restricted shares granted to officers 5,657 - - - 243 - 243 Dividends on Series A Convertible Preferred Stock 93 - - - 5 ( 5 ) - Repurchase of common stock ( 270 ) - - - ( 15 ) ( 15 ) Common shares issued on exercise of options 1,260 - - - 32 32 Common shares issued for financing costs 8,000 - - - 472 472 Common shares issued pursuant to a rights offering, net of offering costs 133,600 - - - 7,327 - 7,327 Net Loss - - - - - ( 16,402 ) ( 16,402 ) Balance, December 31, 2021 1,874,866 - 9,411 94 107,246 ( 103,137 ) 4,203 Balance 1,874,866 - 9,411 94 107,246 ( 103,137 ) 4,203 Fair value of vested options - - - - 701 - 701 Fair value of vested restricted shares granted to officers 8,758 - - - 158 - 158 Repurchase of common stock ( 265 ) - - - ( 2 ) ( 2 ) Dividends on Series A Convertible Preferred Stock - - - - - ( 5 ) ( 5 ) Common shares issued for financing costs 2,000 - - - 37 37 Common shares issued for interest payment 262,234 - - 1,461 1,461 Common shares issued pursuant to a rights offering, net of offering costs 371,892 - - 5,034 - 5,034 Net Loss - - - - - ( 20,057 ) ( 20,057 ) Balance, December 31, 2022 2,519,485 $ - 9,411 $ 94 $ 114,635 $ ( 123,199 ) $ ( 8,470 ) Balance 2,519,485 $ - 9,411 $ 94 $ 114,635 $ ( 123,199 ) $ ( 8,470 ) The accompanying notes are an integral part of these financial statements. F- 5 REED’S, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2022 and 2021 (Amounts in thousands) December 31, 2022 December 31, 2021 Cash flows from operating activities: Net loss $ ( 20,057 ) $ ( 16,402 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 108 143 Loss on disposal of property & equipment - 67 Gain on termination of leases - ( 2 ) Gain on extinguishment of PPP note payable - ( 770 ) Amortization of debt discount 530 162 Amortization of prepaid financing costs 431 295 Fair value of vested options 701 1,684 Fair value of vested restricted shares granted to directors and officers for services 158 243 Common shares issued as financing costs 37 - Change in allowance for doubtful accounts 37 ( 19 ) Provision for receivable with former related party 538 - Change in inventory reserve 344 ( 59 ) Accrued interest on convertible note 2,313 - Lease liability ( 161 ) ( 115 ) Changes in operating assets and liabilities: Accounts receivable ( 525 ) ( 446 ) Inventory 531 ( 5,871 ) Prepaid expenses and other assets 55 322 Decrease in right of use assets 117 100 Accounts payable ( 629 ) 3,688 Accrued expenses ( 58 ) ( 609 ) Net cash used in operating activities ( 15,530 ) ( 17,589 ) Cash flows from investing activities: Intangible asset trademark costs ( 2 ) ( 9 ) Purchase of property and equipment - ( 326 ) Net cash used in investing activities ( 2 ) ( 335 ) Cash flows from financing activities: Borrowings under revolving line of credit 54,564 66,234 Repayments of revolving line of credit ( 53,456 ) ( 56,005 ) Capitalization of financing costs ( 483 ) - Proceeds from sale of common stock 5,034 7,327 Proceeds from convertible note payable, net of expenses 12,430 - Repayment of convertible note payable ( 3,100 ) - Amounts from former related party 1,029 ( 193 ) Principal repayments on finance lease obligation - ( 2 ) Exercise of options - 32 Repurchase of common stock ( 2 ) ( 15 ) Net cash provided by financing activities 16,016 17,378 Net increase (decrease) in cash 484 ( 546 ) Cash at beginning of period 49 595 Cash at end of period $ 533 $ 49 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,911 $ 430 Non-cash investing and financing activities: Dividends on Series A Convertible Preferred Stock $ 5 $ 5 Fair value of warrant recorded to prepaid expenses $ - $ 458 Common Shares issued for financing costs $ 37 $ 472 Common Shares issued for principal payment $ 200 $ - Common Shares issued for interest payment $ 1,261 $ - Note Payable principal extinguished $ - $ 770 The accompanying notes are an integral part of these financial statements. F- 6 REED’S, INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2022 and 2021 (In thousands, except share and per share amounts) 1. Operations and Liquidity Reed’s, Inc., (the “Company”) is the owner and maker of Reed’s Craft Ginger Beer, Reed’s Real Ginger Ale, Reed’s Classic and Stormy Mules, and Reed’s Hard Ginger Ales and Virgil’s Handcrafted Sodas. The Company was established in 1989 and is incorporated in the state of Delaware. Effective on January 24, 2023, the Board of Directors and stockholders have approved resolutions authorizing a reverse stock split of the outstanding shares of the Company’s common stock on the basis of 1 share for every 50 shares of common stock . All shares and per share amounts and information presented herein have been retroactively adjusted to reflect the reverse stock split for all periods presented. Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the year ended December 31, 2022, the Company recorded a net loss of $ 20,057 and used cash in operations of $ 15,530 . These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. As of December 31, 2022, we had a cash balance of $ 533 , with $ 110 of current availability, and $ 1,663 of additional borrowing capacity. Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. As we seek additional sources of financing, there can be no assurance that such financing would be available to us on favorable terms or at all. Our ability to obtain additional financing in the debt and equity capital markets is subject to several factors, including market and economic conditions, our performance and investor sentiment with respect to us and our industry. We have also taken decisive action to improve our margins, including fully outsourcing our manufacturing process, streamlining our product portfolio, negotiating improved vendor contracts and restructuring our selling prices. Recent Trends - Market Conditions During the year ended December 31, 2022, the COVID-19 pandemic continued to impact our operating results and the Company anticipates a residual effect for the balance of the year. In addition, the pandemic could cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively affects the consumers who purchase our products. Based on the recent increase in demand for our products, we believe that over the long term, there will continue to be strong demand for our products. Although the U.S. economy continued to grow during the first quarter of 2022, the continuing impact of the COVID-19 pandemic, higher inflation, the actions by the Federal Reserve to address inflation, and rising energy prices create uncertainty about the future economic environment which will continue to evolve and may impact our business in future periods. We have experienced supply chain challenges, including increased lead times, as well as inflation of raw materials, logistics and labor costs due to availability constraints and high demand. Although we regularly monitor companies in our supply chain, and use alternative suppliers when necessary and available, supply chain constraints could cause a disruption in our ability to obtain raw materials required to manufacture our products and adversely affect our operations. We expect the inflationary trends and supply chain pressures to continue throughout 2023. F- 7 During the year ended December 31, 2022, the Company experienced moderation from elevated freight costs. While the average cost of shipping and handling for the year ended December 31, 2022, was $ 3.95 per case, which is the same as the $ 3.95 per case for the year ended December 31, 2021, it was significantly higher during the first half of the year, however, was significantly reduced during the second half of the year. The Company believes these challenges will continue throughout the year. In addition, the Company experienced increases in the pricing of several of its raw materials and delays in procuring several of these items. However, mitigation plans have been implemented to manage this risk. Additionally, the Company was negatively impacted by supply chain challenges impacting our ability to benefit from strong demand for, and increased sales of our product. The disruption caused by labor shortages, significant raw material cost inflation, logistics issues and increased freight costs, and ongoing port congestion, resulted in suppressed margins and net income. The Company anticipates a continued impact throughout 2023. Our ability to operate without significant incremental negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and protect our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the inception of the COVID-19 pandemic and through December 31, 2022, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. We will continue to innovate in managing our business, coordinating with our employees and suppliers to do our part to be responsible to our employees and business partners in responding to our customers and suppliers. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations. We have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. Nasdaq Notice of Delisting or Failure to Satisfy a Continued Listing Rule or Standard On August 16, 2021, the Company received a written notice from the Nasdaq Listing Qualifications staff of The Nasdaq Stock Market LLC (“Nasdaq”) that the bid price of the Company’s common stock had closed at less than $1 per share over the previous 30 consecutive business days and, as a result, did not comply with Listing Rule 5550(a)(2) (the “Bid Price Rule”). In accordance with Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until February 14, 2022, to regain compliance with the Bid Price Rule. The Company did not regain compliance during the compliance period ended February 14, 2022. Accordingly, the Company requested that Nasdaq grant the Company a second 180 calendar day period to regain compliance. On February 15, 2022, the Company was provided an additional 180 calendar day compliance period, or until August 15, 2022, to demonstrate compliance with the Bid Price Rule. The Company did not regain compliance during the compliance period ended August 15, 2022. On August 16, 2022, the Company received a written notice from Nasdaq indicating that, based upon the Company’s continued non-compliance with the Bid Price Rule, Nasdaq had determined to delist the Company’s securities from Nasdaq unless the Company timely requested a hearing before the Nasdaq Hearings Panel (the “Panel”). The written notice also indicated that the Company was not in compliance with the $ 2.5 million minimum stockholders’ equity requirement for continued listing of the Company’s common stock on Nasdaq as set forth in Nasdaq Listing Rule 5550(b)(1) (the “Minimum Stockholders’ Equity Rule”). The Company timely requested a hearing with the Panel, and after a hearing on September 28, 2022, the Company was given until February 13, 2023, to regain compliance with the Bid Price Rule, and to regain compliance with the Minimum Stockholders’ Equity Rule. Effective January 27, 2023, the Company achieved compliance with the Bid Price Rule after effecting a 1:50 reverse split (see Reverse Stock Split below). However, after evaluating options to achieve compliance with the Minimum Stockholders’ Equity Rule, the Company’s board of directors determined not to proceed with a dilutive capital raise. On February 14, 2023, the Company received a written notice that the Nasdaq’s Listing Qualifications staff has determined that the Company’s securities were to be delisted from Nasdaq, and trading in the Company’s common stock was suspended from the Nasdaq Capital Market on February 16, 2023. On February 16, 2023, the Company’s common stock began being quoted for trading on the OTCQX US Market, operated by OTC Markets, Inc. (“OTCQX”), and the Company continues to be a reporting company under the Securities Exchange Act of 1934, as amended. F- 8 Reverse Stock Split At a special meeting of shareholders held on January 24, 2023, the Company’s shareholders granted the Company’s board of directors the discretion to effect a reverse stock split of the common stock through an amendment to the Company’s Certificate of Incorporation, as amended, at a ratio of any ratio not less than 1-for-6 and not more than 1-for-50 , at any time on or prior to January 24, 2024, with the exact ratio to be set at a whole number within this range by the board of directors in its sole discretion. On January 25, 2023, the Company announced that its board of directors approved a 1-for-50 reverse stock split of the Company’s issued and outstanding shares of common stock, par value $ 0.0001 per share. The authorized number of shares of common stock were not affected by the reverse stock split. No fractional shares were issued in connection with the reverse stock split, as all fractional shares were rounded up to the next whole share. Accordingly, all share and per share amounts presented herein with respect to common stock have been retroactively adjusted to reflect the above-described reverse stock split for all periods presented. 2. Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts receivables, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in valuing warrant liabilities, and assumptions used in the determination of the Company’s liquidity. Accounts Receivable Accounts receivable are generally recorded at the invoiced amounts net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. The allowance for accounts receivable is established through a provision reducing the carrying value of receivables. At December 31, 2022, and 2021, the allowance was $ 252 and $ 215 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and our ability to sell the product(s) concerned. Demand for our products can fluctuate significantly. Factors that could affect demand for our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers. Additionally, our management’s estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory. At December 31, 2022, and 2021, inventory has been reduced by cumulative write-downs for inventory aggregating $ 479 and $ 135 , respectively. F- 9 Property and Equipment Property and equipment are stated at cost. Expenditures for major renewals and improvements that extend the useful lives of property and equipment or increase production capacity are capitalized, and expenditures for repairs and maintenance are charged to expense as incurred. Depreciation is calculated using accelerated and straight-line methods over the estimated useful lives of the assets as follows: Schedule of Estimated Useful Lives of Property and Equipment and Related Depreciation Property and Equipment Type Years of Depreciation Computer hardware and software 3 - 7 years Machinery and equipment 5 years Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended December 31, 2022 and 2021, the Company determined there were no indicators of impairment of its property and equipment. Intangible Assets Intangible assets are comprised of indefinite-lived brand names acquired, so classified because we anticipate that these brand names will contribute cash flows to the Company perpetually. Indefinite-lived intangible assets are not amortized but are assessed for impairment annually, or more frequently if events or circumstances indicate that assets might be impaired and evaluated annually to determine whether the indefinite useful life is appropriate. As part of our impairment test, we first assess qualitative factors to determine whether it is more likely than not the asset is impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds its fair value, as determined by its discounted cash flows, an impairment loss is recognized in an amount equal to that excess. For the years ended December 31, 2022 and 2021, the Company determined there was no impairment of its indefinite-lived brand names. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer. All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfilment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis. Cost of Goods Sold Cost of goods sold is comprised of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs. Additionally, cost of goods sold includes direct production costs in excess of charges allocated to finished goods in production. Charges for labor and overhead allocated to finished goods are determined on a market cost basis, which may be lower than the actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Expenses not related to the production of our products are classified as operating expenses. F- 10 Delivery and Handling Expense Shipping and handling costs are comprised of purchasing and receiving, inspection, warehousing, transfer freight, and other costs associated with product distribution after manufacture and are included as part of operating expenses. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $ 668 and $ 1,418 for the years ended December 31, 2022 and 2021, respectively. Stock Compensation Expense The Company periodically issues stock options and restricted stock awards to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for such grants issued and vesting based on ASC 718, Compensation-Stock Compensation whereby the value of the award is measured on the date of grant and recognized for employees as compensation expense on the straight-line basis over the vesting period. Recognition of compensation expense for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Income Taxes The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. F- 11 For the years ended December 31, 2022 and 2021, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following: Schedule of Potentially Dilutive Securities December 31, 2022 December 31, 2021 Warrants 235,946 90,770 Common stock equivalent of Series A Convertible Preferred Stock 753 753 Convertible note payable 955,363 - Unvested restricted common stock 1,460 2,223 Options 164,423 210,460 Total 1,357,945 304,206 The Series A Convertible Preferred Stock is convertible into Common shares at the rate of 1:0.08 . Fair Value of Financial Instruments The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. Accounting Standards Codification Section 820 defines the following levels of subjectivity associated with the inputs: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3—Unobservable inputs based on the Company’s assumptions. T he Company believes the carrying amounts of certain financial instruments, including 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-term nature of such instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. Segments The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in economic characteristics, nature of products and services, and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying financial statements. Concentrations The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $ 250 . Generally, the Company’s policy is to minimize borrowing costs by immediately applying cash receipts to borrowings against its credit facility. From time to time, however, the Company may be exposed to risk for the amounts of funds held in bank accounts in excess of the FDIC limit. To minimize the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. Gross sales. During the year ended December 31, 2022, the Company’s largest two customers accounted for 17 % and 16 % of gross sales, respectively. During the year ended December 31, 2021, the Company’s largest two customers accounted for 19 % and 11 % of gross sales, respectively. Accounts receivable. As of December 31, 2022, the Company had accounts receivable from two customers which comprised 19 % and 11 % of its gross accounts receivable, respectively. As of December 31, 2021, the Company had accounts receivable from one customer which comprised 18 % of its gross accounts receivable. F- 12 During the years ended December 31, 2022, and 2021, the Company utilized six separate co-packers for most its production and bottling of beverage products in the United States. The Company utilizes co-packers to produce 100 % of its products. The Company has long-standing relationships with two different co-packers, and in conjunction with the sale of its manufacturing plant we entered into a third co-packing agreement with California Custom Beverage LLC (“CCB”), the purchaser of the plant (see Note 13). CCB is 100 % owned by Chris Reed, founder of the Company and formerly Chief Executive Officer, Chairman, director, and most recently, Chief Innovation Officer. Although there are other packers, a change in co-packers may cause a delay in the production process, which could ultimately affect operating results. Purchases from vendors. During the year ended December 31, 2022, the Company’s largest vendor accounted for approximately 12 % of all purchases. During the year ended December 31, 2021, the Company’s largest two vendors accounted for approximately 13 % and 10 % of all purchases, respectively. No other vendor accounted for more than 10% of the total vendor purchases. Accounts payable. As of December 31, 2022, no vendor accounted for more than 10 % of the total accounts payable. As of December 31, 2021, no vendor accounted for more than 10 % of the total accounts payable. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements In August 2020, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2020-06 “Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”).” ASU 2020-06 reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion models. The diluted net income per share calculation for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares, (ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 is effective January 1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January 1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and related disclosures. In May 2021, the FASB issued ASU 2021-04 “Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation— Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815- 40) Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”). ASU 2021-04 provides guidance as to how an issuer should account for a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option (i.e., a warrant) that remains equity classified after modification or exchange as an exchange of the original instrument for a new instrument. An issuer should measure the effect of a modification or exchange as the difference between the fair value of the modified or exchanged warrant and the fair value of that warrant immediately before modification or exchange and then apply a recognition model that comprises four categories of transactions and the corresponding accounting treatment for each category (equity issuance, debt origination, debt modification, and modifications unrelated to equity issuance and debt origination or modification). ASU 2021-04 is effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. An entity should apply the guidance provided in ASU 2021-04 prospectively to modifications or exchanges occurring on or after the effective date. The Company adopted ASU 2021-04 effective January 1, 2022. The adoption of ASU 2021-04 did not have any impact on the Company’s financial statement presentation or disclosures. F- 13 Recently Issued Accounting Pronouncements Not Yet Adopted In September 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments . ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows. Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements. 3. Inventory Inventory is valued at the lower of cost (first-in, first-out) or net realizable value and is comprised of the following (in thousands): Schedule of Inventory December 31, 2022 December 31, 2021 Raw materials and packaging $ 8,526 $ 11,221 Finished products 7,649 5,828 Total $ 16,175 $ 17,049 4. Property and Equipment Property and equipment are comprised of the following (in thousands): Schedule of Property and Equipment December 31, 2022 December 31, 2021 Right-of-use assets under operating leases $ 724 $ 724 Computer hardware and software 400 400 Machinery and equipment 429 429 Total cost 1,553 1,553 Accumulated depreciation and amortization ( 787 ) ( 561 ) Net book value $ 766 $ 992 Depreciation expense for the years ended December 31, 2022, and 2021 was $ 108 and $ 143 , respectively, and amortization of right-of-use assets for the years ended December 31, 2022, and 2021 as $ 117 and $ 100 , respectively. During the year ended December 31, 2021, the Company disposed of right-of-use assets under finance leases with a cost of $ 48 and accumulated amortization of $ 38 and terminated $ 13 of related finance leases payable. During the year ended December 31, 2021, the Company disposed the equipment held for sale and recorded a loss on disposal of $ 67 . 5. Intangible Assets Intangible assets are comprised of brand names acquired, specifically Virgil’s, and costs related to trademarks. They have been assigned an indefinite life, as we currently anticipate that they will contribute cash flows to the Company perpetually. These indefinite-lived intangible assets are not amortized but are assessed for impairment annually and evaluated annually to determine whether the indefinite useful life remains appropriate. We first assess qualitative factors to determine whether it is more likely than not that the asset is impaired. If further testing is necessary, we compare the estimated fair value of our asset with its book value. If the carrying amount of the asset exceeds its fair value, as determined by the discounted cash flows expected to be generated by the asset, an impairment loss is recognized in an amount equal to that excess. Based on management’s assessment, there were no indications of impairment at December 31, 2022. F- 14 During the year ended December 31, 2022, and 2021, the Company capitalized costs of $ 2 and $ 9 , respectively, pertaining to legal and other fees incurred in applying for international trademarks for Reeds and Virgil’s brands. Intangible assets consist of the following (in thousands): Summary of Intangible Assets December 31, 2022 December 31, 2021 Brand names $ 576 $ 576 Trademarks 50 48 Total $ 626 $ 624 6. Line of Credit Amounts outstanding under the Company’s credit facilities are as follows (in thousands): Schedule of Amount Outstanding Under Credit Facilities December 31, 2022 December 31, 2021 Line of credit – Alterna Capital Solutions $ 11,337 $ - Line of credit – Rosenthal & Rosenthal - 10,229 Capitalized financing costs ( 363 ) - Total $ 10,974 $ 10,229 Alterna Capital Solutions On March 28, 2022, the Company entered into a financing agreement with Alterna Capital Solutions (“ACS”), for a line of credit to replace its existing credit facility. The ACS line of credit is for a term of 3 years, provides for borrowings of up to $ 13,000 , and is secured by eligible accounts receivable and inventory. An over advance rider provides for up to $ 400 of additional borrowing above the collateralized base (the “Over Advance”) up to a total borrowing of $ 13,000 . At December 31, 2022, $ 110 of current availability and $ 1,663 of borrowing capacity was available under the financing agreement. Borrowings based on receivables bears an interest of prime plus 4.75% but not less than 8.0%. Borrowings based on inventory bears an interest of prime plus 5.25% but not less than 8.5%. The additional over advance rider bears a rate of prime plus 12.75%, but not less than 16.00%. Additionally, the line of credit is subject to monthly monitoring fee of $1 with a minimum usage requirement on the credit facility . A loan balance of less than $ 1,500 will bear interest at a rate in line with account receivables advances plus the monthly monitoring fee of $ 1 . The Company incurred $ 483 of direct costs of the transaction, consisting primarily of broker, bank and legal fees. These costs have been capitalized and are being amortized over the 3 -year life of the ACS agreement. For the year ended December 31, 2022, amortization of debt discount was $ 121 , and as of December 31, 2022, the remaining unamortized debt discount balance is $ 363 . Rosenthal & Rosenthal (paid off in full on March 30, 2022) In 2018, the Company entered into a financing agreement with Rosenthal & Rosenthal, Inc. (“Rosenthal”) that provided a maximum borrowing capacity of $ 13,000 , based on eligible accounts receivable and inventories (the “permitted borrowings”) plus advances (an “over-advance” of up to $ 4,000 ) in excess of permitted borrowings. On March 30, 2022, the Company paid in full the outstanding balance on its credit facility with Rosenthal with proceeds from ACS discussed above. Borrowings under the Rosenthal financing agreement bore interest at the greater of prime or 4.75 %, plus an additional 2.0 % to 3.5 % depending on whether the borrowing was based upon receivables, inventory or is an over-advance. Additionally, the Rosenthal line of credit was subject to monthly facility and administration fees, and aggregate minimum monthly fees (including interest) of $ 4 . F- 15 The line of credit was secured by substantially all of the assets, excluding intellectual property, of the Company. The over-advance was secured by all of Reed’s intellectual property collateral. On March 11, 2021, the Company entered into an amendment to the Rosenthal agreement and replaced a standby letter of credit of $ 1,500 by a guarantor with a $2,000 pledge of securities to Rosenthal by John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust. John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party, and greater than 5 % beneficial owner of Reed’s common stock . As consideration for the collateral support, Mr. Bello received 8,000 shares of Reed’s restricted stock, with a fair value of $ 472 which was recorded a prepaid financing cost. During the year ended December 31, 2022, $ 121 of the prepaid financing cost was amortized, and as of December 31, 2022, there was no remaining unamortized prepaid finance cost balance. The Company annually incurred an additional $ 130 of fees from Rosenthal, or 1 % of the $ 13,000 borrowing limit. Amortization of this debt discount was $ 65 and $ 162 for the year ended December 31, 2022, and 2021, respectively. At December 31, 2022, there was no remaining unamortized debt discount balance. 7. Secured Convertible Notes Payable Amounts outstanding under secured convertible notes payable are as follows (in thousands): Schedule of Debt December 31, 2022 December 31, 2021 Secured Convertible Note Payable $ 10,450 $ - Accrued interest 1,052     - Capitalized financing costs ( 976 ) - Total $ 10,526 $ - Current portion ( 2,434 ) - Long term portion $ 8,092 $ - Secured Convertible Note Payable In May 2022, the Company entered into a note purchase agreement and agreed to issue $ 11,250 of secured convertible promissory notes (the “Notes”) to entities affiliated with Whitebox Advisors, LLC (collectively, “Whitebox”). The Notes bear interest at a rate of 10% per annum (with 5% per annum payable in cash and 5% per annum payable in kind (“PIK”) by adding such PIK interest to the principal amount of the Notes) . The Notes are secured by substantially all of the Company’s assets (including all of its intellectual property) and are subject to a collateral sharing agreement with ACS, the Company’s existing secured lender (see Note 6). The Notes mature on May 9, 2025 . On May 9, 2022, the Company issued $ 11,250 of Notes to Whitebox. In September 2022, the Company issued an additional $ 2,500 of Notes to Whitebox. The net proceeds from the issuance of the Notes, after deducting placement agent fees and other debt issuance costs, was approximately $ 12,430 . In November 2022, the Company paid off the $ 2,500 of Notes in cash. Beginning in August 2022, $ 11,250 of the Notes have an amortization feature which requires the Company to make monthly payments of principal of $ 200 plus accrued interest, payable in cash or in shares of the Company’s common stock at the option of the Company. Amortization payments that are paid in shares are priced at 90 % of the average of the daily volume weighted average prices of the Company’s common stock during the five trading days prior to the date of amortization payment. During the year ended December 31, 2022, the Company made monthly amortization principal payments aggregating $ 800 , made up of $ 600 in cash, and the issuance of 32,362 shares of common stock valued at $ 200 . At December 31, 2022, the principal balance of the Notes was $ 10,450 . Effective February 10, 2023, the requirement for monthly amortization payments of $ 200 due December 2022 to May 2023 was waived (see Note 15). Remaining amortization payments of principal, as amended, total approximately $ 1.2 million in 2023, $ 2.4 million in 2024, and $ 800 in 2025, leaving a principal balance of the Notes of approximately $ 6.0 million due at maturity. F- 16 Effective August 11, 2022, the Notes were amended to add a 10 % fee for the amount that the Company’s line of credit with ACS exceeds $ 6,000 , as defined (the “Excess ABL Amount”). In addition, Whitebox amended the amount of permitted indebtedness prior to September 30, 2022, to $ 11.5 million. The Company was not in compliance with the Excess ABL Amount covenant at December 31, 2022, and received a waiver of this covenant violation at December 31, 2022, on February 10, 2023. Upon conversion, holders of the Note are entitled to receive an interest make-whole payment, as defined. The make-whole amount is equal to the sum of the remaining scheduled payments of interest on the Notes to be converted that would be due if such notes matured May 9, 2025 , payable, at the Company’s option in cash or in shares of common stock. During the year ended December 31, 2022, the Company recorded interest of $ 3,023 , made up of $ 800 of interest on the Notes, $ 489 related to make whole interest on the $ 2,500 Notes repaid in November 2022, and $ 1,734 related to the excess line of credit debt fee. During the year ended December 31, 2022, the Company made interest payments of $ 1,892 , made up of $ 632 in cash, and the issuance of 229,871 shares of common stock valued at $ 1,261 . At December 31, 2022, the balance of accrued interest was $ 1,052 . The initial conversion rate of the Notes is 0.08306 shares of the Company’s common stock per $1 dollar of principal converted, or approximately $12.04 per share, subject to customary anti-dilution adjustments. In addition, if certain corporate events occur that constitute a make-whole fundamental change as defined, then the note holders are, under certain circumstances, are entitled to an increase in the conversion rate, limited to 0.12155 shares of Common Stock per $1 dollar of principal, or approximately $8.23 per share . The Company’s ability to settle conversions and make amortization payments and interest make-whole payments using shares of the Company’s common stock is subject to certain limitations set forth in the Notes. If the Company experiences a fundamental change as defined, the holders of the notes have the right to require the Company to repurchase the notes for cash at a repurchase price equal to 100 % of the principal amount, plus accrued interest thereon. Effective February 10, 2023, the repurchase price was amended to 110 % of the principal amount, plus accrued interest (see Note 15). At December 31, 2022, the Notes, including accrued interest, are convertible into 955,363 shares of the Company’s common stock pursuant to a share conversion cap limit as defined in the Notes. The Company incurred $ 1,320 of direct costs of the transactions, consisting primarily of placement agent fees and other offering expenses. These costs have been capitalized and are being amortized over the 3 -year life of the Notes. For the year ended December 31, 2022, amortization of debt discount was $ 344 , and as of December 31, 2022, the remaining unamortized debt discount balance is $ 976 . The Company entered into a registration rights agreement with the holders, pursuant to which the Company agreed to register for resale shares issuable under the Notes. 8. Leases Liabilities The Company determines whether a contract is, or contains, a lease at inception. Right-of-use assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at lease commencement based upon the estimated present value of unpaid lease payments over the lease term. The Company leases its headquarters office , and certain office equipment and automobiles. Leases with an initial term of 12 months or less are not included on the balance sheets. During the years ended December 31, 2022, and 2021, lease costs totaled $ 178 and $ 179 , respectively. As of December 31, 2021, operating lease liabilities totaled $ 555 . During the year ended December 31, 2022, the Company made payments of $ 161 towards its operating lease liability. As of December 31, 2022, operating lease liabilities totaled $ 394 . F- 17 As of December 31, 2022, the weighted average remaining lease terms for an operating lease are 2.00 years. As of December 31, 2022, the weighted average discount rate for operating lease is 12.60 %. Future minimum lease payments under the leases are as follows (in thousands): Schedule of Future Minimum Lease Payments Under Leases Years Ending December 31, Amounts 2023 $ 226 2024 221 Total payments 447 Less: Amount representing interest ( 53 ) Present value of net minimum lease payments 394 Less: Current portion ( 187 ) Non-current portion $ 207 9. Stockholders’ Equity Series A Convertible Preferred Stock Series A Convertible Preferred Stock (the “Preferred Stock”) consists of $ 10 par value, 5 % non-cumulative, non-voting, participating preferred stock, with a liquidation preference of $ 10.00 per share. 500,000 shares are authorized. As of December 31, 2022, and 2021, there were 9,411 shares outstanding. Each share of Preferred Stock can be converted into 0.08 shares of the Company’s common stock . Dividends are payable at the rate of 5 % annually, pro-rata and non-cumulative. The dividend can be paid in cash or, at the discretion of our board of directors, in shares of common stock based on its then fair market value. The Company cannot declare or pay any dividend on shares of our common stock until the holders of the Preferred Stock have received their annual dividend. In addition, the holders of the Preferred Stock are entitled to receive pro rata distributions of dividends on an “as converted” basis with the holders of our common stock. In the event of any liquidation, dissolution or winding up of the Company, or if there is a change of control event as defined, the holders of the Preferred Stock are entitled to receive, prior to distributions to the holders of common stock, $ 10.00 per share plus all accrued and unpaid dividends. Thereafter, all remaining assets are distributed pro rata among all security holders. Since June 30, 2008, the Company has the right, but not the obligation, to redeem all or any portion of the Preferred Stock at $ 10.00 per share, the original issue price, plus all accrued and unpaid dividends. The Preferred Stock may be converted at any time, at the option of the holder, into 0.08 shares of common stock, subject to adjustment in the event of stock splits, reverse stock splits, stock dividends, recapitalization, reclassification, and similar transactions. The Company is obligated to reserve authorized but unissued shares of common stock sufficient to affect the conversion of all outstanding shares of Preferred Stock. Except as provided by law, the holders of the Preferred Stock do not have the right to vote on any matters, including the election of directors. However, so long as any shares of Preferred Stock are outstanding, the Company shall not, without the approval of a majority of the preferred stockholders, authorize or issue any equity security having a preference over the Preferred Stock with respect to dividends, liquidation, redemption or voting, including any other security convertible into or exercisable for any senior preferred stock. During the year ended December 31, 2021, the Company paid dividends on the Preferred Stock through the issuance of 93 shares of its common stock, respectively, which based upon the then-current market price of the stock equated to dividends of $ 5 in each of the years. During the year ended December 31, 2022, the Company accrued dividends on the Preferred Stock of $ 5 and is included in accrued expenses in the accompanying balance sheets. No shares of Series A preferred stock were converted into common stock in 2022. F- 18 Common Stock The Company’s common stock has a par value of $ .0001 . On December 30, 2021, our shareholders approved an increase in the authorized number of common shares from 120,000,000 to 180,000,000 . On December 21, 2020, our shareholders approved an increase in the authorized number of common shares from 100,000,000 to 120,000,000 . As of December 31, 2022, there were 180,000,000 shares authorized, and 2,519,485 shares of common stock outstanding. As of December 31, 2021, there were 180,000,000 shares authorized, and 1,874,866 shares of common stock outstanding. Common Stock Issuance On March 10, 2022, the Company entered into a securities purchase agreement with certain institutional and accredited investors pursuant to which the investors agreed to purchase 371,892 shares of the Company’s common stock and warrants to purchase 185,946 shares of common stock in a private placement (including 64,963 shares of the Company’s common stock and warrants to purchase 32,482 shares of common stock to investors who are officers and directors of the Company). The warrants have an exercise price of $ 14.39 per share for a period of five years commencing six months from the closing date of March 11, 2022. The purchase price per share of common stock and associated warrant was $ 14.00 for certain investors and was $ 17.51 for investors who are officers and directors of the Company in compliance with the rules of the Nasdaq Stock Market. The net proceeds to the Company, after deducting placement agent fees and other offering expenses, was approximately $ 5.0 million. The officers and directors of the Company purchased approximately $ 1.1 million of the securities in the offering. In January 2022, the Company issued 2,000 shares of common stock valued at $ 37 to John J. Bello and Nancy E. Bello, as Co-Trustees of The John and Nancy Bello Revocable Living Trust as consideration for the $ 2,000 pledge of securities to Rosenthal (see Note 6). John J. Bello, current Chairman and former Interim Chief Executive Officer of Reed’s, is a related party, and greater than 5 % beneficial owner of Reed’s common stock. On May 5, 2021, the Company entered into a placement agency agreement with Roth Capital Partners, LLC (the “Placement Agent”) and a securities purchase agreement with a certain purchaser for the purchase of shares of the Company’s common stock, par value $ 0.0001 per share, in an offering of securities registered under an effective registration statement filed with the Securities and Exchange Commission (“SEC”). In the offering, the Company sold 133,600 shares of common stock, at a price of $ 59.00 per share. The offering closed on May 7, 2021, and total proceeds received, net of fees, were $ 7,327 . The Placement Agent was paid a total cash fee at the closing of the Offering equal to 6.5% of the gross cash proceeds received by the Company from the sale of the shares of common stock in the offering . Common stock repurchases. During the year ended December 31, 2022, the Company repurchased 265 shares of common stock from an officer for $ 2 based on the market value of share on the date repurchased. The Company retired the shares. During the year ended December 31, 2021, the Company repurchased 270 shares of common stock from an officer for $ 15 based on the market value of share on the date repurchased. The Company retired the shares. 10. Share-Based Payments Management believes that the ability to issue equity compensation, in order to incentivize performance by employees, directors, and consultants, is essential to the Company’s growth strategy. On December 21, 2020, the 2020 Equity Incentive Plan (the “2020 Plan”) was approved by our shareholders. The 2020 Plan provides for the issuance of up to 300,000 shares. Options issued and forfeited under the 2020 plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2022, shares issuable under the 2020 Plan were 297,534 . The 2020 Plan permits the grant of options and stock awards to our employees, directors and consultants. The options may constitute either “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code or “non-qualified stock options”. The Plan is currently administered by the board of directors. The exercise price of an option granted under the plan cannot be less than 100% of the fair market value per share of common stock on the date of the grant of the option. Options may not be granted under the plan on or after the tenth anniversary of the adoption of the plan. Incentive stock options granted to a person owning more than 10% of the combined voting power of the common stock cannot be exercisable for more than five years . When an option is exercised, the purchase price of the underlying stock is received in cash, except that the plan administrator may permit the exercise price to be paid in any combination of cash, shares of stock having a fair market value equal to the exercise price, or as otherwise determined by the plan administrator. F- 19 Restricted common stock The following table summarizes restricted stock activity during the years ended December 31, 2022, and 2021: Summary of Non-vested Restricted Stock Activity Unvested Shares Issuable Shares Fair Value at Date of Issuance Weighted Average Grant Date Fair Value Balance, December 31, 2020 3,000 - $ 92 $ 44.75 Granted 4,920 - 226 46.00 Vested ( 5,657 ) 5,657 - - Forfeited ( 80 ) - - 44.75 Issued - ( 5,657 ) ( 264 ) - Balance, December 31, 2021 2,183 - 54 44.75 Granted 8,839 - 156 17.68 Vested ( 8,759 ) 8,759 - - Forfeited ( 803 ) - ( 15 ) 18.69 Issued - ( 8,759 ) ( 169 ) - Balance, December 31, 2022 1,460 - $ 26 $ 44.75 On January 26, 2022, the board of directors of Reed’s, pursuant to a joint recommendation from its governance and compensation committees, set the cash compensation of its non-employee directors at $50,000 for fiscal 2022, payable quarterly in accordance with the company’s policies for non-employee director compensation. In addition, the Company granted 8,035 restricted stock awards to five non-employee directors. 2,009 of these restricted stock awards vested on February 1, 2022, May 1, 2022, August 1, 2022, and November 1, 2022. The aggregate fair value of the stock awards was $ 150 based on the market price of our common stock price which was $ 16.00 per share on the date of grants and is amortized as shares vest. During the year ended December 31, 2021, the Company issued 4,920 restricted stock awards to five non-employee directors. 1,230 of these restricted stock awards vested on February 1, 2021, May 1, 2021, August 1, 2021, and November 1, 2021. The aggregate fair value of the stock awards was $ 226 based on the market price of our common stock price which was $ 46.00 per share on the date of grants and is amortized as shares vest. The total fair value of restricted common stock vesting during the year ended December 31, 2022, and 2021 was $ 158 and $ 243 , respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of December 31, 2022, the amount of unvested compensation related to issuances of restricted common stock was $ 26 , which will be recognized as an expense in future periods as the shares vest. When calculating basic loss per share, these shares are included in weighted average common shares outstanding from the time they vest. When calculating diluted net income per share, these shares are included in weighted average common shares outstanding as of their grant date. F- 20 Stock Options As of December 31, 2022, the Company has issued stock options to purchase an aggregate of 164,423 shares of common stock. The Company’s stock option activity during the years ended December 31, 2022, and 2021 is as follows: Schedule of Stock Option Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 188,438 $ 59.69 8.55 $ 78 Granted 67,760 52.69 Exercised ( 1,260 ) 25.00 Unvested forfeited or expired ( 41,093 ) 61.15 Vested forfeited or expired ( 3,315 ) 141.57 Outstanding at December 31, 2021 210,530 $ 56.07 7.88 $ - Granted 14,696 11.69 Exercised - - Unvested forfeited or expired ( 29,050 ) 58.62 Vested forfeited or expired ( 31,753 ) 70.36 Outstanding at December 31, 2022 164,423 $ 48.90 7.58 $ - Exercisable at December 31, 2022 80,014 $ 54.32 7.08 $ - During the year ended December 31, 2022, the Company approved options exercisable into 14,696 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 14,696 options were issued to employees, 7,348 options vesting annually over a four -year vesting period, and 7,348 options vesting based on performance criteria to be established by the board of directors. The stock options are exercisable at a price of $ 11.69 per share and expire in ten years . The total fair value of these options at grant date was approximately $ 122 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 11.69 share, expected term of six years , volatility of 82 %, dividend rate of 0 %, and weighted average risk-free interest rate of 2.89 %. The expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award. During the year ended December 31, 2021, the Company received proceeds of $ 32 and issued 1,260 shares of common shares on the exercise of stock options. During the year ended December 31, 2021, the Company approved options exercisable into 67,760 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 67,760 options were issued to employees, 33,880 options vesting annually over a four -year vesting period, and 33,880 options that will vest based on performance criteria to be established by the board of directors. The stock options are exercisable at prices ranging from $ 49.00 to $ 59.00 per share and expire in ten year s. The total fair value of these options at grant date was approximately $ 2,412 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 52.69 per share, expected term of six years , volatility of 79 %, dividend rate of 0 %, and weighted average risk-free interest rate of 0.98 %. The expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award. F- 21 In the measurement of stock options granted in 2022 and 2021, the expected term represents the weighted-average period of time that share option awards granted are expected to be outstanding giving consideration to vesting schedules and historical participant exercise behavior; the expected volatility is based upon historical volatility of the Company’s common stock; the expected dividend yield is based on the fact that the Company has not paid dividends in the past and does not expect to pay dividends in the future; and the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the expected term of the share option award. During the year ended December 31, 2022, and 2021, the Company recognized $ 701 and $ 1,684 of compensation expense relating to vested stock options. As of December 31, 2022, the aggregate amount of unvested compensation related to stock options was approximately $ 1,233 which will be recorded as an expense in future periods as the options vest. As of December 31, 2022, the outstanding options have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of December 31, 2022, which was $ 3.49 , and the exercise price of the outstanding stock options. Additional information regarding options outstanding and exercisable as of December 31, 2022, is as follows: Schedule of Information Regarding Stock Options Options Outstanding Options Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 4.00 - $ 12.00 13,495 $ 11.42 9.39 - $ - $ 25.00 - $ 37.50 21,352 29.17 7.30 16,852 27.61 $ 44.00 - $ 66.00 111,790 48.71 7.80 46,789 47.99 $ 88.00 - $ 120.00 11,803 85.88 4.61 11,630 85.60 $ 122.00 - $ 183.00 5,983 134.44 6.06 4,743 134.86 164,423 $ 48.90 7.58 80,014 $ 54.32 11. Stock Warrants As of December 31, 2022, the Company has issued warrants to purchase an aggregate of 235,946 shares of common stock. The Company’s warrant activity during the years ended December 31, 2022, and 2021 is as follows: Schedule of Warrant Activity Shares Weighted -Average Exercise Price Weighted-Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2020 67,225 $ 78.00 2.52 $ - Granted 30,000 32.00 Exercised - - Forfeited or expired ( 6,455 ) 202.00 Outstanding at December 31, 2021 90,770 51.00 2.77 $ - Granted 185,946 14.39 4.70 Exercised - - Forfeited or expired ( 40,770 ) 80.97 Outstanding at December 31, 2022 235,946 $ 16.99 4.45 $ - Exercisable at December 31, 2022 235,946 $ 16.99 4.45 $ - On March 10, 2022, the Company entered into a securities purchase agreement with certain institutional and accredited investors pursuant to which the investors agreed to purchase 371,892 shares of the Company’s common stock and warrants to purchase 185,946 shares of common stock in a private placement. The warrants have an exercise price of $ 14.39 per share for a period of five years commencing nine months from the closing date of March 11, 2022 (see Note 9). F- 22 On November 24, 2021, the Company granted John Bello, current Chairman, significant shareholder and former Interim Chief Executive Officer of Reed’s, who is a related party, a 5 -year warrant to purchase 30,000 shares of the Company common stock with an exercise price of $ 32.00 . The fair value of the warrants granted was determined to be $ 458 and was recorded as a prepaid financing costs. During the year ended December 31, 2021, the Company amortized $148 of prepaid financing costs to interest expense, leaving a balance remaining of $ 310 to be amortized through July 2022. The fair value of the warrant was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $ 23.00 ; exercise price of $ 22.00 ; expected life of 5 years; volatility of 84.7 %; dividend rate of 0 % and discount rate of 0.77 %. As of December 31, 2021, the outstanding warrants have no intrinsic value. The risk-free interest rate is based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate its future volatility. The expected life of the warrant is based upon its remaining contractual life. The expected dividend yield reflects that the Company has not paid dividends to its common stockholders in the past and does not expect to do so in the foreseeable future. Additional information regarding warrants outstanding and exercisable as of December 31, 2022, is as follows: Schedule of Warrants Outstanding and Exercisable Warrants Outstanding Warrants Exercisable Range of Exercise Price Number of Shares Outstanding Weighted Average Exercise Price Weighted Average Remaining Contractual Life (years) Number of Shares Exercisable Weighted Average Exercise Price $ 14.39 - $ 32.20 235,946 16.99 4.45 235,946 16.99 235,946 $ 16.99 4.45 235,946 $ 16.99 12. Income Taxes For the years ended December 31, 2022, and 2021, a reconciliation of the effective income tax rate to the U.S. statutory rate is as follows: Schedule of Reconciliation of Effective Income Tax Rate to U.S. Statutory Rate December 31, 2022 December 31, 2021 Federal statutory tax rate ( 21 )% ( 21 )% State rate, net of federal benefit ( 5 )% ( 5 )% ( 26 )% ( 26 )% Effect of change in tax rate - % - % Valuation allowance 26 % 26 % Effective tax rate $ - $ - F- 23 As of December 31, 2022, and 2021, significant components of the Company’s deferred tax assets and liabilities are as follows: Schedule of Deferred Income Tax Assets December 31, 2022 December 31, 2021 Deferred income tax asset: Net operating loss carryforwards $ 21,117 $ 18,573 Disqualified corporate interest expense 1,650 1,078 Stock-based compensation 1,989 1,764 Accounts receivable allowances 74 26 Inventory reserves 125 35 Operating Least Liability 103 145 Other ( 70 ) Reserve for asset impairment 58 58 Gross deferred tax assets 25,046 21,679 Valuation allowance ( 24,967 ) ( 21,570 ) Total deferred tax assets 79 109 Deferred tax liabilities: Operating lease right-of-use asset ( 79 ) ( 109 ) Deferred finance costs - - Total deferred tax liabilities ( 79 ) ( 109 ) Net deferred tax asset (liability) $ - $ - At December 31, 2022, and 2021, the Company had available Federal and state net operating loss carryforwards (“NOLs”) to reduce future taxable income. For Federal purposes the amounts available were approximately $ 91,000 $ 80,000 , respectively. For state purposes approximately $ 64,000 and $ 51,000 was available at December 31, 2022, and 2021, respectively. The Federal carryforward for NOLs arising in years prior to 2018 is approximately $ 33,000 , which expires on various dates through 2037 . NOLs for 2019, 2020, 2021 and 2022 of approximately $ 58,000 , can be carried forward indefinitely, but are only able to offset 80% of taxable income in future years . The state carryforward expires on various dates through 2042. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOLs may be limited as a result of changes in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitation. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2022, and 2021, the Company did not have a liability for unrecognized tax benefits. The Company recognizes as income tax expense, interest and penalties on uncertain tax provisions. As of December 31, 2022, and 2021, the Company has not accrued interest or penalties related to uncertain tax positions. Tax years 2018 through 2022 remain open to examination by the major taxing jurisdictions to which the Company is subject. Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the NOLs and will recognize the appropriate deferred tax asset at that time. 13. Transactions with California Custom Beverage, LLC, former related party In December 2018, the Company signed a co-packing agreement with California Custom Beverage, LLC’s (“CCB”), an entity owned by Christopher J. Reed, a former related party, pursuant to which CCB agreed to produce certain products for the Company for agreed fees. The co-packing agreement, as amended, includes certain provisions, among others, for product inputs, shrinkage, and quality assurance. Also beginning in 2019, CCB agreed to pay the Company a 5 % royalty through 2021 on certain private label sales made by CCB. During the years ended December 31, 2022 and 2021, the Company incurred co-packing fees due to CCB of $ 3,718 and $ 2,747 , respectively, of which $ 2,025 and $ 614 , were payable to CCB as of December 31, 2022 and 2021. At December 31, 2022 and 2021, the Company had also recorded receivables from CCB of $ 1,315 and $ 933 , respectively, including royalty receivable of $ 297 and $ 297 , and charge backs of certain costs management determined were permittable under the co-packing agreement of $ 1,018 and $ 636 , respectively. At December 31, 2022 and 2021, accounts receivable due from and accounts payable due to CCB were as follows: Schedule of Related Parties December 31, 2022 December 31, 2021 Accounts receivable, net of provision of $ 538 and zero at December 31, 2022 and 2021, respectively 777 933 Accounts payable ( 2,025 ) ( 614 ) Net (payable) receivable ( 1,248 ) 319 F- 24 A t December 31, 2022, CCB disputes that it owes $ 1,043 of the $ 1,315 recorded as receivable by the Company. The Company believes that it will prevail in this dispute, however, as of December 31, 2022, due to the uncertainty about the ultimate amount that will be settled, the Company has provided a reserve for $ 538 based on management’s estimate. In addition, on April 19, 2023, the Company received a letter from CCB demanding payment of various amounts, including the $ 2,025 outstanding at December 31, 2022. The Company has determined that the probability of realizing any loss on the demand from CCB is remote and therefore has not recorded any additional accruals related to the demand. 14. Commitments and Contingencies In 2018, CCB assumed the monthly payments on our lease obligation for a Los Angeles manufacturing plant, and our release from the obligation by the lessor, however, is dependent upon CCB’s deposit of $1,200 of security with the lessor. As of December 31, 2022, $800 has been deposited with the lessor and Chris J. Reed has placed approximately 7,260 shares of the Company’s common stock valued at $25 that remain in escrow with the lessor. From time to time, we are a party to claims and legal proceedings arising in the ordinary course of business. Our management evaluates our exposure to these claims and proceedings individually and in the aggregate and provides for potential losses on such litigation if the amount of the loss is estimable and the loss is probable. We believe that there are no material litigation matters at the current time. Although the results of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such claims and proceedings will not have a material adverse impact on our financial position, liquidity, or results of operations. 15. Subsequent Events On February 10, 2023, the Company entered into a Partial Option Exercise and Second Amendment to 10% Convertible Notes (the “Notes”, see Note 7) with Whitebox. The Notes were amended so if the Company experiences a fundamental change as defined, the holders of the notes have the right to require the Company to repurchase the notes for cash at a repurchase price equal to 110 % (amended from 100 %) of the principal amount, plus accrued interest. In addition, Whitebox exercised a partial option to purchase $ 2,550 of additional notes (the “Option Notes”) from the Company. The Option Notes bear interest at 10 % per annum. payable in cash and mature on June 20, 2023 . No amortization payments (as defined in the Notes) are payable on the Option Notes, and the Option Notes may be prepaid without premium or penalty. On February 13, 2023, the Company entered into a Limited Waiver and Deferral Agreement with Whitebox. Whitebox waived the Company’s covenant violation of its Excess ABL Amount (see Note 7) at November 30, 2022, December 31, 2022, and January 31, 2023, and deferred payment of the 10 % fee for the Excess ABL Amount until June 2023. In addition, Whitebox also temporarily waived any requirement that the Company repurchase of the Notes in the event of fundamental change (as defined in the Notes), through April 1, 2023, subject to the terms and conditions contained therein. As an inducement, the company issued an aggregate of 82,438 shares of common stock to the holders with a fair value of $ 273 . The shares issued and the shares of common stock issuable upon conversion of the Option Notes are registrable and subject to that certain Registration Rights Agreement dated May 9, 2023. F- 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.