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, 2023 and December 31, 2022 F-4 Statements of Operations for the years ended December 31, 2023 and 2022 F-5 Statements of Changes in Stockholders’ Deficit for the years ended December 31, 2023 and 2022 F-6 Statements of Cash Flows for the years ended December 31, 2023 and 2022 F-7 Notes to Financial Statements for the years ended December 31, 2023 and 2022 F-8 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, 2023 and 2022, 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, 2023 and 2022, 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. 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 of December 31, 2023, the Company’s inventory totaled $11.3 million. As explained in Note 2 to the financial statements, inventories are stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company assesses inventory at each reporting date in order to assert that it is recorded at net realizable value. In determining net realizable value, management considers historical usage, forecasted demand in relation to inventory on hand, market conditions, and other factors. F- 2 We identified management’s assessment of net realizable value of inventory as a critical audit matter as a high degree of auditor judgment and increased auditor effort was required to evaluate the Company’s ability to sell certain products, taking into consideration a number of factors, such as estimating future customer demand, customer preferences, and the broader economy. 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 compared significant assumptions used by management to current industry and economic trends. ● 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. Evaluation of the Company’s ability to continue as a going concern As discussed in Note 1 to the financial statements, for the year ended December 31, 2023, the Company recorded a net loss of $15,523 and used cash in operations of $4,266. Management believes that the Company’s ongoing business, existing cash, plus additional cash received subsequent to December 31, 2023, from investments with significant stockholders, is sufficient to fund operations for twelve months from the date of issuance of these financial statements. We identified the evaluation of Management’s assessment of the Company’s ability to continue as a going concern as a critical audit matter due to the high degree of subjective auditor judgment required to evaluate the Company’s forecasted cash flows used in its going concern analysis due to uncertainty in certain assumptions, specifically forecasted sales, gross profit margins, and feasibility of the Company’s expense management activities The primary procedures we performed to address this critical audit matter included: ● We obtained management’s cash flow forecast and evaluated the reasonableness of the cash flow forecast by comparing it to historical operating results, considering management’s ability to accurately forecast and perform sensitivity analysis on revenue, cash expenditures, and commitments. ● We performed sensitivity analyses on the forecasted revenue and operating margins used in the Company’s cash flow forecast to evaluate the impact on the conclusions reached by management. ● We considered the Company’s historical ability to raise capital, and tested subsequent event activity including, but not limited to, the receipt of subsequent proceeds from investments with significant stockholders. ● We assessed the appropriateness and sufficiency of the Company’s liquidity disclosures and compared to other audit evidence obtained to determine whether such information is consistent with the Company’s disclosures. We have served as the Company’s auditor since 2004. /s/ Weinberg & Company, P.A. Los Angeles, California April 1, 2024 F- 3 REED’S, INC, BALANCE SHEETS (Amounts in thousands, except share amounts) December 31, 2023 December 31, 2022 ASSETS Current assets: Cash $ 603 $ 533 Accounts receivable, net of allowance of $ 860 and $ 252 , respectively 4,788 5,671 Inventory 11,300 16,175 Receivable from former related party 259 777 Prepaid expenses and other current assets 811 939 Total current assets 17,761 24,095 Property and equipment, net of accumulated depreciation of $ 1,068 and $ 787 , respectively 493 766 Intangible assets 629 626 Total assets $ 18,883 $ 25,487 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 9,133 $ 9,805 Accrued expenses 1,096 233 Revolving line of credit, net of capitalized financing costs of $ 201 and $ 363 , respectively 9,758 10,974 Payable to former related party 259 2,025 Current portion of convertible notes payable, net of debt discount of $ 424 and $ 414 , respectively 6,737 2,434 Current portion of lease liabilities 207 187 Total current liabilities 27,190 25,658 Convertible note payable, net of debt discount of $ 148 and $ 562 , respectively, less current portion 10,874 8,092 Lease liabilities, less current portion - 207 Total liabilities 38,064 33,957 Stockholders’ 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; 4,187,291 and 2,519,485 shares issued and outstanding, respectively - - Additional paid in capital 119,452 114,635 Accumulated deficit ( 138,727 ) ( 123,199 ) Total stockholders’ deficit ( 19,181 ) ( 8,470 ) Total liabilities and stockholders’ deficit $ 18,883 $ 25,487 The accompanying notes are an integral part of these financial statements. F- 4 REED’S, INC. STATEMENTS OF OPERATIONS For the Years Ended December 31, 2023 and 2023 (Amounts in thousands, except share and per share amounts) 2023 2022 Year Ended December 31, 2023 2022 Net Sales $ 44,711 $ 53,041 Cost of goods sold 31,884 40,929 Inventory write-offs associated with exited categories and major packaging and formula changes 1,848 - Product quality hold write-down 1,267 - Gross profit 9,712 12,112 Operating expenses: Delivery and handling expense 7,561 11,603 Selling and marketing expense 4,865 7,316 General and administrative expense 6,118 7,489 Provision for receivable with former related party 585 538 Total operating expenses 19,129 26,946 Loss from operations ( 9,417 ) ( 14,834 ) Interest expense ( 6,106 ) ( 5,223 ) Net loss ( 15,523 ) ( 20,057 ) Dividends on Series A Convertible Preferred Stock ( 5 ) ( 5 ) Net loss attributable to common stockholders $ ( 15,528 ) $ ( 20,062 ) Loss per share – basic and diluted $ ( 4.39 ) $ ( 9.07 ) Weighted average number of shares outstanding – basic and diluted 3,537,882 2,211,319 The accompanying notes are an integral part of these financial statements. F- 5 REED’S, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT For the Years Ended December 31, 2023 and 2022 (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, 2021 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 ) Fair value of vested options - - - - 490 - 490 Fair value of vested restricted shares granted to officers 750 - - - 3 - 3 Repurchase of common stock ( 274 ) - - - ( 1 ) ( 1 ) Common shares issued for financing costs 82,438 - - - 273 273 Issuance of shares for dividends on Series A Convertible Preferred Stock - - - - - ( 5 ) ( 5 ) Common shares issued as compensation 18,160 - - 36 36 Common shares issued for cash, net of offering costs 1,566,732 - - 4,016 - 4,016 Net Loss - - - - - ( 15,523 ) ( 15,523 ) Balance, December 31, 2023 4,187,291 $ 9,411 $ 94 $ 119,452 $ ( 138,727 ) $ ( 19,181 ) Balance 4,187,291 $ 9,411 $ 94 $ 119,452 $ ( 138,727 ) $ ( 19,181 ) The accompanying notes are an integral part of these financial statements. F- 6 REED’S, INC. STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2023 and 2022 (Amounts in thousands) December 31, 2023 December 31, 2022 Cash flows from operating activities: Net loss $ ( 15,523 ) $ ( 20,057 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 142 108 Loss on disposal of property & equipment 8 - Amortization of debt discount 1,137 530 Amortization of prepaid financing costs - 431 Fair value of vested options 490 701 Fair value of vested restricted shares granted to directors and officers for services 3 158 Common shares issued as financing costs 37 Common shares issued for compensation 36 - Product quality hold write-down 1,267 - Allowance for estimated credit losses 608 37 Provision for receivable with former related party 585 538 Inventory write down 955 344 Accrued interest on convertible note 2,831 2,313 Lease liability ( 187 ) ( 161 ) Changes in operating assets and liabilities: Accounts receivable 275 ( 525 ) Inventory 2,653 531 Prepaid expenses and other assets 528 55 Decrease in right of use assets 140 117 Accounts payable ( 1,073 ) ( 629 ) Accrued expenses 859 ( 58 ) Net cash used in operating activities ( 4,266 ) ( 15,530 ) Cash flows from investing activities: Intangible asset trademark costs ( 3 ) ( 2 ) Purchase of property and equipment ( 85 ) - Sale of property and equipment 68 - Net cash used in investing activities ( 20 ) ( 2 ) Cash flows from financing activities: Proceeds from line of credit 43,836 54,564 Payments on the line of credit ( 45,213 ) ( 53,456 ) Payment of debt issuance costs - ( 483 ) Proceeds from sale of common stock 4,016 5,034 Proceeds from convertible note payable, net of expenses 3,751 12,430 Payment of convertible note payable ( 200 ) ( 3,100 ) Amounts from former related party, net ( 1,833 ) 1,029 Repurchase of common stock ( 1 ) ( 2 ) Net cash provided by financing activities 4,356 16,016 Net increase in cash 70 484 Cash at beginning of period 533 49 Cash at end of period $ 603 $ 533 Supplemental disclosures of cash flow information: Cash paid for interest $ 1,046 $ 1,911 Non-cash investing and financing activities: Dividends on Series A Convertible Preferred Stock $ 5 $ 5 Common Shares issued for financing costs $ 273 - Common Shares issued for principal payment $ - $ 200 Common Shares issued for interest payment $ - $ 1,261 The accompanying notes are an integral part of these financial statements. F- 7 REED’S, INC. NOTES TO FINANCIAL STATEMENTS For the Years Ended December 31, 2023 and 2022 (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. Liquidity For the year ended December 31, 2023, the Company recorded a net loss of $15,523 and used cash in operations of $4,266. In accordance with Accounting Standards Codification (“ASC”) 205-40, Going Concern , the Company’s management has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the accompanying financial statements were issued. As of the issuance date of these financial statements, management expects that the Company’s existing cash of $603, plus $4,100 of additional cash received subsequent to December 31, 2023, from investments with significant stockholders, will be sufficient to fund the Company’s current operating plan for at least twelve months from the date of issuance of these financial statements. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management’s assessment whether there is sufficient cash on hand, together with expected capital raises, to assure operations for a period of at least twelve months from the date these financial statements are issued, is based on conditions that are known and reasonably knowable to management, considering various scenarios, projections, and estimates and certain key assumptions. These assumptions include, among other factors, management’s ability to raise additional capital, and the expected timing and nature of the Company’s forecasted cash expenditures. Historically, the Company has financed its operations through public and private sales of common stock, convertible debt instruments, credit lines from financial institutions, and cash generated from operations. 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. Recent Trends – Market Conditions Although the U.S. economy continued to grow throughout 2023, the 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. The Company has 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 the Company regularly monitors 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. The Company has experienced moderation in inflation and anticipates this to continue throughout 2024. During the year ended December 31, 2023, the Company experienced moderation from the elevated freight costs experienced in 2022. The average cost of shipping and handling for year ended December 31, 2023, was $ 3.07 per case, as compared to $ 3.95 per case for the year ended December 31, 2022. Although the Company has experienced decreases in freight costs over the last three quarters, in the Company’s opinion there remains a volatile environment and the Company will continue to monitor pricing and availability in transportation. Mitigation plans have been implemented to manage this risk. The Company has been 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. F- 8 Nasdaq Delisting and now trading on the OTCQX US Market 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”). 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. Reverse Stock Split On January 25, 2023, the Company effectuated a 1-for-50 reverse stock split of its 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, and there was no effect on total stockholders’ deficit. All common shares, stock options, stock warrants and per share amounts presented herein have been adjusted retroactively to reflect the reverse stock splits 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 credit loss reserves for accounts receivable, assumptions used in valuing inventories at net realizable value, impairment testing of recorded long-term tangible and intangible assets, the realizability of deferred tax assets and the related valuation allowance, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, 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 credit losses, which is an estimate of amounts that may not be collectible . 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 credit losses 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 credit losses, credit losses are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding. A s of December 31, 2023 and December 31, 2022, the allowance for credit losses was $ 860 and $ 252 , respectively. F- 9 Inventory Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. The Company regularly reviews 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, 2023, and 2022, inventory has been reduced by cumulative write-downs for inventory aggregating $ 1,434 and $ 479 , respectively. 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 - 5 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, 2023 and 2022, 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, 2023 and 2022, 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. F- 10 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. 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 $ 24 and $ 668 for the years ended December 31, 2023 and 2022, 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 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. F- 11 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. For the years ended December 31, 2023 and 2022, 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, 2023 December 31, 2022 Warrants 549,292 235,946 Common stock equivalent of Series A Convertible Preferred Stock 753 753 Convertible note payable 1,514,055 955,363 Unvested restricted common stock - 1,460 Options 145,012 164,423 Total 2,209,112 1,357,945 Anti-dilutive Securities 2,209,112 1,357,945 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 in which there is little or no market data for the asset or liability which requires the Company to develop its own assumptions. The 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 Under ASC 280, Segment Reporting, operating segments are defined as components of an enterprise where discrete financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”), in deciding how to allocate resources and in assessing performance. The Company has one component. Therefore, the Company’s Chief Executive Officer, who is also the CODM, makes decisions and manages the Company’s operations as a single operating segment for the manufacture and distribution of its products. F- 12 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, 2023, the Company’s largest two customers accounted for 24 % and 15 % of gross sales, respectively. During the year ended December 31, 2022, the Company’s largest two customers accounted for 17 % and 16 % of gross sales, respectively. For the years ending December 31, 2023 or 2022, no other customer accounted for more than 10% revenue. Accounts receivable. As of December 31, 2023, the Company had accounts receivable from three customers which comprised 24 %, 15 % and 11 % of its gross accounts receivable, respectively. As of December 31, 2022, the Company had accounts receivable from two customers which comprised 19 % and 11 % of its gross accounts receivable, respectively. At December 31, 2023 or 2022, no other customers accounted for more than 10% of accounts receivable. The Company utilizes co-packers to produce 100% of its products. During the year ended December 31, 2023 and the year ended December 31, 2022, the Company utilized six separate co-packers for most its production and bottling of beverage products in the United States. The Company has long-standing relationships with two different co-packers, and a third co-packing agreement with California Custom Beverage LLC (“CCB”), a former related party (see Note 13). 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, 2023, the Company’s largest vendor accounted for approximately 12 % of all purchases. During the year ended December 31, 2022, the Company’s largest vendor accounted for approximately 12 % of all purchases. Accounts payable. As of December 31, 2023, two vendors accounted for 10 % and 10 % of total accounts payable, respectively. As of December 31, 2022, no vendor accounted for more than 10 % of the total accounts payable. Recent Accounting Pronouncements In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure , which is intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expense categories that are regularly provided to the chief operating decision maker and included in each reported measure of a segment’s profit or loss. The update also requires all annual disclosures about a reportable segment’s profit or loss and assets to be provided in interim periods and for entities with a single reportable segment to provide all the disclosures required by ASC 280, Segment Reporting , including the significant segment expense disclosures. This standard will be effective for the Company on January 1, 2024 and interim periods beginning in fiscal year 2025, with early adoption permitted. The updates required by this standard should be applied retrospectively to all periods presented in the financial statements. The Company does not expect this standard to have a material impact on its results of operations, financial position or cash flows. In September 2022, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations . The ASU requires buyers to disclose information about their supplier finance programs. Interim and annual requirements include the disclosure of outstanding amounts under the obligations as of the end of the reporting period, and annual requirements include a roll-forward of those obligations for the annual reporting period, as well as a description of payment and other key terms of the programs. This update is effective for annual periods beginning after December 15, 2022, and interim periods within those fiscal years, except for the requirement to disclose roll-forward information, which is effective for fiscal years beginning after December 15, 2023. The Company adopted ASU 2022-04 on January 1, 2023, and there was no material impact on our financial statements. 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 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. The Company adopted this standard effective January 1, 2023 and there was no material impact of adopting this standard on the Company’s financial statements and related disclosures. Other recent accounting pronouncements and guidance 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 consisted of the following (in thousands): Schedule of Inventory December 31, 2023 December 31, 2022 Raw materials and packaging $ 6,445 $ 8,526 Finished products 4,855 7,649 Total $ 11,300 $ 16,175 During the year ended December 31, 2023, the Company incurred inventory charges of totaling $ 1,848 , which represents $ 1,452 impairment charge related to major packaging and formula changes and $ 396 for the markdown of inventory related to exited categories. There were no such inventory charges during the year ended December 31, 2022. 4. Property and Equipment Property and equipment are comprised of the following (in thousands): Schedule of Property and Equipment December 31, 2023 December 31, 2022 Right-of-use assets under operating leases $ 724 $ 724 Computer hardware and software 400 400 Machinery and equipment 352 429 Construction in progress 85 - Total cost 1,561 1,553 Accumulated depreciation and amortization ( 1,068 ) ( 787 ) Net book value $ 493 $ 766 Depreciation expense for the years ended December 31, 2023, and 2022 was $ 142 and $ 108 , respectively, and amortization of right-of-use assets for the years ended December 31, 2023, and 2022 as $ 139 and $ 117 , respectively. During the year ended December 31, 2023, the Company disposed of its equipment costing $ 77 and recorded a loss on disposal of $ 9 . 5. Intangible Assets Intangible assets consisted of the following (in thousands): Summary of Intangible Assets December 31, 2023 December 31, 2022 Brand names $ 576 $ 576 Trademarks 53 50 Total $ 629 $ 626 F- 14 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, 2023. During the year ended December 31, 2023, and 2022, the Company capitalized costs of $ 3 and $ 2 , respectively, pertaining to legal and other fees incurred in applying for international trademarks for Reeds and Virgil’s brands. 6. Line of Credit The Company’s credit facility consisted of the following (in thousands): Schedule of Amount Outstanding Under Credit Facilities December 31, 2023 December 31, 2022 Line of credit – Alterna Capital Solutions $ 9,959 $ 11,337 Less: capitalized financing costs ( 201 ) ( 363 ) Total $ 9,758 $ 10,974 In March, 2022, the Company entered into a financing agreement for a line of credit with Alterna Capital Solutions (“ACS”) 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, and are subject to a collateral sharing agreement with Whitebox, another secured lender (see Note 7). 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 . As of December 2023, the remaining availability under the line of credit was $ 23 of current availability, and $ 3,041 of borrowing capacity available. Borrowings based on receivables bears an interest of prime plus 4.75% but not less than 8.0% (13.25% at December 31, 2023 and 12.25% at December 31, 2022). Borrowings based on inventory bears an interest of prime plus 5.25% but not less than 8.5% (13.90 % at December, 31, 2023 and 12.90% at December 31, 2022). The additional over advance rider bears a rate of prime plus 12.75%, but not less than 16.00% (18.00% at December 31, 2023 and 18.00% at December 31, 2022). 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. The unamortized debt discount balance was $ 363 at December 31, 2022. For the year ended December 31, 2023, amortization of debt discount was $ 162 , and as of December 31, 2023, the remaining unamortized debt discount balance is $ 201 . F- 15 7. Secured Convertible Notes Payable Amounts outstanding under secured convertible notes payable are as follows (in thousands): Schedule of Secured Convertible Notes Payable December 31, 2023 December 31, 2022 Secured Convertible Note Payable $ 14,300 $ 10,450 Accrued interest (includes excess ABL fees of $ 2,176 and $ 648 ) 3,883 1,052 Capitalized financing costs ( 572 ) ( 976 ) Total $ 17,611 $ 10,526 Current portion ( 6,737 ) ( 2,434 ) Long term portion due through May, 2025 $ 10,874 $ 8,092 Convertible notes In May 2022, the Company issued $ 11,250 of convertible notes payable (the “Original Notes”) to entities affiliated with Whitebox Advisors, LLC (collectively, “Whitebox”). The Original Notes bear interest at 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), 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 Original Notes mature on May 9, 2025 . In September 2022, the Company issued an additional $ 2,500 of convertible notes payable (the “Option Notes”) to Whitebox. The Option Notes were due May 9, 2025, and were repaid in full in November 2022. The Original Notes together with the Option Notes are collectively referred to as the “Notes”. Upon conversion or early payment, holders of the Notes are entitled to receive an interest make-whole payment, as defined, equal to the sum of the remaining scheduled payments of interest on the Notes that would be due at maturity, payable, at the Company’s option, in cash or in shares of common stock. 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 (see Note 6) exceeds $ 6,000 , as defined (the “Excess ABL Amount”). Effective June 30, 2023, the Excess ABL Amount was amended to $ 7,500 . The Original Notes and Option 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, based on 90 % of the average prices of the Company’s common stock, as defined. During 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 . In February 2023 and May 2023, the Company issued an aggregate of $ 4,050 of additional Option Notes to Whitebox that substantially have the same terms as the Original Notes, except the Option Notes issued in 2023 do not require any amortization payments, bear interest at 10% payable in cash, and were initially due four months after issuance and extended to November 28, 2023. The Company and Whitebox have tentatively agreed to extend the due date of the 2023 Option Notes to approximately April 30, 2024 (see Note 15). During 2023, Whitebox waived the requirement for the Company to pay the December 2022 to October 2023 monthly amortization payments on the Original Notes. The November 2023 amortization payment of $ 200 principal was paid, and the amortization payment for December 2023 was waived subsequent to December 31, 2023 (see Note 15). At December 31, 2023, the principal balance of the Notes was $14,300. Accrued interest During 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 2022 Option Notes repaid November 2022, and $ 1,734 related to the Excess ABL Amount fee. During 2022, the Company made interest payments of $ 1,892 , including the issuance of 229,871 shares of common stock valued at $ 1,261 , and at December 31, 2022, the balance of accrued interest was $ 1,052 . During 2023, the Company recorded interest of $ 3,604 , made up of $ 1,428 of interest on the Notes, and $ 2,176 related to the Excess ABL Amount fees. In addition, during 2023, accrued interest of $ 773 was paid. At December 31, 2023, the balance of accrued interest was $ 3,883 . Debt discount During 2022, the Company incurred $ 1,320 of direct costs of the Notes transactions, consisting primarily of placement agent fees and other offering expenses. These costs were 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 . During the year ended December 31, 2023, the Company incurred $ 299 of direct costs of issuing the 2023 Option Notes and issued 82,438 shares of the Company’s common stock valued at $ 273 as inducement for the aforementioned waiver. These costs have been capitalized and are being amortized over the shorter of the remaining term of the Notes or waiver period. For the year ended December 31, 2023, amortization of debt discount was $ 976 , and as of December 31, 2023, the remaining unamortized debt discount balance is $ 572 . Other If the Company experiences a fundamental change, as defined, such as a change of control, or the sale or disposition of all or substantially all of the Company’s asset, 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, and among other amendments. F- 16 At December 31, 2023, the Original Notes and 2023 Option Notes are convertible at an initial conversion rate of 0.0831 shares of the Company’s common stock per one 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 one dollar of principal, or approximately $8.23 per share . Subsequent to December 31, 2023, the conversion rate of the Notes was amended (see Note 15). At December 31, 2023, the Notes, including accrued interest, are convertible into 1,514,055 shares of the Company’s common stock. 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. A holder may not convert or be issued shares of common stock to the extent such conversion or issuance would cause such holder, together with its affiliates and attribution parties and any group of which it is a member, to beneficially own a number of shares of common stock which would exceed 9.9% of the Company’s then outstanding common stock following such conversion or issuance. The Company is subject to a registration rights agreement with Whitebox dated May 9, 2023 pursuant to which the Company registered for resale by holders all shares potentially issuable upon conversion of, or in satisfaction of amortization or interest make-whole payments with respect to the Notes. As noted above, while the Company has been successful negotiating waivers and amendments under the Notes to extend various due dates and defer certain payments of interest and principal that were not paid when due, it may not be able to continue to do so in the future. If the Company is unable to service or repay the Notes and accrued interest at maturity and is otherwise unable to extend the maturity dates or refinance these obligations, the Company may default. A default would trigger acceleration under the Notes, and it is unlikely that the Company would have sufficient funds to make these payments. Upon a default, the holders of the Notes have the right to exercise their remedies to collect, including foreclosing on our assets. 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, 2023, and 2022, lease costs totaled $ 178 and $ 178 , respectively. As of December 31, 2022, operating lease liabilities totaled $ 394 . During the year ended December 31, 2023, the Company made payments of $ 187 towards its operating lease liability. As of December 31, 2023, operating lease liabilities totaled $ 207 . As of December 31, 2023, the weighted average remaining lease terms for an operating lease are 1.00 years. As of December 31, 2023, 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 2024 $ 221 2025 - Total payments 221 Less: Amount representing interest ( 14 ) Present value of net minimum lease payments 207 Less: Current portion ( 207 ) Non-current portion $ - F- 17 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, 2023, and 2022, 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 years ended December 31, 2023 and 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 2023 and 2022. Common Stock As of December 31, 2023, there were 180,000,000 shares authorized, and 4,187,291 shares of common stock outstanding. As of December 31, 2022, there were 180,000,000 shares authorized, and 2,519,485 shares of common stock outstanding. Common Stock Issuances On May 25, 2023, the Company entered into a Securities Purchase Agreement with D&D Source of Life Holding Ltd., as the lead investor, and certain of Reed’s affiliates pursuant to which the investors agreed to purchase an aggregate of 1,566,732 shares of Reed’s common stock and warrants to purchase 313,346 shares of Common Stock. The purchase price was $ 2.585 per share of Common Stock with the associated warrant. The net proceeds to the Company, after deducting offering expenses, was $ 4,016 . The warrants are exercisable for a term of three years at an exercise price of $ 2.50 per share. F- 18 On May 25, 2023, in order to induce the lead investor to subscribe, the Company granted the lead investor certain preemptive rights and agreed to support the lead investor’s nomination of two board designees, one of which shall be an independent director. 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. Common stock repurchases During the year ended December 31, 2023, the Company repurchased 274 shares of common stock from an officer for $ 1 based on the market value of share on the date repurchased. The Company retired the shares. 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. 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, 2023, shares issuable under the 2020 Plan were 189,213 . 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. Restricted common stock The following table summarizes restricted stock activity during the years ended December 31, 2023, and 2022: Summary of Restricted Stock Activity Unvested Shares Issuable Shares Fair Value at Date of Issuance Weighted Average Grant Date Fair Value Balance, December 31, 2021 2,223 - $ 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 1,500 - 26 44.75 Granted - - - - Vested ( 750 ) 750 - - Forfeited ( 750 ) - - 18.69 Issued - ( 750 ) ( 3 ) - Balance, December 31, 2023 - - $ - $ - F- 19 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. The total fair value of restricted common stock vesting during the year ended December 31, 2023, and 2022 was $ 3 and $ 158 , respectively, and is included in general and administrative expenses in the accompanying statements of operations. As of December 31, 2023, the amount of unvested compensation related to issuances of restricted common stock was $ 0 . 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. Stock Options As of December 31, 2023, the Company has issued stock options to purchase an aggregate of 145,012 shares of common stock. The Company’s stock option activity during the years ended December 31, 2023, and 2022 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, 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 ) 48.90 Outstanding at December 31, 2022 164,423 $ 48.90 7.58 $ - Granted 10,037 4.50 Exercised - - Unvested forfeited or expired ( 10,497 ) 48.74 Vested forfeited or expired ( 18,951 ) 54.59 Outstanding at December 31, 2023 145,012 $ 45.09 6.75 $ - Exercisable at December 31, 2023 92,917 $ 52.63 6.16 $ - F- 20 During the year ended December 31, 2023, the Company approved options exercisable into 10,037 shares to be issued pursuant to Reed’s 2020 Equity Incentive Plan. 10,037 options were issued to employees, 5,016 options vesting annually over a four -year vesting period, and 5,021 options vesting based on performance criteria to be established by the board of directors. The stock options are exercisable at a price of $ 4.50 per share and expire in ten years . The total fair value of these options at grant date was approximately $ 32 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 4.50 share, expected term of six years , volatility of 82 %, dividend rate of 0 %, and weighted average risk-free interest rate of 3.59 %. 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, 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, 2023 and 2022, the Company recognized $ 490 and $ 701 of compensation expense relating to vested stock options. As of December 31, 2023, the aggregate amount of unvested compensation related to stock options was approximately $ 443 which will be recognized as an expense as the options vest in future periods through March 28, 2027. As of December 31, 2023, the outstanding and exercisable options have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of December 31, 2023, which was $ 1.60 , and the exercise price of the outstanding stock options. Additional information regarding options outstanding and exercisable as of December 31, 2023, 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 23,532 $ 8.47 8.68 3,369 $ 11.09 $ 25.00 - $ 37.50 20,352 29.38 6.30 18,102 28.68 $ 44.00 - $ 66.00 85,157 49.18 6.84 55,475 48.64 $ 88.00 - $ 120.00 11,803 85.88 3.61 11,803 85.88 $ 122.00 - $ 183.00 4,168 129.52 5.14 4,168 129.52 145,012 $ 45.09 6.75 92,917 $ 51.75 F- 21 11. Stock Warrants As of December 31, 2023, the Company has issued warrants to purchase an aggregate of 313,346 shares of common stock. The Company’s warrant activity during the years ended December 31, 2023, and 2022 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, 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 $ - Granted 313,346 2.59 2.39 Exercised - - Forfeited or expired - - Outstanding at December 31, 2023 549,292 $ 8.77 2.84 $ - Exercisable at December 31, 2023 549,292 $ 8.77 2.84 $ - On May 25, 2023, the Company entered into a Securities Purchase Agreement with D&D Source of Life Holding Ltd., as the lead investor, and certain of Reed’s affiliates pursuant to which the investors agreed to purchase an aggregate of 1,566,732 shares of Reed’s common stock and warrants to purchase 313,346 shares of Common Stock. The purchase price per share of Common Stock and associated warrant was $ 2.585 . The warrants are exercisable for a term of three years at a per share exercise price of $ 2.50 . 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). As of December 31, 2023, the outstanding and exercisable warrants have no intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of December 31, 2023, which was $ 1.60 , and the exercise price of the Company’s warrants to purchase common stock. Additional information regarding warrants outstanding and exercisable as of December 31, 2023, 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 - $ 32.20 549,292 8.77 2.84 549,292 8.77 549,292 $ 8.77 2.84 549,292 $ 8.77 F- 22 12. Income Taxes For the years ended December 31, 2023 and 2022, 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, 2023 December 31, 2022 Federal statutory tax rate ( 21 )% ( 21 )% State rate, net of federal benefit ( 5 )% ( 5 )% Federal and state tax rate ( 26 )% ( 26 )% Effect of change in tax rate - % - % Valuation allowance 26 % 26 % Effective tax rate $ - $ - As of December 31, 2023 and 2022, significant components of the Company’s deferred tax assets and liabilities are as follows: Schedule of Deferred Income Tax Assets December 31, 2023 December 31, 2022 Deferred income tax asset: Net operating loss carryforwards $ 21,118 $ 20,581 Disqualified corporate interest expense 1,650 2,886 Stock-based compensation 1,989 2,118 Accounts receivable allowances 74 225 Inventory reserves 125 375 Operating Leasr liability 103 54 Other ( 70 ) ( 9 ) Asset impairment 58 57 Gross deferred tax assets 25,047 26,287 Valuation allowance ( 24,857 ) ( 26,098 ) Total deferred tax assets 190 189 Deferred tax liabilities: Operating lease right-of-use asset ( 190 ) ( 189 ) Deferred finance costs - - Total deferred tax liabilities ( 190 ) ( 189 ) Net deferred tax asset (liability) $ - $ - At December 31, 2023 and 2022, the Company had available Federal and state net operating loss carryforwards (“NOL”s) to reduce future taxable income. For Federal purposes the amounts available were approximately $ 98,000 ] and $ 92,000 , respectively. For state purposes approximately $[ 62,000 ]and $ 49,000 was available at December 31, 2023 and 2022, respectively. The Federal carryforward for NOLs arising in years prior to 2018 is approximately $[ 32,000 ], which expires on various dates through 2037. NOLs originating after 2017 of approximately $ 66,000 , 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 2043. 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. F- 23 Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s NOL may be limited as a result of changes in stock ownership. NOLs incurred subsequent to the latest change in control are not subject to the limitation. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of December 31, 2023 and 2022, 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, 2023 and 2022, the Company has not accrued interest or penalties related to uncertain tax positions. As of the year ended December 31, 2023, the tax returns for 2020 through 2023 remain open to examination by the Internal Revenue Service and for 2019 to 2023 for various state 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 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, 2023 and 2022, the Company incurred co-packing fees due to CCB of $ 1,957 and $ 3,718 , respectively, of which $ 259 and $ 2,205 , were payable to CCB as of December 31, 2023 and 2022. At December 31, 2023 and 2022, the Company had also recorded receivables from CCB of $ 1,382 and $ 1,315 , respectively, including royalty receivable of $ 297 , and the balance for charge backs of certain costs management determined were permittable under the co-packing agreement. At December 31, 2022, CCB disputed 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, 2023 and 2022, due to the uncertainty about the ultimate amount that will be settled, the Company has provided a reserve for $ 1,123 and $ 538 , respectively, based on management’s estimate. At December 31, 2023 and 2022, accounts receivable due from and accounts payable due to CCB were as follows: Schedule of Related Parties December 31, 2023 December 31, 2022 Accounts receivable, net of provision of $ 1,123 and $ 538 at December 31, 2023 and 2022, respectively 259 777 Accounts payable ( 259 ) ( 2,025 ) Net (payable) receivable - ( 1,248 ) In addition, on April 19, 2023, the Company received a letter from CCB demanding payment of various amounts, including the $ 452 and $ 2,025 outstanding at December 31, 2023 and 2022, respectively. 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. F- 24 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, 2023, $ 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 $ 12 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 Simple Agreements for Future Equity (“SAFE”) investments During the first quarter of 2024, the Company received $ 4.1 million in gross proceeds from two significant Simple Agreements for Future Equity (“SAFE”) investments . During the first quarter of 2024, the company received $ 4.1 million in gross proceeds from three significant stockholders of the Company, D&D Source of Life Holding LTD (“D&D”) and Union Square Park Partners LLP, and John J. Bello, the Company’s Chairman, pursuant to Simple Agreements for Future Equity (“SAFE”) agreements. The SAFE investments will convert into the next equity financing of Reed’s on the same terms and conditions as investors in Reed’s next equity financing at the lesser of $ 1.50 per share or the per share price in the financing. Until such time as the SAFE investments convert to equity the approximately $ 4.1 million received is recorded as a liability. D&D was given the right to designate a second independent director nominee to the board of directors of Reed’s and the company agreed to limit the size of its board of directors to nine (9) for so long as D&D owns 25% or more of the equity securities of the company. Limited Waiver, Deferral, and Amendment and Restatement of Secured Convertible Notes Payable On February 12, 2024, Reed’s entered into a Limited Waiver, Deferral, and Amendment and Restatement Agreement (the “Waiver and Amendment”) with each holder of the Notes payable to Whitebox (see Note 7). Subject to the Waiver and Amendment, the holders agreed to temporarily waive certain events of default under the Notes, including the failure to pay Excess ABL Amounts and the failure to pay amortization payments due December 1, 2023 to April 30, 2024, and to waive the maturity date of the Option Notes originally due through November 28, 2023, to April 30, 2024. In addition, as of the date of these financial statements, the Company and Whitebox have tentatively agreed to amend and restate the Notes in full to provide, among other things, the following: Original Notes ● The conversion price of the Original Notes will be amended to be between 125% and 145% of the effective price of the company’s subsequent equity offering, with the premium set based on the aggregate gross proceeds realized by the company in the offering and the conversion price subject to a cap of $7.50 per share. ● A portion of the outstanding ABL accrued fees will be satisfied through payment of $ 132 in cash and the issuance of shares of the company’s common stock (up to the beneficial ownership limitation applicable to each holder) at a value per share equal to the lesser of $ 1.50 or the per share price of securities issued in the company’s subsequent equity offering. The remaining balance of any outstanding accrued ABL fees will be added to the principal amount of the Notes. The $ 132 has not been paid nor any shares issued as of the date of these financial statements Option Notes ● The maturity date of the Option Notes will be amended to March 31, 2025. ● The conversion price of the Option Notes will be amended to 120% of the arithmetic average of the Daily VWAP for the five (5) VWAP Trading Days beginning on, and including, the VWAP Trading Day immediately following the consummation of an equity offering undertaken for purposes of satisfying the terms and conditions of the Waiver and Amendment . ● The Option Notes shall bear interest at a rate of 10% per annum, with 5% per annum payable in cash and 5% per annum payable “in kind” by adding such PIK interest to the unpaid principal amount. ● The company shall have the right at any time prior to the date that is the 180 th day from the effective date to prepay the amended and restated Option Notes, in whole or in part, at a price equal to 102% of the principal amount plus all accrued and unpaid interest thereon to the date of prepayment. F- 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.