REED'S, INC. 10-Q

Item 1. Financial Statements REED’S, INC, CONDENSED BALANCE SHEETS (Amounts in thousands, except share amounts) March 31, 2024 December 31, 2023 (Unaudited) ASSETS Current assets: Cash $ 314 $ 603 Accounts receivable, net of allowance of $ 258 and $ 860 , respectively 3,251 3,571 Inventory 12,017 11,300 Receivable from former related party 264 259 Prepaid expenses and other current assets 2,332 2,028 Total current assets 18,178 17,761 Property and equipment, net of accumulated depreciation of $ 1,136 and $ 1,068 , respectively 441 493 Intangible assets 631 629 Total assets $ 19,250 $ 18,883 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 8,484 $ 9,133 Accrued expenses 872 1,096 Revolving line of credit, net of capitalized financing costs of $ 161 and $ 201 , respectively 7,844 9,758 Payable to former related party 331 259 Current portion of convertible notes payable, net of debt discount of $ 509 and $ 424 , respectively 7,339 6,737 Current portion of lease liabilities 155 207 Total current liabilities 25,025 27,190 SAFE agreements 4,097 - Convertible note payable, net of debt discount of $ 45 and $ 148 , respectively, less current portion 10,853 10,874 Total liabilities 39,975 38,064 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 4,187,291 shares issued and outstanding, respectively - - Additional paid in capital 119,581 119,452 Accumulated deficit ( 140,400 ) ( 138,727 ) Total stockholders’ deficit ( 20,725 ) ( 19,181 ) Total liabilities and stockholders’ deficit $ 19,250 $ 18,883 The accompanying notes are an integral part of these financial statements. F- 1 REED’S, INC. CONDENSED STATEMENTS OF OPERATIONS For the Three Months Ended March 31, 2024 and 2023 (Unaudited) (Amounts in thousands, except share and per share amounts) March 31, 2024 March 31, 2023 Net Sales $ 9,595 $ 11,157 Cost of goods sold 6,182 8,459 Gross profit 3,413 2,698 Operating expenses: Delivery and handling expense 1,502 2,120 Selling and marketing expense 1,093 1,447 General and administrative expense 1,468 1,709 Total operating expenses 4,063 5,276 Loss from operations ( 650 ) ( 2,578 ) Interest expense ( 1,023 ) ( 1,779 ) Net loss $ ( 1,673 ) $ ( 4,357 ) Net loss per share – basic and diluted $ ( 0.40 ) $ ( 1.70 ) Weighted average number of shares outstanding – basic and diluted 4,187,291 2,559,855 The accompanying notes are an integral part of these condensed financial statements. F- 2 REED’S, INC. CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT For the Three Months Ended March 31, 2024 and 2023 (Unaudited) (Amounts in thousands except share amounts) Shares Amount Shares Amount Capital Deficit Deficit Common Stock Preferred Stock Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Deficit Deficit Balance, December 31, 2023 4,187,291 $ - 9,411 $ 94 $ 119,452 $ ( 138,727 ) $ ( 19,181 ) Fair value of vested options - - - - 129 - 129 - - - - - - - Net loss - - - - - ( 1,673 ) ( 1,673 ) Balance, March 31, 2024 4,187,291 $ - 9,411 $ 94 $ 119,581 $ ( 140,400 ) $ ( 20,725 ) Common Stock Preferred Stock Additional Paid In Accumulated Total Stockholders’ Shares Amount Shares Amount Capital Deficit Equity 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 - - 229 229 Fair value of vested restricted shares granted to officers 750 - 4 4 Repurchase of common stock ( 274 ) - ( 1 ) ( 1 ) Common shares issued for financing costs 82,438 - 273 273 Net loss - - - - - ( 4,357 ) ( 4,357 ) Balance, March 31, 2023 2,602,399 $ - 9,411 $ 94 $ 115,140 $ ( 127,556 ) $ ( 12,322 ) Balance 2,602,399 $ - 9,411 $ 94 $ 115,140 $ ( 127,556 ) $ ( 12,322 ) The accompanying notes are an integral part of these condensed financial statements. F- 3 REED’S, INC. CONDENSED STATEMENTS OF CASH FLOWS For the Three Months Ended March 31, 2024 and 2023 (Unaudited) (Amounts in thousands) March 31, 2024 March 31, 2023 Cash flows from operating activities: Net loss $ ( 1,673 ) $ ( 4,357 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation 29 47 Amortization of debt discount 144 281 Fair value of vested options 129 229 Fair value of vested restricted shares granted to officers - 4 Change in allowance for doubtful accounts ( 601 ) ( 39 ) Inventory write-downs ( 783 ) ( 228 ) Accrued interest 564 1,113 Changes in operating assets and liabilities: Accounts receivable 922 1,044 Inventory 66 1,102 Prepaid expenses and other assets ( 1,305 ) 338 Decrease in right of use assets 39 32 Accounts payable 351 1,360 Accrued expenses ( 225 ) 235 Lease liabilities ( 52 ) ( 44 ) Net cash provided by (used in) operating activities ( 2,395 ) 1,117 Cash flows from investing activities: Trademark costs ( 2 ) - Purchase of property and equipment ( 16 ) - Net cash used in investing activities ( 18 ) - Cash flows from financing activities: Proceeds from line of credit 8,285 8,699 Payments on line of credit ( 10,239 ) ( 12,120 ) Proceeds from convertible note payable, net of expenses - 2,405 Proceeds from SAFE agreement 4,097 - Payment of cost recorded as debt discount ( 86 ) Repurchase of common stock - ( 1 ) Amounts from former related party, net 67 ( 166 ) Net cash provided by (used in) financing activities 2,124 ( 1,183 ) Net increase (decrease) in cash ( 289 ) ( 66 ) Cash at beginning of period 603 533 Cash at end of period $ 314 $ 467 Supplemental disclosures of cash flow information: Cash paid for interest $ 318 $ 390 Non-cash investing and financing activities: Reclass of prepaid expenses and accounts payable $ 1,000 $ 0 The accompanying notes are an integral part of these condensed financial statements. F- 4 REED’S, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Three Months Ended March 31, 2024 and 2023 (Unaudited) (In thousands, except share and per share amounts) 1. Summary of Significant Accounting Policies Basis of Presentation The accompanying condensed financial statements of Reed’s, Inc. (the “Company”, “we”, “us”, or “our”), have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. We believe that the disclosures contained in these condensed financial statements are adequate to make the information presented herein not misleading. These condensed financial statements should be read in conjunction with the financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on April 1, 2024. The accompanying condensed financial statements are unaudited, but in the opinion of management contain all adjustments, including normal recurring adjustments, necessary to present fairly the Company’s financial position as of March 31, 2024, and the results of its operations and its cash flows for the three months ended March 31, 2024 and 2023. The balance sheet as of December 31, 2023 is derived from the Company’s audited financial statements. The results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024. Liquidity For the three months ended March 31, 2024, the Company recorded a net loss of $1,673 and used cash in operations of $2,395. 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 $ 314 , which includes $ 4,100 of additional cash received during the three months ended March 31, 2024, from investments with significant stockholders plus expected cash from operations, 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. 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, strategic transactions 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 Although the U.S. economy continued to grow throughout 2023 and into Q1 2024, 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. 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. During the three months ended March 31, 2024, the Company experienced moderation from the elevated freight costs experienced in 2023. The average cost of shipping and handling for the three months ended March 31, 2024, was $ 3.01 per case, as compared to $ 3.46 per case for the three months ended March 31, 2023. Although the Company has experienced decreases in freight costs over the last four 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 affecting 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. The Company has experienced moderation in inflation and anticipates this to continue throughout 2024. F- 5 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 valuation allowance for deferred tax assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and assumptions used in the determination of the Company’s liquidity. 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. Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year, excluding shares of unvested restricted common stock. Shares of restricted stock are included in the basic weighted average number of common shares outstanding from the time they vest. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Shares of restricted stock are included in the diluted weighted average number of common shares outstanding from the date they are granted. Potential common shares are excluded from the computation when their effect is antidilutive. For the periods ended March 31, 2024 and 2023, 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 March 31, 2024 March 31, 2023 Warrants 549,292 235,946 Options 141,869 174,460 Convertible note payable 1,557,066 1,257,491 Unvested restricted common stock - 710 Common stock equivalent of Series A Convertible Preferred stock 753 753 Total 2,248,980 1,669,360 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. F- 6 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. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs aggregated $ 17 and $ 55 for the three months ended March 31, 2024 and 2023, respectively. Concentrations Net sales. During the three months ended March 31, 2024, the Company’s two largest customers accounted for 17 % and 16 % of net sales, respectively. During the three months ended March 31, 2023, the Company’s two largest customers accounted for 18 % and 12 % of net sales, respectively. No other customers exceeded 10% of net sales in either period. Accounts receivable. As of March 31, 2024, the Company had accounts receivable from one customer which comprised 29 % of its gross 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. No other customers exceeded 10% of gross accounts receivable in either period. The Company utilizes co-packers to produce 100% of its products. During the three months ended March 31, 2024 and the year ended December 31, 2023, 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 11). 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 three months ended March 31, 2024, the Company’s largest vendor accounted for approximately 10 % of all purchases. During the three months ended March 31, 2023, the Company’s largest vendor accounted for approximately 11 % of all purchases. No other vendors exceeded 10% of all purchases in either period. Accounts payable. As of March 31, 2024, one vendor accounted for 11 % of total accounts payable. As of December 31, 2023, two vendors accounted for 10 % and 10 % of total accounts payable, respectively. No other vendors exceeded 10% of accounts payable in either period. Fair Value of Financial Instruments The Company uses various inputs in determining the fair value of its financial assets and liabilities and measures these assets on a recurring basis. Financial assets recorded at fair value are categorized by the level of subjectivity associated with the inputs used to measure their fair value. ASC 820 defines the following levels of subjectivity associated with the inputs: Level 1—Quoted prices in active markets for identical assets or liabilities. Level 2—Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly. Level 3—Unobservable inputs based on the Company’s assumptions. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, accounts receivable, short-term bank loans, accounts payable, notes payable and other payables, approximate their fair values because of the short maturity of these instruments. The carrying values of capital lease obligations and long-term financing obligations approximate their fair values because interest rates on these obligations are based on prevailing market interest rates. Reclassifications Certain prior year amounts have been reclassified for consistency with the current period presentation. Collection from customers amounting to $ 1,217 that was previously presented as a deduction from prepaid expenses have been reclassed as an offset against accounts receivable. These reclassifications had no effect on the reported results of operations or cash flows. 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. F- 7 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. 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. 2. Inventory Inventory is valued at the lower of cost (first-in, first-out) or net realizable value, net of write downs, and is comprised of the following (in thousands): Schedule of Inventory March 31, 2024 December 31, 2023 Raw materials and packaging $ 6,766 $ 6,445 Finished products 5,251 4,855 Total $ 12,017 $ 11,300 3. Property and Equipment Property and equipment are comprised of the following (in thousands): Schedule of Property and Equipment March 31, 2024 December 31, 2023 Right-of-use assets under operating leases $ 724 $ 724 Computer hardware and software 400 400 Machinery and equipment 352 352 Construction in progress 101 85 Total cost 1,577 1,561 Accumulated depreciation and amortization ( 1,136 ) ( 1,068 ) Net book value $ 441 $ 493 F- 8 Depreciation expense for the three months ended March 31, 2024 and 2023 was $ 29 and $ 47 , respectively, and amortization of right-of-use assets for the three months ended March 31, 2024 and 2023 was $ 39 and $ 32 , respectively. 4. Intangible Assets Intangible assets consist of the following (in thousands): Summary of Intangible Assets March 31, 2024 December 31, 2023 Brand names $ 576 $ 576 Trademarks 55 53 Total $ 631 $ 629 5. Line of Credit The Company’s credit facility consisted of the following (in thousands): Schedule of Amount Outstanding Under Credit Facilities March 31, 2024 December 31, 2023 Line of credit – Alterna Capital Solutions $ 8,005 $ 9,959 Less: capitalized financing costs ( 161 ) ( 201 ) Total $ 7,844 $ 9,758 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 6). 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 March 31, 2024, there was no remaining availability under the line of credit, and $ 4,995 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 March 31, 2024 and 13.25% at December 31, 2023). Borrowings based on inventory bears an interest of prime plus 5.25% but not less than 8.5% (13.90% at March 31, 2024 and 13.90% at December 31, 2023). The additional over advance rider bears a rate of prime plus 12.75%, but not less than 16.00% (18.00% at March 31, 2024 and 18.00% at December 31, 2023). 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 $ 201 at December 31, 2023. For the three months ended March 31, 2024, amortization of debt discount was $ 40 , and as of March 31, 2024, the remaining unamortized debt discount balance is $ 161 . 6. Secured Convertible Notes Payable Amounts outstanding under the Company’s convertible notes payable are as follows (amounts in 000’s except share amounts): Schedule of Secured Convertible Notes Payable March 31, 2024 December 31, 2023 Secured Convertible “Original” Notes Payable (A) $ 10,250 $ 10,250 Secured Convertible “Option”” Notes Payable (B) 4,050 4,050 Secured Convertible “Option”” Notes Payable 4,050 4,050 Accrued interest 1,457 1,059 Accrued interest on excess debt borrowing 2,989 2,824 Capitalized financing costs ( 554 ) ( 572 ) Total $ 18,192 $ 17,611 Secured Convertible Notes (A) 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 Alterna Capital (ACS), the Company’s existing secured lender. The Original Notes mature the earlier of March 31, 2025 or the scheduled maturity of any unsecured indebtedness incurred by the Company that is junior in right of payment to Note obligations. 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 exceeds $ 6,000 , as defined (the “Excess ABL Amount”). Effective June 30, 2023, the Excess ABL Amount was amended to $ 7,500 . At March 31,2024 and December 31, 2023, the principal balance of the Original Notes was $ 10,250 . The Original 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 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 to May 2024 was waived. The parties agreed that amortization period shall resume on June 1, 2024. The terms of the Original Notes contained conversion terms that are expected to be amended, subject to satisfaction of certain conditions. Under the revised terms, the conversion price of the Original Notes will 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. In addition on February 12, 2024, subject to the satisfaction of certain conditions, the parties agreed that 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. F- 9 (B) 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, initially were to bear interest at 10% payable in cash, and were initially due four months after issuance. On February 12, 2024, the parties agreed to change the terms so that 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. In addition, the parties agreed, subject to certain outstanding conditions, to amend the maturity date to the earlier of March 31, 2025 or the scheduled maturity of any unsecured indebtedness incurred by the Company that is junior in right of payment to Note obligations. Once they are amended, the Company shall have the right at any time prior to the date that is the 180th 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. At March 31, 2024 and December 31, 2023, the principal balance of the Option Notes was $ 4,050 . The terms of the Original Notes contained conversion terms that are expected to be amended , subject to the satisfaction of certain conditions by the Company. Under the revised terms, the conversion price of the Option Notes will be 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 Waiver of Default On February 12, 2024, the Company entered into a Limited Waiver, Deferral, and Amendment and Restatement Agreement (the “Waiver and Amendment”) with each holder (each an entity affiliated with Whitebox Advisors, LLC) of the Original and Option Notes payable to Whitebox (the “Notes”). 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. Subject to satisfaction of certain conditions by March 31, 2024, the parties further agreed to amend and restate the Notes, to extend the maturity date of the Option Notes originally due November 28, 2023, to March 31, 2025 and to equitize certain interest and fees owing on the Notes. The conversion rate under the amended and restated notes is to be based on the pricing and size of the Company’s proposed equity financing of a minimum of $ 3 million (which will include conversion of approximately $ 4.1 million of previously funded SAFE investments into equity of the Company). Delays related to the Company’s evaluation of long term financing options have delayed the proposed financing. On April 1, 2024 the parties executed the Amended Limited Waiver, Deferral, and Amendment and Restatement Agreement (“Amended Waiver”). Subject to certain terms and conditions set forth in the Amended Waiver, the holders temporarily waived certain specified events of default under the Notes to April 30, 2024 and extended the waiver of monthly amortization payments to April 30, 2024. In addition, Reed’s remitted a partial interest payment of $ 100 to the holders. Accrued Interest At December 31, 2023, the balance of accrued interest was $ 3,883 . During the period ended March 31, 2024, the Company recorded interest of $ 563 , made up of $ 398 of interest on the convertible notes, and $ 165 related to the excess ABL fees. At March 31, 2024, the balance of accrued interest was $ 4,446 . Debt Discount At December 31, 2023, the unamortized debt discount was $ 572 . During the period ended March 31, 2024, the Company incurred $ 86 of costs for the aforementioned waivers. These costs have been capitalized and are being amortized over the term of the convertible notes or waiver period. For the three months ended March 31, 2024, amortization of debt discount was $ 104 , and as of March 31, 2024, the remaining unamortized debt discount balance is $ 554 . F- 10 7. Leases Liabilities During the three months ended March 31, 2024 and 2023, lease costs totaled $ 39 and $ 32 , respectively. As of December 31, 2023, operating lease liabilities totaled $ 207 . During the three months ended March 31, 2024, the Company made payments of $ 52 towards its operating lease liability. As of March 31, 2024, operating lease liabilities totaled $ 155 . As of March 31, 2024, the weighted average remaining lease terms for an operating lease are 0.75 years. As of March 31, 2024, the weighted average discount rate on the operating lease is 12.60 %. 8. 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 LP, 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. 9. Stock-Based Compensation Stock Options The following table summarizes stock option activity during the three months ended March 31, 2024: Schedule of Stock Option Activity Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Terms (Years) Aggregate Intrinsic Value Outstanding at December 31, 2023 145,012 $ 45.09 6.75 $ - Granted - $ - Exercised - $ - Unvested forfeited - $ - Vested forfeited ( 3,143 ) $ 45.05 Outstanding at March 31, 2024 141,869 $ 44.03 6.50 $ - Exercisable at March 31, 2024 111,583 $ 51.09 6.07 $ - During the three months ended March 31, 2024 and 2023, the Company recognized $ 129 and $ 229 of compensation expense relating to vested stock options. As of March 31, 2024, the aggregate amount of unvested compensation related to stock options was approximately $ 314 which will be recognized as an expense as the options vest in future periods through March 28, 2027. As of March 31, 2024, 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 March 31, 2024, which was $ 1.63 , and the exercise price of the outstanding stock options. F- 11 10. Stock Warrants The Company’s warrant activity during the three months ended March 31, 2024 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, 2023 549,292 $ 8.77 2.84 $ - Granted - - - Exercised - - - Forfeited - - - Outstanding at March 31, 2024 549,292 $ 8.77 2.59 $ - Exercisable at March 31, 2024 549,292 $ 8.77 2.59 $ - As of March 31, 2024, the outstanding and exercisable warrants have no aggregate intrinsic value. The aggregate intrinsic value was calculated as the difference between the closing market price as of March 31, 2024, which was $ 1.63 , and the exercise price of the Company’s warrants to purchase common stock. 11. 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. At March 31, 2024 and 2023, accounts receivable due from and accounts payable due to CCB were as follows: Schedule of Related Parties March 31, 2024 December 31, 2023 Accounts receivable, net of provision of $ 1,123 and $ 1,123 at March 31, 2024 and December 31, 2023, respectively 264 259 Accounts payable ( 331 ) ( 259 ) Net (payable) receivable ( 67 ) - In addition, on April 19, 2023, the Company received a letter from CCB demanding payment of various amounts, including the $ 452 ] and $ 452 outstanding at March 31, 2024 and December 31, 2023, 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. 12. Commitments and Contingencies During 2023, the firm engaged an investment bank to explore financing options for the Company. We have a maximum obligation of $ 1.2 M in fees so far in this engagement. These fees will be recognized on a success basis and will be paid out only if a transaction is finalized. In 2018, CCB assumed the monthly payments on our lease obligation for a Los Angeles manufacturing plant for payments through September 2024, 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 March 31, 2024, $ 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 result 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. 13. Subsequent Events Secured Convertible Notes Payable The Company has not yet satisfied conditions required for issuance of the amended and restated Notes and equitization of certain interest and fees owing on the Notes. The conversion rate under the amended and restated Notes is to be based on the pricing and size of the Company’s proposed equity financing of a minimum of $ 3 million (which will include conversion of approximately $ 4.1 million of previously funded SAFE investments into equity of the Company). Delays related to the Company’s evaluation of long term financing options have delayed the proposed financing. On May 17, 2024, Reed’s entered into a Limited Waiver, Deferral, and Amendment and Restatement Agreement (the “Waiver and Amendment”) with each holder. The holders agreed to temporarily waive certain specified events of default and the payment of Excess ABL Fees through June 10, 2024. Further, the holders agreed to waive the payment of monthly amortization payments through June 30, 2024. Amortization payments are scheduled to resume on July 1, 2024. The Company further remitted $ 40 representing all interest (including default interest) to the holders and reimbursed the holders for certain fees and expenses. F- 12