REED'S, INC. 10-Q

Item 1. Financial Statements REED’S, INC. CONDENSED BALANCE SHEETS (Amounts in thousands, except share amounts) September 30, 2024 December 31, 2023 (Unaudited) ASSETS Current assets: Cash $ 306 $ 603 Accounts receivable, net of allowance of $ 577 and $ 860 , respectively 2,770 3,571 Inventory 9,251 11,300 Receivable from former related party 259 259 Prepaid expenses and other current assets 1,476 2,028 Total current assets 14,062 17,761 Property and equipment, net of accumulated depreciation of $ 1,277 and $ 1,068 , respectively 335 493 Intangible assets 636 629 Total assets $ 15,033 $ 18,883 LIABILITIES AND STOCKHOLDERS’ DEFICIT Current liabilities: Accounts payable $ 8,313 $ 9,133 Accrued expenses 1,274 1,096 Revolving line of credit, net of capitalized financing costs of $ 81 and $ 201 , respectively 5,390 9,758 Payable to former related party 211 259 Current portion of convertible notes payable, net of debt discount of $ 459 and $ 572 , respectively 21,751 6,737 Current portion of lease liabilities 47 207 Total current liabilities 36,986 27,190 Convertible note payable, net of debt discount of $ 0 and $ 148 , respectively, less current portion - 10,874 Total liabilities 36,986 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; 8,187,291 and 4,187,291 shares issued and outstanding, respectively 1 - Additional paid in capital 125,719 119,452 Accumulated deficit ( 147,767 ) ( 138,727 ) Total stockholders’ deficit ( 21,953 ) ( 19,181 ) Total liabilities and stockholders’ deficit $ 15,033 $ 18,883 The accompanying notes are an integral part of these condensed financial statements. F- 1 REED’S, INC. CONDENSED STATEMENTS OF OPERATIONS For the Three and Nine Months Ended September 30, 2024 and 2023 (Unaudited) (Amounts in thousands, except share and per share amounts) 2024 2023 2024 2023 Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Net Sales $ 6,752 $ 11,856 $ 28,221 $ 33,018 Cost of goods sold 5,537 7,823 19,762 23,778 Gross profit 1,215 4,033 8,459 9,240 Operating expenses: Delivery and handling expense 1,279 1,908 4,204 5,714 Selling and marketing expense 1,283 861 3,473 3,567 General and administrative expense 1,791 1,407 5,239 4,427 Total operating expenses 4,353 4,176 12,916 13,708 Loss from operations ( 3,138 ) ( 143 ) ( 4,457 ) ( 4,468 ) Interest expense ( 2,405 ) ( 1,293 ) ( 4,578 ) ( 4,459 ) Change in fair value of SAFE investments 1,393 - - - Net loss ( 4,150 ) ( 1,436 ) ( 9,035 ) ( 8,927 ) Dividends on Series A Convertible Preferred Stock - - ( 5 ) ( 5 ) Net Loss Attributable to Common Stockholders $ ( 4,150 ) $ ( 1,436 ) $ ( 9,040 ) $ ( 8,932 ) Loss per share – basic and diluted $ ( 0.82 ) $ ( 0.34 ) $ ( 2.02 ) $ ( 2.69 ) Weighted average number of shares outstanding – basic and diluted 5,066,412 4,169,131 4,483,587 3,322,959 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 and Nine Months Ended September 30, 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, June 30, 2024 4,187,291 $ - 9,411 $ 94 $ 119,674 $ ( 143,617 ) $ ( 23,849 ) Fair value of vested options 46 46 Common shares issued for cash 1,268,795 1,903 1,903 Common shares issued upon conversion of SAFE agreement 2,731,205 1 4,096 4,097 Net loss - - - ( 4,150 ) ( 4,150 ) Balance, September 30, 2024 8,187,291 $ 1 9,411 $ 94 $ 125,719 $ ( 147,767 ) $ ( 21,953 ) 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 268 268 Dividends on Series A Convertible Preferred Stock - - - ( 5 ) ( 5 ) Common shares issued for cash 1,268,795 1,903 1,903 Common shares issued upon conversion of SAFE agreement 2,731,205 1 - 4,096 4,097 Net loss - - - ( 9,035 ) ( 9,035 ) Balance, September 30, 2024 8,187,291 $ 1 9,411 $ 94 $ 125,719 $ ( 147,767 ) $ ( 21,953 ) 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, June 30, 2023 4,169,131 $ - 9,411 $ 94 $ 119,138 $ ( 130,695 ) $ ( 11,463 ) Fair value of vested options - - 139 139 Net loss - - - - - ( 1,436 ) ( 1,436 ) Balance, September 30, 2023 4,169,131 $ - 9,411 $ 94 $ 119,277 $ ( 132,131 ) $ ( 12,760 ) 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, 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 351 351 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 Dividends on Series A Convertible Preferred Stock - - - ( 5 ) ( 5 ) Common shares issued for cash, net of offering costs 1,566,732 - 4,016 4,016 Net loss - - - ( 8,927 ) ( 8,927 ) Balance, September 30, 2023 4,169,131 $ - 9,411 $ 94 $ 119,277 $ ( 132,131 ) $ ( 12,760 ) Balance 4,169,131 $ - 9,411 $ 94 $ 119,277 $ ( 132,131 ) $ ( 12,760 ) The accompanying notes are an integral part of these condensed financial statements. F- 3 REED’S, INC. CONDENSED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2024 and 2023 (Unaudited) (Amounts in thousands) September 30, 2024 September 30, 2023 Cash flows from operating activities: Net loss $ ( 9,035 ) $ ( 8,927 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 88 112 Loss on disposal of property and equipment 9 Amortization of debt discount 568 958 Fair value of vested options 268 351 Fair value of vested restricted shares granted to officers - 3 Product quality hold write-down ( 29 ) Change in allowance for doubtful accounts ( 282 ) 262 Inventory write-downs ( 825 ) ( 205 ) Accrued interest 3,141 2,483 Changes in operating assets and liabilities: Accounts receivable 1,084 142 Inventory 2,903 417 Prepaid expenses and other assets ( 449 ) 450 Decrease in right of use assets 121 102 Accounts payable 180 ( 738 ) Accrued dividend - ( 5 ) Accrued expenses 173 639 Lease liabilities ( 160 ) ( 137 ) Net cash used in operating activities ( 2,254 ) ( 4,084 ) Cash flows from investing activities: Trademark costs ( 7 ) ( 1 ) Purchase of property and equipment ( 51 ) ( 84 ) Sale of property and equipment - 68 Net cash used in investing activities ( 58 ) ( 17 ) Cash flows from financing activities: Proceeds from line of credit 24,878 32,686 Payments on line of credit ( 29,367 ) ( 34,085 ) Proceeds from convertible note payable, net of expenses - 3,797 Payment of accrued interest on convertible note payable ( 513 ) ( 268 ) Proceeds from sale of common stock 1,903 4,016 Proceeds from convertible notes 1,400 - Proceeds from issuance of SAFE agreement 4,097 ( 1 ) Payment of cash recorded as debt discount ( 335 ) - Amounts from former related party, net ( 48 ) ( 1,573 ) Net cash provided by financing activities 2,015 4,572 Net decrease in cash ( 297 ) 471 Cash at beginning of period 603 533 Cash at end of period $ 306 $ 1,004 Supplemental disclosures of cash flow information: Cash paid for interest $ 238 $ 548 Non-cash investing and financing activities: Dividends on Series A Convertible Preferred Stock $ 5 $ 5 Reclass of prepaid expenses and accounts payable 1,000 The accompanying notes are an integral part of these condensed financial statements. F- 4 REED’S, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS Three and Nine Months Ended September 30, 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 September 30, 2024, and the results of its operations and its cash flows for the nine months ended September 30, 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 nine months ended September 30, 2024, are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2024. Going Concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, for the nine months ended September 30, 2024, the Company recorded a net loss of $ 9,035 , and utilized $ 2,254 of cash in operations and at September 30, 2024, had a working capital deficiency of $ 22,923 and a stockholders’ deficit of $ 21,953 . As of September 30, 2024, the Company borrowed $ 5,471 on its line of credit and owed $ 22,210 on its Notes (See Note 5 and Note 6 for further detail). These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company’s independent registered public accounting firm, in its report on the Company’s consolidated financial statements for the year ended December 31, 2023, has also expressed substantial doubt about the Company’s ability to continue as a going concern. As of September 30, 2024, we had a cash balance of $ 306 , no availability under our line of credit and $ 7,529 of additional borrowing capacity from the credit facility assuming there is availability under the terms. Historically, we have financed our operations through public and private sales of common stock, issuance of preferred and common stock, convertible debt instruments, term loans and credit lines from financial institutions, and cash generated from operations. To alleviate these conditions, management is currently evaluating various funding alternatives and may seek to raise additional funds through the issuance of equity, mezzanine or debt securities, through arrangements with strategic partners or through obtaining credit from financial institutions. The Company is continuing to discuss restructuring of debt with existing lenders and is exploring new financing opportunities to address the line of credit which comes due in March 2025 (see Note 5) and the portion of the debt under the Notes which comes due on December 15, 2024 (see Note 6). 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. F- 5 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 Q3 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 ending September 30, 2024, the Company continued to experience moderation from the elevated freight costs experienced in 2023. The average cost of shipping and handling for the three months ended September 30, 2024, was $ 2.99 as compared to $ 2.98 in the three months ended September 30, 2023. During the nine months ended September 30, 2024, the average cost of shipping and handling was $ 2.66 per case, as compared to $ 3.17 per case for the nine months ended September 30, 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 continuing throughout 2024. 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, assumptions in determining the fair value of our SAFE investments 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 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. F- 6 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 computation when their effect is antidilutive. For the periods ended September 30, 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 September 30, 2024 September 30, 2023 Warrants 549,292 549,292 Options 128,309 145,012 Convertible note payable 1,844,829 1,475,725 Common stock equivalent of Series A Convertible Preferred stock 753 753 Total 2,523,183 2,170,782 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 expenses for non-employees is in the same period and manner as if the Company had paid cash for the services. The Company recognizes the fair value of stock-based compensation within its Statements of Operations with classification depending on the nature of the services rendered. The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Advertising Costs Advertising costs are expensed as incurred and are included in selling and marketing expense. Advertising costs for the three months ended September 30, 2024, and 2023, aggregated $ 8 and $ 22 , respectively. Advertising costs for the nine months ended September 30, 2024, and 2023, aggregated $ 38 and $ 82 , respectively. Concentrations Net sales. During the three months ended September 30, 2024, two customers accounted for 18 % and 15 % of gross billing, respectively, and during the nine months ended September 30, 2024, three customers accounted for 18 %, 15 %, and 11 % of gross billing, respectively. During the three months ended September 30, 2023, three customers accounted for 22 %, 14 %, and 12 % of gross billing, respectively, and during the nine months ended September 30, 2023, two customers accounted for 19 % and 13 % of gross billing, respectively. No other customers exceeded 10% of sales in either period. F- 7 Accounts receivable. As of September 30, 2024, the Company had accounts receivable from two customers which comprised 32 % and 13 % of its gross accounts receivable, respectively. 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 nine months ended September 30, 2024 and the year ended December 31, 2023, the Company utilized nine 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 nine months ended September 30, 2024, the Company’s two largest vendors accounted for approximately 11 % and 10 % of all purchases. During the nine months ended September 30, 2023, the Company’s largest vendor accounted for approximately 9 % of all purchases. No other vendors exceeded 10% of all purchases in either period. Accounts payable. As of September 30, 2024, no vendor accounted for more than 10 % 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. The fair value of our liability under our SAFE investments were determined using level 3 inputs. (Note 8) 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 at December 31, 2023 have been reclassed as an offset against accounts receivable. This reclassification 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 became effective for the Company on January 1, 2024. to The adoption of 2023-7 did not have a material impact on the Company’s results of operations, financial position or cash flows. F- 8 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 September 30, 2024 December 31, 2023 Raw materials and packaging $ 6,143 $ 6,445 Finished products 3,108 4,855 Total $ 9,251 $ 11,300 3. Property and Equipment Property and equipment are comprised of the following (in thousands): Schedule of Property and Equipment September 30, 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 136 85 Total cost 1,612 1,561 Accumulated depreciation and amortization ( 1,277 ) ( 1,068 ) Net value $ 335 $ 493 Depreciation expense for the nine months ended September 30, 2024 and 2023 was $ 88 and $ 112 , respectively, and amortization of right-of-use assets for the nine months ended September 30, 2024 and 2023 was $ 121 and $ 102 , respectively. 4. Intangible Assets Intangible assets consist of the following (in thousands): Summary of Intangible Assets September 30, 2024 December 31, 2023 Brand names $ 576 $ 576 Trademarks 60 53 Total $ 636 $ 629 F- 9 5. Line of Credit The Company’s credit facility consisted of the following (in thousands): Schedule of Amount Outstanding Under Credit Facilities September 30, 2024 December 31, 2023 Line of credit – Alterna Capital Solutions $ 5,471 $ 9,959 Less: capitalized financing costs ( 81 ) ( 201 ) Total $ 5,390 $ 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 $ 500 of additional borrowing above the collateralized base (the “Over Advance”) up to a total borrowing of $ 13,500 . As of September 30, 2024, there was no remaining availability under the line of credit, and $ 7,529 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 September 30, 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 September 30, 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% (25.00% at September 30, 2024 and 18.00% at December 31, 2023). Additionally, the line of credit is subject to a 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 nine months ended September 30, 2024, amortization of debt discount was $ 120 , and as of September 30, 2024, the remaining unamortized debt discount balance is $ 81 . On July 26, 2024, Norman E. Snyder Jr, CEO of the Company, provided a personal guaranty for $ 500 over advance on our existing line of credit. The over advance was repaid by September 30, 2024. 6. Secured Notes Payable Amounts outstanding under the Company’s secured convertible notes payable are as follows (amounts in 000’s except share amounts): Schedule of Secured Convertible Notes Payable September 30, 2024 December 31, 2023 Secured Convertible “Original” Notes Payable (A) $ 10,250 $ 10,250 Secured “Option” Notes Payable (B) 6,504 4,050 Secured Convertible “Option” Notes Payable 6,504 4,050 Accrued interest 2,222 1,059 Accrued interest on excess debt borrowing 3,234 2,824 Capitalized financing costs ( 459 ) ( 572 ) Total $ 21,751 $ 17,611 F- 10 Secured 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 September 30, 2025 or the scheduled maturity of any unsecured indebtedness incurred by the Company that is junior in right of payment to Note obligations. At each of September 30, 2024 and December 31, 2023, the principal balance of the Original Notes was $ 10,250 . Upon conversion or early payment, holders of the Original 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 Original Notes that would be due at maturity, payable, at the Company’s option, in cash or in shares of common stock. On August 1, 2022, the Original Notes were amended to add a 10 % fee (“Excess ABL Fee’) commencing with the fiscal month ending October 31, 2022 for the amount that the Company’s line of credit with ACS exceeds (i) (x) prior to November 30, 2024, $9,500 and (y) on and after November 30, 2024, $6,500, if the Company has not publicly announced or is not actively pursuing a proposed transaction as a result of which the Company reasonably believes that its Common Stock will be listed on a national securities exchange) or $9,500 otherwise, minus (ii) any amounts repaid to ACS pursuant to the Option Notes (not to exceed $500) plus (iii) the aggregate principal amount of Original Notes voluntarily converted into Conversion Consideration (as defined therein), in each case subject to the terms of the collateral sharing agreement; provided that the sum of the amounts in clauses (i), (ii) and (ii) above shall not exceed $10,500 minus any amounts repaid ACS as contemplated by the Option Notes (not to exceed $500) . 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 amortization period resumed on June 1, 2024. (B) At the time of issuance of the Original Notes, the Company also granted the investors an option to purchase up to an additional $ 12,000 aggregate principal amount of “Option Notes”. At December 31, 2023, the principal balance of the Option Notes was $ 4,050 . On August 1, 2024, the Company entered into an Option Exercise and Nineth Amendment (“Exercise and Amendment Agreement”) to the Notes with Whitebox. Pursuant to the Exercise and Amendment Agreement, holders of the Original Notes exercised an option to purchase an aggregate of approximately $ 6,504 Option Notes, which consisted of (i) an exchange of $ 4,050 of existing notes, (ii) additional cash proceeds to the Company of $ 1,400 , and (iii) an additional finance cost of $ 1,054 The Option Notes mature on the earlier of December 15, 2024, and ninety one days before the schedule maturity of any unsecured indebtedness incurred by the Company that is junior in right of payment to its Note obligations. The Option Notes bear interest in arrears on the outstanding principal amount at a rate of 11.13 % per annum, payable in cash. The Option Notes may be prepaid without premium or penalty. Unless $ 1,400 of the principal amount is prepaid, payment of any Option Note on the maturity date (or due to an acceleration (whether declared or automatic)) shall be accompanied by an additional amount (such amount, the “MOIC Deficiency Amount”), if any, sufficient to achieve a 1.13:1.00 multiple of invested capital since August 1, 2024 (the “MOIC”) on the aggregate principal amount of the Option Notes being paid. The MOIC Deficiency Amount shall be calculated based on (i) the sum of all fees, original issue discount, interest, premiums, principal and other payments received in cash by the applicable holders in respect of the Option Notes since August 1, 2024 (excluding any reimbursement of out-of-pocket costs or expenses reimbursed and any indemnification payments made to the applicable Holders in respect of the Option Notes), as the numerator, and (ii) the aggregate principal amount of the Option Notes on August 1, 2024, as the denominator. F- 11 Pursuant to the Exercise and Amendment Agreement, Whitebox temporarily waived the specified events of default under the Notes and temporarily waived any requirement that the Company conduct a repurchase of Original Notes in the event of a Make-Whole Fundamental Change (as defined in the Original Notes), subject to the terms and conditions therein. Waiver of Default On August 1, 2024, the Whitebox waived the specified events of default under the Original Notes and Option Notes (collectively referred to herein as the “Notes”) and temporarily waived any requirement that the Company conduct a repurchase of Original Notes in the event of a Make-Whole Fundamental Change (as defined in the Original Notes) through December 15, 2024 (See Note 13). Accrued Interest At December 31, 2023, the balance of accrued interest was $ 3,883 . During the period ended September 30, 2024, the Company recorded interest of $ 3,141 , made up of $ 1,832 of interest on the Notes, and $ 1,309 related to the excess ABL fees and made payments of $ 514 towards accrued interest and $ 1,054 was added to the principal of the Option Notes. At September 30, 2024, the balance of accrued interest was $ 5,456 . Debt Discount At December 31, 2023, the unamortized debt discount was $ 572 . During the period ended September 30, 2024, the Company incurred $ 335 of costs for the aforementioned waivers. These costs have been capitalized and are being amortized over the term of the Notes or waiver period. For the nine months ended September 30, 2024, amortization of debt discount was $ 448 , and as of September 30, 2024, the remaining unamortized debt discount balance is $ 459 . 7. Leases Liabilities During the nine months ended September 30, 2024 and 2023, lease costs totaled $ 89 and $ 67 , respectively. As of December 31, 2023, operating lease liabilities totaled $ 207 . During the nine months ended September 30, 2024, the Company made payments of $ 160 towards its operating lease liability. As of September 30, 2024, operating lease liabilities totaled $ 47 . As of September 30, 2024, the weighted average remaining lease terms for an operating lease are 0.25 years. As of September 30, 2024, the weighted average discount rate on the operating lease is 12.60 %. On May 10 2024, the Company entered into a new lease with Merritt 7 Ventures LLC, for commercial office space for its corporate headquarters. The lease has an 11-year term and is expected to commence in December 2024. Aggregate monthly base rent for the first year of the lease shall be $ 8,590 . Base rent shall increase incrementally on an annual basis by approximately 3.6 %. Customary tax and electricity rent assessments in addition to base rent are payable. In year one, the aggregate of these charges is $ 7,409 per month. Total payments over the life of the lease are expected to be $ 2,129 . F- 12 8. Issuance of Common Stock During the first quarter of 2024, the Company received $ 4,097 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 former Chairman, pursuant to Simple Agreements for Future Equity (“SAFE”) investments. The SAFE investments were to 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. 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. The Company initially recorded the SAFE investments as a liability at $ 5,490 which was reflected on its June 30, 2024 balance sheet, and reflected a loss from change in fair value of SAFE investments of $ 1,393 . On September 9, 2024, the Company entered into a Securities Purchase Agreement with various purchasers for the issuance of 4,000,000 common shares for total consideration of $ 6,000 . The various purchasers also held the investment in the Company’s SAFEs. As part of the total capital raise, 2,731,205 shares of common stock valued at $ 4,097 upon conversion of the SAFEs , an additional 1,268,795 common shares were issued to D&D Source of Life Holding Ltd. for consideration of $ 1,903 . Upon conversion of the SAFE instruments during the three months ended September 30, 2024, the Company recorded a gain from change in fair value of SAFE investments of $ 1,393 . 9. Stock-Based Compensation Stock Options The following table summarizes stock option activity during the nine months ended September 30, 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 143,000 $ 45.09 6.75 $ - Granted - $ - Exercised - $ - Unvested forfeited ( 5,178 ) $ 16,61 Vested forfeited ( 9,513 ) $ 44.98 Outstanding at September 30, 2024 128,309 $ 46.18 5.97 $ - Exercisable at September 30, 2024 112,447 $ 50.06 5.70 $ - During the nine months ended September 30, 2024 and 2023, the Company recognized $ 268 and $ 351 of compensation expense relating to vested stock options. As of September 30, 2024, the aggregate amount of unvested compensation related to stock options was approximately $ 105 which will be recognized as an expense as the options vest in future periods through March 28, 2027. As of September 30, 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 September 30, 2024, which was $ 1.39 , and the exercise price of the outstanding stock options. F- 13 10. Stock Warrants The Company’s warrant activity during the nine months ended September 30, 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 September 30, 2024 549,292 $ 8.77 2.34 $ - Exercisable at September 30, 2024 549,292 $ 8.77 2.34 $ - As of September 30, 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 September 30, 2024, which was $ 1.39 , 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 September 30, 2024 and 2023, accounts receivable due from and accounts payable due to CCB were as follows: Schedule of Related Parties September 30, 2024 December 31, 2023 Accounts receivable, net of provision of $ 1,123 and $ 1,123 at September 30, 2024 and December 31, 2023, respectively 259 259 Accounts payable ( 211 ) ( 259 ) Net (payable) receivable 48 - 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 September 30, 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 September 30, 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 $ 10 that remain in escrow with the lessor. F- 14 We are, and from time to time, we be 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 a) Convertible notes On October 10, 2024, Whitebox sold and assigned its entire interest in eight secured promissory notes (the “Notes”) (Note 6) of the Company to the Company’s majority stockholder, D&D. The Notes contain customary affirmative and negative covenants and events of default. The Notes were secured by substantially all of the Company’s assets, including all intellectual property. On November 14, 2024, the Company entered into a new secured one-year term loan with a principal amount of $ 10 million with Whitebox. The loan bears interest of 8 % which is payable quarterly. The term loan is secured by substantially all of the Company’s assets, including all intellectual property. The Company used part of the proceeds to pay off and close its existing revolving line of credit (Note 5). On November 14, 2024, in conjunction with the term loan transaction, D&D and the Company amended the Notes. D&D released all collateral under the Notes, deferred cash payments thereunder and extended the maturity dates of all of the Notes to 181 days after the maturity of the revolving credit facility, which is November 14, 2025 (with the maturity dates of the notes extended to May 14, 2026). b) Board of Directors On October 21, 2024, the board of directors of the Company, upon recommendation from its governance committee, appointed Sam Van to serve as a member of its board of directors. Mr. Van is an independent director designee of D&D. On October 28, John J. Bello and Louis Imbrogno, Jr. resigned from the board of directors (“board”) of the Company. Prior to resignation, Mr. Bello had served as the Chairman of the board and a member of its operating committee. Mr. Imbrogno had served on the governance committee and audit committee and as chair of the compensation committee On October 29, Thomas W. Kosler also resigned from the board. He had served as chair of the audit committee. F- 15