REED'S, INC. 10-K

Item 8. Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm (PCAOB Firm ID: 572 ) F-2 Financial Statements: Balance Sheets as of December 31, 2024 and December 31, 2023 F-4 Statements of Operations for the years ended December 31, 2024 and 2023 F-5 Statements of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2024 and 2023 F-6 Statements of Cash Flows for the years ended December 31, 2024 and 2023 F-7 Notes to Financial Statements for the years ended December 31, 2024 and 2023 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, 2024 and 2023, 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, 2024 and 2023, 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, 2024, the Company’s inventory totaled $8.1 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 the evaluation of slow-moving and obsolete inventories at net realizable value as a critical audit matter because a high degree of auditor judgment and effort was required to evaluate the Company’s ability to sell certain products. The primary procedures we performed to address this critical audit matter included: ● We obtained management’s analysis for estimated excess or obsolete inventories and evaluated the appropriateness of management’s approach. ● 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 Liquidity As discussed in Note 1 to the financial statements, the Company recorded a net loss of $13.2 and used cash in operations of $6.1 million during the year ended December 31, 2024. During 2024, management took steps to convert high interest bearing debt to equity, and to raise additional equity. Management believes that the Company’s ongoing business, existing cash, and credit facilities are 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 fund its operations over the next twelve months 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 liquidity 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 considered the effects of the Company’s restructured debt and expected projected interest and finance costs ● 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 financing and re-finance its debt, if necessary. ● 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. Liability Claims As described in Notes 15 and 16 of the financial statements, the Company is subject to periodic lawsuits, claims, vendor disputes and other matters (the “Claims”). The Company accrues an estimated reserve related to the resolution cost of these matters for which management believes a loss is probable of occurring, and the amount of the loss is reasonably estimable. Due to the uncertainty of potential costs to be incurred related to the Claims, and the uncertainty of the ultimate outcome of each of the individual Claims, management applies significant judgments and estimates in determining the probability that a loss has been incurred and the amount to accrue for such loss. We identified the accrual and disclosure of the Claims as a critical audit matter due to the significant judgments made by management when assessing the probability of a loss as well as the ultimate resolution costs of the Claims. Auditing management’s estimates and assumptions required a high degree of auditor judgment and increased audit effort due to the impact these assumptions have on the accrued reserves and disclosures. The primary procedures we performed to address this critical audit matter included: ● We obtained management’s evaluation of the Claims for accrual and disclosure and management’s evaluation of the probability that a loss has been incurred, and management’s estimate of the amount of the loss. ● We tested the accuracy and completeness of the initial agreements that served as the basis for management’s estimates of the probability that a loss has been incurred, the amount of the loss, and any settlement activity. ● We evaluated the assumptions used by management to develop the estimate of the probability a loss has been incurred. ● We performed confirmation procedures with the Company’s external legal counsel to corroborate management’s assertions regarding claim information, claim status, the probability the Company has incurred a loss, and the estimated amount of any potential loss. We have served as the Company’s auditor since 2004. /s/ Weinberg & Company, P.A. Weinberg & Company, P.A. Los Angeles, California March 28, 2025 F- 3 REED’S, INC, BALANCE SHEETS (Amounts in thousands, except share amounts) December 31, 2024 December 31, 2023 ASSETS Current assets: Cash $ 10,391 $ 603 Accounts receivable, net of allowance of $ 859 and $ 860 , respectively 3,979 3,571 Inventory, net 8,114 11,300 Receivable from former related party 144 259 Prepaid expenses and other current assets 683 2,028 Total current assets 23,311 17,761 Property and equipment, net of accumulated depreciation of $ 636 and $ 1,068 , respectively 1,185 493 Intangible assets 644 629 Total assets $ 25,140 $ 18,883 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities: Accounts payable $ 6,956 $ 9,133 Accrued expenses 984 1,096 Revolving line of credit, net of capitalized financing costs of $ 201 - 9,758 Senior secured loan, net of capitalized financing costs of $ 329 9,571 - Payable to former related party 144 259 Current portion of convertible notes payable, net of debt discount of $ 424 - 6,737 Current portion of lease liabilities - 207 Total current liabilities 17,655 27,190 Convertible note payable, net of debt discount of $ 148 less current portion - 10,874 Lease liabilities, less current portion 837 - Total liabilities 18,492 38,064 Commitments and Contingencies 0 0 Stockholders’ equity (deficit): Series A Convertible Preferred stock, $ 10 par value, 500,000 shares authorized, 9,411 shares issued and outstanding 94 94 Common stock, $ .0001 par value, 180,000,000 shares authorized; 45,371,247 and 4,187,291 shares issued and outstanding, respectively 3 - Additional paid in capital 158,435 119,452 Accumulated deficit ( 151,884 ) ( 138,727 ) Total stockholders’ equity (deficit) 6,648 ( 19,181 ) Total liabilities and stockholders’ equity $ 25,140 $ 18,883 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, 2024 and 2023 (Amounts in thousands, except share and per share amounts) 2024 2023 Year Ended December 31, 2024 2023 Net Sales $ 37,954 $ 44,711 Cost of goods sold 26,578 31,884 Inventory write-offs associated with exited categories and major packaging and formula changes - 1,848 Product quality hold write-down - 1,267 Gross profit 11,376 9,712 Operating expenses: Delivery and handling expense 5,863 7,561 Selling and marketing expense 4,405 4,865 General and administrative expense 9,109 6,118 Provision for receivable with former related party 115 585 Total operating expenses 19,492 19,129 Loss from operations ( 8,116 ) ( 9,417 ) Other Income 445 - Interest expense, net ( 5,481 ) ( 6,106 ) Net loss ( 13,152 ) ( 15,523 ) Dividends on Series A Convertible Preferred Stock ( 5 ) ( 5 ) Net loss attributable to common stockholders $ ( 13,157 ) $ ( 15,528 ) Loss per share – basic and diluted $ ( 1.64 ) $ ( 4.39 ) Weighted average number of shares outstanding – basic and diluted 8,041,496 3,537,882 The accompanying notes are an integral part of these financial statements. F- 5 REED’S, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) For the Years Ended December 31, 2024 and 2023 (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, 2022 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 Dividends on Series A Convertible Preferred Stock 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 ) Fair value of vested options - - - - 528 - 528 Dividends on Series A Convertible Preferred Stock Preferred Stock - - - - - ( 5 ) ( 5 ) Issuance of shares for conversion of convertible notes payable to related party 22,478,074 2 - - 20,230 - 20,232 Capital contribution upon conversion of notes payable - - - 2,248 - 2,248 Common shares issued for cash 15,974,677 1 - - 11,881 - 11,882 Common shares issued upon conversion of SAFE agreement with related entities 2,731,205 4,096 4,096 Net Loss - - - - - ( 13,152 ) ( 13,152 ) Balance, December 31, 2024 45,371,247 $ 3 9,411 $ 94 $ 158,435 $ ( 151,884 ) $ 6,648 Balance 45,371,247 3 9,411 $ 94 $ 158,435 $ ( 151,884 ) $ 6,648 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, 2024 and 2023 (Amounts in thousands) December 31, 2024 December 31, 2023 Cash flows from operating activities: Net loss $ ( 13,152 ) $ ( 15,523 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 125 142 Loss on disposal of property & equipment - 8 Amortization of debt discount 1,057 1,137 Fair value of vested options 528 490 Fair value of vested restricted shares granted to directors and officers for services - 3 Common shares issued for compensation - 36 Product quality hold write-down - 1,267 Allowance for estimated credit losses - 608 Provision for receivable with former related party 115 585 Inventory write down 277 955 Accrued interest on convertible note 3,409 2,831 Lease liability ( 205 ) ( 187 ) Changes in operating assets and liabilities: Accounts receivable ( 408 ) 275 Inventory 2,909 2,653 Prepaid expenses and other assets 561 528 Decrease in right of use assets 169 140 Accounts payable ( 1,393 ) ( 1,073 ) Accrued expenses ( 116 ) 859 Net cash used in operating activities ( 6,124 ) ( 4,266 ) Cash flows from investing activities: Intangible asset trademark costs ( 15 ) ( 3 ) Purchase of property and equipment ( 152 ) ( 85 ) Sale of property and equipment - 68 Net cash used in investing activities ( 167 ) ( 20 ) Cash flows from financing activities: Proceeds from line of credit 29,195 43,836 Payments on the line of credit ( 39,153 ) ( 45,213 ) Proceeds from sale of common stock 4,016 Proceeds from senior secured loan payable, net of expenses 9,524 - Proceeds from convertible note payable, net of expenses 1,400 3,751 Proceeds received from SAFE agreement 4,096 - Proceeds received from rights offering 11,883 - Payment of convertible note payable ( 514 ) ( 200 ) Amounts from former related party, net ( 115 ) ( 1,833 ) Payment of costs recorded as debt discount ( 237 ) - Repurchase of common stock - ( 1 ) Net cash provided by financing activities 16,079 4,356 Net increase in cash 9,788 70 Cash at beginning of period 603 533 Cash at end of period $ 10,391 $ 603 Supplemental disclosures of cash flow information: Cash paid for interest $ 870 $ 1,046 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 upon conversion of convertible notes payable $ 22,478 $ - Common Shares issued upon conversion of SAFE agreement $ 4,096 $ - Initial recognition of right of use asset and operating lease liability upon execution of new lease $ 835 $ - 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, 2024 and 2023 (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, 2024, the Company recorded a net loss of $ 13,152 and used cash in operations of $ 6,124 . During 2024, the Company took significant steps to convert high interest debt to equity, raise additional equity, and refinance its credit facility. 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 $ 10,391 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 2024 and 2023, inflation, actions by the Federal Reserve to address inflation, fluctuations in energy prices, and the potential impacts of tariffs and geopolitical events 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 year ended December 31, 2024, the average cost of shipping and handling was $ 2.75 per case, as compared to $ 3.07 per case for the year ended December 31, 2023. Although the Company has experienced decreases in freight costs, 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, has resulted in suppressed margins. In 2024 the Company experienced moderation in inflation. Please refer to Notes 6, 7 and 8 in the accompanying financial statements for a description of our line of credit, senior secured loan, and notes payable. F- 8 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, 2024 and December 31, 2023, the allowance for credit losses was $ 859 and $ 860 , respectively. Inventory Inventory is stated at the lower of cost or net realizable value, with cost determined on a first-in, first-out (“FIFO”) basis. 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, 2024, and 2023, inventory has been reduced by allowances for write-downs for inventory aggregating $ 277 and $ 1,848 , 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, 2024 and 2023, the Company determined there were no indicators of impairment of its property and equipment. F- 9 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, 2024 and 2023, the Company determined there was no impairment of its indefinite-lived brand names. Revenue Recognition The Company recognizes revenue in accordance with Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers (“ASC 606”). Revenue and costs of sales are recognized when control of the products transfers to our customer, which generally occurs upon shipment from our facilities. The Company’s performance obligations are satisfied at that time. The Company does not have any significant contracts with customers requiring performance beyond delivery, and contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time. Shipping and handling activities are performed before the customer obtains control of the goods and therefore represent a fulfilment activity rather than a promised service to the customer. All of the Company’s products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. The Company does not allow for returns, except for damaged products when the damage occurred pre-fulfilment. Damaged product returns have historically been insignificant. Because of this, the stand-alone nature of our products, and our assessment of performance obligations and transaction pricing for our sales contracts, we do not currently maintain a contract asset or liability balance for obligations. We assess our contracts and the reasonableness of our conclusions on a quarterly basis. Cost of Goods Sold Cost of goods sold is comprised of the costs of raw materials and packaging utilized in the manufacture of products, co-packing fees, repacking fees, in-bound freight charges, as well as certain internal transfer costs. Additionally, cost of goods sold includes direct production costs in excess of charges allocated to finished goods in production. Charges for labor and overhead allocated to finished goods are determined on a market cost basis, which may be lower than the actual costs incurred. Plant costs in excess of production allocations are expensed in the period incurred rather than added to the cost of finished goods produced. Expenses not related to the production of our products are classified as operating expenses. 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 $ 63 and $ 24 for the years ended December 31, 2024 and 2023, 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. F- 10 The fair value of the Company’s stock options is estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the stock options or restricted stock, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods. Income Taxes The Company uses an asset and liability approach for accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. Loss per Common Share Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to common stockholders by the weighted average number of shares of common stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. For the years ended December 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 December 31, 2024 December 31, 2023 Warrants 549,292 549,292 Common stock equivalent of Series A Convertible Preferred Stock 753 753 Convertible note payable - 1,514,055 Options 323,878 145,012 Total 873,923 2,209,112 Anti-dilutive Securities 873,923 2,209,112 Each share of Preferred Stock can be converted into 0.08 shares of the Company’s common stock. 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: F- 11 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 The Company’s President and Chief Executive Officer is the Company’s Chief Operating Decision Maker (“CODM”) and evaluates performance and makes operating decisions about allocating resources based on internal financial data. The Company has determined that it operates in a single reportable segment, which consists of manufacturing carbonated beverages under Reed’s and Virgil’s brand names and comprises the financial results of the Company. The required segment information, including significant segment expenses, is presented at Note 17 . 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, 2024, the Company’s largest three customers accounted 19 %, 15 % and 11 % of gross sales, respectively. During the year ended December 31, 2023, the Company’s largest two customers accounted for 24 % and 15 % of gross sales, respectively. For the years ending December 31, 2024 or 2023, no other customer accounted for more than 10% revenue. Accounts receivable. As of December 31, 2024, the Company had accounts receivable from two customers which comprised 17 % and 14 % 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. At December 31, 2024 or 2023, 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, 2024 and 2023, the Company utilized nine separate co-packers for most its production and bottling of beverage products in the United States. Although there are other co-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, 2024, no vendor accounted for more than 10% of all purchases During the year ended December 31, 2023, the Company’s largest vendor accounted for approximately 12 % of all purchases. Accounts payable. As of December 31, 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. 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 reclassified as an offset against accounts receivable. This reclassification had no effect on the reported results of operations or cash flows. F- 12 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. The adoption of 2023-7 did not have a material impact on the Company’s results of operations, financial position or cash flows. In November 2024, FASB issued ASU 2024-03 Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40) Disaggregation of Income Statement Expenses. The guidance in ASU 2024-03 requires public business entities to disclose in the notes to the financial statements, among other things, specific information about certain costs and expenses including purchases of inventory; employee compensation; and depreciation and amortization expense for each caption on the income statement where such expenses are included. The update is effective for annual reporting periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027. Early adoption is permitted, and the amendments may be applied prospectively to reporting periods after the effective date or retrospectively to all periods presented in the financial statements. We are currently evaluating the provisions of this guidance and assessing the potential impact on our financial statement 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, 2024 December 31, 2023 Raw materials and packaging $ 5,144 $ 6,445 Finished products 2,970 4,855 Total $ 8,114 $ 11,300 During the year ended December 31, 2024 the Company incurred $ 277 of inventory charges related to inventory obsolescence. During the year ended December 31, 2023, the Company incurred inventory charges of totaling $ 1,848 , which includes a $ 1,452 impairment charge related to major packaging and formula changes and $ 396 for the markdown of inventory related to exited categories. 4. Property and Equipment Property and equipment are comprised of the following (in thousands): Schedule of Property and Equipment December 31, 2024 December 31, 2023 Right-of-use assets under operating leases $ 832 $ 724 Leasehold improvements 84 - Computer hardware and software 553 400 Machinery and equipment 352 352 Construction in progress - 85 Total cost 1,821 1,561 Accumulated depreciation and amortization ( 636 ) ( 1,068 ) Net book value $ 1,185 $ 493 F- 13 Depreciation expense for the years ended December 31, 2024, and 2023 was $ 125 and $ 142 , respectively, and amortization of right-of-use assets for the years ended December 31, 2024, and 2023 as $ 169 and $ 140 , respectively. During the year ended December 31, 2023, the Company disposed of its equipment costing $ 77 and recorded a loss on disposal of $ 8 . 5. Intangible Assets Intangible assets consisted of the following (in thousands): Schedule of Intangible Assets December 31, 2024 December 31, 2023 Brand names $ 576 $ 576 Trademarks 68 53 Total $ 644 $ 629 Intangible assets are comprised of acquired brand names, 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, 2024. During the year ended December 31, 2024, and 2023, the Company capitalized costs of $ 15 and $ 3 , 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, 2024 December 31, 2023 Line of credit – Alterna Capital Solutions $ - $ 9,959 Less: capitalized financing costs - ( 201 ) Total $ - $ 9,758 On March 28, 2022, the Company entered into a financing agreement for a line of credit with Alterna Capital Solutions (“ACS”). The ACS line of credit was for a term of 3 years, provided for borrowings of up to $ 13,000 , was secured by eligible accounts receivable and inventory, and was subject to a collateral sharing agreement with Whitebox Advisors, LLC (“Whitebox”), another secured lender (see Note 7). An over advance rider provided for up to $ 400 of additional borrowing above the collateralized base (the “Over Advance”) up to total borrowings 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 accrued interest at a rate equal to prime plus 4.75% but not less than 8.00% (13.25% at December 31, 2023). Borrowings based on inventory accrued interest at a rate equal to prime plus 5.25% but not less than 8.50% (13.90 % at December, 31, 2023). The additional over advance rider accrued interest at a rate equal to prime plus 12.75%, but not less than 16.00% (18.00% at December 31, 2023). Additionally, the line of credit was subject to a monthly monitoring fee of $1 with a minimum usage requirement on the credit facility. Any loan balance of less than $ 1,500 accrued interest at a rate equal to account receivables advances plus the monthly monitoring fee of $ 1 . On November 14, 2024 the Company repaid the full outstanding principal amount of $ 6,569 of the line of credit. The Company incurred $ 483 of direct costs associated with the line of credit transaction, consisting primarily of broker, bank and legal fees. These costs were capitalized and amortized over the 3 -year life of the ACS agreement. The unamortized debt discount balance was $ 201 at December 31, 2023. For the year ended December 31, 2024, amortization of debt discount was $ 121 , and upon repayment of the outstanding principal amount, the remaining unamortized debt discount of $ 81 was written off. F- 14 7. Senior Secured Loan Payable Schedule of Secured Notes Payable December 31, 2024 December 31, 2023 Secured Convertible Note Payable $ 9,900 $ - Capitalized financing costs ( 329 ) - Total $ 9,571 $ - On November 14, 2024, the Company entered into a Senior Secured Loan and Security Agreement (the “Loan Agreement”) with certain funds affiliated with Whitebox, as lenders, and Cantor Fitzgerald Securities, as administrative agent and collateral agent. The Loan Agreement provides a revolving credit commitment in an aggregate amount of $ 10,000 (the “Senior Secured Loan”). The Senior Secured Loan accrues interest at a per annum rate equal to 8.00 % on the principal amount outstanding, payable quarterly in arrears. The Senior Secured Loan also accrues an unused fee at a rate per annum equal to 3.00% on the excess, if any, of the revolving credit commitment over the average principal amount outstanding from time to time during the preceding fiscal quarter, payable quarterly in arrears. The Senior Secured Loan is secured by substantially all of the Company’s assets, including all intellectual property. As of December 31, 2024, the principal amount outstanding on the Senior Secured Loan was $ 9,900 and the remaining availability was $ 100 . The financing agreement with Whitebox includes customary restrictions that limit our ability to engage in certain types of transactions. Additionally, the agreement contains a financial covenant that requires us to meet a certain minimum cash balance and liquidity threshold as of the end of each month. We were in compliance with the terms of our agreement with Whitebox as of December 31, 2024. The Company incurred $ 376 of direct costs associated with the Senior Secured Loan transaction, consisting primarily of broker, bank and legal fees. These costs have been capitalized and are being amortized over the 1 -year life of the agreement. For the year ended December 31, 2024, amortization of debt discount was $ 47 . The unamortized debt discount balance was $ 329 at December 31, 2024. 8. Secured Convertible Notes Payable Amounts outstanding under secured convertible notes payable are as follows (in thousands): Schedule of Secured Convertible Notes Payable December 31, 2024 December 31, 2023 Secured Convertible “Original” Note Payable (A) $ - $ 10,250 Secured “Option” Notes Payable (B) - 4,050 Secured Convertible “Option” Notes Payable - 4,050 Accrued interest (includes excess ABL fees of $ 2,176 and $ 648 ) - 3,883 Capitalized financing costs - ( 572 ) Total $ - $ 17,611 Current portion - ( 6,737 ) Long term portion due through May, 2025 $ - $ 10,874 F- 15 Convertible notes (A) In May 2022, the Company issued $ 11,250 of convertible notes payable (the “Original Notes”) to entities affiliated with 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 December 31, 2024 and December 31, 2023, the principal balance of the Original Notes was $ 0 and $ 10,250 , respectively. 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. On October 10, 2024, Whitebox sold and assigned its entire interest in the $ 10,250 Secured Convertible Note Payable, interest added to Original Note of $ 1,124 and the $ 6,504 Option Note Payable to the Company’s majority stockholder, D&D Source of Life Holding LTD (“D&D”) including accrued interest of $ 4,600 in the aggregate amount of $ 22,478 . F- 16 Accrued Interest At December 31, 2023, the balance of accrued interest was $ 3,883 . During the year ended December 31, 2024, the Company recorded interest of $ 3,409 , made up of $ 2,100 interest on the Notes, and $ 1,309 related to the excess ABL fees, made payments of $ 514 towards accrued interest and $ 2,178 was added to principal. At November 14, 2024, the balance of accrued interest was $ 4,600 . On November 19, 2024, the Company entered into an exchange agreement with D&D wherein outstanding principal of the convertible notes amounting to $ 17,878 and accrued interest of $ 4,600 or an aggregate of $ 22,478 were converted into 22,478,074 shares of the Company’s common stock (see Note 10). Debt Discount At December 31, 2023, the unamortized debt discount was $ 572 . During the period ended December 31, 2024, the Company incurred $ 237 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 year ended December 31, 2024, amortization of debt discount was $ 606 . Upon conversion of the notes to common shares, the Company wrote-off the remaining unamortized debt discount balance of $ 203 to interest expense. 9. Lease 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. As of December 31, 2023, operating lease liabilities pertaining to its former office facility totaled $ 207 . In May 2024, the Company entered into a long-term non-cancellable lease agreement for its new office facility that requires aggregate average monthly payments of $ 9 beginning December 2024. The lease terminates in November 2035. The Company classified the lease as an operating lease and determined that the value of the right of use asset and lease liability at the adoption date was $ 835 , respectively, using a discount rate of 8.00 %. During the year ended December 31, 2024, the Company made aggregate payments of $ 205 towards its operating lease liability. As of December 31, 2024, operating lease liabilities totaled $ 837 . F- 17 During the years ended December 31, 2024, and 2023, lease costs totaled $ 134 and $ 178 , respectively. 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 2025 $ 61 2026 98 2027 93 2028 96 Thereafter 890 Total payments 1,238 Less: Amount representing interest ( 401 ) Present value of net minimum lease payments 837 Less: Current portion - Non-current portion $ 837 10. Issuance of Common Stock Issuance of common stock in accordance with SAFE Agreements During the first quarter of 2024, the Company received $ 4,097 in gross proceeds from three significant stockholders of the Company, D&D, 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, as part of a Securities Purchase Agreement described below, the Company issued 2,731,205 shares of its common stock valued at $ 4,096 upon conversion of the SAFEs. Upon conversion of the SAFE instruments, the Company recorded a gain from change in fair value of SAFE investments of $ 1,393 during the year ended December 31, 2024. Other issuances of common stock for cash 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 described above. In addition to the issuance of the 2,731,205 shares of common stock valued at $ 4,096 upon conversion of the SAFE described above, the Company issued an additional 1,268,795 common shares to D&D for consideration of $ 1,903 . On December 30, 2024, the Company entered into a Securities Purchase Agreement with accredited investors. The Company issues 14,705,882 shares of common stock for aggregate gross proceeds of $ 10 million. The average price per share was $ 0.68 . On May 25, 2023, the Company entered into a Securities Purchase Agreement with D&D, 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. Common shares issued upon conversion of Notes Payable On November 19, 2024, the Company issued 22,478,048 shares of its Common stock with a fair value of $ 20,232 to D&D upon conversion of Convertible Notes Payable and accrued interest of $ 22,478 . The excess of the converted value of the convertible notes and accrued interest over the fair value of the shares issued of $ 2,248 was treated as a capital contribution. 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. 11. 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, 2024, and 2023, 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. F- 18 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, 2024 and 2023, the Company accrued dividends on the Preferred Stock of $ 5 which is included in accrued expenses in the accompanying balance sheets. No shares of Series A preferred stock were converted into common stock in 2024 and 2023. F- 19 12. 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, 2024, shares issuable under the 2020 Plan were 209,656 . 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 exercise 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. On April 29, 2024, the 2024 Inducement Plan (the “2024 Plan”) was approved by the compensation committee of our board of directors. The 2024 Plan provides for the issuance of up to 250,000 shares. Options issued and forfeited under the 2024 plan contain an Evergreen provision and cannot be re-priced without shareholder approval. As of December 31, 2024, shares issuable under the 2024 Plan were 44,007 . The 2024 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 excise price 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. Stock Options As of December 31, 2024, the Company has issued stock options to purchase an aggregate of 239,651 shares of common stock. The Company’s stock option activity during the years ended December 31, 2024, and 2023 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, 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 $ - Granted 205,669 1.30 Exercised - - Unvested forfeited or expired ( 8,846 ) 16.61 Vested forfeited or expired ( 17,957 ) 44.98 Outstanding at December 31, 2024 323,878 $ 17.47 8.03 $ - Exercisable at December 31, 2024 239,651 $ 20.45 7.82 $ - F- 20 During the year ended December 31, 2024, the Company approved options exercisable into 205,669 shares to be issued pursuant to the 2024 Plan. 205,669 options were issued to employees, 148,714 vested immediately, 25,059 options vest annually over two to four -year vesting periods, and 31,896 options vesting based on performance criteria to be established by the board of directors. The stock options are exercisable at a price of $ 1.30 per share and expire in ten years . The total fair value of these options at grant date was approximately $ 229 , which was determined using a Black-Scholes-Merton option pricing model with the following average assumption: stock price of $ 1.30 share, expected term of six years , volatility of 92 %, dividend rate of 0 %, and weighted average risk-free interest rate of 4.65 %. 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, the Company approved options exercisable into 10,037 shares to be issued pursuant to the 2020 Plan. 10,037 options were issued to employees, of which, 5,016 options vest annually over a four -year vesting period, and 5,021 options vest 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, 2024 and 2023, the Company recognized $ 528 and $ 490 of compensation expense relating to vested stock options. As of December 31, 2024, the aggregate amount of unvested compensation related to stock options was approximately $ 77 which will be recognized as an expense as the options vest in future periods through March 28, 2027. As of December 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 December 31, 2024, which was $ 0.63 , and the exercise price of the outstanding stock options. Additional information regarding options outstanding and exercisable as of December 31, 2024, 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 $ 1.30 - $ 4.00 206,652 $ 1.31 9.33 137,591 $ 1.31 $ 4.50 - $ 6.75 3,932 4.50 8.05 1,476 4.50 $ 12.00 - $ 18.00 12,512 12.00 7.35 6,259 12.00 $ 25.00 - $ 37.50 19,116 29.66 5.31 19,116 29.66 $ 44.00 - $ 66.00 70,070 49.28 5.82 63,615 48.84 $ 80.00 - $ 120.00 7,428 89.34 3.29 7,426 89.34 $ 122.00 - $ 183.00 4,168 129.52 4.14 4,168 129.52 323,878 $ 17.47 5.83 239,651 $ 21.45 F- 21 13. Stock Warrants As of December 31, 2024, the Company has issued warrants to purchase an aggregate of 549,292 shares of common stock. The Company’s warrant activity during the years ended December 31, 2024, and 2023 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, 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 $ - Granted - - Exercised - - Forfeited or expired - - Outstanding at December 31, 2024 549,292 $ 8.77 1.84 $ - Exercisable at December 31, 2024 549,292 $ 8.77 1.84 $ - On May 25, 2023, the Company entered into a Securities Purchase Agreement with D&D, 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 . As of December 31, 2024, 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, 2024, which was $ 0.64 , and the exercise price of the Company’s warrants to purchase common stock. Additional information regarding warrants outstanding and exercisable as of December 31, 2024, 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 1.84 549,292 8.77 549,292 $ 8.77 1.84 549,292 $ 8.77 F- 22 14. Income Taxes For the years ended December 31, 2024 and 2023, 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, 2024 December 31, 2023 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, 2024 and 2023, significant components of the Company’s deferred tax assets and liabilities are as follows: Schedule of Deferred Income Tax Assets December 31, 2024 December 31, 2023 Deferred income tax asset: Net operating loss carryforwards $ 25,309 $ 20,581 Disqualified corporate interest expense 4,642 2,886 Stock-based compensation 2,256 2,118 Accounts receivable allowances 476 225 Inventory reserves 51 375 Operating lease liability 219 54 Other - ( 9 ) Asset impairment 58 58 Gross deferred tax assets 33,011 26,288 Valuation allowance ( 32,793 ) ( 26,098 ) Total deferred tax assets 218 190 Deferred tax liabilities: Operating lease right-of-use asset ( 218 ) ( 190 ) Deferred finance costs - Total deferred tax liabilities ( 218 ) ( 190 ) Net deferred tax asset (liability) $ - $ - At December 31, 2024 and 2023, 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 $ 104,000 and $ 97,000 , respectively. For state purposes approximately $ 66,000 and $ 53,000 was available at December 31, 2024 and 2023, respectively. The Federal carryforward for NOLs arising in years prior to 2018 is approximately $ 31,000 , which expires on various dates through 2037. NOLs originating after 2017 of approximately $ 73,000 , 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 2044. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Due to restrictions imposed by Internal Revenue Code Section 382 regarding substantial changes in ownership of companies with loss carryforwards, the utilization of the Company’s 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. F- 23 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, 2024 and 2023, 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, 2024 and 2023, the Company has not accrued interest or penalties related to uncertain tax positions. As of the year ended December 31, 2024, the tax returns for 2021 through 2024 remain open to examination by the Internal Revenue Service and for 2020 to 2024 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. 15. 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 December 31, 2024 and 2023, accounts receivable due from and accounts payable due to CCB were as follows: Schedule of Related Parties December 31, 2024 December 31, 2023 Accounts receivable, net of provision of $ 1,238 and $ 1,123 at December 31, 2024 and 2023, respectively 144 259 Accounts payable ( 144 ) ( 259 ) Net (payable) receivable - - In addition, on April 19, 2023, the Company received a letter from CCB demanding payment of various amounts outstanding at December 31, 2024 and 2023. 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. During 2024, the Company commenced arbitration proceedings with CCB in order to reach a settlement agreement, the arbitration is pending final judgement. 16. Commitments and Contingencies On May 1, 2023, the Company engaged an investment bank to explore financing options. Subject to services provided by the investment bank, we may have a remaining obligation not expected to exceed $ 1,500 related to this engagement. Management believes it has provided an adequate provision for any amounts due, if any, in the accompanying financial statements. 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. F- 24 17. Segment Information The Company operates and manages its business as one reportable and operating segment as a manufacturer of carbonated beverages under Reed’s and Virgil’s brand names. The measure of segment assets is reported on the balance sheet as total assets. The Company’s CODM reviews financial information presented and decides how to allocate resources based on net income (loss). Net income (loss) is used for evaluating financial performance. Significant segment expenses include research and development, salaries, insurance, and stock-based compensation. Operating expenses include all remaining costs necessary to operate our business, which primarily include external professional services and other administrative expenses. The following table presents the significant segment expenses and other segment items regularly reviewed by our CODM. Schedule of Segment Information December 31, 2024 December 31, 2023 Operating expenses Salaries 3,740 3,136 Insurance 530 557 Stock-based compensation 528 492 Selling and marketing 4,405 4,865 Freight and delivery 4,544 5,520 Warehousing 1,320 2,041 Other operating expenses 4 ,425 2,518 Total operating expenses 19,492 19,129 Interest and other expenses, net 5,036 6,106 Net loss $ ( 13,152 ) $ ( 15,523 ) 18. Subsequent Events On February 4, 2025, the Company formed a new subsidiary, Reed’s (Asia) Limited (BVI). The new subsidiary (“Reed’s Asia”) was formed as an early part of the Company’s expansion into new geographic markets in the Asia Pacific region. On February 20, 2025, Reed’s Asia reached an agreement to acquire 100 % of the outstanding common stock of Roci Labo Inc., a Japanese corporation (the “Reed’s Japan Transaction”). On March 18, 2025, Reed’s Asia received Japanese government approval for the Reed’s Japan Transaction. The new subsidiary, operating as Reed’s Japan Co., Ltd (“Reed’s Japan”), was acquired as an early part of the Company’s strategic expansion into new geographic markets in Japan. The acquisition price for the Reed’s Japan Transaction was not material. F- 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.