SEC Connect
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2017
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
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For the transition period from _________ to
_________
Commission file number 001-32420
TRUE DRINKS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation
or Organization)
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(IRS Employer Identification No.)
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18662 MacArthur Blvd., Suite 110
Irvine, CA 92612
(Address of Principal Executive Offices)
(949) 203-3500
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,”
“accelerated filer,” “smaller reporting
company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
(Check
one):
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[X]
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Emerging growth
company |
[ ] |
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-12 of the Exchange Act). Yes
[ ] No [X]
The number of shares of Common Stock, with $0.001 par value,
outstanding on May 15, 2017 was 200,317,230.
TRUE DRINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017
INDEX
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ITEM 1. FINANCIAL STATEMENTS
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS
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March 31,
2017
(unaudited)
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$1,675,197
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$15,306
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Accounts
receivable, net
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989,279
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536,817
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Inventory,
net
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792,931
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318,912
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Prepaid
expenses and other current assets
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389,075
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127,258
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Total
Current Assets
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3,846,482
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998,293
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Restricted Cash
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209,622
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209,570
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Property and Equipment, net
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9,731
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11,064
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Patents, net
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220,000
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250,000
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Goodwill
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3,474,502
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3,474,502
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Total Assets
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$7,760,337
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$4,943,429
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
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Current
Liabilities:
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Accounts
payable and accrued expenses
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$2,400,668
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$1,258,252
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Debt
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177,802
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109,682
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Derivative
liabilities
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96,707
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5,792,572
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Total
Current Liabilities
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2,675,177
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7,160,506
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Commitments and
Contingencies (Note
7)
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Stockholders’ Equity
(Deficit):
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Common
Stock, $0.001 par value, 300,000,000 shares authorized, 200,317,230
and 119,402,009 shares issued and outstanding at March 31, 2017 and
December 31, 2016, respectively
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200,317
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119,402
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Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,750,000 shares authorized, 1,292,870 and
1,292,870 shares issued and outstanding at March 31, 2017 and
December 31, 2016, respectively
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1,293
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1,293
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Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 shares authorized, 106,704 and
109,352 shares issued and outstanding at March 31, 2017 and
December 31, 2016, respectively
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107
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109
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Preferred
Stock – Series D (liquidation preference $100 per share),
$0.001 par value, 50,000 and 0 shares authorized, 35,250 and 0
shares issued and outstanding at March 31, 2017 and December 31,
2016, respectively
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35
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-
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Additional
paid in capital
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40,947,888
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33,456,325
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Accumulated
deficit
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(36,064,480)
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(35,794,206)
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Total
Stockholders’ Equity (Deficit)
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5,085,160
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(2,217,077)
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Total Liabilities and Stockholders’ Equity
(Deficit)
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$7,760,337
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$4,943,429
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED
STATEMENTS OF
OPERATIONS
(Unaudited)
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Three Months Ended
March 31,
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Net
Sales
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$1,529,752
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$583,298
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Cost
of Sales
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973,613
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733,411
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Gross Profit
(Loss)
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556,139
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(150,113)
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Operating
Expenses
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Selling and
marketing
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1,583,531
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1,068,913
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General and
administrative
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1,417,908
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1,068,350
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Total operating
expenses
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3,001,439
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2,137,263
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Operating
Loss
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(2,445,300)
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(2,287,376)
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Other
Income (Expense)
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Change in fair
value of derivative liabilities
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2,243,518
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1,139,365
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Interest
expense
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(20,538)
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(12,214)
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Other
expense
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(47,954)
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(18,923)
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2,175,026
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1,108,228
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NET LOSS
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(270,274)
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(1,179,148)
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Declared dividends on Preferred Stock
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64,644
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66,626
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Net
loss attributable to common stockholders
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$(334,918)
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$(1,245,774)
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Net
loss per common share, basic and diluted
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$(0.00)
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$(0.01)
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Weighted
average common shares outstanding, basic and diluted
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146,976,287
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112,219,264
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS
OF CASH
FLOWS
(Unaudited)
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Three
Months Ended
March
31,
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CASH
FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$(270,274)
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$(1,179,148)
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Adjustments to
reconcile net loss to net cash used in operating
activities
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Depreciation
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1,333
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657
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Amortization
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30,000
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35,294
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Provision for bad
debt expense
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8,030
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140,152
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Provision for
inventory losses
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-
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110,000
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Change in estimated
fair value of derivative
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(2,243,518)
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(1,139,365)
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Fair value of stock
issued for services
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360,500
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18,000
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Stock based
compensation
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83,227
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61,555
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Change in operating
assets and liabilities:
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Accounts
receivable
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(460,491)
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1,470,994
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Inventory
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(474,019)
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(51,614)
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Prepaid
expenses and other current assets
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(261,817)
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(201,063)
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Accounts
payable and accrued expenses
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1,143,852
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(141,493)
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Net
cash used in operating activities
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(2,083,177)
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(876,031)
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CASH
FLOWS FROM INVESTING ACTIVITIES
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Restricted cash
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(52)
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(53)
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Net
cash used in investing activities
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(52)
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(53)
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CASH
FLOWS FROM FINANCING ACTIVITIES
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Proceeds from warrants exercised for cash
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-
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30,000
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Proceeds from issuance of Series C Preferred Stock
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-
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1,000,000
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Proceeds
from issuance of Series D Preferred Stock
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3,675,000
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-
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Net
borrowings on line-of-credit facility
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68,120
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Repayments on debt
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-
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(403,778)
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Net
cash provided by financing activities
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3,743,120
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626,222
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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1,659,891
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(249,862)
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CASH AND CASH
EQUIVALENTS- beginning of
period
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15,306
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376,840
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CASH AND CASH
EQUIVALENTS- end of
period
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$1,675,197
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$126,978
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SUPPLEMENTAL
DISCLOSURES
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Interest paid in
cash
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$20,538
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$13,119
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Non-cash
financing and investing activities:
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Conversion of
preferred stock to common stock
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$2,766
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$698
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Conversion of notes
payable and accrued interest to Series C preferred
stock
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$-
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$500,000
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Dividend paid in
common stock
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$66,080
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$68,441
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Dividends declared
but unpaid
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$64,644
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$66,626
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Warrants issued in
connection with Series C Preferred Offering
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$-
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$303,043
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Warrants issued in
connection with Series D Preferred Offering
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$2,262,334
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$-
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Warrants issued for
services
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$29,000
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$-
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Warrants exchanged
for common stock
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$5,743,681
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$-
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The
accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2017
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
Overview
True Drinks Holdings, Inc. (the
“Company”,
“us” or
“we”) was
incorporated in the state of Nevada in January 2001 and is the
holding company for True Drinks, Inc. (“True Drinks”), a beverage company
incorporated in the state of Delaware in January 2012 that
specializes in all-natural, vitamin-enhanced drinks. Our primary
business is the development, marketing, sale and distribution of
our flagship product, AquaBal® Naturally Flavored Water, a
zero-sugar, zero-calorie, preservative-free, vitamin-enhanced,
naturally flavored water drink. We distribute AquaBal®
nationally through select retail channels, such as grocery stores,
mass merchandisers, drug stores and online. We also market and
distribute Bazi® All Natural Energy, a liquid nutritional
supplement drink, which is currently distributed online and through
our existing database of customers.
Our principal place of business is 18662 MacArthur
Boulevard, Suite 110, Irvine, California, 92612. Our telephone
number is (949) 203-2500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU".
Recent Developments
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the
Certificate of Designation, Preferences, Rights and Limitations of
the Series D Convertible Preferred Stock (the
“Certificate of
Designation”) with the
Nevada Secretary of State, designating 50,000 shares of the
Company's preferred stock, par value $0.001 per share, as Series D
Convertible Preferred Stock (the “Series D
Preferred”).
Each share of Series D Preferred has a stated
value of $100 per share, and, following the expiration of the 20
day calendar day period set forth in Rule 14c-2(b) under the
Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), commencing upon
the distribution of an Information Statement on Schedule 14C to the
Company's stockholders, each share of Series D Preferred is
convertible, at the option of each respective holder, into that
number of shares of the Company’s Common Stock equal to the
stated value, divided by $0.15 per share (the
“Conversion
Shares”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Conversion Shares in the
event: (i) there are sufficient authorized shares of Common Stock
reserved as Conversion Shares; (ii) the Conversion Shares are
registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Conversion
Shares are freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company's Common Stock is at least $0.62 per share for 10
consecutive trading days.
Series D Offering
On February 8, 2017 (the
“Initial
Investment Date”), the
Company and certain accredited investors (the
“Series D
Investors”) entered into
a Securities Purchase Agreement (the “Series D Purchase
Agreement”), wherein the
Company may offer and sell to Series D Investors up to 50,000
shares of Series D Preferred for $100 per share (the
“Series D
Offering”). As additional
consideration, Series D Investors will also receive five-year
warrants (the “Series D
Warrants”), to purchase
up to 200% of the Conversion Shares issuable upon conversion of
shares of Series D Preferred purchased under the Series D Offering
for $0.15 per share. In accordance with the terms and conditions of
the Series D Purchase Agreement, all Series D Warrants issued in
connection with the Series D Offering will be exchanged for shares
of Common Stock pursuant to the Warrant Exchange Program, as
further described below.
On
the Initial Investment Date, the Company issued to Series D
Investors an aggregate total of 31,750 shares of Series D
Preferred, as well as Series D Warrants to purchase up to an
aggregate total of 42,333,341 shares of Common Stock. Between the
Initial Investment Date and March 31, 2017, the Company issued an
additional 5,000 shares of Series D Preferred and Series D Warrants
to purchase up to an aggregate total of 6,666,669 shares of Common
Stock. The issuance of the shares of Series D Preferred in the
quarter resulted in gross proceeds to the Company of $3.675
million. Each Series D Warrant contains a price protection feature
that adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued during the quarter, totaling $2,262,334,
was recorded to derivative liabilities. Between April 1, 2017 and
the date of this Report, the Company has issued an additional 1,200
shares of Series D Preferred and Series D Warrants to purchase up
to an aggregate total of 1,600,002 shares of Common Stock. The
issuance of the shares of Series D Preferred since March 31, 2017
has resulted in gross proceeds to the Company of
$120,000.
Warrant Exchange
Beginning on February 8, 2017, the Company and
certain holders of outstanding Common Stock purchase warrants (the
“Outstanding
Warrants”), entered into
Warrant Exchange Agreements (each, an “Exchange
Agreement”), pursuant to
which each holder agreed to cancel their respective Outstanding
Warrants in exchange for one-half of a share of Common Stock for
every share of Common Stock otherwise issuable upon exercise of
Outstanding Warrants (the “Warrant Exchange
Program”). The Company
expects to issue up to 76.0 million shares of Common Stock in
exchange for the cancellation of 152.0 million Outstanding
Warrants, including the Warrants issued in connection with the
Series D Offering, over the course of the Warrant Exchange
Program.
During
the three months ended March 31, 2017, the Company issued
73,106,466 shares of Common Stock in exchange for the cancellation
of 146,212,905 Outstanding Warrants. Between April 1, 2017 and the
date of this Report, the Company has issued an additional 800,001
shares of Common Stock in exchange for the cancellation of
1,600,002 Outstanding Warrants.
Amendment to Niagara Agreement
On
January 23, 2017, the Company and Niagara Bottling, LLC
(“Niagara”)
entered into an amendment to the bottling agreement first executed
on October 9, 2015 (the “Niagara Amendment”) to, among
other matters, modify the Company’s annual commitment to
purchase finished goods from Niagara (the “Annual Commitment”) and modify
the Take or Pay Price (defined below) for 2017, 2018 and 2019.
Prior to entering into the Amendment, the Annual Commitment
obligated the Company to purchase 3.2 million finished cases of
AquaBall® from Niagara in the period running from June 1st to
March 31st each year. In the event the Company did not satisfy the
purchase requirements under the Annual Commitment, the Company
would incur a liability to pay Niagara $2.00 for each case not
produced (the “Take or Pay
Price”).
Under
the terms and conditions of the Amendment, the Company and Niagara
agreed to: (i) change the period during which the Annual Commitment
is assessed to begin on January 1st and end on December 31st of
each year; (ii) change the Company’s Annual Commitment for
2017, 2018 and 2019 to 1.5 million, 2.25 million and 2.75 million
cases, respectively; (iii) modify the Take or Pay Price to $4.25,
$3.00 and $2.50 per case in 2017, 2018 and 2019, respectively;
(iii) purchase 491,000 cases from Niagara on or before June 30,
2017; and (iv) on the first day of each month, the Company must now
provide Niagara with its estimated purchase requirements for the
next three months (the Company previously was required to provide
Niagara with its minimum volume requirements for the upcoming
12-month period on or before February 1st of each year). In 2020,
the Annual Commitment will return to 3.2 million cases per year,
and the Take or Pay Price will revert to $2.00 per
case.
In
addition to the adjustments to the Annual Commitment and the Take
or Pay Prices, the Company agreed to pay to Niagara an additional
fee per case of AquaBall® manufactured of $0.40, $0.25 and
$0.10 in 2017, 2018 and 2019, respectively.
Appointment of James Greco as Chief Executive Officer
On
April 13, 2018, James Greco, a current member of the
Company’s Board of Directors, began serving as the
Company’s Chief Executive Officer, a role previously held by
Kevin Sherman. Following Mr. Greco’s appointment, Mr. Sherman
will continue to serve as the Company’s President and as a
member of the Company’s Board of Directors.
Basis of
Presentation and Going
Concern
The accompanying condensed consolidated balance
sheet as of December 31, 2016, which has been derived from audited
financial statements included in the Company’s Form 10-K for
the year ended December 31, 2016, and the accompanying interim
condensed consolidated financial statements have been prepared by
management pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) for interim financial reporting. These
interim condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals)
necessary to fairly present the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). Operating results for the three-month
period ended March 31, 2017 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2017,
or for any other interim period during such year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in
accordance with the rules and regulations of the SEC, although the
Company believes that the disclosures made are adequate to make the
information not misleading. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2016 filed with the SEC on March 31,
2017.
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplates continuation
of the Company as a going concern. As of and for the three months
ended March 31, 2017, the Company had a net loss of $270,274, has
working capital of $1,171,305, and an accumulated deficit of
$36,064,480. The Company had $1,884,819 in cash at March 31, 2017
with $209,622 of this cash being restricted, as discussed below.
The Company may require additional capital to execute its business
plan, marketing and operating plan, and therefore sustain
operations, which capital may not be available on favorable terms,
if at all. The accompanying condensed consolidated financial
statements do not include any adjustments that might result in the
event the Company was unable to generate sufficient cash from
operations, execute its business, marking or operating plan, or
obtain additional working capital, if
necessary.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries True
Drinks, Bazi, Inc. and GT Beverage Company, LLC. All inter-company
accounts and transactions have been eliminated in the preparation
of these condensed consolidated financial statements.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made by management
include, among others, derivative liabilities, provision for losses
on accounts receivable, allowances for obsolete and slow moving
inventory, stock compensation, deferred tax asset valuation
allowances, and the realization of long-lived and intangible
assets, including goodwill. Actual results could differ from those
estimates.
Restricted Cash
At March 31, 2017, the Company had $209,622 in
restricted cash with a financial institution securing a letter of
credit. The letter of credit matures in August 2017 and was issued
as part of the contractual obligations related to the Licensing
Agreement entered into with Disney Consumer Products, Inc.
(“Disney”) during the quarter ended September 30,
2015.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to our customers based on an
evaluation of their financial condition; generally, collateral is
not required. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. Actual uncollected amounts have
historically been consistent with the Company’s expectations.
Receivables are charged off against the reserve for doubtful
accounts when, in management’s estimation, further collection
efforts would not result in a reasonable likelihood of receipt, or
later as proscribed by statutory regulations.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound and the risk of loss
is minimal.
All production of AquaBall® is done by
Niagara, under the terms and conditions of the Niagara Agreement.
Niagara handles all aspects of production, including the
procurement of all raw materials necessary to produce
AquaBall®. We currently utilize a separate facility to handle
any necessary repackaging of AquaBall®
into six packs or 15-packs for club
customers.
During
the first quarter of 2017, we relied significantly on one supplier
for 100% of our purchases of certain raw materials for Bazi®.
Bazi, Inc. has sourced these raw materials from this supplier since
2007 and does not anticipate any issues with the supply of these
raw materials.
We
did not have any significant concentrations in either sales or
accounts receivable during the three months ended March 31, 2017 or
2016. No customers exceeded 10% of the Company’s sales or
accounts receivable during the three months ended March 31, 2017 or
2016.
A significant portion of our revenue comes from
sales of the AquaBall®
Naturally Flavored Water.
For the
three months ended March 31, 2017 and 2016, sales of AquaBall®
accounted for 97% and 91% of the Company’s total revenue,
respectively.
Inventory
The
Company purchases for resale a vitamin-enhanced flavored water
beverage and a liquid dietary supplement.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or market (net realizable value). Cost includes shipping
and handling fees and costs, which are subsequently expensed to
cost of sales. The Company provides for estimated losses from
obsolete or slow-moving inventories, and writes down the cost of
inventory at the time such determinations are made. Reserves are
estimated based on inventory on hand, historical sales activity,
industry trends, the retail environment, and the expected net
realizable value.
The Company maintained inventory reserves of
$110,000 and $110,000 as of March 31, 2017 and December 31, 2016,
respectively. This inventory reserve is related to our remaining
finished goods inventory of AquaBall®,
prior to the production of our preservative-free new formulation of
AquaBall®
produced by Niagara. The prior
formulation AquaBall®
is still being sold, but only to
select accounts at a reduced price.
Inventory
is comprised of the following:
|
|
|
|
|
Purchased
materials
|
$98,501
|
$89,358
|
|
Finished
goods
|
804,430
|
339,554
|
|
Allowance
for obsolescence reserve
|
(110,000)
|
(110,000)
|
|
Total
|
$792,931
|
$318,912
|
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be
generated by the asset. No impairment was deemed necessary during
the quarter ended March 31, 2017.
Goodwill and identifiable intangible assets
As
a result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value.
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly to future cash flows.
Identifiable intangible assets are reviewed for impairment whenever
events and circumstances indicate the carrying value of such assets
or liabilities may not be recoverable and exceed their fair value.
If an impairment loss exists, the carrying amount of the
identifiable intangible asset is adjusted to a new cost basis. The
new cost basis is amortized over the remaining useful life of the
asset. Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses.
During the year ended December 31, 2016, we
recognized impairment on identifiable intangible assets of $679,411
related to the interlocking spherical bottle patent acquired in the
acquisition of GT Beverage Company, Inc., and adjusted the carrying
value of this patent to $250,000 as of December 31,
2016. As of March 31, 2017, no additional impairment had
been recognized on identifiable intangible
assets.
Income Taxes
As
the Company’s calculated provision (benefit) for income tax
is based on annual expected tax rates, no income expense was
recorded for the three month periods ended March 31, 2017 and 2016.
At March 31, 2017, the Company had tax net operating loss
carryforwards and a related deferred tax asset, which had a full
valuation
allowance.
Stock-Based Compensation
For
the three-month periods ended March 31, 2017 and 2016, general and
administrative expenses included stock based compensation expense
of $83,227 and $61,555, respectively.
The Company uses a Black-Scholes option-pricing
model (the “Black-Scholes
Model”) to estimate the
fair value of outstanding stock options and warrants not accounted
for as derivatives. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over the contractual
term of the option or warrant. The expected life is based on the
contractual term of the option or warrant and expected exercise
and, in the case of options, post-vesting employment termination
behavior. Currently, our model inputs are based on the simplified
approach provided by Staff Accounting Bulletin
(“SAB”) 110. The risk-free interest rate is based
on U.S. Treasury zero-coupon issues with a remaining term equal to
the expected life assumed at the date of the
grant.
The
fair value for restricted stock awards is calculated based on the
stock price on the date of grant.
Fair Value of Financial Instruments
The
Company does not have any assets or liabilities carried at fair
value on a recurring or non-recurring basis, except for derivative
liabilities.
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable and accrued expenses, and debt.
Management believes that the carrying amount of these financial
instruments approximates their fair values, due to their relatively
short-term nature.
Derivative Instruments
A derivative is an instrument whose value is
“derived” from an underlying instrument or index such
as a future, forward, swap, option contract, or other financial
instrument with similar characteristics, including certain
derivative instruments embedded in other contracts
(“embedded
derivatives”) and for
hedging activities. As a matter of policy, the Company does not
invest in financial derivatives or engage in hedging transactions.
However, the Company has entered into complex financing
transactions that involve financial instruments containing certain
features that have resulted in the instruments being deemed
derivatives or containing embedded derivatives. Derivatives
and embedded derivatives, if applicable, are measured at fair value
using the binomial lattice (“Binomial
Lattice”) pricing model
and marked to market and reflected on our condensed consolidated
statement of operations as other (income) expense at each reporting
period. However, such new and/or complex instruments may have
immature or limited markets. As a result, the pricing models used
for valuation of derivatives often incorporate significant
estimates and assumptions, which may impact the level of precision
in the financial statements. Furthermore, depending on the terms of
a derivative or embedded derivative, the valuation of derivatives
may be removed from the financial statements upon conversion of the
underlying instrument into some other security.
Basic and Diluted Income (loss) per share
Our computation of earnings per share
(“EPS”) includes basic and diluted EPS. Basic EPS
is measured as the income (loss) available to common stockholders
divided by the weighted average common shares outstanding for the
period. Diluted income (loss) per share reflects the potential
dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that then shared in the income (loss) of the Company
as if they had been converted at the beginning of the periods
presented, or issuance date, if later. In computing diluted income
(loss) per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are
used to purchase common stock at the average market price during
the period. Options and warrants may have a dilutive effect under
the treasury stock method only when the average market price of the
common stock during the period exceeds the exercise price of the
options and warrants. Potential common shares that have an
antidilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of
diluted EPS.
Income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares
of common stock outstanding during the respective periods. Basic
and diluted (loss) per common share is the same for periods in
which the Company reported an operating loss because all warrants
and stock options outstanding are anti-dilutive. At March 31, 2017
and 2016, we excluded 70,256,259 and 132,899,032,
respectively, shares of Common
Stock equivalents as their effect would have been
anti-dilutive.
Research and Development
Research
and development costs are expensed as incurred.
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers: Topic 606. This ASU outlines a single comprehensive
model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue
recognition guidance. This accounting standard is effective for
annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Early adoption is permitted for annual reporting periods beginning
after December 15, 2016. The Company is currently evaluating the
impact this accounting standard will have on the Company's
financial statements.
On February 25, 2016, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update
(“ASU”) 2016-2, “Leases” (Topic 842),
which is intended to improve financial reporting for lease
transactions. This ASU will require organizations that lease
assets, such as real estate, airplanes and manufacturing equipment,
to recognize on their balance sheet the assets and liabilities for
the rights to use those assets for the lease term and obligations
to make lease payments created by those leases that have terms of
greater than 12 months. The recognition, measurement, and
presentation of expenses and cash flows arising from a lease by a
lessee primarily will depend on its classification as finance or
operating lease. This ASU will also require disclosures to help
investors and other financial statement users better understand the
amount and timing of cash flows arising from leases. These
disclosures will include qualitative and quantitative requirements,
providing additional information about the amounts recorded in the
financial statements. The ASU is effective for the Company for the
year ending December 31, 2019 and interim reporting periods within
that year, and early adoption is permitted. Management has not yet
determined the effect of this ASU on the Company's financial
statements.
In March 2016, the FASB issued ASU
2016-09, Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), which simplifies the accounting for
share-based payment transactions, including the income tax
consequences, an option to recognize gross share-based compensation
expense with actual forfeitures recognized as they occur, as well
as certain classifications in the statement of cash flows. This
guidance will be effective for fiscal years beginning after
December 15, 2016, and early adoption is permitted. The Company is
currently evaluating the effect this guidance will have on our
financial statements and related disclosures.
In August 2016, FASB issued ASU No.
2016-15, “Statement of Cash Flows: Classification of
Certain Cash Receipts and Cash
Payments,” (“ASU 2016-15”) which eliminates the diversity in
practice related to the classification of certain cash receipts and
payments. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The retrospective transition
method, requiring adjustment to all comparative periods presented,
is required unless it is impracticable for some of the amendments,
in which case those amendments would be prospectively adopted as of
the earliest date practicable. ASU 2016-15 is effective for the
Company’s annual and interim reporting periods beginning
January 1, 2018. The Company is currently evaluating the effect
this guidance will have on our financial statements and related
disclosures.
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18 requires that a statement of
cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as
restricted cash or restricted cash equivalents. ASU 2016-18 will
become effective for us beginning January 1, 2019, or fiscal 2019.
ASU 2016-18 is required to be applied retrospectively. Upon the
adoption, amounts described as restricted cash will be included
with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period amounts shown on the
statements of cash flows.
Subsequent
Events
In
March 2017, the Company and Disney entered into a renewed
Licensing Agreement, which extended the Company’s license
with Disney through March 31, 2019 (the “Disney Agreement”). The terms of
the Disney Agreement entitle Disney to receive a royalty rate of 5%
on sales of AquaBall® Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$807,000 over the period from April 1, 2017 through March 31, 2019.
In addition, the Company is required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the agreement.
Management has
reviewed and evaluated subsequent events and transactions occurring
after the balance sheet date through the filing of this Quarterly
Report on Form 10-Q and determined that, except as disclosed
herein, no subsequent events occurred.
NOTE 2 — SHAREHOLDERS’ EQUITY
Securities
Our authorized capital
stock currently consists of 300.0 million shares of common stock,
and 5.0 million shares of preferred stock, $0.001 par value
per share, of which 2.75 million shares have been designated as
Series B Convertible Preferred Stock (“Series
B Preferred”),
200,000 shares have been designated as Series C Convertible
Preferred Stock (“Series
C Preferred”) and 50,000
shares have been designated as Series D Preferred. Below is a
summary of the rights and preferences associated with each type of
security.
Common
Stock. The holders of Common
Stock are entitled to receive, when and as declared by the Board of
Directors, dividends payable either in cash, in property or in
shares of Common Stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series B
Preferred. Each share of the
Company’s Series B Preferred
Convertible Stock (“Series
B Preferred”) has
a stated value of $4.00 per share (“Stated
Value”) and accrued
annual dividends equal to 5% of the Stated Value, payable by the
Company in quarterly installments, in either cash or shares of
Common Stock. Each share of Series B Preferred is convertible, at
the option of the holder, into that number of shares of Common
Stock equal to the Stated Value, divided by $0.25 per share (the
“Series B Conversion
Shares”). The Company
also has the option to require the conversion of the Series B
Preferred into Series B Conversion Shares in the event: (i) there
were sufficient authorized shares of Common Stock reserved as
Series B Conversion Shares; (ii) the Series B Conversion Shares
were registered under the Securities Act, or the Series B
Conversion Shares were freely tradable, without restriction, under
Rule 144 of the Securities Act; (iii) the daily trading volume of
the Company's Common Stock, multiplied with the closing price,
equaled at least $250,000 for 20 consecutive trading days; and (iv)
the average closing price of the Company's Common Stock was at
least $0.62 per share for 10 consecutive trading
days.
During
the three months ended March 31, 2017, the Company declared $64,644
in dividends on outstanding shares of its Series B Preferred. As of
March 31, 2017, there remained $64,644 in cumulative unpaid
dividends on the Series B Preferred. These dividends were paid by
issuing 710,392 shares of the Company’s Common Stock in May
2017.
Series
C Preferred. Each share of Series
C Preferred has a stated value of $100 per share, and is
convertible, at the option of each respective holder, into that
number of shares of Common Stock equal to $100, divided by $0.15
per share (the “Series
C Conversion
Shares”). The
Company also has the option to require conversion of the Series C
Preferred into Series C Conversion Shares in the event: (i) there
are sufficient authorized shares of Common Stock reserved as Series
C Conversion Shares; (ii) the Series C Conversion Shares are
registered under the Securities Act of 1933, or the Series C
Conversion Shares are freely tradable, without restriction, under
Rule 144 of the Securities Act; and (iii) the average closing price
of the Company's Common Stock is at least $0.62 per share for 10
consecutive trading days.
Series D
Preferred. Each share of Series
D Preferred has a stated value of $100 per share, and, following
the expiration of the 20 day calendar day period set forth in Rule
14c-2(b) under the Exchange Act, commencing upon the distribution
of an Information Statement on Schedule 14C to the Company's
stockholders, each share of Series D Preferred is convertible, at
the option of each respective holder, into that number of shares of
the Company’s Common Stock equal to the stated value, divided
by $0.15 per share. The Certificate of Designation also gives the
Company the option to require the conversion of the Series D
Preferred into Conversion Shares in the event: (i) there are
sufficient authorized shares of Common Stock reserved as Conversion
Shares; (ii) the Conversion Shares are registered under the
Securities Act of 1933, as amended (the “Securities
Act”), or the Conversion
Shares are freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company's Common Stock is at least $0.62 per share for 10
consecutive trading days.
Issuances of Securities
On
January 20, 2016, the Company and holders of Secured Notes in the
principal amount of $500,000 entered into Note Exchange Agreements,
pursuant to which these holders exchanged the outstanding principal
balance of their Secured Notes into an aggregate total of 4,413
shares of Series C Preferred and five-year warrants to purchase up
to an aggregate total of 1,029,413 shares of Common Stock for $0.17
per share. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $92,768, was recorded to
derivative liabilities.
During
2016, the Company issued 60,000 shares of Series C Preferred for
$100 per share over the course of three separate
closings.
As
additional consideration for participating in the April Series C
Offering, the Purchasers received five-year warrants to purchase up
to an aggregate total of approximately 33.3 million shares of
Common Stock for $0.15 per share. At the completion of the April
Series C Offering, the Company had issued warrants to purchase up
to an aggregate total of approximately 33.4 million shares of
Common Stock. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $2,856,678, was recorded to
derivative liabilities.
During
the year ended December 31, 2016, the Company issued 200,000 shares
of Common Stock in connection with certain consulting agreements.
The Company expensed the fair value of the Common Stock issued of
$18,000.
As described in Note 1 above, under the heading
“Recent
Developments”, between
February 8, 2017 and May 4, 2017, the Company issued an aggregate
total of 37,950 shares of Series D Preferred as a part of the
Series D Offering. As additional consideration, Series D Investors
received Series D Warrants to purchase up to 50,600,012 shares of
Common Stock, an amount equal to 200% of the Conversion Shares
issuable upon conversion of shares of Series D Preferred purchased
under the Series D Offering, for $0.15 per share. In accordance
with the terms and conditions of the Series D Purchase Agreement,
all Series D Warrants issued in connection with the Series D
Offering will be exchanged for shares of Common Stock pursuant to
the Warrant Exchange Program.
As described in Note 1 above, under the heading
“Recent
Developments”, beginning
on February 8, 2017 the Company and holders of Outstanding Warrants
entered into Exchange Agreements pursuant to which each holder
agreed to cancel their respective Outstanding Warrants in exchange
for one-half of a share of Common Stock for every share of Common
Stock otherwise issuable upon exercise of Outstanding Warrants. As
of the date of this Report, the Company has issued 73,906,467
shares of Common Stock, in exchange for the cancellation of
147,812,907 Outstanding Warrants.
NOTE 3 — WARRANTS AND
STOCK BASED COMPENSATION
Warrants
A
summary of the Company’s warrant activity for the three
months ended March 31, 2017 is presented below:
|
|
|
Weighted Average Exercise Price
|
|
Outstanding, December 31, 2016
|
101,396,416
|
$0.16
|
|
Granted
|
50,000,010
|
0.15
|
|
Exercised
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Exchanged
|
(146,212,905)
|
0.15
|
|
Outstanding, March 31, 2017
|
5,183,521
|
0.20
|
As
of March 31, 2017, the Company had the following outstanding
warrants to purchase shares of its Common Stock:
|
|
Weighted Average
Exercise Price Per Share
|
Weighted Average
Remaining Life (Yrs.)
|
|
3,281,452
|
$0.15
|
2.36
|
|
427,633
|
$0.19
|
4.22
|
|
737,218
|
$0.25
|
1.69
|
|
|
$0.38
|
1.69
|
|
|
$0.20
|
2.36
|
Stock-Based Compensation
Non-Qualified Stock Options
The
Company granted options to purchase an aggregate total of 2,000,000
shares of Common Stock during the three months ended March 31,
2017.
The
weighted average estimated fair value per share of the stock
options at grant date was $0.058 per share. Such fair values were
estimated using the Black-Scholes stock option pricing model and
the following weighted average assumptions.
|
|
|
|
Expected
life
|
|
|
Estimated
volatility
|
75.0%
|
|
Risk-free
interest rate
|
0.66%
|
|
Dividends
|
-
|
Stock
option activity during the three months ended March 31, 2017 is
summarized as follows:
|
|
|
Weighted
Average
Exercise
Price
|
|
Options
outstanding at December 31, 2016
|
3,460,000
|
$0.15
|
|
Exercised
|
-
|
0.15
|
|
Granted
|
2,000,000
|
0.15
|
|
Forfeited
|
(360,000)
|
0.15
|
|
Expired
|
-
|
-
|
|
Options
outstanding at March 31, 2017
|
5,100,000
|
$0.15
|
Restricted Stock Awards
During
the three months ended March 31, 2017 and 2016, the Company did not
grant any restricted stock awards under the Company’s 2013
Stock Incentive Plan.
A
summary of the Company’s restricted common stock activity
during the three months ended March 31, 2017 is summarized as
follows:
|
|
Restricted Common Stock Awards
|
|
Outstanding,
December 31, 2016
|
12,772,229
|
|
Granted
|
-
|
|
Issued
|
-
|
|
Forfeited
|
-
|
Outstanding,
March 31, 2017
|
12,772,229
|
NOTE 4 — DEBT
A
summary the line-of-credit as of December 31, 2016 and 2015 is
as follows:
|
|
|
|
Outstanding, December 31, 2016
|
$109,682
|
|
|
68,120
|
Outstanding March 31, 2017
|
$177,802
|
In
September 2015, the Company began a private offering to certain
accredited investors of: (i) Secured Notes in the aggregate
principal amount of up to $2.5 million; and (ii) and warrants to
purchase that number of shares equal to 15% of the principal amount
of the Secured Note purchased by each investor, divided by the
ten-day average closing price of the Company’s Common Stock.
Each Secured Note accrues interest at a rate of 12% per annum, and
will mature one year from the date of issuance. As of December 31,
2015, the Company had issued Secured Notes in the aggregate
principal amount of $855,000 and warrants to purchase an aggregate
total of 280,265 shares of Common Stock. On January 20, 2016,
Secured Notes in the aggregate principal amount of $500,000 were
exchanged for shares of Series C Preferred and warrants and all
other outstanding Secured Notes were repaid in full.
Line-of-Credit Facility
The
Company entered into a line-of-credit agreement with a financial
institution on June 30, 2014. The terms of the agreement allow the
Company to borrow up to the lesser of $1.5 million or 85% of the
sum of eligible accounts receivables. At March 31, 2017, the total
outstanding on the line-of-credit was $177,802 and the Company did
not have any availability to borrow. The line-of-credit bears
interest at Prime rate (3.5% as of March 31, 2017) plus 4.5% per
annum, as well as a monthly fee of 0.50% on the average amount
outstanding on the line, and is secured by the accounts receivables
that are funded against. The line-of-credit matures on July 31,
2017.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
The
Company leases its corporate office in Irvine, California on a
one-year term. The current lease term is set to expire on September
30, 2017. Total rent expense related to the Company's operating
lease for the three months ended March 31, 2017 was $14,346. Total
remaining payments on the lease through September 30, 2017 are
$28,458.
The
Company maintains employment agreements with certain key members of
management. The agreements provide for minimum base salaries,
eligibility for stock options, performance bonuses and severance
payments.
Legal Proceedings
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations.
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations.
NOTE 6 – FAIR VALUE MEASUREMENTS
The
application of fair value measurements may be on a recurring or
nonrecurring basis depending on the accounting principles
applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value. FASB ASC
820-10-35 specifies a hierarchy of valuation techniques based on
whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs
create the following fair value hierarchy:
- Level
1: Observable inputs such as
quoted prices in active markets;
- Level
2: Inputs, other than the
quoted prices in active markets, that are observable either
directly or indirectly; and
- Level
3: Unobservable inputs in which
there is little or no market data, which require the reporting
entity to develop its own assumptions.
This
hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when
estimating fair value.
The Company assesses its recurring fair value
measurements as defined by FASB ASC 810. Liabilities measured at
estimated fair value on a recurring basis include derivative
liabilities. Transfers between fair value classifications occur
when there are changes in pricing observability levels. Transfers
of financial liabilities among the levels occur at the beginning of
the reporting period. There were no transfers
between Level 1, Level 2 and/or Level 3 during the three months
ended March 31, 2017. The Company had no Level 1 or 2 fair value
measurements at March 31, 2017 or December 31,
2016.
The
following table presents the estimated fair value of financial
liabilities measured at estimated fair value on a recurring basis
included in the Company’s financial statements as of March
31, 2017 and December 31, 2016:
|
|
|
|
|
|
|
|
|
Quoted market prices in active markets
|
Internal Models with significant observable market
parameters
|
Internal models with significant unobservable market
parameters
|
|
Derivative
liabilities – March 31, 2017
|
$96,707
|
$-
|
$-
|
$96,707
|
|
Derivative
liabilities – December 31, 2016
|
$5,792,572
|
$-
|
$-
|
$5,792,572
|
The
following table presents the changes in recurring fair value
measurements included in net loss for the three months ended
March 31, 2017 and 2016:
|
|
Recurring Fair Value Measurements
|
|
|
Changes in Fair Value
Included in Net Income
|
|
|
|
|
|
|
Derivative
liabilities – March 31, 2017
|
$2,243,518
|
$-
|
$2,243,518
|
|
Derivative
liabilities – March 31, 2016
|
$1,139,365
|
$-
|
$1,139,365
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the three months ended
March 31, 2017:
|
|
|
Recorded New Derivative Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
|
|
Derivative
liabilities
|
$5,792,572
|
$2,291,334
|
$(5,743,681)
|
$(2,243,518)
|
$96,707
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the three months ended
March 31, 2016:
|
|
|
Recorded New Derivative Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
|
|
Derivative
liabilities
|
$6,199,021
|
$303,043
|
$-
|
$(1,139,365)
|
$5,362,699
|
NOTE 7 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. and an 18-month licensing agreement
with Marvel Characters, B.V. (collectively, the
“Licensing
Agreements”) in 2012.
Each Licensing Agreement allows us to feature popular Disney and
Marvel characters on AquaBall®
Naturally Flavored Water, allowing
AquaBall®
to stand out among other beverages
marketed towards children. Under the terms and conditions of the
Licensing Agreements, we work with the Disney and Marvel teams to
create colorful, eye-catching labels that surround the entire
spherical shape of each AquaBall®.
Once the label designs are approved, we work with Disney and Marvel
to set retail calendars, rotating the placement of different
AquaBall®
designs over the course of the
year.
As dosclosed in Note 1 above, under the heading
“Subsequent
Events,” in March 2017, the Company and
Disney entered into a renewed Licensing Agreement, which extended
the Company’s license with Disney through March 31, 2019. The
terms of the Disney Agreement entitle Disney to receive a royalty
rate of 5% on sales of AquaBall®
Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$807,000 over the period from April 1, 2017 through March 31, 2019.
In addition, the Company is required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the agreement.
On August 22, 2015, the
Company and Marvel entered
into a renewed Licensing Agreement to extend the Company's license
to feature certain
Marvel characters on bottles of AquaBall® Naturally
Flavored Water through December 31, 2017. The Marvel Agreement requires the Company to pay
to Marvel a 5% royalty rate
on sales of AquaBall® Naturally Flavored Water adorned with
Marvel characters, paid quarterly, through December 31, 2017, with
a total guarantee of $200,000.
NOTE 8 – INCOME TAXES
The Company does not
have significant income tax expense or benefit for the three months
ended March 31, 2017 or 2016. Tax net operating loss carryforwards
have resulted in a net deferred tax asset with a 100% valuation
allowance applied against such asset at March 31, 2017 and 2016.
Such tax net operating loss carryforwards
(“NOL”) approximated
$35.6 million at March 31, 2017. Some or all of such NOL may be
limited by Section 382 of the Internal Revenue
Code.
The income tax effect of temporary differences between financial
and tax reporting and net operating loss carryforwards gives rise
to a deferred tax asset at March 31, 2017 and 2016 as
follows:
|
|
|
|
|
Deferred
tax asset –NOL’s
|
$13,200,000
|
$13,200,000
|
|
Less
valuation allowance
|
(13,200,000)
|
(13,200,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend
to identify forward-looking statements in this report by using
words such as “believes,” “intends,”
“expects,” “may,” “will,”
“should,” “plan,” “projected,”
“contemplates,” “anticipates,”
“estimates,” “predicts,”
“potential,” “continue,” or similar
terminology. These statements are based on our beliefs as well as
assumptions we made using information currently available to us. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may
differ significantly from the results discussed in the
forward-looking statements. These risks include changes in demand
for our products, changes in the level of operating expenses, our
ability to expand our network of customers, changes in general
economic conditions that impact consumer behavior and spending,
product supply, the availability, amount, and cost of capital to us
and our use of such capital, and other risks discussed in this
report. Additional risks that may affect our performance are
discussed under “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2016.
The following discussion of the financial condition and results of
operations should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this
Quarterly Report. Fluctuations in annual and quarterly results may
occur as a result of factors affecting demand for our products such
as the timing of new product introductions by us and by our
competitors and our customers’ political and budgetary
constraints. Due to such fluctuations, historical results and
percentage relationships are not necessarily indicative of the
operating results for any future period.
Overview
True
Drinks Holdings, Inc., the holding company for True Drinks, Inc.,
is a healthy beverage provider which produces AquaBall®
Naturally Flavored Water. AquaBall® is a healthy alternative
to the other products in the children's beverage market. True
Drinks has licensing agreements with Disney and Marvel for use of
their characters on bottles of AquaBall®. AquaBall® is a
naturally flavored, vitamin-enhanced, zero-calorie,
preservative-free, dye-free, sugar-free alternative to juice and
soda. AquaBall® is currently available in four flavors: fruit
punch, grape, strawberry lemonade and berry. Our target consumers:
kids, young adults, and their guardians, are attracted to the
product by the entertainment and media characters on the bottle and
continue to consume the beverage because of its health benefits and
great taste. True Drinks Holdings, Inc. (the “Company”, “us” or “we”) was incorporated in the
state of Nevada in January 2001 and is the holding company for True
Drinks, Inc. (“True
Drinks”), a beverage company incorporated in the state
of Delaware in January 2012.
We
distribute AquaBall® nationally through select retail
channels, such as grocery stores, mass merchandisers, convenience
stores and online. We also market and distribute Bazi® All
Natural Energy, a liquid nutritional supplement drink, which is
currently distributed online and through our existing database of
customers.
True
Drinks is continuing to innovate to meet the healthy hydration
demands of the American consumer. Health and wellness awareness has
increased significantly, resulting in growing demand for beverages
with little or no calories and natural ingredients. AquaBall®
is directly responsive to this need for children and we plan to
increase our offerings for this and other age groups.
Our
strategy is to continue to i) grow our presence - both in store and
online - and continue to build out our distribution network, ii)
increase brand awareness though public relations, social media and
guerrilla marketing and iii) expand our platform through line
extensions.
Our
sales have been seasonal with the highest volume typically realized
during the summer and warmer months. As a result, our operating
results from one fiscal quarter to the next may not be comparable.
Additionally, our operating results are affected by numerous
factors, including changes in consumer preference for beverage
products, competitive pricing in the marketplace and weather
conditions.
Our principal place of business is 18662 MacArthur
Boulevard, Suite 110, Irvine, California, 92612. Our telephone
number is (949) 203-2500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Critical Accounting Polices and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates; including those related
to collection of receivables, inventory obsolescence, sales returns
and non-monetary transactions such as stock and stock options
issued for services. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. We believe there have been no changes to
our critical accounting policies subsequent to the filing of our
annual report on Form 10-K for the year ended December 31,
2016.
Comparison of the Three Months Ended March 31, 2017 to the Three
Months Ended March 31, 2016.
Net Sales
Net sales for the three months ended March 31,
2017 were $1,529,752, compared with sales of $583,298
for the three months ended March 31,
2016, a 162% increase. This increase is primarily the result
of chain authorizations secured by our sales team for reset of
accounts beginning in February 2017 and continuing through May
2017. These authorizations have also allowed our team to secure
distributor partners in 45 states. Many of these distributors
received their initial shipments in February and March, with the
remaining distributors set to receive their initial shipments in
April and May.
We
have expanded distribution of AquaBall® with national accounts
in the grocery and convenience markets, and we have built out our
direct store delivery (“DSD”) network into 45 states
during the past twelve months with resets continuing through May
2017. Our marketing and sales teams are now focused on increasing
brand awareness and improving velocities moving through our current
retailers, as well as adding new placements with strategic
accounts.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Three Months Ended
March 31, 2017
(% of Sales)
|
|
AquaBall®
|
97%
|
|
Bazi®
|
3%
|
Gross Profit (Loss) and Gross Margin
Gross profit
for the three months ended March 31, 2017 was $556,139, compared to
gross loss of $150,113 for the three months ended March 31, 2016.
Gross profit as a percentage of revenue (gross margin) during
three months ended March 31, 2017 was 36%, compared to negative 26%
for the same period in 2016. This increase in gross profit is
a great improvement for our Company, and is a direct result of our
relationship with Niagara Bottling who provides finished goods to
the Company and bills the Company for the product as it is shipped
to customers, allowing our costs to become more consistent. It is
also attributable to our shift away from focusing on the low-margin
club channel to the mainstream grocery and convenience channels. We
expect margins to maintain margins in the 35-40% range moving
forward.
Sales, General and Administrative Expense
Sales,
general and administrative expenses were $3,001,439 for the three
months ended March 31, 2017, as compared to $2,137,263 for the
three months ended March 31, 2016. This period over period increase
of $946,454 is the result of increased people-related expenses and
travel expenses, as well as marketing expenses at new retailers,
each resulting from the first quarter of 2017 being a much more
active selling season for AquaBall® as we continue to
introduce our new preservative-free product to the marketplace. In
2016, sales of the previous version of our product were winding
down as we were working on our first production run with Niagara
Bottling.
Change in Fair Value of Derivative Liabilities
The Company recorded a gain on the change in fair
value of derivative liabilities for the three months ended March
31, 2017 of $2,243,518, as compared to a gain of
$1,139,365
for the change in fair value of
derivative liabilities for the three months ended March 31,
2016.
Interest Expense
Interest expense for the three months ended March
31, 2017 was $20,538, as compared to interest expense of $12,214
for the three months ended March 31, 2016. Interest expense
consists of interest and fees due on promissory notes generated in
the third quarter of 2015, all of which were either converted into
shares of Series C Preferred during the January Note Exchange, as
described in Note 3 to the Condensed Consolidated Financial
Statements included in this Report, or were repaid by the Company
in full during the first quarter of 2016.
Income Taxes
There
is no income tax expense recorded for the three months ended March
31, 2017 and 2016, as the Company’s calculated provision
(benefit) for income tax is based on annual expected tax rates. As
of March 31, 2017, the Company has tax net operating loss
carryforwards and a related deferred tax asset, offset by a full
valuation allowance.
Net Loss
Our net loss for the three months ended March 31,
2017 was $270,274 as compared to a net loss of $1,179,148
for the three months ended March 31,
2016. This year-over-year improvement of approximately $0.9 million
in net income is due to an increase of almost $1.1 million in other
income. On a per share basis, our loss was $0.00 per share for the
three months ended March 31, 2017, as compared to a loss of $0.01
per share for the three months ended March 31,
2016.
Liquidity and Capital Resources
Our auditors have included a paragraph in their
report on our consolidated financial statements, included in our
Annual Report on Form 10-K for the fiscal year ended December 31,
2016, indicating that there is substantial doubt as to the ability
of the Company to continue as a going concern. The accompanying
condensed consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America, which contemplates continuation of the
Company as a going concern. For the three months ended March 31,
2017, the Company had a net loss of $270,274, has working capital
of $1,171,305, and an accumulated deficit of $36,064,480. Although,
during the year ended December 31, 2016 and the three-months ended
March 31, 2017 the Company raised approximately $9.7 million from
financing activities, including sale of shares of Series C
Convertible Preferred Stock and Series D Convertible Preferred
Stock, additional capital will be necessary to advance the
marketability of the Company's products to the point at which the
Company can sustain operations. Management's plans are to continue
to contain expenses, expand distribution and sales of its
AquaBall®
Naturally Flavored Water as rapidly as
economically possible, and raise capital through equity and/or debt
offerings to execute the Company’s business plan and achieve
profitability from continuing operations. The accompanying
condensed consolidated financial statements do not include any
adjustments that might result in the event the Company is
unsuccessful in its plans.
The Company has financed its operations through
sales of equity and, to a lesser degree, cash flow provided by
sales of AquaBall®.
Despite recent sales of preferred stock as described below, funds
generated from sales of shares of our preferred stock or other
equity or debt securities, and cash flow provided by sales may be
insufficient to fund our operating requirements for the next twelve
months. As a result, we may require additional capital to continue
operating as a going concern. No assurances can be given that we
will be successful. In the event we are unable to obtain
additional financing in the next year, we may not be able to fund
our working capital requirements, and therefore may be unable to
continue as a going concern.
Recent Capital Raising Activity
January 2016 Note
Exchange. On January 20, 2016,
the Company and holders of Secured Notes in the principal amount of
$500,000 entered into Note Exchange Agreements pursuant to which
the holders agreed to convert the outstanding principal balance of
their Secured Notes into an aggregate total of 4,413 shares of
Series C Preferred and warrants to purchase up to an agate total of
1,029,413 shares of Common Stock for $0.17 per share. Neither
holder received warrants to purchase shares of the Company’s
Common Stock in connection with their respective Secured Notes, and
agreed to waive any unpaid interest accrued under the Secured Notes
prior to the execution of the Note Exchange
Agreement.
April 2016 Series C
Offering. On April 13, 2016,
the Company and Red Beard entered into a securities purchase
agreement, pursuant to which Red Beard agreed to purchase an
aggregate total of 50,000 shares of Series C Preferred for $100 per
share over the course of two closings. The Company issued 25,000
shares of Series C Preferred to Red Beard on April 13, 2016. As
additional consideration, investors will receive five-year warrants
to purchase up to an aggregate total of approximately 33.3 million
shares of Common Stock for $0.15 per share. On April 13, 2016, the
Company issued to Red Beard warrants to purchase approximately 16.7
million shares of Common Stock.
On
July 13, 2016, the securities purchase agreement was amended to
modify the closing schedule for the remaining 25,000 shares of
Series C Preferred to be purchased. As amended, 10,000 shares of
Series C Preferred were purchased on July 15, 2016, and the
remaining 25,000 shares were purchased between August 31, 2016 and
September 13, 2016.
Series D Offering and Warrant
Exchange. On February 8, 2017,
the Company and Series D Investors entered into the Series D
Purchase Agreement, wherein the Company may offer and sell to
Series D Investors up to 50,000 shares of Series D Preferred for
$100 per share. As additional consideration, Series D Investors
will also receive Series D Warrants to purchase up to 200% of the
Conversion Shares issuable upon conversion of shares of Series D
Preferred purchased under the Series D Offering for $0.15 per
share.
On
the Initial Investment Date, the Company issued to Series D
Investors an aggregate total of 31,750 shares of Series D
Preferred, as well as Series D Warrants to purchase up to an
aggregate total of 42,333,341 shares of Common Stock. Between the
Initial Investment Date and March 31, 2017, the Company issued an
additional 5,000 shares of Series D Preferred and Series D Warrants
to purchase up to an aggregate total of 6,666,669 shares of Common
Stock. The issuance of the shares of Series D Preferred in the
quarter resulted in gross proceeds to the Company of $3.675
million. Each Series D Warrant contains a price protection feature
that adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued during the quarter, totaling $2,262,334,
was recorded to derivative liabilities. Between April 1, 2017 and
the date of this Report, the Company has issued an additional 1,200
shares of Series D Preferred and Series D Warrants to purchase up
to an aggregate total of 1,600,002 shares of Common Stock. The
issuance of the shares of Series D Preferred since March 31, 2017
has resulted in gross proceeds to the Company of
$120,000.
Warrant Exchange.
Beginning on February 8, 2017, the
Company and certain holders of Outstanding
Warrants, entered into Exchange
Agreements, pursuant to which
each holder agreed to cancel their respective Outstanding Warrants
in exchange for one-half of a share of Common Stock for every share
of Common Stock otherwise issuable upon exercise of Outstanding
Warrants. The Company expects
to issue up to 76.0 million shares of Common Stock in exchange for
the cancellation of 152.0 million Outstanding Warrants, including
the Warrants issued in connection with the Series D Offering, over
the course of the Warrant Exchange Program.
During
the three months ended March 31, 2017, the Company issued
73,106,466 shares of Common Stock in exchange for the cancellation
of 146,212,905 Outstanding Warrants. Between April 1, 2017 and the
date of this Report, the Company has issued an additional 800,001
shares of Common Stock in exchange for the cancellation of
1,600,002 Outstanding Warrants.
Off-Balance Sheet Items
We
had no off-balance sheet items as of March 31, 2017.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not a required disclosure for smaller reporting
companies.
ITEM 4. CONTROLS AND
PROCEDURES
|
(a)
|
Evaluation of disclosure controls and procedures.
|
We maintain disclosure controls and procedures (as
defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the “Exchange
Act”)) that are designed
to ensure that information required to be disclosed in our periodic
reports filed under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
rules and forms of the SEC, and that this information is
accumulated and communicated to our management, including our
principal executive and financial officers, to allow timely
decisions regarding required disclosure.
Our
management, with the participation and supervision of our Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their
costs.
Based
on that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were
not effective based on our material weakness in the form of lack of
segregation of duties, which stems from our early stage status and
limited capital resources to hire additional financial and
administrative staff.
|
(b)
|
Changes in internal controls over financial reporting.
|
The
Company’s Chief Executive Officer and Chief Financial Officer
have determined that there have been no changes, in the
Company’s internal control over financial reporting during
the period covered by this report identified in connection with the
evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect,
Company’s internal control over financial
reporting.
ITEM
1. LEGAL
PROCEEDINGS
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations.
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or,
to the knowledge of the executive officers of the Company or any of
our subsidiaries, threatened against or affecting the Company, or
our Common Stock in which an adverse decision could have a material
adverse effect.
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended December 31, 2016, filed on
March 31, 2017. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of March 31, 2017, there have been no material changes
to the disclosures made in the above-referenced Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM
4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
|
(a)
|
|
EXHIBITS
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a)
|
|
31.2
|
|
Certification of the Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
|
|
32.1
|
|
Certification by the Principal Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
|
Certification by the Principal Financial and Accounting Officer
pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Date: May 15, 2017
|
|
TRUE DRINKS HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ James J. Greco
|
|
|
|
|
|
|
James J. Greco
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
Date: May 15, 2017
|
|
By:
|
/s/ Daniel Kerker
|
|
|
|
|
|
|
Daniel Kerker
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|