Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
[X]
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2017
|
[ ]
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
|
For the transition period from _________ to
_________
Commission file number 001-32420
TRUE DRINKS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada
|
|
84-1575085
|
|
(State or Other Jurisdiction of Incorporation
or Organization)
|
|
(IRS Employer Identification No.)
|
4 Executive Circle, Suite 280
Irvine, CA 92614
(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):
|
Large accelerated filer
|
[ ]
|
Accelerated filer
|
[ ]
|
|
Non-accelerated filer
|
[ ]
|
Smaller reporting company
|
[X]
|
|
|
|
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, $0.001 par value per share,
outstanding on November 14, 2017 was 216,151,590.
TRUE DRINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
19
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
19
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
ITEM 1. FINANCIAL STATEMENTS
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$217,474
|
$15,306
|
|
Accounts
receivable, net
|
263,480
|
536,817
|
|
Inventory,
net
|
488,761
|
318,912
|
|
Prepaid
expenses and other current assets
|
183,225
|
127,258
|
|
Total
Current Assets
|
1,152,940
|
998,293
|
|
|
|
|
|
Restricted Cash
|
-
|
209,570
|
|
Property and Equipment, net
|
7,130
|
11,064
|
|
Patents, net
|
160,000
|
250,000
|
|
Goodwill
|
3,474,502
|
3,474,502
|
|
Total Assets
|
$4,794,572
|
$4,943,429
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$1,588,255
|
$1,258,252
|
|
Debt,
short-term
|
514,353
|
109,682
|
|
Derivative
liabilities
|
67,528
|
5,792,572
|
|
Total
Current Liabilities
|
2,170,136
|
7,160,506
|
|
|
|
|
|
Debt,
long-term
|
1,570,963
|
-
|
|
|
|
|
|
Total
Liabilities
|
3,741,099
|
7,160,506
|
|
|
|
|
|
Commitments and
Contingencies (Note
5)
|
|
|
|
|
|
|
|
Stockholders’ Equity
(Deficit):
|
|
|
|
Common
Stock, $0.001 par value, 300,000,000 shares authorized, 214,622,929
and 119,402,009 shares issued and outstanding at September 30, 2017
and December 31, 2016, respectively
|
214,623
|
119,402
|
|
Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,500,000 shares authorized, 1,285,585 and
1,292,870 shares issued and outstanding at September 30, 2017 and
December 31, 2016, respectively
|
1,285
|
1,293
|
|
Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 and 150,000 shares authorized,
105,704 and 109,352 shares issued and outstanding at September 30,
2017 and December 31, 2016, respectively
|
106
|
109
|
|
Preferred
Stock – Series D (liquidation preference $100 per share),
$0.001 par value, 50,000 and 0 shares authorized, 38,750 and 0
shares issued and outstanding at September 30, 2017 and December
31, 2016, respectively
|
39
|
-
|
|
Additional
paid in capital
|
42,625,878
|
33,456,325
|
|
Accumulated
deficit
|
(41,788,458)
|
(35,794,206)
|
|
|
|
|
|
Total
Stockholders’ Equity (Deficit)
|
1,053,473
|
(2,217,077)
|
|
|
|
|
|
Total Liabilities and Stockholders’ Equity
(Deficit)
|
$4,794,572
|
$4,943,429
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
$1,030,008
|
$961,949
|
$4,494,713
|
$2,028,216
|
|
|
|
|
|
|
|
Cost of Sales
|
720,080
|
628,195
|
2,918,945
|
1,884,309
|
|
|
|
|
|
|
|
Gross Profit
|
309,928
|
333,754
|
1,575,768
|
143,907
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
Selling
and marketing
|
1,913,814
|
558,899
|
4,864,499
|
2,696,295
|
|
General
and administrative
|
1,680,234
|
956,614
|
4,825,983
|
3,573,520
|
|
Total
operating expenses
|
3,594,048
|
1,515,513
|
9,690,482
|
6,269,815
|
|
|
|
|
|
|
|
Operating Loss
|
(3,284,120)
|
(1,181,759)
|
(8,114,714)
|
(6,125,908)
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
Change
in fair value of derivative liabilities
|
33,347
|
3,051,973
|
2,272,697
|
3,026,433
|
|
Interest
(expense) income
|
(59,311)
|
(10,428)
|
(104,229)
|
(39,632)
|
|
Other
(expense) income
|
|
178
|
(48,006)
|
(18,745)
|
|
Total
Other (Expense) Income
|
(25,964)
|
3,041,723
|
2,120,462
|
2,968,056
|
|
|
|
|
|
|
|
|
(3,310,084)
|
1,859,964
|
(5,994,252)
|
(3,157,852)
|
|
|
|
|
|
|
|
Declared dividends on Preferred Stock
|
66,080
|
66,080
|
196,085
|
198,929
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders
|
$(3,376,164)
|
$1,793,884
|
$(6,190,337)
|
$(3,356,781)
|
|
|
|
|
|
|
|
Net (loss) income per common share
|
|
|
|
|
|
Basic:
|
$(0.02)
|
$0.01
|
$(0.03)
|
$(0.03)
|
|
Diluted:
|
$(0.02)
|
$0.01
|
$(0.03)
|
$(0.03)
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
Basic:
|
208,056,810
|
121,989,573
|
186,111,074
|
118,978,522
|
|
Diluted:
|
208,056,810
|
210,146,167
|
186,111,074
|
118,978,522
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Nine Months Ended
September 30,
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$(5,994,252)
|
$(3,157,852)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
|
3,934
|
3,557
|
|
Amortization
|
90,000
|
105,882
|
|
Accretion
of debt discount
|
17,846
|
-
|
|
Provision
for bad debt expense
|
(18,204)
|
140,152
|
|
Provision
for inventory losses
|
-
|
110,000
|
|
Change
in estimated fair value of derivative
|
(2,272,697)
|
(3,026,433)
|
|
Fair
value of common stock issued for services
|
605,500
|
18,000
|
|
Stock
based compensation
|
480,043
|
229,858
|
|
Change
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
291,541
|
1,258,991
|
|
Inventory
|
(169,849)
|
707,364
|
|
Prepaid
expenses and other current assets
|
(55,967)
|
(160,523)
|
|
Accounts
payable and accrued expenses
|
1,379,568
|
(623,123)
|
|
Net cash used in operating activities
|
(5,642,537)
|
(4,394,127)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
Restricted
cash
|
209,570
|
(158)
|
|
Purchase
of property and equipment
|
-
|
(11,775)
|
|
Net cash provided by (used in) investing activities
|
209,570
|
(11,933)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from warrants exercised for cash
|
-
|
45,000
|
|
Proceeds
from issuance of Series C Preferred Stock
|
-
|
6,000,000
|
|
Proceeds
from issuance of Series D Preferred Stock
|
4,562,500
|
-
|
|
Borrowings
on debt
|
1,350,000
|
94,998
|
Principal
repayment on debt
|
(208,602)
|
(703,778)
|
|
Net
borrowing on line-of-credit facility
|
(68,763)
|
-
|
|
Net cash provided by financing activities
|
5,635,135
|
5,436,220
|
|
|
|
|
|
NET INCREASE IN CASH
|
202,168
|
1,030,160
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS- beginning of
period
|
15,306
|
376,840
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS- end of
period
|
$217,474
|
$1,407,000
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
Interest
paid in cash
|
$ 69,885
|
$41,758
|
|
Non-cash
financing and investing activities:
|
|
|
|
Conversion
of preferred stock to common stock
|
$7,131
|
$1,473
|
|
Dividends
paid in common stock
|
$196,086
|
$198,449
|
|
Dividends
declared but unpaid
|
$196,086
|
$198,929
|
|
Debt
discount recorded in connection with borrowings on
debt
|
$164,411
|
$-
|
|
Notes
payable issued in exchange for accounts payable
|
$1,049,564
|
$-
|
|
Conversion
of notes payable and accrued interest to Series C Preferred
Stock
|
$-
|
$500,000
|
|
Warrants
exchanged for common stock
|
$6,080,278
|
$-
|
Issuance
of restricted stock
|
$-
|
$2,620
|
|
Warrants
issued in connection with Preferred Offering
|
$2,627,931
|
$3,159,721
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 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,
AquaBall® Naturally Flavored Water, a zero-sugar,
zero-calorie, preservative-free, vitamin-enhanced, naturally
flavored water drink. We distribute AquaBall® 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 4 Executive
Circle, Suite 280, Irvine, California, 92614. Our telephone number
is (949) 203-3500. 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".
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 nine-month
period ended September 30, 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 nine months
ended September 30, 2017, the Company had a net loss of $5,994,252,
negative working capital of $1,017,196, and an accumulated deficit
of $41,788,458. The Company had $217,474 in cash at September 30,
2017. The Company currently requires 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 will result if the
Company is unable to secure the capital necessary to execute its
business, marking or operating plan.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries True
Drinks, Inc., 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 September 30, 2017, the Company did not have
any restricted cash. The Company had a letter of credit which
matured on August 31, 2017, originally 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. Currently, the
Company’s renewed licensing agreement with Disney is secured
by a letter of credit, which letter is secured by the Company's
largest investor.
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 Bottling, LLC (“Niagara”), under the terms and conditions of the
bottling agreement first executed by the Company and Niagara in
October 2015, and subsequently amended (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 all repackaging of
AquaBall®
into six packs or 15-packs for club
customers.
During
the three months ended September 30, 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.
No
customer made up more than 10% of accounts receivable at September
30, 2017 or December 31, 2016. No customer made up more than 10% of
net sales for each of the three or the nine-month periods ended
September 30, 2017 and September 30, 2016.
A significant portion of our revenue comes from
sales of AquaBall®
Naturally Flavored Water.
For the
three months ended September 30, 2017 and 2016, sales of
AquaBall® accounted for 92% and 97% of the Company’s
total revenue, respectively. For the nine months ended
September 30, 2017 and 2016, sales of AquaBall® accounted for
96% and 93% of the Company’s total revenue,
respectively.
Inventory
The
Company contracts for the manufacturing, for resale, of 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 as of September
30, 2017 and December 31, 2016.
Inventory
is comprised of the following:
|
|
|
|
|
Purchased
materials
|
$37,775
|
$89,358
|
|
Finished
goods
|
560,986
|
339,554
|
|
Allowance
for obsolescence reserve
|
(110,000)
|
(110,000)
|
|
Total
|
$488,761
|
$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 September 30, 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 September
30, 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 and nine-month periods ended September 30,
2017 and 2016. At September 30, 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 nine-month periods ended September 30, 2017 and 2016, general
and administrative expenses included stock based compensation
expense of $480,043 and $229,858, 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 (loss) Income per share
Our computation of earnings per share
(“EPS”) includes basic and diluted EPS. Basic EPS
is measured as the (loss) income available to common stockholders
divided by the weighted average common shares outstanding for the
period. Diluted (loss) income 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 (loss) income of the Company
as if they had been converted at the beginning of the periods
presented, or issuance date, if later. In computing diluted (loss)
income 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.
(Loss) income per common share is computed by
dividing net (loss) income 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 September 30,
2017 and 2016, we excluded 119,187,105 and
106,713,737, 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. During the three
and nine months ended September 30, 2017 and 2016, we did not incur
any costs associated with research and development.
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.
The Company has
elected to adopt the guidance beginning in fiscal 2018 using the
full retrospective approach, which applies the standard to all
periods presented. The Company is performing a preliminary
assessment of the impact of adoption of this guidance, including
required disclosures, and does not expect a significant impact on
processes, systems or controls. The Company will continue to
evaluate the impact of adoption of this
guidance.
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 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 the Company
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.
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 Convertible Preferred Stock
(“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 of 1933, as amended (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 September 30, 2017, the Company declared
$66,080 in dividends on outstanding shares of its Series B
Preferred. During the nine months ended September 30, 2017, the
Company declared $196,085 in dividends on outstanding shares of its
Series B Preferred. As of September 30, 2017, there remained
$66,080 in cumulative unpaid dividends on the Series B Preferred.
These dividends were paid by issuing 528,661 shares of the
Company’s Common Stock in October 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 “Series D Conversion
Shares”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Series D Conversion
Shares in the event: (i) there are sufficient authorized shares of
Common Stock reserved as Series D Conversion Shares; (ii) the
Series D Conversion Shares are registered under the Securities Act,
or the Series D 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
Between February 8, 2017 and August 21, 2017, the
Company issued an aggregate total of 45,625 shares of Series D
Preferred for $100 per share in a series of private placement
transactions (the “Series D
Financing”). As
additional consideration, investors in the Series D Financing
received warrants to purchase up to 60,833,353 shares of Common
Stock, an amount equal to 200% of the Series D Conversion Shares
issuable upon conversion of shares of Series D Preferred purchased
under the Series D Financing, exercisable for $0.15 per share. In
accordance with the terms and conditions of the Securities Purchase
Agreement executed in connection with the Series D Financing, all
warrants issued were exchanged for shares of Common Stock pursuant
to the Warrant Exchange Program (defined below). During the nine
months ended September 30, 2017, 6,875 shares of Series D Preferred
were converted to Common Stock.
Beginning on February 8, 2017 the Company and
holders of outstanding Common Stock purchase warrants (the
“Outstanding
Warrants”) entered into
Warrant 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
“Warrant Exchange
Program”). As of the date
of this Quarterly Report on Form 10-Q, the Company has issued
79,040,135 shares of Common Stock, in exchange for the cancellation
of 158,080,242 Outstanding Warrants.
NOTE 3 — WARRANTS AND STOCK BASED
COMPENSATION
Warrants
On July 26, 2017, the Company commenced an
offering of Senior Secured Promissory Notes (the
“Secured Notes”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the
“Secured Note
Financing”). As
additional consideration for participating in the Secured Note
Financing, investors received five-year warrants, exercisable for
$0.15 per share, to purchase that number of shares of the
Company’s Common Stock equal to 50% of the principal amount
of the Secured Note purchased, divided by $0.15 per share. Between
July 26, 2017 and September 30, 2017, the Company offered and sold
Secured Notes in the aggregate principal amount of $1,350,000 and
issued Warrants to purchase up to 4,500,001 shares of Common Stock
to participating investors.
A
summary of the Company’s warrant activity for the three and
nine months ended September 30, 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
|
|
Granted
|
3,000,002
|
0.15
|
|
Exercised
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Exchanged
|
(3,000,002)
|
0.15
|
|
Outstanding, June 30, 2017
|
5,183,521
|
$0.20
|
|
Granted
|
11,733,340
|
0.15
|
|
Exercised
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Exchanged
|
(7,267,333)
|
0.15
|
Outstanding, September 30, 2017
|
9,649,528
|
$0.18
|
As
of September 30, 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.)
|
|
7,747,459
|
$0.15
|
3.30
|
|
427,633
|
$0.19
|
2.97
|
|
737,218
|
$0.25
|
0.44
|
|
737,218
|
$0.38
|
0.44
|
|
9,649,528
|
$0.18
|
2.85
|
Stock-Based
Compensation
Non-Qualified Stock Options
During
the quarter ended September 30, 2017, the Company granted options
to certain employees and each member of the Company’s Board
of Directors to purchase an aggregate total of 39,390,782 shares of
Common Stock. Each option granted during the quarter ended
September 30, 2017 has an exercise price of $0.07 per share, and
expires five years from the date of issuance. As further described
below, certain of these options were issued in exchange for the
cancellation of previously issued restricted stock awards to our
Chief Marketing Officer, Chief Financial Officer and Chief
Operating Officer.
During the three and nine months
ended September 30, 2017 and 2016, the Company granted stock
options to purchase an aggregate of 31,390,782 and 3,460,000 shares
of Common Stock, respectively. The weighted average estimated
fair value per share of the stock options at grant date was $0.03
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%
|
|
Risk-free
interest rate
|
1.1%
|
|
Dividends
|
-
|
Stock
option activity during the nine months ended September 30, 2017 is
summarized as follows:
|
|
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 31, 2016
|
3,460,000
|
$0.15
|
|
Exercised
|
-
|
-
|
|
Granted
|
41,390,782
|
0.07
|
|
Forfeited
|
(1,220,000)
|
0.15
|
|
Expired
|
-
|
-
|
|
Options outstanding at September 30, 2017
|
43,630,782
|
$0.08
|
Restricted Stock Awards
During
the quarter ended September 30, 2017, our Chief Marketing Officer,
Chief Financial Officer and Chief Operating Officer cancelled
10,720,252 previously issued restricted stock awards in exchange
for stock options to purchase an aggregate total of 10,720,252
shares of Common Stock. In addition, the Company issued a total of
1,302,084 shares of restricted stock to James Greco, our Chief
Executive Officer, pursuant to the employment agreement entered
into by the Company and Mr. Greco in April 2017, and an aggregate
total of 2,289,156 shares of restricted stock to our directors as
payment of accrued but unpaid board fees.
During
the three and nine months ended September 30, 2017, the Company
granted an aggregate total of 3,591,240 restricted stock awards to
under the Company’s 2013 Stock Incentive Plan, as amended.
The Company did not grant any restricted stock awards during the
three and nine months ended September 30, 2016. A summary of the
Company’s restricted Common Stock activity during the nine
months ended September 30, 2017 is summarized as
follows:
|
|
Restricted Common Stock Awards
|
|
Outstanding, December 31, 2016
|
12,772,229
|
|
Granted
|
3,591,240
|
|
Issued
|
(2,289,156)
|
|
Forfeited
|
(10,720,252)
|
|
Outstanding, September 30, 2017
|
3,354,061
|
NOTE 4 — DEBT
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 September 30, 2017, the
total outstanding on the line-of-credit was $40,919 and the Company
did not have any availability to borrow. The line-of-credit bears
interest at Prime rate (5.42% as of September 30, 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.
A
summary of the line-of-credit as of September 30, 2017 and December
31, 2016 is as follows:
|
|
|
|
Outstanding, December 31, 2016
|
$109,682
|
|
Net
Borrowings
|
(68,763)
|
|
Outstanding September 30, 2017
|
$40,919
|
Note Payable
In April 2017, the Company converted approximately
$1,050,000 of accounts payable into a secured note payable
agreement with Niagara (the “Niagara
Note”). At September 30,
2017, the total principal amount outstanding under the Niagara Note
was approximately $841,000. The Niagara Note calls for monthly
payments of principal and interest totaling $25,000 through
December 2017, and monthly payments of approximately $52,000
through maturity. The note bears interest at 8% per annum, matures
in April 2019 and is secured by the personal guarantee which
secures the Niagara Agreement.
Secured Note Financing
As
disclosed in Note 3 above, on July 26, 2017, the Company commenced
an offering of Secured Notes in the aggregate principal amount of
up to $1.5 million to certain accredited investors. Between July
26, 2017 and September 30, 2017, the Company offered and sold
Secured Notes in the aggregate principal amount of $1,350,000 and
issued warrants to purchase up to 4,500,001 shares of Common Stock
to participating accredited investors. The warrants were valued at
$164,411 and were recorded as a discount to notes payable. During
the three months ended September 30, 2017, a total of $17,846 of
the debt discount was amortized and recorded as interest
expense.
The Secured Notes (i) bear interest at a rate of
8% per annum, (ii) have a maturity date of 1.5 years from the date
of issuance, and (iii) are subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “Security
Agreement”).
A
summary of the note payable as of September 30, 2017 and December
31, 2016 is as follows:
|
|
|
|
Outstanding, December 31, 2016
|
$-
|
|
Conversion
of accounts payable into note payable
|
1,049,564
|
|
Borrowings
on secured notes
|
1,350,000
|
|
Recording
of debt discount on secured notes
|
(164,411)
|
|
Amortization
of debt discount to interest expense
|
17,846
|
|
Repayments
|
(208,602)
|
|
Outstanding September 30, 2017
|
$2,044,397
|
NOTE 5 — COMMITMENTS AND CONTINGENCIES
During
the quarter ended September 30, 2017, we moved our corporate
headquarters and entered into a new lease for the facility, which
lease will expire on March 31, 2019. Base rent during the term of
the lease is $5,331 per month for the first 12 months, and $5,563
for the final six months, and total rent payments on the lease
through March 31, 2019, the expiration date, are $97,350. Total
rent expense related to our operating lease for the nine months
ended September 30, 2017 was $44,981.
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 nine months
ended September 30, 2017. The Company had no Level 1 or 2 fair
value measurements at September 30, 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
September 30, 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 – September 30, 2017
|
$67,528
|
$-
|
$-
|
$67,528
|
|
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 nine-months ended
September 30, 2017 and 2016:
|
|
Recurring Fair Value Measurements
|
|
|
Changes in Fair Value
Included in Net Income
|
|
|
|
|
|
|
Derivative
liabilities – September 30, 2017
|
$2,272,697
|
$-
|
$2,272,697
|
|
Derivative
liabilities – September 30, 2016
|
$3,026,433
|
$-
|
$3,026,433
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the nine months ended
September 30, 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
|
$2,627,931
|
$(6,080,278)
|
$(2,272,697)
|
$67,528
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the nine months ended
September 30, 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
|
$3,159,721
|
$-
|
$(3,026,433)
|
$6,332,309
|
NOTE 7 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. (“Disney”) and an 18-month licensing agreement with
Marvel Characters, B.V. (“Marvel”) (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.
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 over the period from January 1, 2016
through December 31, 2017. The Company has decided not to renew the
Marvel Agreement for another term. The Licensing Agreement will,
therefore, terminate at the expiration of the current agreement on
December 31, 2017.
NOTE 8 – INCOME TAXES
The Company does not
have significant income tax expense or benefit for the nine months
ended September 30, 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 September 30,
2017 and 2016. Such tax net operating loss carryforwards
(“NOL”) approximated
$35.5 million at September 30, 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 September 30, 2017 and 2016 as
follows:
|
|
|
|
|
Deferred
tax asset –NOL’s
|
$15,600,000
|
$13,500,000
|
|
Less
valuation allowance
|
(15,600,000)
|
(13,500,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
NOTE 9 – SUBSEQUENT EVENTS
On
October 19, 2017, we received a notice of breach and request for
meet and confer from Niagara with respect to certain past due
payment obligations under the Niagara Agreement. Pursuant to the
Niagara Agreement, the Company has 30 days from the date of the
notice to bring all amounts due current or negotiate a settlement
with Niagara for the amounts owed. Failure to do so may result in
an event of default under the Niagara Agreement.
On
October 27, 2017, the Company offered and sold Secured Notes in the
aggregate principal amount of $100,000 and issued Warrants to
purchase up to 333,334 shares of Common Stock to participating
investors.
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.
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 several unique products. Our flagship product is
AquaBall® Naturally Flavored Water which we believe to be the
healthiest children's beverage on the market. True Drinks has
licensing agreements with Disney Consumer Products, Inc.
(“Disney”) and Marvel Characters, B.V.
(“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.
Sales
of beverages tend to be seasonal with the highest volume typically
realized during the summer and warmer months. However, as our sales
velocity and distribution has been increasing over the year this
trend may not apply to us. 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 4 Executive
Circle, Suite 280, Irvine, California, 92614. Our telephone number
is (949) 203-3500. 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 September 30, 2017 to the
Three Months Ended September 30, 2016.
Net Sales
Net sales for the three months ended September 30,
2017 were $1,030,008, compared with sales of $961,649
for the three months ended September
30, 2016, a 7% increase. This increase is primarily the
continued result of chain authorizations secured by our sales team
for shelf resets at retailers beginning in February 2017 and
continuing through June 2017, thus increasing sales based revenues
in the three months ended September 30, 2017 compared to the three
months ended September 30, 2016.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Three Months Ended
September 30, 2017
(% of Sales)
|
|
AquaBall®
|
92%
|
|
Bazi®
|
8%
|
Gross Profit and Gross Margin
Gross profit for the three months ended
September 30, 2017 was $309,928, compared to gross profit of
$333,754 for the three months ended September 30, 2016.
Gross profit as a percentage of revenue (gross margin) during
the three months ended September 30, 2017 was 30.1%, compared to
34.7% for the same period in 2016. This
decrease in gross profit is a result of a small change in our sales
mix. We sold more of our lower margin six packs in the three months
ended September 30, 2017 than in the three months ended September
30, 2016. While we are updating our packaging to reduce costs on
six packs, we are still currently selling the remaining six packs
which were produced at higher costs. We anticipate maintaining
margins in the 30-40% range.
Sales, General and Administrative Expense
Sales,
general and administrative expense was $3,594,048 for the three
months ended September 30, 2017, as compared to $1,515,513 for the
three months ended September 30, 2016. This period over period
increase of $2,078,535 is the result of an increase of
approximately $1.2 million in marketing expenditures composed of
direct retailer marketing and brand awareness marketing in the New
England region. We also saw increases in stock-based compensation
and the issuance of equity to consultants of approximately
$400,000.
Change in Fair Value of Derivative Liabilities
The Company recorded a change in fair value of
derivative liabilities of a gain of $33,347 for the three months
ended September 30, 2017, as compared to a gain of
$3,051,973
for the change in fair value of
derivative liabilities for the three months ended September 30,
2016.
Interest Expense
Interest
expense for the three months ended September 30, 2017 was $59,311,
as compared to interest expense of $10,428 for the three months
ended September 30, 2016.
Income Taxes
There
is no income tax expense recorded for the three months ended
September 30, 2017 and 2016, as the Company’s calculated
provision (benefit) for income tax is based on annual expected tax
rates. As of September 30, 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 September
30, 2017 was $3,310,084 as compared to a net income of
$1,859,964
for the three months ended September
30, 2016. This year-over-year difference of approximately $5.17
million is primarily due an increase in operating expenses of
approximately $2.1 million, and a difference in the change of fair
value of derivatives of approximately $3.0 million in other income.
On a basic and diluted per share basis, our loss was $0.02 per
share for the three months ended September 30, 2017, as compared to
income of $0.01 per share for the three months ended September 30,
2016.
Comparison of the Nine Months Ended September 30, 2017 to the Nine
Months Ended September 30, 2016.
Net Sales
Net
sales for the nine months ended September 30, 2017 was $4,494,713,
compared with sales of $2,028,216 for the nine months ended
September 30, 2016, a 122% increase. This increase is
primarily the result of chain authorizations secured by our sales
team for shelf resets at retailers beginning in February 2017 and
continuing through June 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 having received their
initial shipments in April through June.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Nine Months Ended
September 30, 2017
(% of Sales)
|
|
AquaBall™
|
96%
|
|
Bazi®
|
4%
|
Gross Profit and Gross Margin
Gross profit for the nine months ended
September 30, 2017 was $1,575,768, compared to gross profit of
$143,907 for the nine months ended September 30, 2016.
Gross profit as a percentage of revenue (gross margin) during
the nine months ended September 30, 2017 was 35.1%. This
increase in gross profit is a great improvement for our Company,
and is a direct result of our relationship with Niagara,
who provides finished goods to the
Company and bills the Company for the product as it is shipped to
customers, reducing our costs and improving product quality. It is
also attributable to our shift away from focusing on the low-margin
club channel to mainstream grocery and convenience channels. We
expect to maintain gross margins in the 30-40% range moving
forward.
Sales, General and Administrative Expense
Sales,
general and administrative expenses were $9,690,482 for the nine
months ended September 30, 2017, as compared to $6,269,815 for the
nine months ended September 30, 2016. This increase in the 2017
period, when compared to the 2016 period, is the result of
increased direct selling expenses and marketing expenses at new
retailers, each resulting from the first quarter of 2017 being a
much more active selling season for AquaBall®. As a percentage
of sales, our sales, general and administrative expense was 216% of
sales compared to 309% in the same period in 2016.
Change in Fair Value of Derivative Liabilities
The
Company recorded a gain on the change in fair value of derivative
liabilities for the nine months ended September 30, 2017 of
$2,272,697, as compared to a gain of $3,026,433 for the change in
fair value of derivative liabilities for the nine months ended
September 30, 2016.
Interest Income
Interest
expense for the nine months ended September 30, 2016 was $104,229,
as compared to interest expense of $39,632 for the nine months
ended September 30, 2016.
Income Taxes
There
is no income tax expense recorded for the nine months ended
September 30, 2017 and 2016, due to the Company's net losses. As of
September 30, 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 nine months ended September 30, 2017 was
$5,994,252 as compared to a net loss of $3,157,852 for the nine
months ended September 30, 2016. This year-over-year difference of
approximately $2.8 million in net income is due to an increase in
operating expenses of about $3.4 million, offset by increase in
gross profit of approximately $1.4 million and $0.8 million in
other income. On a
basic and diluted per
share basis, our loss was $0.03 per share for the nine months ended
September 30, 2017 and 2016.
We expect to continue to incur a net loss in subsequent periods,
and plan to fund our operations using proceeds received from
capital raising activities until our operations become profitable.
Although we anticipate a continued growth in sales and gross
margins as a result of increased velocity, distribution and brand
awareness these increases may not occur, may take longer than
anticipated, or may not be sufficient to produce net income in any
subsequent quarters.
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 nine months ended September 30, 2017, the
Company had a net loss of $5,944,252, negative working capital of
$1,017,196, and an accumulated deficit of $41,788,458. Although,
during the year ended December 31, 2016 and the nine-months ended
September 30, 2017 the Company raised approximately $6.7 million
from financing activities, including sale of shares of Series C
Convertible Preferred Stock and Series D Convertible Preferred
Stock, as well as Senior Secured Promissory Notes (described
below), additional capital is 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 focus on
raising capital through equity and/or debt offerings to execute the
Company’s business plan, while continuing to contain
expenses. The accompanying condensed consolidated financial
statements do not include any adjustments that will result in the
event the Company is unsuccessful in securing the capital necessary
to execute our business plan.
The
Company has financed its operations through sales of equity and
debt securities, and, to a lesser extent, cash flow provided by
sales of its products. Despite recent sales of preferred stock and
the issuance of Senior Secured Promissory Notes, funds generated
from sales of our securities, and cash flow provided by sales are
insufficient to fund our operating requirements for the next twelve
months. As a result, we 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, 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
Series D Offering and Warrant
Exchange. On February 8, 2017,
the Company and certain accredited investors entered into
Securities Purchase Agreements, for the private placement of up to
50,000 shares of Series D Convertible Preferred Stock
(“Series D
Preferred”) for $100 per
share. As additional consideration for participation in the private
placement, investors received warrants to purchase up to 200% of
the shares of Common Stock issuable upon conversion of shares of
Series D Preferred purchased, with an exercise price of $0.15 per
share (the “Series D
Financing”).
In
February 2017, the Company issued an aggregate total of 31,750
shares of Series D Preferred, as well as warrants to purchase up to
an aggregate total of 42,333,341 shares of Common Stock. Between
February 2017 and March 2017, the Company issued an additional
5,000 shares of Series D Preferred and warrants to purchase up to
an aggregate total of 6,666,669 shares of Common Stock. Between
April 1, 2017 and August 21, 2017, the Company has issued an
additional 8,875 shares of Series D Preferred and warrants to
purchase up to an aggregate total of 11,833,343 shares of Common
Stock. The issuance of the shares of Series D Preferred during the
nine months ended September 30, 2017 resulted in gross proceeds to
the Company of $4.56 million. Each warrant issued during the Series
D Financing 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 nine months, totaling $2,627,931, was recorded to
derivative liabilities.
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, 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 79.0 million shares of Common Stock
in exchange for the cancellation of 158.0 million Outstanding
Warrants, including the Warrants issued in connection with the
Series D Financing, over the course of the Warrant Exchange
Program.
During
the nine months ended September 30, 2017, the Company issued
79,040,135 shares of Common Stock in exchange for the cancellation
of 158,080,242 Outstanding Warrants.
Secured Note
Financing. On July 26,
2017, we commenced an offering of Senior Secured Promissory Notes
(the “Secured Notes”) in the aggregate principal amount of up
to $1.5 million to certain accredited investors (the
“Secured Note
Financing”). As
additional consideration for participating in the Secured Note
Financing, investors received five-year warrants, exercisable for
$0.15 per share, to purchase that number of shares of the our
Common Stock equal to 50% of the principal amount of the Secured
Note purchased, divided by $0.15 per share. Between July 26, 2017
and September 30, 2017, we offered and sold Secured Notes in the
aggregate principal amount of $1,350,000 and issued Warrants to
purchase up to 4.5 million shares of Common Stock to participating
investors.
The Secured Notes (i) bear interest at a rate of
8% per annum, (ii) have a maturity date of 1.5 years from the date
of issuance, and (iii) are subject to a pre-payment and change in
control premium of 125% of the principal amount of the Secured
Notes at the time of pre-payment or change in control, as the case
may be. To secure the Company’s obligations under the Secured
Notes, the Company granted to participating investors a continuing
security interest in substantially all of the Company’s
assets pursuant to the terms and conditions of a Security Agreement
(the “Security
Agreement”).
Off-Balance Sheet Items
We had no off-balance sheet items as of September
30, 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.
Investing
in our securities involves a high degree of risk. You should
consider carefully the risks and uncertainties described below,
together with all of the other information in this Quarterly Report
on Form 10-Q and in our Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year ended
December 31, 2016 before investing in our securities. The risks
described below are not the only risks facing our
Company. Additional risks and uncertainties not
currently known to us or that we currently deem to be immaterial
may also materially adversely affect our business, financial
condition and/or operating results. If any of the following
risks are realized, our business, financial condition and
results of operations could be materially and adversely
affected.
Risks Related to the Company
We have a history of operating losses and, despite consummation of
recent financings, we require additional financing to satisfy our
current contractual obligations and execute our business
plan.
We
have not been profitable since inception. We had a net loss of
$5,994,252 and $5,445,563 for the nine months ended September 30,
2017 and the year ended December 31, 2016, respectively.
Additionally, sales of AquaBall™ Naturally Flavored Water are
significantly below levels necessary to achieve positive cash
flow.
Although we have recently consummated equity and
debt financings that have resulted in aggregate gross proceeds of
approximately $6.7 million for the nine months ended September 30,
2017, our cash position was approximately $215,000 at September 30,
2017, and we used approximately $5,463,000 of cash for operations
during the nine months ended September 30, 2017. To continue as a
going concern, and to satisfy our contractual obligations under the
bottling agreement executed by the Company and Niagara Bottling,
LLC (“Niagara”) in October 2015 (the
“Niagara
Agreement”), we need to
secure proceeds from the sale of additional debt or equity
securities, whether in a private or public offering, in the near
term. No assurances can be given that we will be successful in our
attempts to generate proceeds to fund our operations. In the event
we are unable to raise additional capital through the issuance of
additional debt or equity securities, we will be unable to continue
as a going concern.
We are currently in breach of the Niagara Agreement, which could,
in turn, have a materially adverse effect on our business,
financial condition and results of operation. No assurances can be
given that we can cure the breach or otherwise satisfy our
remaining obligation.
On October 19, 2017, we received a notice of
breach and request for meet and confer from Niagara with respect to
certain past due payment obligations under the Niagara Agreement.
Pursuant to the Niagara Agreement, the Company has 30 days from the
date of the notice to bring all amounts due current or negotiate a
settlement with Niagara for the amounts owed. Failure to do so may
result in an event of default under the Niagara Agreement, which
would have a material adverse effect on our business, financial
condition and results of operations.
We may not be able to satisfy recently incurred debt obligations
when due.
We recently issued Senior Secured Promissory Notes
(the “Secured
Notes”) in the aggregate
principal amount of $1,500,000, which Secured Notes will mature in
January 2019. Additionally, we granted the holders of the Secured
Notes a continuing security interest in substantially all of our
assets to secure our obligations under the Secured
Notes.
If
we are unable to successfully execute our business and marketing
plan, we may not achieve profitability, and may not be able to
satisfy our obligations under the Secured Notes when due, or
otherwise satisfy the debt covenants. We may seek additional
financing to satisfy our obligations, which financing may not be
available on a timely basis, on terms that are acceptable or at
all. Failure to meet our obligations under the Secured Notes,
including paying off the Secured Notes when it becomes due and
payable would result in a default of the Secured Notes, which
default would have a material adverse effect our business, results
of operations and financial condition, and therefore threaten our
financial viability.
Substantially all
of our assets are pledged to secure obligations under our
outstanding indebtedness.
We
have granted a continuing security interest in substantially all of
our assets to the holders of the Secured Notes we issued in July
2017 as security for our obligations under the Secured Notes. If we
default on any of our obligations under the Secured Notes, the
holders of the Secured Notes will be entitled to exercise remedies
available to them resulting from such default, including increasing
the applicable interest rate on all amounts outstanding under the
Secured Notes, declaring all amounts due thereunder immediately due
and payable, assuming control of the pledged assets. Our results of
operations and financial condition would be materially harmed as a
result of the Secured Note holders’ exercise of their
remedies in the event of a default.
We face substantial uncertainties in executing our business
plan.
We
must attain certain objectives in order to successfully execute our
business plan over, including certain sales and distribution of
AquaBall® Naturally Flavored Water required by the minimum
volume requirements for each 12-month period under the Niagara
Agreement. Failure to sustain sales sufficient to meet our
Annual Commitment to Niagara will have a material adverse impact on
our business, and no assurances can be given that we will be
successful in our efforts.
We
believe that, in order to execute our business plan and achieve
sales growth, we must, among other things, successfully recruit
additional personnel in key positions, develop a larger
distribution network, establish a broader customer base and
increase awareness of our brand name. In order to implement any of
these initiatives, we will be required to materially increase
our operating expenses, which may require additional working
capital. If we are unable to secure additional working capital, we
will be unable to accomplish our objectives, and if we are unable
to accomplish one or more of these objectives, our business may
fail.
Our licensing agreements are critical components of the marketing
of the AquaBall® line, and there is no guarantee the
licensing agreements will be renewed at the end of each
agreement’s term.
We
currently have licensing agreements with Disney Consumer Products,
Inc. and Marvel Characters, B.V. that allow us to place popular
Disney and Marvel characters on labels of
AquaBall® Naturally Flavored Water. The use of these
characters, including Disney Princesses and other Disney
characters, is critical to making AquaBall™ stand out
among our competitors. These licensing agreements have varying
terms, the Disney Agreement expires on March 31, 2017 and the
Marvel Agreement expires on December 31, 2017, and there is no
guarantee we will renew these agreements upon expiration, nor are
we able to guarantee that we will have licensing agreements with
other companies when the Disney Agreement and Marvel Agreement
expire.
Certain large shareholders may have certain personal interests that
may affect the Company.
As a result of securities held by Mr. Vincent C.
Smith, the Vincent C. Smith, Jr. Annuity Trust 2015-1 (the
“Smith Trust”), and Red Beard, an entity affiliated with
Mr. Smith, Mr. Smith may be deemed the beneficial owner of, in the
aggregate, approximately 49% of the Company’s outstanding
voting securities. As a result, Mr. Smith, the Smith Trust
and/or Red Beard has the potential ability to exert influence over
both the actions of the Board of Directors and the outcome of
issues requiring approval by the Company’s
shareholders. This concentration of ownership may have effects
such as delaying or preventing a change in control of the Company
that may be favored by other shareholders or preventing
transactions in which shareholders might otherwise recover a
premium for their shares over current market
prices.
Our limited operating history makes it difficult to evaluate our
prospects.
We
have a limited operating history on which to evaluate our business
and prospects. Our current flagship product, AquaBall™
Naturally Flavored Water, was formulated and introduced to the
public for sale in 2012. Our other product, Bazi® All Natural
Energy, has had limited market success. There can be no assurance
that we will achieve significant sales as a result of us focusing
our sales efforts on the AquaBall® product, or that our
new sales model with be successful.
We
also may not be successful in addressing our other operating
challenges, such as developing brand awareness and expanding our
market presence through retail sales and our direct-to-consumer and
online sales strategy. Our prospects for profitability must be
considered in light of our evolving business model. These factors
make it difficult to assess our prospects.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar other
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we, or our independent distributors, will
be in compliance with all of these regulations. A failure by us or
our distributors to comply with these laws and regulations could
lead to governmental investigations, civil and criminal
prosecutions, administrative hearings and court proceedings, civil
and criminal penalties, injunctions against product sales or
advertising, civil and criminal liability for the Company and/or
its principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to the Company or its principals. In addition, the adoption
of new regulations and policies or changes in the interpretations
of existing regulations and policies may result in significant
new compliance costs or discontinuation of product sales, and may
adversely affect the marketing of our products, resulting in
decreases in revenues.
Our ability to increase sales is dependent on growing in our
existing markets as well as expanding into new markets in other
countries. As we expand into foreign markets, we will become
subject to different political, cultural, exchange rate, economic,
legal and operational risks. We may invest significant amounts in
these expansions with little success.
We
currently are focusing our marketing efforts in the United States
and, to a lesser extent, Canada. We believe that our future growth
will come from both the markets that we are currently operating in
and other international markets. We do not have any history of
international expansion, and therefore have no assurance that any
efforts will result in increased revenue. Additionally, we may need
to overcome significant regulatory and legal barriers in order to
sell our products, and we cannot give assurance as to whether our
distribution method will be accepted. These markets may require
that we reformulate our product to comply with local customs and
laws. However, there is no guarantee that the reformulated product
will be approved for sale by these regulatory agencies or attract
local distributors.
We are currently dependent on a single manufacturer for the
production of AquaBall®, and we do not independently analyze
our products before distribution. If we are not able to ensure
timely product deliveries, potential distributors and customers
may not order our products, and our revenues
may decrease. In addition, any errors in our product
manufacturing could result in product recalls, significant legal
exposure, and reduced revenues and the loss of
distributors.
We
rely entirely on Niagara to manufacture our flagship product,
AquaBall® Naturally Flavored Water. In the event Niagara is
unable to satisfy our supply requirements, manufacture our products
on a timely basis, fill and ship our orders promptly, provide
services at competitive costs or offer reliable products and
services, our revenues and relationships with our independent
distributors and customers would be adversely impacted. In the
event Niagara becomes unable or unwilling to continue to provide us
with products in required volumes and at suitable quality levels,
we would be required to identify and obtain acceptable replacement
manufacturing sources. There is no assurance that we would be able
to obtain alternative manufacturing sources on a timely basis.
Additionally, Niagara sources the raw materials for AquaBall®,
and if we were to use alternative manufacturers we may not be able
to duplicate the exact taste and consistency profile of the product
from Niagara. An extended interruption in the supply of our
products would result in decreased product sales and our revenues
would likely decline.
Although
we require Niagara to verify the accuracy of the contents of our
products, we do not have the expertise or personnel to directly
monitor the production of products. We rely exclusively, without
independent verification, on certificates of analysis regarding
product content provided by Niagara and limited safety testing by
them. We cannot be assured that Niagara will continue to supply
products to us reliably in the compositions we require. Errors in
the manufacture of our products could result in product recalls,
significant legal exposure, adverse publicity, decreased revenues,
and loss of distributors and endorsers.
We face significant competition from existing suppliers of products
similar to ours. If we are not able to compete with these companies
effectively, we may not be able to achieve
profitability.
We
face intense competition from numerous resellers, manufacturers and
wholesalers of liquid nutrition drinks similar to ours, from both
retail and online providers. We consider the significant competing
products in the U.S. market for the AquaBall® to be
Capri-Sun, Good to Grow, Bug Juice, and other alternatives marketed
towards children, and for Bazi® to be Red Bull®,
Monster®, RockStar®, and 5 Hour Energy®. Most
of our competitors have longer operating histories, established
brands in the marketplace, revenues significantly greater than ours
and better access to capital than us. We expect that these
competitors may use their resources to engage in various
business activities that could result in reduced sales of our
products. Companies with greater capital and research capabilities
could re-formulate existing products or formulate new products that
could gain wide marketplace acceptance, which could have a
depressive effect on our future sales. In addition, aggressive
advertising and promotion by our competitors may require us to
compete by lowering prices because we do not have the resources to
engage in marketing campaigns against these competitors, and the
economic viability of our operations likely would be
diminished.
Adverse publicity associated with our products or ingredients, or
those of similar companies, could adversely affect our sales and
revenues.
Adverse
publicity concerning any actual or purported failure of our Company
to comply with applicable laws and regulations regarding any aspect
of our business could have an adverse effect on the public
perception of our Company. This, in turn, could negatively affect
our ability to obtain financing, endorsers and attract distributors
or retailers for the AquaBall® and/or Bazi®, which
would have a material adverse effect on our ability to generate
sales and revenues.
Our
distributors’ and customers’ perception of the safety
and quality of our products or even similar products distributed by
others can be significantly influenced by national media attention,
publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar
products distributed by others. Adverse publicity, whether or not
accurate, that associates consumption of our products or any
similar products with illness or other adverse effects, will likely
diminish the public’s perception of our products. Claims that
any products are ineffective, inappropriately labeled or have
inaccurate instructions as to their use, could have a material
adverse effect on the market demand for our products, including
reducing our sales and revenues.
Our products may not meet health and safety standards or could
become contaminated.
We
have adopted various quality, environmental, health and safety
standards. We do not have control over all of the third parties
involved in the manufacturing of our products and their compliance
with government health and safety standards. Even if our
products meet these standards they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our bottlers,
distributors or suppliers. This could result in expensive
production interruptions, recalls and liability claims. Moreover,
negative publicity could be generated from false, unfounded or
nominal liability claims or limited recalls. Any of these failures
or occurrences could negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expenses.
We
face an inherent risk of exposure to product liability claims if
the use of our products results in, or is believed to have resulted
in, illness or injury. Most of our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Although
we maintain product liability insurance, it may not be
sufficient to cover all product liability claims and such claims
that may arise, could have a material adverse effect on our
business. The successful assertion or settlement of an uninsured
claim, a significant number of insured claims or a claim exceeding
the limits of our insurance coverage would harm us by adding
further costs to our business and by diverting the attention of our
senior management from the operation of our business. Even if we
successfully defend a liability claim, the uninsured litigation
costs and adverse publicity may be harmful to our
business.
Any
product liability claim may increase our costs and adversely
affect our revenues and operating income. Moreover, liability
claims arising from a serious adverse event may increase our
costs through higher insurance premiums and deductibles, and
may make it more difficult to secure adequate insurance
coverage in the future. In addition, our product liability
insurance may fail to cover future product liability claims,
which, if adversely determined, could subject us to substantial
monetary damages.
The success of our business will depend upon our ability to create
brand awareness.
The
market for functional beverages is already highly competitive, with
many well-known brands leading the industry. Our ability to compete
effectively and generate revenue will be based upon our ability to
create awareness of our products distinct from those of our
competitors. It is imperative that we are able to convey to
consumers the benefits of our products. However, advertising
and packaging and labeling of such products will be limited by
various regulations. Our success will be dependent upon our
ability to convey to consumers that our products are superior to
those of our competitors.
We must continue to develop and introduce new products to
succeed.
The
functional beverage and nutritional supplement industry is subject
to rapid change. New products are constantly introduced to the
market. Our ability to remain competitive depends on our ability to
enhance existing products, continue to develop and manufacture new
products in a timely and cost effective manner, to accurately
predict market transitions, and to effectively market our products.
Our future financial results will depend to a great extent on the
successful introduction of several new products. We cannot be
certain that we will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing existing
products.
The
success of new product introductions depends on various factors,
including the following:
● proper
new product selection;
● successful
sales and marketing efforts;
● timely
delivery of new products;
● availability
of raw materials;
● pricing
of raw materials;
● regulatory
allowance of the products; and
● customer
acceptance of new products.
We may from time to time write off obsolete inventories resulting
in higher expenses and consequently greater net
losses.
As
we sometimes produce product adorned with characters on a
promotional schedule, over production of a certain character set
could result in write-downs of our inventories. A change in
ingredients or labeling requirements could also result in the
obsolescence of certain inventory. Write-downs of this type could
make it more difficult for us to achieve profitability. We incurred
write-downs against inventory of $0 and $576,559 for the nine
months ended September 30, 2017 and the year ended December 31,
2016, respectively.
Product returns could require us to incur significant additional
expenses, which would make it difficult for us to achieve
profitability.
We
have not established a reserve in our financial statements for
product returns. However, we may experience product returns as we
focus on the AquaBall® line of products and expand our
market presence nationwide. We will continue to analyze our returns
to determine if a reserve is necessary. If our reserves prove to be
inadequate, we may incur significant expenses for product
returns. As we gain more operating experience, we may need to
establish a reserve for product returns.
If we are not able to adequately protect our intellectual property,
then we may not be able to compete effectively and we
may not be profitable.
Our
existing proprietary rights may not afford remedies and
protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by
competitors. We own the formulations contained in our products
and we consider these product formulations our critical proprietary
property, which must be protected from competitors. We do not have
any patents for our product formulations because we do not believe
they are necessary to protect our proprietary rights. Although
trade secret, trademark, copyright and patent laws generally
provide such protection and we attempt to protect ourselves through
contracts with manufacturers of our products, we may not be
successful in enforcing our rights. In addition, enforcement of our
proprietary rights may require lengthy and expensive
litigation. We have attempted to protect some of the trade names
and trademarks used for our products by registering them with the
U.S. Patent and Trademark Office, but we must rely on common law
trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide the same remedies as are granted to
federally registered trademarks, and the rights of a common law
trademark are limited to the geographic area in which the trademark
is actually used. Our inability to protect our intellectual
property could have a material adverse impact on our ability to
compete and could make it difficult for us to achieve a
profit.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and
new regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expenses and significant
management time and attention.
Loss of key personnel could impair our ability to
operate.
Our
success depends on hiring, retaining and integrating senior
management and skilled employees. We are currently dependent
on certain current key employees, specifically James Greco, our
Chief Executive Officer, and Kevin Sherman, our Chief Marketing
Officer, each of who are vital to our ability to grow our business
and achieve profitability. As with all personal service
providers, our officers can terminate their relationship with us at
will. Our inability to retain these individuals
may result in our reduced ability to operate our
business.
Risks Related to Our Common Stock
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our securities on the OTC
Pink Marketplace. An active trading market for our Common Stock may
not develop. Consequently, we cannot assure you when and if an
active-trading market in our shares will be established, or whether
any such market will be sustained or sufficiently liquid to enable
holders of shares of our Common Stock to liquidate their investment
in our company. If an active public market should develop in the
future, the sale of unregistered and restricted securities by
current shareholders may have a substantial impact on any such
market.
If, and when, then shares of Common Stock underlying our
outstanding derivative securities are issued, our shareholders will
experience immediate and substantial dilution in the book value of
their investment.
We currently have 216,151,590 shares of Common
Stock issued and outstanding. If, and when, holders of our
outstanding derivative securities, which securities include Series
B Convertible Preferred Stock (“Series B
Preferred”), Series C
Preferred, Series D Preferred and any warrants that remain
outstanding after the completion of the Warrant Exchange Program,
decide to exercise or convert those securities into Common Stock,
the number of shares of our Common Stock issued and outstanding
could increase by as much as 78%. Conversion of all or a portion of
our outstanding derivative securities would have a substantial and
material dilutive effect on our existing stockholders and on our
earnings per share.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
shareholders.
Our
Articles of Incorporation authorize the issuance of up to 300.0
million shares of Common Stock. The issuance of any such shares of
Common Stock will result in a reduction in value of our outstanding
Common Stock. If we do issue any such additional shares of Common
Stock, such issuance also will cause a reduction in the
proportionate ownership and voting power of all other shareholders.
Further, any such issuance may result in a change of control of our
corporation.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community and without
significant revenues can be subject to wide price swings. The
market price of our securities may be subject to wide changes in
response to quarterly variations in operating results,
announcements of new products by us or our competitors, reports by
securities analysts, volume trading, or other events or factors. In
addition, the financial markets have experienced significant price
and volume fluctuations for a number of reasons, including the
failure of certain companies to meet market expectations. These
broad market price swings, or any industry-specific market
fluctuations, may adversely affect the market price of our
securities.
Companies
that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation,
it could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because
our Common Stock may be classified as “penny stock,”
trading may be limited, and the share price could decline.
Moreover, trading of our Common Stock, if any, may be limited
because broker-dealers would be required to provide their customers
with disclosure documents prior to allowing them to participate in
transactions involving our Common Stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our Common Stock.
We have issued preferred stock with rights senior to our Common
Stock, and may issue additional preferred stock in the future, in
order to consummate a merger or other transaction necessary to
continue as a going concern.
Our
Articles of Incorporation authorizes the issuance of up to
5.0 million shares of preferred stock, par value $0.001
per share, without shareholder approval and on terms established by
our directors, of which 2.75 million shares have been
designated as Series B Preferred, 200,000 shares have been
designated as Series C Preferred and 50,000 shares have been
designated as Series D Preferred. We may issue additional
shares of preferred stock in order to consummate a financing or
other transaction, in lieu of the issuance of Common
Stock. The rights and preferences of any such class or series
of preferred stock would be established by our board of directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the Common Stock.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
Because
of our significant operating losses and because we intend to retain
future profits, if any, to expand our business, we have never paid
cash dividends on our Common Stock and do not anticipate paying any
cash dividends in the foreseeable future. You should not make an
investment in our Common Stock if you require dividend income. Any
return on investment in our Common Stock would only come from an
increase in the market price of our stock, which is uncertain and
unpredictable.
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
|
|
|
|
Form of Senior Secured Promissory Note, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed on
August 1, 2017
|
|
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed on August 1, 2017
|
|
|
|
Form of Security Agreement, incorporated by reference from Exhibit
10.3 to the Current Report on Form 8-K, filed on August 1,
2017
|
|
|
|
Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a)
|
|
|
|
Certification of the Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
|
|
|
|
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
|
|
|
|
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: November 14, 2017
|
|
TRUE DRINKS HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ James J. Greco
|
|
|
|
|
|
|
James J. Greco
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
Date: November 14, 2017
|
|
By:
|
/s/ Daniel Kerker
|
|
|
|
|
|
|
Daniel Kerker
Chief Financial Officer
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|