truu10q_june302014.htm
UNITED STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended June 30, 2014
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
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For the transition period from _________ to _________
Commission file number 001-32420
TRUE DRINKS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation
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(IRS Employer Identification No.)
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or Organization)
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18552 MacArthur Blvd., Suite 325
Irvine, CA 92612
(Address of Principal Executive Offices)
(949) 203-3500
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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[X]
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-12 of the Exchange Act). Yes [ ] No [X]
The number of shares of Common Stock, with $0.001 par value, outstanding on August 13, 2014 was 38,660,684.
TRUE DRINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2014
ITEM 1. FINANCIAL STATEMENTS
TRUE DRINKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30,
2014
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December 31,
2013
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ASSETS
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(Unaudited)
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Current Assets:
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Prepaid expenses and other current assets
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Property and Equipment, net
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Accounts payable and accrued expenses
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Convertible notes payable, net
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Total Current Liabilities
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Commitments and Contingencies (Note 5)
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Common Stock, $0.001 par value, 120,000,000 and 40,000,000 shares authorized, 36,542,960 and 27,855,587 shares outstanding at June 30, 2014 and December 31, 2013, respectively
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Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,607,870 and 1,776,923 shares outstanding at June 30, 2014 and December 31, 2013, respectively
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Additional paid in capital
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Total Stockholders’ Equity
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Total Liabilities and Stockholders’ Equity
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The accompanying notes are an integral part of these financial statements.
TRUE DRINKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended
June 30,
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Six Months Ended
June 30,
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2014
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2013
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2014
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2013
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Net Sales
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$
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1,161,142
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$
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1,303,371
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$
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1,811,674
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$
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1,714,172
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Cost of Sales
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966,393
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1,200,936
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1,495,694
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1,464,886
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Gross Profit
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194,749
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102,435
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315,980
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249,286
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Operating Expenses
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Selling and marketing
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1,005,346
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654,412
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1,575,874
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1,084,898
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General and administrative
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1,132,763
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851,582
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2,124,569
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1,896,646
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Total operating expenses
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2,138,109
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1,505,994
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3,700,443
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2,981,544
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Operating Loss
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(1,943,360
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(1,403,559
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(3,384,463
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(2,732,258
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Other Expense (Income)
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Change in fair value of derivative liabilities
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(383,439
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(105,605
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1,742,098
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(105,605
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Interest expense
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14,120
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152,418
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51,249
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380,617
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NET LOSS
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$
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(1,574,041
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$
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(1,450,372
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$
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(5,177,810
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$
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(3,007,270
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Dividends on Preferred Stock
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$
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97,775
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$
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-
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$
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230,979
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$
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-
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Net loss attributable to common stockholders
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$
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(1,671,816
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$
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(1,450,372
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$
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(5,408,789
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$
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(3,007,270
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Loss per common share, basic and diluted
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$ |
(0.05
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$ |
(0.05
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$ |
(0.17
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$ |
(0.11
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Weighted average common shares outstanding, basic and diluted
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34,839,764
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27,400,619
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31,407,485
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27,105,681
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The accompanying notes are an integral part of these financial statements.
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June 30,
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2014
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2013
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net loss
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$
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(5,177,810
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$
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(3,007,270
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Adjustments to reconcile net loss to net cash used in operating activities
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Depreciation
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4,406
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10,190
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Amortization
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95,588
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95,589
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Accretion of deferred financing costs
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-
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32,074
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Change in estimated fair value of derivative liabilities
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1,742,098
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(105,605
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Amortization of debt discount
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-
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45,109
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Fair value of common stock issued for services
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69,875
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247,340
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Stock based compensation
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258,834
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594,902
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Change in operating assets and liabilities:
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Accounts receivable
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(347,463
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(597,603
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Inventory
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(744,137
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247,863
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Prepaid expenses and other current assets
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(32,385
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(267,902
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Other assets
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-
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3,948
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Accounts payable and accrued expenses
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1,050,828
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309,407
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Other current liabilities
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-
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167,715
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Net cash used in operating activities
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(3,080,166
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(2,224,243
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CASH FLOWS FROM INVESTING ACTIVITIES
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Change in restricted cash
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(66
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242
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Purchase of property and equipment
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(2,349
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)
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-
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Net cash (used in ) provided by investing activities
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(2,415
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)
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242
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CASH FLOWS FROM FINANCING ACTIVITIES
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Dividends paid
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(2,195
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)
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-
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Proceeds from issuance of Series B Preferred Stock, net
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1,887,413
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-
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Proceeds from notes payable
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360,000
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2,869,000
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Deferred financing costs paid
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-
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(219,924
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)
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Repayments on notes payable
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(20,000
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)
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(172,000
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)
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Repayments on term loan
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(1,916,667
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)
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-
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Net cash provided by financing activities
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308,551
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2,477,076
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NET (DECREASE) INCREASE IN CASH
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(2,774,030
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)
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253,075
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CASH- beginning of period
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$
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3,136,766
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$
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4,449
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CASH- end of period
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$
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362,736
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$
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257,524
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SUPPLEMENTAL DISCLOSURES
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Interest paid in cash
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$
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7,944
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$
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17,330
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Non-cash financing and investing activities:
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Conversion of Preferred Stock to Common Stock
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$
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7,458
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$
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25,304
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Cashless exercise of warrants
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$
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41,229
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$
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-
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Dividends declared but unpaid
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$
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230,979
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$ |
-
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Dividends on Preferred Stock paid in Common Stock
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$
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8,139
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$
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-
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Conversion of notes payable and accrued interest to Common Stock
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$
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764,938
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$
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860,818
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Warrants issued in connection with Series B Preferred Offering
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$
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616,411
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$
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299,699
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Warrants issued as debt discount
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$
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-
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$
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730,758
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 2014
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”), formed on January 19, 2012 in Delaware to create and commercialize all-natural, vitamin-enhanced drinks. Our primary business is the development, marketing, sale and distribution of our flagship product, AquaBall™ Naturally Flavored Water, a vitamin-enhanced, naturally flavored water drink packaged in our patented stacking spherical bottles. 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 through select retail channels, online, and through our existing database of customers.
Our principal place of business is 18552 MacArthur Boulevard, Suite 325, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://www.truedrinks.com. Our Common Stock, par value $0.001 (“Common Stock”) is currently listed for quotation on the Over-the-Counter marketplace (“OTCQB”) under the symbol TRUU.
Developments During the Quarter
In April, we gained significant distribution for six packs of AquaBall™, specifically at Rite Aid and Toys’R’Us. We have commitments to expand this distribution into other large format retailers in the third quarter.
In June, we sold 199 pallets of our new 16-pack Club Pack of AquaBall™ to 150 Sam’s Club locations. We shipped our second order into Sam’s Club in August. We are working to further expand our presence in the club channel in the third quarter.
Basis of Presentation and Going Concern
The accompanying condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited financial statements included in Form 10-K for the year ended December 31, 2013, 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 six-month period ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014, 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, 2013 filed with the SEC on March 31, 2014.
The accompanying 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. As of and for the three months ended June 30, 2014, the Company incurred a net loss of $1,574,041, has negative working capital of $3,393,734, and an accumulated deficit of $15,419,288. The Company had $495,867 in cash at June 30, 2014 with $133,131 of this cash being restricted, as discussed below. The Company will require additional capital to execute its business, marketing and operating plan, and therefore sustain operations, which capital may not be available on favorable terms, if at all. The accompanying condensed consolidated financial statements do not include any adjustments that might result in the event the Company was unable to generate sufficient cash from operations, execute its business, marking or operating plan, or obtain additional working capital, if necessary.
Principles of Consolidation
The accompanying 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 of America 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
The Company has $133,131 in restricted cash with a financial institution securing a letter of credit. The letter of credit matures in August 2015 and was issued as part of contractual obligations related to one of our licensing agreements with Disney Consumer Products, Inc.
Accounts Receivable
We maintain an allowance for doubtful accounts, which is analyzed on a periodic basis to ensure that it is adequate to the best of management’s knowledge. Management develops an estimate of the allowance for doubtful accounts receivable based on the perceived likelihood of ultimate payment. Although the Company expects to collect amounts due, actual collections may differ from these estimated amounts. The allowance for doubtful accounts was approximately $210,000 at June 30, 2014 and December 31, 2013, respectively.
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.
We utilized a variety of suppliers to purchase raw materials for the AquaBall™ Naturally Flavored Water during the six-months ended June 30, 2014 and the year ended December 31, 2013.
During 2013, 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 we do not anticipate any issues with the supply of these raw materials.
A significant portion of our revenue comes from sales of the AquaBall™ Naturally Flavored Water with the remaining sales coming from Bazi® All Natural Energy. For the six months ended June 30, 2014, sales of AquaBall™ accounted for 95% of our sales, compared to 84% for the corresponding period in 2013. While no assurances can be given, we anticipate that sales of AquaBall™ will continue to grow in future periods as a percentage of sales relative to sales of Bazi™.
Inventory
Inventory is stated at the lower of cost or market on a FIFO (first-in first-out) basis. Provisions are made to reduce excess or obsolete inventory to the estimated net realizable value. The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.
Management reviews the carrying value of inventory in relation to its sales history and industry trends to determine an estimated net realizable value. Changes in economic conditions or customer demand could result in obsolete or slow moving inventory that cannot be sold or must be sold at reduced prices and could result in an inventory reserve. No inventory reserves were considered necessary as of June 30, 2014 and December 31, 2013.
Inventory is comprised of the following:
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June 30,
2014
(unaudited)
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December 31,
2013
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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 June 30, 2014.
Intangible Assets
Intangible assets consists of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products, customer list, and the estimated value of GT Beverage Company, LLC’s interlocking spherical bottle patent. The Company’s intangible assets are amortized over their estimated remaining useful lives. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. No impairment was deemed necessary during the quarter ended June 30, 2014.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually, typically in the fourth quarter. No impairment indicators were noted during the quarter ended June 30, 2014.
Income Taxes
For the quarters ended June 30, 2014 and 2013, the Company incurred tax net operating losses, and accordingly, had no income tax provision. At June 30, 2014, 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 six-month periods ended June 30, 2014 and 2013, general and administrative expenses included stock based compensation expense of $258,834 and $594,902, 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. 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 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 (see Note 3, “Stock Options and Warrants”).
Fair Value of Financial Instruments
The carrying amount of our cash, accounts receivable, accounts payable, and accrued expenses approximate their estimated fair values due to the short-term maturities of those financial instruments. The carrying amount of the notes payable approximates their fair value due to the short maturity of the notes and since the interest rate approximates current market interest rates for similar instruments. See Note 6 for derivative instruments.
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. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. 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.
Net Loss Per Share
Earnings per share requires presentation of both basic earnings per common share and diluted earnings per common share. Since the Company has a net loss for all periods presented, Common Stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive. At June 30, 2014 and 2013, the Company had 85,023,884 and 36,249,673 shares of Common Stock equivalents outstanding, respectively.
Research and Development
Research and development costs are expensed as incurred.
Recent Accounting Pronouncements
Except as noted below, the Company has reviewed all recently issued, but not yet effective accounting pronouncements and has concluded that there are no recently issued, but not yet effective pronouncements that may have a material impact on the Company’s future financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
Subsequent Events
Management has evaluated subsequent events through the date the accompanying condensed consolidated financial statements were filed with the SEC, and noted no other significant subsequent events not elsewhere disclosed herein.
NOTE 2 — SHAREHOLDERS’ EQUITY
Series B Convertible Preferred Stock
We are currently authorized to issue up to 5,000,000 shares of preferred stock, of which 2,750,000 shares are currently designated as Series B Convertible Preferred Stock. Each share of Series B Preferred has a stated value of $4.00 per share (“Stated Value”) and accrues annual dividends equal to 5% of the Stated Value, payable by the Company in quarterly installments, in either cash or shares of Common Stock. The Company declared a dividend totaling $97,775 and paid previously declared dividends of $8,139 during the quarter ended June 30, 2014. The cumulative unpaid dividends on the Series B Preferred Stock are $222,840 and $2,194 at June 30, 2014 and December 31, 2013, respectively. 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 “Conversion Shares”). The Company also has the option to require the conversion of the Series B Preferred into Conversion Shares in the event: (i) there are sufficient authorized shares of Common Stock reserved as Conversion Shares; (ii) the Conversion Shares are registered under the Securities Act of 1933, as amended (the “Securities Act”), or the Conversion Shares are freely tradable, without restriction, under Rule 144 of the Securities Act; (iii) the daily trading volume of the Company's Common Stock, multiplied with the closing price as reported by the OTCBB, equals at least $250,000 for 20 consecutive trading days; and (iv) the average closing price of the Company's Common Stock is at least $0.62 per share for 10 consecutive trading days.
Over the course of the Series B Offering, between November 2013 and February 2014, the Company offered and sold 2.0 million shares of Series B Preferred to certain accredited investors in exchange for a total of $8,000,000 in cash, less cash fees of $659,440. The investors also received Warrants to purchase an aggregate total of 9,333,334 shares of the Company’s Common Stock for $0.30 per share. The Company also issued Warrants to purchase 1,946,721 shares of Common Stock to certain placement agents assisting with the Series B Offering. Each Warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all Warrants issued during the Series B Offering, or $1,534,007, was recorded to derivative liabilities.
Between February 2014 and June 2014, holders of 520,980 shares of Series B Preferred converted those shares into 8,335,680 shares of Common Stock.
Other Transactions
In February 2014, holders of $789,938 in outstanding principal, lender’s fees and interest on certain convertible notes payable exchanged this total for 197,487 shares of Series B Preferred and Warrants to purchase 921,596 shares of Common Stock for $0.30 per share.
Between March 2014 and June 2014, the Company issued 220,000 shares of Common Stock in connection with two consulting agreements. The Company expensed the fair value of the Common Stock issued of $69,875 to consulting expense.
In May 2014, the Company issued 69,138 shares of Common Stock pursuant to a cashless exercise of 152,360 outstanding warrants.
NOTE 3 — STOCK OPTIONS AND WARRANTS
Warrants
A summary of the Company’s warrant activity for the six months ended June 30, 2014 is presented below:
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Warrants
Outstanding
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Weighted
Average
Exercise Price
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Outstanding, December 31, 2013
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Outstanding, March 31, 2014
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Exercised
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) |
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Expired
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) |
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Outstanding, June 30, 2014
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As of June 30, 2014, the Company had the following outstanding warrants to purchase shares of its Common Stock:
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Warrants Outstanding
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Weighted Average
Exercise Price Per Share
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Weighted Average
Remaining Life (Yrs.)
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Non-Qualified Stock Options
The Company granted 2,457,390 non-qualified stock options to employees during the six months ended June 30, 2014.
Stock option activity during the six months ended June 30, 2014 is summarized as follows:
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Options Outstanding
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Weighted-Average
Exercise Price
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Options outstanding at December 31, 2013
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Options outstanding at March 31, 2014
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) |
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Options outstanding at June 30, 2014
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The following table summarizes information about the Company’s stock options outstanding as of June 30, 2014:
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Outstanding Options
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Exercisable Options
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Range of
Exercise Prices
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Number
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Weighted Average
Remaining
Contractual Life
(Years)
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Aggregate
Intrinsic
Value
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Number
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Aggregate
Intrinsic
Value
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NOTE 4 — CONVERTIBLE NOTES
A summary of convertible notes payable as of June 30, 2014, is as follows:
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Amount
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Outstanding, December 31, 2013
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Notes converted to Common Stock
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Outstanding, March 31, 2014
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Notes issued
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Notes repaid
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Notes converted to Common Stock
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Outstanding, June 30, 2014
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In January 2014, the Company repaid $25,750 in outstanding principal, lender’s fees and accrued interest of certain notes payable.
In February 2014, holders of bridge financing notes, totaling $789,938 in outstanding principal, lender’s fees and accrued interest, converted their notes into shares of the Company’s Series B Preferred.
Term Loan
In November 2013, the Company secured a commercial term loan in the amount of $2.0 million from Avid Bank. The loan had a term of two years, accrued interest at 2.75% above prime, was secured by virtually all of the Company’s assets, and required an asset coverage ratio of assets to outstanding principal of 1.5. The note and all outstanding interest were paid back in full in April 2014. All amounts due under the commercial term loan with Avid Bank, totaling approximately $1.67 million, were paid in full in April 2014.
Unsecured Notes
In June 2014, the Company issued unsecured promissory notes to certain accredited investors, resulting in net proceeds to the Company of $360,000. These promissory notes have a term of one year and carry an annual interest rate of 8%. The unsecured promissory notes were issued principally to provide liquidity necessitated as a result of the termination, and payment in full, of all amounts due and payable under the Avid Bank commercial term loan.
NOTE 5 — COMMITMENTS AND CONTINGENCIES
The Company has entered in a number of agreements with various consultants. Termination of any of these agreements could result in termination fees.
The Company leases its corporate office in Irvine, California on a one-year term, which term was most recently renewed in July 2013. Total rent expense related to the Company's operating lease for the six months ended June 30, 2014 was $29,374. Total remaining payments on the lease through July 31, 2015 are $57,187.
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.
On July 1, 2011, a lawsuit was filed in the United States District Court, the Southern District of Ohio, Cincinnati Division, against GT Beverage Company, LLC (“GT LLC”) by Dominion Liquid Technologies, LLC. The lawsuit alleged that GT LLC breached terms of a 2010 co-packing agreement, which governed the relationship between the parties. In July 2014, the Company settled this lawsuit for $350,000. The settlement was paid for with 1,166,667 restricted shares of its Common Stock. Such amount has been accrued for at June 30, 2014.
On April 22, 2014, a lawsuit was filed in the Superior Court of California, County of Orange, against the Company by Advantage Sales and Marketing, LLC. The plaintiff initially seeks damages of $92,064. Management currently believes the overall risk to the Company in connection with this matter is less than the amount claimed, and intends to vigorously defend itself. However, the Company is unable to estimate a possible range of loss at this time.
We are currently not involved in any litigation except noted above that we believe could have a material adverse effect on our financial condition or results of operations. Other than described above, 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.
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:
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- Level 1: Observable inputs such as quoted prices in active markets;
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- Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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- Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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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 quarter ended June 30, 2014. The Company had no Level 1 or 2 fair value measurements at June 30, 2014 or December 31, 2013.
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 June 30, 2014:
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Level 1
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Level 2
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Level 3
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Total carrying value
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Quoted market prices in active markets
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Internal Models with significant observable market parameters
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Internal models with significant unobservable market parameters
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The following table presents the changes in recurring fair value measurements included in net loss for the quarter ended June 30, 2014:
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Recurring Fair Value Measurements
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Changes in Fair Value Included in Net Loss For the Quarter Ended June 30, 2014
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Revenues
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Expenses
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Total
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The table below sets forth a summary of changes in the fair value of our Level 3 financial liabilities for the quarter ended June 30, 2014:
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March 31, 2014
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Recorded New Derivative Liabilities
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Write off of Derivative Liabilities
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Change in Estimated Fair Value Recognized in Results of Operations
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June 30, 2014
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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, 2013.
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 "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 vitamin-enhanced, naturally flavored water drink packaged in our patented stacking spherical bottles. We distribute the 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 18552 MacArthur Boulevard, Suite 325, Irvine, California, 92612. Our telephone number is (949) 203-2500. Our corporate website address is http://www.truedrinks.com. Our Common Stock, par value $0.001 (“Common Stock”) is currently listed for quotation on the Over-the-Counter marketplace (“OTCQB”) 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, 2013.
Comparison of the Three Months Ended June 30, 2014 to the Three Months Ended June 30, 2013.
Net Sales
Net sales for the three months ended June 30, 2014 were $1,161,142, compared with sales of $1,303,371 for the three months ended June 30, 2013. Sales for the three months ended June 30, 2013 included cerain non-recurring large promotion-related shipments to Winn-Dixie and Walgreens. Sales for the three months ended June 30, 2014 grew 78% from the three months ended March 31, 2014. This quarter-over-quarter increase was principally due to the introduction of six packs of AquaBall Naturally Flavored Water to accounts such as Rite Aid and Toys’R’Us, along with the introduction of our club pack at Sam’s Club.
The percentage that each product category represented of our net sales is as follows:
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Product Category
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Three Months Ended
June 30, 2014
(% of Sales)
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While no assurances can be given, management currently anticipated that net sales will increase in subsequent periods as a result of existing distribution agreements, and anticipated sales to key accounts established during the quarter ended June 30, 2014.
Gross Profit
Gross profit for the three months ended June 30, 2014 was $194,749, compared to $102,435 for the three months ended June 30, 2013. Gross profit as a percentage of revenue (gross margin) during three months ended June 30, 2014 was 17%. Gross margin increased from 2013 due to several one-time charges that occurred in the 2013 period. Gross margins were held low in the three months ended June 30, 2014 by low initial margins on our new club pack which we sold to Sam’s Club. Gross margin on this item will increase as volume grows and will result in increased overall margins.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $2,138,109 for the three months ended June 30, 2014, as compared to $1,505,994 for the three months ended June 30, 2013. This increase was due to increases in freight, legal fees associated with pending litigation, and accruing the expense related to the settlement of the lawsuit with Dominion Liquid Technologies, which increases are offset by lower stock based compensation expense.
Change in Fair Value of Derivative Liabilities
The Company recorded a gain for the change in fair value of derivative liabilities for the three months ended June 30, 2014 of $383,439.
Interest Expense
Interest expense for the three months ended June 30, 2014 was $14,120, as compared to $152,418 for the three months ended June 30, 2013. Interest expense decreased in the current quarter principally due to the payment of all amounts due under certain convertible promissory notes, and the conversion of all amounts due under the the remaining convertible promissory notes into Series B Preferred, and the payoff of all amounts due under the commercial line of credit with Avid Bank.
Income Taxes
There is no income tax expense recorded for the three months ended June 30, 2014 and 2013, due to the Company's net losses. As of June 30, 2014, 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 June 30, 2014 was $1,574,041, as compared to a net loss of $1,450,372 for the three months ended June 30, 2013. On a per share basis, our loss was $0.05 per share for the three months ended June 30, 2014 and 2013.
Comparison of the Six Months Ended June 30, 2014 to the Six Months Ended June 30, 2013.
Net Sales
Net sales for the six months ended June 30, 2014 were $1,811,674 compared to net sales of $1,714,172 for the six months ended June 30, 2013. Net sales during the six month period increased principally as a result of increased sales of AquaBall™ during the six-month period ended June 30, 2014, compared to the comparable period in 2013, offset by certain non-recurring promotion-related shipments to Winn-Dixie and Walgreens.
The percentage that each product category represented of our net sales is as follows:
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Product Category
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Six Months Ended
June 30, 2014
(% of Sales)
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AquaBall™
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90
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%
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Bazi®
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10
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%
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Gross profit for the six months ended June 30, 2014 was $315,980. Gross profit as a percentage of revenue (gross margin) during six months ended June 30, 2014 was 17%.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $3,700,443 for the six months ended June 30, 2014 as compared to $2,981,544 for the six months ended June 30, 2013. This increase was principally due to increased slotting fees, marketing expenditures, and accruing the expense related to the settlement of the lawsuit with Dominion Liquid Technologies, which increases are offset by lower stock based compensation expense.
Interest expense for the six months ended June 30, 2014 was $51,249 as compared to $380,617 for the six months ended June 30, 2013. Interest expense decreased in the current quarter principally due to the payment of all amounts due under certain convertible promissory notes, and the conversion of all amounts due under the the remaining convertible promissory notes into Series B Preferred, during the six months ended June 30, 2014, and the payoff of all amounts due under the commercial line of credit with Avid Bank.
There is no income tax expense recorded for the periods ended June 30, 2014 and 2013, due to the Company's net losses. As of June 30, 2014, the Company has tax net operating loss carryforwards and a related deferred tax asset, offset by a full valuation allowance.
Our net loss for the six months ended June 30, 2014 was $5,177,810 as compared to a net loss of $3,007,270 for the six months ended June 30, 2013. On a per share basis, our loss was $0.17 and $0.11 per share for the six months ended June 30, 2014 and 2013, respectively.
Liquidity and Capital Resources
The Company had negative working capital of $3,393,734 and $1,969,081 at June 30, 2014 and March 30, 2014, respectively, and $495,867 and $3,061,287 in cash at June 30, 2014 and March 30, 2014, respectively. The substantial decrease in working capital and cash is principally due to the payoff of all amounts due under the commerical line of credit with Avid Bank, totaling $1.67 million, and, to a lesser extent, to fund operating losses.
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, 2013, 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. As of and for the quarter ended June 30, 2014, the Company incurred a net loss of $1,574,041, has negative working capital of $3,393,734 and an accumulated deficit of $15,419,288. While subsequent to December 31, 2013, the Company raised approximately $1,890,000 resulting from the sale of shares of its Series B Convertible Preferred Stock ("Series B Preferred"), additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations. Management's plans are to continue to contain expenses, expand distribution and sales of its AquaBall™ Naturally Flavored Water as rapidly as economically possible, and, if necessary, raise capital through equity and debt offerings in the event additional capital is necessary to execute the Company’s business, marketing and operating plan, and achieve profitability from continuing operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result in the event the Company is unsuccessful in its plans.
The Company has financed its operations through sales of equity and, to a lesser degree, cash flow provided by sales of AquaBall™. Despite recent sales of debt securities as described below, funds generated from sales of our Common Stock, shares of Series B Preferred and cash flow provided by AquaBall™, sales may be insufficient to fund our operating requirements for the next twelve months. As a result we may require additional capital to continue operating as a going concern. No assurances can be given that we will be successful.
Series B Offering
On November 25, 2013, the Company commenced a private offering of up to 2.0 million shares of Series B Preferred for $4.00 per share (“Purchase Price”), and five-year warrants (“Warrants”), exercisable for $0.30 per share (the "Exercise Price"), to purchase that number of shares of the Company's Common Stock equal to 35% of the Purchase Price, divided by the Exercise Price. The Company completed the Series B Offering in February 2014, and, over the course of the offering, offered and sold approximately 2.0 million shares of Series B Preferred and Warrants to purchase approximately 9.3 million shares of Common Stock to certain accredited investors.
Term Loan and Note Conversion
On November 29, 2013, the Company executed a Loan and Security Agreement and other ancillary documents for a $2.0 million term loan from Avid Bank (the "Bank") (the "Term Loan"), which Term Loan accrues interest at a rate of prime plus 2.75% and matures on November 29, 2015. The Company's repayment of the Term Loan is secured by a continuing security interest in substantially all of the Company's assets. Proceeds from the Term Loan, together with a portion of the proceeds from the Series B Offering were used to repay certain Notes (defined below) issued during the Note Offering (defined below), totaling approximately $2.5 million in principal and accrued interest (the "Note Repayment"). In April 2014, the note and all outstanding interest were repaid.
Unsecured Notes
In June 2014, the Company issued unsecured promissory notes to certain accredited investors, resulting in net proceeds to the Company of $360,000. These promissory notes have a term of one year and carry an annual interest rate of 8%.
Off-Balance Sheet Items
We had no off-balance sheet items as of June 30, 2014.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the information required by this item.
ITEM 4. CONTROLS AND PROCEDURES
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(a)
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Evaluation of disclosure controls and procedures.
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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.
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(b)
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Changes in internal controls over financial reporting.
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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.
On July 1, 2011, a lawsuit was filed in the United States District Court, the Southern District of Ohio, Cincinnati Division, against GT Beverage Company, LLC (“GT LLC”) by Dominion Liquid Technologies, LLC. The lawsuit alleged that GT LLC breached terms of a 2010 co-packing agreement, which governed the relationship between the parties. In July 2014, the Company settled this lawsuit for $350,000. The settlement was paid for with 1,166,667 restricted shares of its Common Stock. Such amount has been accrued for at June 30, 2014.
On April 22, 2014, a lawsuit was filed in the Superior Court of California, County of Orange, against the Company by Advantage Sales and Marketing, LLC. The plaintiff initially seeks damages of $92,064. Management currently believes the overall risk to the Company in connection with this matter is less than the amount claimed, and intends to vigorously defend itself. However, the Company is unable to estimate a possible range of loss at this time.
We are currently not involved in any litigation except noted above that we believe could have a material adverse effect on our financial condition or results of operations. Other than described above, 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.
We have identified the following risk factors in addition to the risks factors previously disclosed in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2014:
We have a history of operating losses and, despite consummation of recent financings, our working capital has decreased substantially. Our decrease in working capital may present liquidity problems.
We have not been profitable since inception. We had a net loss of approximately $1.57 million and $5.18 million for the three- and six-month period ended June 30, 2014, respectively, and had negative working capital of approximately $3.4 million at June 30, 2014. Although we have recently consummated equity and debt financings resulting in gross proceeds of approximately $12.4 million, we have used a substantial portion of the gross proceeds to fund operating losses and pay down certain indebtedness, resulting in approximately $495,867 in cash at June 30, 2014, of which approximately $133,131 is restricted. As a result, we will require additional capital to execute our business and marketing plan, and continue as a going concern. Our history of losses may impair our ability to obtain necessary financing on favorable terms or at all. It may also impair our ability to attract investors if we attempt to raise additional capital by selling additional debt or equity securities in a private or public offering.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Between March 2014 and June 2014, the Company issued 220,000 shares of Common Stock in connection with two consulting agreements, with a value of approximately $69,875. The The unregistered shares of Common Stock were offered and sold in transactions exempt from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) thereof and/or Rule 506 of Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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(a)
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EXHIBITS
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Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
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Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a)
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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
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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
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XBRL Taxonomy Extension Schema
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XBRL Taxonomy Extension Calculation Linkbase
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XBRL Taxonomy Extension Definition Linkbase
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XBRL Taxonomy Extension Label Linkbase
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XBRL Taxonomy Extension Presentation Linkbase
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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.
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Date: August 13, 2014
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TRUE DRINKS HOLDINGS, INC.
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By: /s/ Lance Leonard
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Lance Leonard
President, Chief Executive Officer, and Director
(Principal Executive Officer)
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Date: August 13, 2014
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By: /s/ Daniel Kerker
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Daniel Kerker
Chief Financial Officer
(Principal Financial and Accounting Officer)
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