SEC Connect
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2016
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
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For the transition period from _________ to
_________
Commission file number 001-32420
TRUE DRINKS HOLDINGS,
INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation
or Organization)
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(IRS Employer Identification No.)
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18662 MacArthur Blvd., Suite 110
Irvine, CA 92612
(Address of Principal Executive Offices)
(949) 203-3500
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[X] No [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
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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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[ ]
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Smaller reporting company
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[X]
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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 November 14, 2016 was 114,912,273.
TRUE DRINKS HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
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PART I
ITEM 1. FINANCIAL
STATEMENTS
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE
SHEETS
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$1,407,000
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$376,840
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Accounts
receivable, net
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444,272
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1,843,415
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Inventory,
net
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741,355
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1,558,719
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Prepaid
expenses and other current assets
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236,446
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75,923
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Total
Current Assets
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2,829,073
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3,854,897
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Restricted Cash
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209,518
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209,360
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Property and Equipment, net
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12,748
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4,530
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Patents, net
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964,706
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1,070,588
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Goodwill
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3,474,502
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3,474,502
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Total Assets
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$7,490,547
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$8,613,877
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
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Current
Liabilities:
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Accounts
payable and accrued expenses
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$1,000,403
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$1,623,046
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Debt
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228,039
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1,336,819
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Derivative
liabilities
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6,332,309
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6,199,021
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Total
Current Liabilities
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7,560,751
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9,158,886
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Commitments and
Contingencies (Note
5)
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Stockholders’
Deficit:
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Common
Stock, $0.001 par value, 300,000,000 shares authorized, 117,412,273
and 111,434,284 shares issued and outstanding at September 30, 2016
and December 31, 2015, respectively
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117,412
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111,434
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Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,500,000 shares authorized, 1,292,870 and
1,317,870 shares issued and outstanding at September 30, 2016 and
December 31, 2015, respectively
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1,293
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1,318
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Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 and 150,000 shares authorized,
111,617 and 48,853 shares issued and outstanding at September 30,
2016 and December 31, 2015, respectively
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112
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49
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Additional
paid in capital
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33,317,475
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29,690,834
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Accumulated
deficit
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(33,506,496)
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(30,348,644)
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Total
Stockholders’ Deficit
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(70,204)
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(545,009)
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Total Liabilities and Stockholders’ Deficit
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$7,490,547
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$8,613,877
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(Unaudited)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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Net Sales
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$961,949
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$1,323,730
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$2,028,216
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$4,172,626
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Cost of Sales
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628,195
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1,188,222
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1,884,309
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3,950,961
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Gross Profit
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333,754
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135,508
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143,907
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221,665
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Operating Expenses
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Selling
and marketing
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558,899
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2,325,567
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2,696,295
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4,269,670
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General
and administrative
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956,614
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1,006,486
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3,573,520
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3,302,782
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Total
operating expenses
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1,515,513
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3,332,053
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6,269,815
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7,572,452
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Operating Loss
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(1,181,759)
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(3,196,545)
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(6,125,908)
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(7,350,787)
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Other Income (Expense)
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Change
in fair value of derivative liabilities
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3,051,973
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1,079,335
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3,026,433
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749,943
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Interest
expense
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(10,428)
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(15,456)
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(39,632)
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(223,160)
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Other
expense
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178
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-
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(18,745)
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3,041,723
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1,063,879
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2,968,056
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526,783
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NET INCOME (LOSS)
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$1,859,964
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$(2,132,666)
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$(3,157,852)
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$(6,824,004)
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Declared dividends on Preferred Stock
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$66,080
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$68,636
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$198,929
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$203,397
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Net income (loss) attributable to common stockholders
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$1,793,884
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$(2,201,302)
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$(3,356,781)
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$(7,027,401)
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Net income (loss) per common share
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Basic:
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$0.01
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$(0.02)
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$(0.03)
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$(0.11)
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Diluted:
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$0.01
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$(0.02)
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$(0.03)
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$(0.11)
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Weighted average common shares outstanding
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Basic:
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121,989,573
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88,086,922
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118,978,522
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64,289,691
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Diluted:
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210,146,167
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88,086,922
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118,978,522
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64,289,691
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
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Nine Months Ended
September 30,
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net
loss
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$(3,157,852)
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$(6,824,004)
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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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3,557
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2,469
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Amortization
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105,882
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112,732
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Provision
for bad debt expense
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140,152
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(51,769)
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Provision
for inventory losses
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110,000
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-
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Change
in estimated fair value of derivative
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(3,026,433)
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(749,943)
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Fair
value of common stock issued for services
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18,000
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470,062
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Stock
based compensation
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229,858
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453,491
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Change
in operating assets and liabilities:
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Accounts
receivable
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1,258,991
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(104,970)
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Inventory
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707,364
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(903,897)
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Prepaid
expenses and other current assets
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(160,523)
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386,768
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Accounts
payable and accrued expenses
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(623,123)
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(142,177)
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Net cash used in operating activities
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(4,394,127)
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(7,351,238)
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CASH FLOWS FROM INVESTING ACTIVITIES
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Restricted
cash
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(158)
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(76,110)
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Purchase
of property and equipment
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(11,775)
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-
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Net cash used in investing activities
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(11,933)
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(76,110)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds
from warrants exercised for cash
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45,000
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-
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Proceeds
from issuance of Series C Preferred Stock
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6,000,000
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9,000,048
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Borrowings
on debt
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94,998
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1,035,792
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Repayments
on debt
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(703,778)
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(3,184,786)
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Net cash provided by financing activities
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5,436,220
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6,851,054
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
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1,030,160
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(576,294)
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CASH AND CASH
EQUIVALENTS- beginning of
period
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376,840
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668,326
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CASH AND CASH
EQUIVALENTS- end of
period
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$1,407,000
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$92,032
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SUPPLEMENTAL DISCLOSURES
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Interest
paid in cash
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$41,758
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$137,556
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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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$1,473
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$54,034
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Dividends
paid in common stock
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$198,449
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$203,397
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Dividends
declared
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$198,929
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$68,636
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Conversion
of debt and accrued interest to Series C Preferred
Stock
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$500,000
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$1,214,206
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Warrants
issued in connection with Series C Preferred Offering
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$3,159,721
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$2,858,742
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Issuance
of restricted stock
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$2,620
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$-
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(Unaudited)
September 30, 2016
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 18662 MacArthur
Boulevard, Suite 110, Irvine, California, 92612. Our telephone
number is (949) 203-2500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Recent Developments
Completion of April Series C Offering
On April 13, 2016, the Company and one of the
Company’s current shareholders, Red Beard Holdings, LLC
(“Red
Beard”), entered into a
Securities Purchase Agreement, as amended (the
“April Purchase
Agreement”), wherein Red
Beard, together with any other signatories to the April Purchase
Agreement (collectively, the “Purchasers”), agreed to purchase up to 50,000 shares
of Series C Convertible Preferred Stock (“Series C
Preferred”) for $100 per
share over the course of three separate closings (the
“April Series C
Offering”).
The
Company issued an aggregate total of 25,000 shares of Series C
Preferred on April 13, 2016, 10,000 shares of Series C Preferred on
July 15, 2016 and, between August 31, 2016 and September 13, 2016,
the Company issued an aggregate total of 25,000 shares of Series C
Preferred. As additional consideration for participating in the
April Series C Offering, the Purchasers received five-year warrants
to purchase up to an aggregate total of approximately 33.3 million
shares of the Company’s Common Stock for $0.15 per
share.
Basis of
Presentation and Going
Concern
The accompanying condensed consolidated balance
sheet as of December 31, 2015, which has been derived from audited
financial statements included in the Company’s Form 10-K for
the year ended December 31, 2015, and the accompanying interim
condensed consolidated financial statements have been prepared by
management pursuant to the rules and regulations of the Securities
and Exchange Commission (“SEC”) for interim financial reporting. These
interim condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals)
necessary to fairly present the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). Operating results for the three-month
and nine-month periods ended September 30, 2016 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2016, 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, 2015
filed with the SEC on March 24, 2016.
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 three months ended September 30, 2016, the
Company earned net income of $1,859,964, has negative working
capital of $4,731,678, and an accumulated deficit of $33,506,496.
The Company had $1,616,518 in cash at September 30, 2016 with
$209,518 of this cash being restricted, as discussed below. The
Company will require additional capital, not only to satisfy its
contractual obligations under the bottling agreement entered into
with Niagara Bottling, LLC (“Niagara”) in October 2015 (the
“Niagara
Agreement”), but also to
execute its business plan, marketing and operating plan, and
therefore sustain operations, which capital may not be available on
favorable terms, if at all. The accompanying condensed consolidated
financial statements do not include any adjustments that might
result in the event the Company was unable to generate sufficient
cash from operations, execute its business, marking or operating
plan, or obtain additional working capital, if
necessary.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries True
Drinks, Bazi, Inc. and GT Beverage Company, LLC. All inter-company
accounts and transactions have been eliminated in the preparation
of these condensed consolidated financial statements.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Significant estimates made by management
include, among others, derivative liabilities, provision for losses
on accounts receivable, allowances for obsolete and slow moving
inventory, stock compensation, deferred tax asset valuation
allowances, and the realization of long-lived and intangible
assets, including goodwill. Actual results could differ from those
estimates.
Restricted Cash
At September 30, 2016, the Company had $209,518 in
restricted cash with a financial institution securing a letter of
credit. The letter of credit matures in August 2017 and was issued
as part of the contractual obligations related to the Licensing
Agreement entered into with Disney Consumer Products, Inc.
(“Disney”) during the quarter ended September 30,
2015 (the “Disney
Agreement”).
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 $250,000 and $110,000 at September 30, 2016 and
December 31, 2015, 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.
All
production of AquaBall™ is done by Niagara through the
Niagara Agreement. Niagara handles all aspects of production
including the procurement of all raw materials necessary to produce
AquaBall™. We utilize two facilities currently to handle any
necessary repackaging of AquaBall into six packs or 15-packs for
club customers.
We
rely 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. For the three months
ended September 30, 2016 and 2015, sales of AquaBall™
accounted for 97% and 96% of the Company’s total revenue,
respectively.
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. The Company maintained inventory reserves of
$110,000 and $0 as of September 30, 2016 and December 31, 2015.
This inventory reserve is related to our remaining finished goods
inventory of AquaBall prior to the production of our new
formulation of AquaBall produced by Niagara. The prior formulation
AquaBall is still being sold, but only to select accounts at a
reduced price.
Inventory
is comprised of the following:
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September 30,
2016
(unaudited)
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Purchased
materials
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$34,504
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$689,703
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Finished
goods
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816,851
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869,016
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Allowance
for obsolescence reserve
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(110,000)
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-
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Total
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$741,355
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$1,558,719
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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 September 30, 2016.
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 September 30,
2016.
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 charges
have been recorded for goodwill during the three and nine month
period ended September 30, 2016.
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,
2016 and 2015. At September 30, 2016, 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, 2016 and 2015, general
and administrative expenses included stock based compensation
expense of $229,858 and $453,491, 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.
The
fair value of the Common Stock warrant liability is based on a
Monte Carlo simulation that utilizes various assumptions, including
estimated volatility of 75% and an expected term ranging from 2.5
years to 5.0 years as of September 30, 2016, and 75% volatility and
an expected term ranging from 3.0 years to 5.0 years as of December
31, 2015. The most significant input in determining the fair value
of the Common Stock warrant liability is the price of the
Company’s Common Stock on the measurement date.
Basic and Diluted Income (loss) per share
Our
computation of earnings per share (“EPS”) includes basic and diluted
EPS. Basic EPS is measured as the income (loss) available to common
stockholders divided by the weighted average common shares
outstanding for the period. Diluted income (loss) per share
reflects the potential dilution, using the treasury stock method,
that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the income (loss)
of the Company as if they had been converted at the beginning of
the periods presented, or issuance date, if later. In computing
diluted income (loss) per share, the treasury stock method assumes
that outstanding options and warrants are exercised and the
proceeds are used to purchase common stock at the average market
price during the period. Options and warrants may have a dilutive
effect under the treasury stock method only when the average market
price of the common stock during the period exceeds the exercise
price of the options and warrants. Potential common shares that
have an antidilutive effect (i.e., those that increase income per
share or decrease loss per share) are excluded from the calculation
of diluted EPS.
Income
(loss) per common share is computed by dividing net income (loss)
by the weighted average number of shares of common stock
outstanding during the respective periods. Basic and diluted (loss)
per common share is the same for periods in which the Company
reported an operating loss because all warrants and stock options
outstanding are anti-dilutive. At September 30, 2016 and 2015, we
excluded 106,713,737 and 80,684,324, respectively, shares of Common
Stock equivalents as their effect would have been
anti-dilutive.
The
following is a reconciliation of the shares used in the computation
of basic and diluted EPS for the three and nine-month periods ended
September 30, 2016 and 2015, respectively:
|
|
Three months ended
September 30,
|
Nine months ended
September 30,
|
|
|
|
|
|
|
|
Basic
EPS – weighted-average number of common shares
outstanding
|
121,989,573
|
88,086,922
|
118,978,522
|
64,289,691
|
|
Effect
of dilutive potential common shares
|
88,156,594
|
-
|
-
|
-
|
|
Diluted
EPS – weighted-average number of common shares and potential
common shares outstanding
|
210,146,167
|
88,086,922
|
118,978,522
|
64,289,691
|
Research and Development
Research
and development costs are expensed as incurred.
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts
with Customers: Topic 606. This ASU outlines a single comprehensive
model for entities to use in accounting for revenue arising from
contracts with customers and supersedes most current revenue
recognition guidance. This accounting standard is effective for
annual reporting periods beginning after December 15, 2017,
including interim reporting periods within that reporting period.
Early adoption is permitted for annual reporting periods beginning
after December 15, 2016. The Company is currently evaluating the
impact this accounting standard will have on the Company's
financial statements.
On
February 25, 2016, the Financial Accounting Standards Board
(“FASB”) issued
Accounting Standards Update (“ASU”) 2016-2,
“Leases” (Topic 842), which is intended to improve
financial reporting for lease transactions. This ASU will require
organizations that lease assets, such as real estate, airplanes and
manufacturing equipment, to recognize on their balance sheet the
assets and liabilities for the rights to use those assets for the
lease term and obligations to make lease payments created by those
leases that have terms of greater than 12 months. The
recognition, measurement, and presentation of expenses and cash
flows arising from a lease by a lessee primarily will depend on its
classification as finance or operating lease. This ASU will also
require disclosures to help investors and other financial statement
users better understand the amount and timing of cash flows arising
from leases. These disclosures will include qualitative and
quantitative requirements, providing additional information about
the amounts recorded in the financial statements. The ASU is
effective for the Company for the year ending December 31, 2019 and
interim reporting periods within that year, and early adoption is
permitted. Management has not yet determined the effect of this ASU
on the Company's financial statements.
In March 2016, the FASB issued ASU
2016-09, Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment
Accounting (“ASU 2016-09”), which simplifies the accounting for
share-based payment transactions, including the income tax
consequences, an option to recognize gross share-based compensation
expense with actual forfeitures recognized as they occur, as well
as certain classifications in the statement of cash flows. This
guidance will be effective for fiscal years beginning after
December 15, 2016, and early adoption is permitted. The Company is
currently evaluating the effect this guidance will have on our
financial statements and related disclosures.
In August 2016, FASB issued ASU No.
2016-15, “Statement of Cash Flows: Classification of
Certain Cash Receipts and Cash Payments,” (“ASU
2016-15”) which eliminates the diversity in practice
related to the classification of certain cash receipts and
payments. ASU 2016-15 designates the appropriate cash flow
classification, including requirements to allocate certain
components of these cash receipts and payments among operating,
investing and financing activities. The retrospective transition
method, requiring adjustment to all comparative periods presented,
is required unless it is impracticable for some of the amendments,
in which case those amendments would be prospectively adopted as of
the earliest date practicable. ASU 2016-15 is effective for the
Company’s annual and interim reporting periods beginning
January 1, 2018. The Company is currently evaluating the effect
this guidance will have on our financial statements and related
disclosures.
Subsequent Events
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 no subsequent
events occurred.
NOTE 2 — SHAREHOLDERS’ EQUITY
Securities
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 the Company’s Common Stock. Dividends have no
cumulative rights and dividends will not accumulate if the Board of
Directors does not declare such dividends.
Series A
Preferred. On January 18, 2013,
upon the filing of the Amendment to the Articles of Incorporation,
the Company converted 1,544,565 shares of Series A Preferred issued
to former True Drinks shareholders into 25,304,017 shares of the
Company’s Common Stock. In February 2015, the Company filed a
Certificate of Elimination with the State of Nevada to eliminate
the Series A Preferred Stock.
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 was 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, 2016, the Company declared
$66,080 in dividends on outstanding shares of its Series B
Preferred. As of September 30, 2016, there remained $66,080 in
cumulative unpaid dividends on the Series B Preferred. These
dividends were paid by issuing 479,735 shares of the
Company’s Common Stock in October 2016.
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.
Issuances
On
November 25, 2015, the Company and certain accredited investors
entered into securities purchase agreements to purchase up to
30,000 shares of Series C Preferred for $100 per share over the
course of three separate closings. The Company issued an aggregate
total of 10,000 shares of Series C Preferred and five-year warrants
to purchase 2,333,333 shares of Common Stock, exercisable at $0.15
per share, on November 25, 2015, 10,000 shares of Series C
Preferred and five-year warrants to purchase 2,333,333 shares of
Common Stock, exercisable at $0.15 per share, on December 16, 2015,
and 10,000 shares of Series C Preferred and five-year warrants to
purchase 2,333,333 shares of Common Stock, exercisable at $0.15 per
share, on January 19, 2016. Each warrant contains a
price-protection feature that adjusts the exercise price in the
event of certain dilutive issuances of securities. Such
price-protection feature is determined to be a derivative liability
and, as such, the value of all such warrants issued was recorded to
derivative liabilities with $548,022 being recorded between
November and December 2015, and $210,275 recorded in January
2016.
On January 20, 2016, the Company and holders of
certain senior subordinated secured promissory notes
(“Secured
Notes”) in the principal
amount of $500,000 entered into Note Exchange Agreements, pursuant
to which these holders exchanged the outstanding principal balance
of their Secured Notes into an aggregate total of 4,413 shares of
Series C Preferred and five-year warrants to purchase up to an
aggregate total of 1,029,413 shares of Common Stock for $0.17 per
share. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $92,768, was recorded to
derivative liabilities.
On
April 13, 2016, the Company and Red Beard, entered into the April
Purchase Agreement, wherein Red Beard, together with any other
Purchaser, agreed to purchase up to 50,000 shares of Series C
Preferred for $100 per share over the course of three separate
closings. The Company issued an aggregate total of 25,000 shares of
Series C Preferred on April 13, 2016, 10,000 shares of Series C
Preferred on July 15, 2016 and, between August 31, 2016 and
September 13, 2016, the Company issued an aggregate total of 25,000
shares of Series C Preferred.
As
additional consideration for participating in the April Series C
Offering, the Purchasers received five-year warrants to purchase up
to an aggregate total of approximately 33.3 million shares of
Common Stock for $0.15 per share. At the completion of the April
Series C Offering, the Company had issued warrants to purchase up
to an aggregate total of approximately 33.4 million shares of
Common Stock. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $2,856,678, was recorded to
derivative liabilities.
NOTE 3 — WARRANTS
Warrants
A
summary of the Company’s warrant activity for the three and
nine months ended September 30, 2016 is presented
below:
|
|
|
Weighted Average Exercise Price
|
|
Outstanding, December 31, 2015
|
66,919,107
|
$0.18
|
|
Granted
|
36,696,083
|
0.15
|
|
Exercised
|
(300,000)
|
0.15
|
|
Expired
|
(61,453)
|
30.00
|
|
Outstanding, September 30, 2016
|
103,253,737
|
$0.16
|
As
of September 30, 2016, 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.)
|
|
1,474,435
|
$0.38
|
1.03
|
|
1,120,479
|
$0.25
|
1.24
|
|
1,164,476
|
$0.19
|
4.26
|
|
1,029,413
|
$0.17
|
4.56
|
|
98,464,934
|
$0.15
|
3.90
|
|
103,253,737
|
$0.16
|
4.10
|
Non-Qualified Stock Options
The
Company granted options to purchase an aggregate total of 3,460,000
shares of Common Stock during the three months and nine months
ended September 30, 2016.
The
weighted average estimated fair value per share of the stock
options at grant date was $0.06 per share. Such fair values were
estimated using the Black-Scholes stock option pricing model and
the following weighted average assumptions.
|
|
|
|
Expected
life
|
|
|
Estimated
volatility
|
75.0%
|
|
Risk-free
interest rate
|
0.66%
|
|
Dividends
|
-
|
Stock
option activity during the nine months ended September 30, 2016 is
summarized as follows:
|
|
Options
Outstanding
|
Weighted Average
Exercise
Price
|
|
Options
outstanding at December 31, 2015
|
-
|
$-
|
|
Exercised
|
-
|
-
|
|
Granted
|
3,460,000
|
0.15
|
|
Forfeited
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Options
outstanding at September 30, 2016
|
3,460,000
|
$0.15
|
NOTE 4 — DEBT
A
summary of debt as of September 30, 2016, is as
follows:
|
|
|
|
Outstanding, December 31, 2015
|
$1,336,819
|
|
Borrowings
|
94,998
|
|
Repayments
|
(703,778)
|
|
Conversions
to Series C Preferred Stock
|
(500,000)
|
|
Outstanding, September 30, 2016
|
$228,039
|
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, 2016, the
total outstanding on the line-of-credit approximated $173,000, and
the Company did not have any borrowing availability. The
line-of-credit bears interest at Prime rate 3.25% as of September
30, 2016 plus 4.50% 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 receivable funded against.
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. The current lease term is set to expire on December
31, 2016. Total rent expense related to the Company's operating
lease for the nine months ended September 30, 2016 was $42,293.
Total remaining payments on the lease through December 31, 2016 are
$14,429.
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.
The
Company has entered in a number of agreements with various
consultants. Termination of any of these agreements could result in
termination fees.
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, 2016. The Company had no Level 1 or
2 fair value measurements at September 30, 2016 or December 31,
2015.
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 the
dates indicated:
|
|
|
Level
1
|
Level
2
|
Level
3
|
|
|
Total
carrying value
|
Quoted
market prices in active markets
|
Internal
Models with significant observable market
parameters
|
Internal
models with significant unobservable market
parameters
|
|
Derivative
liabilities – September 30, 2016
|
$6,332,309
|
$-
|
$-
|
$6,332,309
|
|
Derivative
liabilities – December 31, 2015
|
$6,199,021
|
$-
|
$-
|
$6,199,021
|
The
following table presents the changes in recurring fair value
measurements included in net loss for the nine months ended
September 30, 2016 and 2015:
|
|
Recurring Fair Value Measurements
|
|
|
Changes in Fair Value
Included in Net Loss
|
|
|
|
|
Total
|
|
Derivative
liabilities – September 30, 2016
|
$3,026,433
|
$-
|
$3,026,433
|
|
Derivative
liabilities – September 30, 2015
|
$749,943
|
$-
|
$749,943
|
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
|
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, 2015:
|
|
|
Recorded
New Derivative Liabilities
|
Reclassification
of Derivative Liabilities to Additional Paid in
Capital
|
Change
in Estimated Fair Value Recognized in Results of
Operations
|
September
30, 2015
|
|
Derivative
liabilities
|
$1,569,522
|
$2,858,742
|
$-
|
$(749,943)
|
$3,678,321
|
NOTE 7 – LICENSING AGREEMENTS
We originally entered into a three-year licensing
agreement 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.
During the quarter
ended September 30, 2015, we entered into renewed Licensing
Agreements with both Marvel Characters
B.V. (“Marvel”)
and Disney, pursuant to which we secured licenses to feature
certain Marvel and Disney characters on bottles of
AquaBall™ Naturally Flavored Water through 2017. Our
agreement with Marvel expires on December 31, 2017,
and requires payment of a 5% royalty rate on sales of
AquaBall™ Naturally Flavored Water adorned with Marvel
characters, paid quarterly, with a total guarantee of $200,000. Our
agreement with Disney expires on March 31, 2017, and requires
payment of a 5% royalty rate on sales of AquaBall™
Naturally Flavored Water adorned with Disney characters, paid
quarterly, with a total guarantee of $450,870. We are
also required to make an annual ‘common marketing
fund’ contribution equal to 1% of our sales, and must spend a
total of $820,000 on advertising and promotional opportunities over
the term of the agreement with Disney.
NOTE 8 – INCOME TAXES
The Company does not
have significant income tax expense or benefit for the period ended
September 30, 2016 or 2015. 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, 2016 and
2015. Such tax net operating loss carryforwards
(“NOL”) approximated
$33.7 million at September 30, 2016. 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, 2016 and 2015 as
follows:
|
|
|
|
|
Deferred
tax asset –NOL’s
|
$13,500,000
|
$9,100,000
|
|
Less
valuation allowance
|
(13,500,000)
|
(9,100,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend
to identify forward-looking statements in this report by using
words such as “believes,” “intends,”
“expects,” “may,” “will,”
“should,” “plan,” “projected,”
“contemplates,” “anticipates,”
“estimates,” “predicts,”
“potential,” “continue,” or similar
terminology. These statements are based on our beliefs as well as
assumptions we made using information currently available to us. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may
differ significantly from the results discussed in the
forward-looking statements. These risks include changes in demand
for our products, changes in the level of operating expenses, our
ability to expand our network of customers, changes in general
economic conditions that impact consumer behavior and spending,
product supply, the availability, amount, and cost of capital to us
and our use of such capital, and other risks discussed in this
report. Additional risks that may affect our performance are
discussed under “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2015.
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 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 18662 MacArthur
Boulevard, Suite 110, Irvine, California, 92612. Our telephone
number is (949) 203-2500. Our corporate website address is
http://www.truedrinks.com. Our common stock, par value $0.001 per
share (“Common
Stock”), is currently
listed for quotation on the OTC Pink Marketplace under the symbol
“TRUU.”
Critical Accounting Polices and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates; including those related
to collection of receivables, inventory obsolescence, sales returns
and non-monetary transactions such as stock and stock options
issued for services. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. We believe there have been no changes to
our critical accounting policies subsequent to the filing of our
annual report on Form 10-K for the year ended December 31,
2015.
Comparison of the Three Months Ended September 30, 2016 to the
Three Months Ended September 30, 2015.
Net Sales
Net sales for the three months ended September 30,
2016 were $961,649, compared with sales of $1,323,730 for the three
months ended September 30, 2015, a 27% decrease. This decrease
is primarily the result of the introduction of our new,
preservative-free formulation of AquaBall™ manufactured by
Niagara Bottling, LLC (“Niagara”). Our initial production run with Niagara
was not ready for shipment until the beginning of June, which
greatly hindered our ability to get the new product on the shelves
during the second and third quarters of fiscal
2016.
In addition to launching the new,
preservative-free formulation of AquaBall™, we spent the
quarter continuing to revamp our sales staff, including the hiring
of Jeff Culbertson as our Vice President of Sales in April of 2016,
two additional national account managers to focus on sales activity
in the eastern and western regions of the United States,
respectively, and regional sales managers to oversee the progress
of our growing direct-store-distribution
(“DSD”)
network. We expect our sales efforts to focus on expanding
distribution with national accounts in the grocery, convenience,
drug and mass retail markets, as well as continuing to build out
our DSD network during the remainder of fiscal 2016 and throughout
fiscal 2017. Our sales team is also, and will continue to be
focused on securing distribution during the next account resets for
national grocery and convenience store accounts over the next
several months. We anticipate sales of our new preservative-free
AquaBall to continue to increase as we gain chain authorizations
and sign distributors to service those
accounts.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Three Months Ended
September 30, 2016
(% of Sales)
|
|
AquaBall™
|
97%
|
|
Bazi®
|
3%
|
Gross Profit (Loss) and Gross Margin
Gross profit
for the three months ended September 30, 2016 was $333,754,
compared to $135,508 for the three months ended September 30, 2015.
Gross profit as a percentage of revenue (gross margin) during
three months ended September 30, 2016 was 35%, compared to 10% for
the same period in 2015. This increase in gross profit is a
great improvement for our Company, and is a direct result of our
relationship with Niagara Bottling who provides finished goods to
the Company and bills the Company for the product as it is shipped
to customers, allowing our costs to become more
consistent.
We
expect margins to continue to improve during the fourth quarter of
2016 and into the first quarter of 2017 as we work to reduce
inefficiencies in the manufacturing process with Niagara, and as we
ship the last of our inventory of the prior formulation of
AquaBall™. We also expect the distribution of our new
preservative-free AquaBall™ in the grocery, convenience, drug
and mass channels to increase in future periods. In the past, we
had a greater focus on the club channel, which had a severely
negative affect on our margins. Although we have also improved our
margins in the club channel, we expect a lower percentage of our
overall sales to come from this channel moving
forward.
Sales, General and Administrative Expense
Sales,
general and administrative expenses were $1,515,513 for the three
months ended September 30, 2016, as compared to $3,332,053 for the
three months ended September 30, 2015. This period over period
decrease of $1,817,168 is primarily the result of reduced staffing
levels and other employment related costs implemented in the first
half of fiscal 2016 due, in part, to our relationship with Niagara
which acts as an extension of our operations department by
providing the Company with finished goods and only billing for
those goods when shipped to customers. This structure has caused,
and will continue to cause, our warehouse and fulfillment costs to
decrease, as our agreement with Niagara allows us to store up to
4,000 pallets of product at their facility at no cost.
Additionally, our freight expenses as a percentage of sales
decreased substantially as our new bottle now allows us to ship 69%
more bottles per truck, and we are shipping larger orders as we are
utilizing distributors rather than shipping directly to customers
for a larger share of our business. This has far more than offset
an increase in the average distance of our shipments, as we have
shifted from three facilities to one production facility in Dallas.
We also spent less on marketing in the third quarter of fiscal
2016, as compared to the prior period, an expect marketing expense
to continue to decrease as we focus on building out our
distribution.
Change in Fair Value of Derivative Liabilities
The
Company recorded a gain on the change in fair value of derivative
liabilities for the three months ended September 30, 2016 of
$3,051,973, as compared to a gain of $1,079,335 for the change in
fair value of derivative liabilities for the three months ended
September 30, 2015.
Interest Expense
Interest
expense for the three months ended September 30, 2016 was $10,428,
as compared to interest expense of $15,456 for the three months
ended September 30, 2015. Interest expense consists of interest and
fees due on promissory notes issued in the third quarter of
2015.
Income Taxes
There
is no income tax expense recorded for the three months ended
September 30, 2016 and 2015, as the Company’s calculated
provision (benefit) for income tax is based on annual expected tax
rates. As of September 30, 2016, the Company has tax net operating
loss carryforwards and a related deferred tax asset, offset by a
full valuation allowance.
Net (Income) Loss
Our
net income for the three months ended September 30, 2016 was
$1,859,964 as compared to a net loss of $2,132,666 for the three
months ended September 30, 2015. This year-over-year increase of
approximately $4.0 million in net income is due to a nearly $2.0
million decrease in net operating loss in addition to an increase
of almost $2.0 million in other income. On a per share basis, our
income was $0.02 per share for the three months ended September 30,
2016, as compared to a loss of $0.02 per share for the three months
ended September 30, 2015.
Comparison of the Nine Months Ended September 30, 2016 to the Nine
Months Ended September 30, 2015.
Net Sales
Net
sales for the nine months ended September 30, 2016 were $2,028,216,
compared with sales of $4,172,626 for the nine months ended
September 30, 2015, a 51% decrease. The decrease in sales for
the nine months ended September 30, 2016 was a result of the
introduction of our new formulation of AquaBall™, as
explained above. We anticipate increases in net sales each quarter
moving forward as we expand distribution of our new,
preservative-free formulation of AquaBall.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Nine Months Ended
September 30, 2016
(% of Sales)
|
|
AquaBall™
|
93%
|
|
Bazi®
|
7%
|
Gross Profit (Loss) and Gross Margin
Gross profit
for the nine months ended September 30, 2016 was $143,907, compared
to gross profit of $221,665 for the nine months ended September 30,
2015. Gross profit as a percentage of revenue (gross margin)
during nine months ended September 30, 2016 was 7%. This low
percentage is due primarily to discounts given on product as we
transitioned out of our prior, cold-fill formulation of
AquaBall™ to our new preservative-free, hot-fill formulation
of AquaBall™ manufactured by Niagara in the first half of
2016. As noted above, we expect gross margins to continue to
increase as sales of our prior formulation cease, and Niagara
becomes the exclusive manufacturer of AquaBall™.
Sales, General and Administrative Expense
Sales,
general and administrative expenses were $6,269,815 for the nine
months ended September 30, 2016, as compared to $7,572,452 for the
nine months ended September 30, 2015. The decrease in expenses was
a result of the decrease experienced in the third quarter of 2016,
as discussed above.
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, 2016 of
$3,026,433, as compared to a gain of $749,943 for the change in
fair value of derivative liabilities for the nine months ended
September 30, 2015.
Interest Expense
Interest
expense for the nine months ended September 30, 2016 was $39,632,
as compared to interest expense of $223,160 for the nine months
ended September 30, 2015. Interest expense consists of interest and
fees due on promissory notes generated in the third quarter of
2015, $500,000 of which were converted into shares of Series C
Preferred the January Note Exchange (defined below) during the
first quarter of 2016.
Income Taxes
There
is no income tax expense recorded for the nine months ended
September 30, 2016 and 2015, due to the Company's net losses. As of
September 30, 2016, 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, 2016 was
$3,157,852 as compared to a net loss of $6,824,004 for the nine
months ended September 30, 2015. As noted above, the decrease in
net loss is largely due to the nearly $4.0 million improvement to
net income in the third quarter, as explained above. On a per share
basis, our loss was $0.03 per share for the nine months ended
September 30, 2016, as compared to a loss of $0.11 per share for
the nine months ended September 30, 2015.
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 growth in sales and gross margins as a
result of the Niagara Agreement and the introduction of our new,
preservative free formulation of AquaBall™, 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, 2015, indicating
that there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying condensed
consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America, which contemplates continuation of the Company as a
going concern. For the three months ended September 30, 2016, the
Company earned net income of $1,859,964, has negative working
capital of $4,731,678, and an accumulated deficit of $33,506,496.
Although, during the year ended December 31, 2015 and the
nine-months ended September 30, 2016 the Company raised
approximately $18 million from the sale of shares of Series C
Preferred and $855,000 from the issuance of Secured Notes,
additional capital will be necessary to advance the marketability
of the Company's products to the point at which the Company can
sustain operations, including satisfying our contractual
obligations with Niagara. Management's plans are to continue to
contain expenses, expand distribution and sales of its
AquaBall™ Naturally Flavored Water as rapidly as economically
possible, and raise capital through equity and debt offerings to
execute the Company’s business plan and achieve profitability
from continuing operations. The accompanying condensed consolidated
financial statements do not include any adjustments that might
result in the event the Company is unsuccessful in its
plans.
The
Company has financed its operations through sales of equity and, to
a lesser degree, cash flow provided by sales of AquaBall™.
Despite recent sales of preferred stock as described below, funds
generated from sales of shares of our preferred stock or other
equity or debt securities, and cash flow provided by
AquaBall™ sales are insufficient to fund our operating
requirements for the next twelve months. As a result we will
require additional capital to continue operating as a going
concern. No assurances can be given that we will be
successful. In the event we are unable to obtain
additional financing in the short-term, we will not be able to fund
our working capital requirements, and therefore will be unable to
continue as a going concern.
Series C Offerings, Note Payments, Note Exchange and Issuance of
Secured Notes
November 2015 Series C
Offering. On November 25,
2015, the Company and certain accredited investors entered into
securities purchase agreements to purchase up to 30,000 shares of
Series C Preferred for $100 per share over the course of three
separate closings. The Company issued an aggregate total of 10,000
shares of Series C Preferred and five-year warrants to purchase
2,333,333 shares of Common Stock, exercisable at $0.15 per share,
on November 25, 2015, 10,000 shares of Series C Preferred and
five-year warrants to purchase 2,333,333 shares of Common Stock,
exercisable at $0.15 per share, on December 16, 2015, and 10,000
shares of Series C Preferred and five-year warrants to purchase
2,333,333 shares of Common Stock, exercisable at $0.15 per share,
on January 19, 2016. Each warrant contains a price-protection
feature that adjusts the exercise price in the event of certain
dilutive issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued was recorded to derivative liabilities
with $548,022 being recorded between November and December 2015,
and $210,275 recorded in January 2016.
January 2016 Note
Exchange. On January 20, 2016,
the Company and holders of Secured Notes from the September 2015
Secured Note Offering in the principal amount of $500,000 entered
into Note Exchange Agreements pursuant to which the holders agreed
to convert the outstanding principal balance of their Secured Notes
into an aggregate total of 4,413 shares of Series C Preferred and
warrants to purchase up to an agate total of 1,029,413 shares of
Common Stock for $0.17 per share. Neither holder received warrants
to purchase shares of the Company’s Common Stock in
connection with their respective Secured Notes, and agreed to waive
any unpaid interest accrued under the Secured Notes prior to the
execution of the Note Exchange Agreement.
April 2016 Series C
Offering. On April 13, 2016,
the Company and Red Beard entered into a securities purchase
agreement, pursuant to which Red Beard agreed to purchase an
aggregate total of 50,000 shares of Series C Preferred for $100 per
share over the course of two closings. The Company issued 25,000
shares of Series C Preferred to Red Beard on April 13, 2016. As
additional consideration, investors will receive five-year warrants
to purchase up to an aggregate total of approximately 33.3 million
shares of Common Stock for $0.15 per share. On April 13, 2016, the
Company issued to Red Beard warrants to purchase approximately 16.7
million shares of Common Stock.
On
July 13, 2016, the securities purchase agreement was amended to
modify the closing schedule for the remaining 25,000 shares of
Series C Preferred to be purchased. As amended, 10,000 shares of
Series C Preferred were purchased on July 15, 2016, and the
remaining 25,000 shares were purchased between August 31, 2016 and
September 13, 2016.
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, 2016, the
total outstanding on the line-of-credit approximated $173,000, and
the Company did not have any availability to borrow. The
line-of-credit bears interest at Prime rate 3.25% as of September
30, 2016 plus 4.50% 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 receivable funded against.
Off-Balance Sheet Items
We
had no off-balance sheet items as of September 30,
2016.
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.
PART II
ITEM 1. LEGAL
PROCEEDINGS
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations.
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations. There is no action, suit, proceeding,
inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or,
to the knowledge of the executive officers of the Company or any of
our subsidiaries, threatened against or affecting the Company, or
our Common Stock in which an adverse decision could have a material
adverse effect.
Our
results of operations and financial condition are subject to
numerous risks and uncertainties described in our Annual Report on
Form 10-K for our fiscal year ended December 31, 2015, filed on
March 24, 2016. You should carefully consider these risk factors in
conjunction with the other information contained in this Quarterly
Report. Should any of these risks materialize, our business,
financial condition and future prospects could be negatively
impacted. As of September 30, 2016, there have been no material
changes to the disclosures made in the above-referenced Form
10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR
SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER
INFORMATION
None.
|
(a)
|
|
EXHIBITS
|
|
31.1
|
|
Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a)
|
|
31.2
|
|
Certification of the Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
|
|
32.1
|
|
Certification by the Principal Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
|
Certification by the Principal Financial and Accounting Officer
pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
101.INS
|
|
XBRL Instance Document
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
Date: November 14, 2016
|
|
TRUE DRINKS HOLDINGS, INC.
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Kevin Sherman
|
|
|
|
|
|
Kevin Sherman
Chief Executive Officer and Director
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
Daniel Kerker
Chief Financial Officer
(Principal
Financial and Accounting Officer)
|
|
|
|
|
|
|
-23-