Charlie's Holdings, Inc. - Annual Report: 2016 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
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[X]
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ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year ended December 31, 2016
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or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file No.
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 of incorporation)
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(I.R.S. Employer Identification Number)
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18662 MacArthur Blvd, Suite 110
Irvine, CA 92612
(Address of principal executive offices)
(949) 203-3500
(Issuer’s telephone number)
Securities registered pursuant
to Section 12(b) of the Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock ($0.001 par value)
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Over the Counter
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Securities registered under Section 12(g) of the Exchange Act:
None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [X]
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 (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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
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 the definitions of “large
accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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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 [X]
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act). Yes
[ ] No [X]
The aggregate market value of common stock held by non-affiliates
as of the last business day of the registrant’s most recently
completed second fiscal quarter, June 30, 2016, was approximately
$11.6 million based on a closing market price of $0.17 per
share.
There
were 199,693,811 shares of the registrant’s common stock
outstanding as of March 31, 2017.
TRUE DRINKS HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2016
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38
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains “forward-looking” statements
within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934 and is subject
to the safe harbor created by those sections. 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 below under “Risk Factors Associated with Our
Business.”
PART I
ITEM 1. DESCRIPTION OF
BUSINESS
As used in this Annual Report,
“we”, “us”, “our”, “True Drinks”, “Company” or “our Company” refers to True Drinks Holdings, Inc. and
all of its subsidiaries, unless the context requires otherwise. We
are a holding company and conduct no operating business, except
through our subsidiaries.
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, convenience stores and through online
retailers. 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
January Note Exchange
On January 20, 2016, the Company and certain
holders of senior subordinated
secured promissory notes (“Secured
Notes”)
in the principal amount of $500,000
entered into Note Exchange Agreements pursuant to which the holders
agreed to convert the outstanding principal balance of their
Secured Notes into an aggregate total of 4,413 shares of Series C
Convertible Preferred Stock (“Series C
Preferred”) and five-year
warrants to purchase up to an agate total of 1,029,701 shares of
Common Stock for $0.17 per share.
Amendment to Series C Preferred Certificate of
Designation
On April 13, 2016, in connection with the April
Series C Offering (defined below), the Company filed the Third
Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
(the “Series C
Amendment”), with the
Nevada Secretary of State in order to: (i) prohibit, except in
certain circumstances, any holder of shares of the Company’s
Series C Preferred from voting more than 50% of the total voting
power of the outstanding shares of capital stock of the Company;
(ii) increase the number of shares of preferred stock designated as
Series C Preferred from 150,000 to 200,000, and (iii) permit the
issuance of shares of Series C Preferred and certain warrants to
purchase shares of the Company’s Common
Stock.
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, which agreement was amended on July
13, 2016 (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 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.
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the
Certificate of Designation, Preferences, Rights and Limitations of
the Series D Convertible Preferred Stock (the
“Certificate of
Designation”) with the
Nevada Secretary of State, designating 50,000 shares of the
Company's preferred stock, par value $0.001 per share, as Series D
Convertible Preferred Stock (the “Series D
Preferred”).
Each share of Series D Preferred has a stated
value of $100 per share, and, following the expiration of the 20
day calendar day period set forth in Rule 14c-2(b) under the
Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), commencing upon
the distribution of an Information Statement on Schedule 14C to the
Company's stockholders, each share of Series D Preferred is
convertible, at the option of each respective holder, into that
number of shares of the Company’s Common Stock equal to the
stated value, divided by $0.15 per share (the
“Conversion
Shares”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Conversion Shares in the
event: (i) there are sufficient authorized shares of Common Stock
reserved as Conversion Shares; (ii) the Conversion Shares are
registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Conversion
Shares are freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company's Common Stock is at least $0.62 per share for 10
consecutive trading days.
Series D Offering
On February 8, 2017 (the
“Initial
Investment Date”), the
Company and certain accredited investors (the
“Series D
Investors”) entered into
a Securities Purchase Agreement (the “Series D Purchase
Agreement”), wherein the
Company may offer and sell to Series D Investors up to 50,000
shares of Series D Preferred for $100 per share (the
“Series D
Offering”). As additional
consideration, Series D Investors will also receive five-year
warrants (the “Series D
Warrants”), to purchase
up to 200% of the Conversion Shares issuable upon conversion of
shares of Series D Preferred purchased under the Series D Offering
for $0.15 per share. In accordance with the terms and conditions of
the Series D Purchase Agreement, all Series D Warrants issued in
connection with the Series D Offering will be exchanged for shares
of Common Stock pursuant to the Warrant Exchange Program, as
further described below.
On the Initial Investment Date, the Company issued to Series D
Investors an aggregate total of 31,750 shares of Series D
Preferred, as well as Series D Warrants to purchase up to an
aggregate total of 42,333,341 shares of Common Stock. Between the
Initial Investment Date and the date of this Annual Report, the
Company has issued an additional 5,000 shares of Series D Preferred
and Series D Warrants to purchase up to an aggregate total of
6,666,669 shares of Common Stock. The issuance of the shares of
Series D Preferred to date has resulted in gross proceeds to the
Company of approximately $3.7 million.
Warrant Exchange
Beginning on February 8, 2017, the Company and
certain holders of outstanding Common Stock purchase warrants (the
“Outstanding
Warrants”), entered into
Warrant Exchange Agreements (each, an “Exchange
Agreement”), pursuant to
which each holder agreed to cancel their respective Outstanding
Warrants in exchange for one-half of a share of Common Stock for
every share of Common Stock otherwise issuable upon exercise of
Outstanding Warrants (the “Warrant Exchange
Program”). The Company
expects to issue up to 71.7 million shares of Common Stock in
exchange for the cancellation of 143.4 million Outstanding
Warrants, including the Warrants issued in connection with the
Series D Offering, over the course of the Warrant Exchange
Program.
To date the Company has issued 73,106,453 shares of Common Stock,
in exchange for the cancellation of 146,212,905 Outstanding
Warrants.
Our Products
We
market and distribute products that offer a healthful, natural
alternative to high sugar, high calorie and nutritionally deficient
beverages. Our mission is to bring integrity back to the beverage
industry and that honesty applies to every drop in every bottle.
Our goal is to create and deliver beverages for families that
encourage improved health, while being clear about what our
products contain (and what they don’t).
AquaBall™ Naturally Flavored Water
Our flagship product is AquaBall™ Naturally
Flavored Water, a zero-sugar, zero-calorie, preservative-free,
vitamin-enhanced, naturally flavored water drink. AquaBall™
does not contain high fructose corn syrup, artificial flavors, or
artificial colors. Unlike high sugar and high calorie beverages
marketed toward children, AquaBall™ is sweetened with stevia,
an all-natural sweetener, allowing AquaBall™ to provide a
zero-sugar, zero-calorie alternative to juice and soda for
kids. The main component of
the marketing vision behind the AquaBall™ brand is our licensing
agreements with Disney Consumer Products, Inc. and Marvel
Entertainment, allowing each AquaBall™ bottle to prominently
feature various Disney and Marvel characters. Both Disney and
Marvel characters have an established reputation of high retail
sales of licensed products, giving each AquaBall™ the presence associated with these
brands.
AquaBall™
is packaged in 10-ounce bottles, and is wrapped with colorful,
eye-catching labels featuring popular Disney characters and various
Marvel Superheroes. AquaBall™ currently comes in fruit punch,
grape, strawberry lemonade and berry frost flavors and is sold
primarily in grocery and convenience stores throughout the United
States. During the year ended December 31, 2016,
AquaBall™ sales accounted for approximately 92% of the
Company’s total revenues.
Bazi®
Bazi®
All Natural Energy, is a liquid nutritional drink packed with eight
different super fruits, including the Chinese jujube and seven
other superfruits, plus 12 vitamins. The proprietary formula
contains the following fruits: jujube fruit, blueberry,
pomegranate, goji berry, chokeberry, raspberry, acai and sea
buckthorn. Additionally, Bazi® contains 12 vitamins including
vitamins A, C, E and B-complex. In August, 2011, BioEnergy Ribose
was added to Bazi® enhancing the products energy delivery
system. During the year ended December 31, 2016, Bazi® sales
accounted for approximately 8% of the Company’s total
revenues.
Manufacturing and Distribution
Manufacturing
Beginning in May 2016,
all production of AquaBall™ moved to Niagara Bottling, LLC
(“Niagara”),
pursuant to the terms and conditions of a bottling agreement
executed by the Company and Niagara in October 2015 (the
“Niagara
Agreement”). Niagara
handles all aspects of production, including the procurement of all
raw materials necessary to produce AquaBall™. In accordance
with the terms of the Niagara Agreement, Niagara provides us with
finished goods and bills us for product as it is shipped to
customers. In addition to Niagara, we work a limited number of
partners to repack bottles of AquaBall™ into six-packs and
our 15-pack club packages.
Prior to May 2016, we utilized the service of certain third parties
to supply and manufacture our products. We had co-packing
agreements with 7-Up Bottling in Modesto, California, Mountain Pure
in Palestine, Texas, and Adirondack Beverages in Scotia, New York
to package up to 4.0 million cases of AquaBall™ Naturally
Flavored Water per year.
Bazi® has been, and continues to be manufactured by Arizona
Packaging and Production since 2007.
Retail Distribution
After
experiencing an increase in same store sales in those locations
serviced by regional distributors, we began shifting
our retail distribution strategy towards a nationwide network
of regional distributors for each of our grocery, drug and
convenience accounts in November 2015. Throughout 2016 and the
first quarter of 2017, we signed with distributor partners in 44
states. We will continue to ship directly to certain customers for
which direct to warehouse delivery is required.
Online Sales
Our e-commerce platform allows current and future
consumers to purchase AquaBall™ Naturally Flavored Water and
Bazi® Energy Shot through Amazon.com and http://www.drinkbazi.com,
respectively. We drive traffic to relevant landing pages and micro
sites through digital marketing campaigns and promotions, as well
as a variety of social media marketing efforts.
Sales and Marketing
Our
sales and marketing efforts are directed from our corporate offices
in Irvine, California, utilizing our own staff, as well as outside
resources retained to build market awareness and shelf placement of
our products, including dedicated sales teams from Disney Consumer
Products, Inc. and Marvel Entertainment. The Company manages key
national accounts through our in-house national sales team. Our
sales teams work to secure national distribution with these
customers through multiple avenues including joint sales meetings
with Disney and Marvel sales personnel.
As
noted above, in November 2015, we began building a nationwide
network of direct store distributors to handle the distribution of
AquaBall™ in the grocery, drug and convenience channels. With
the exception of accounts requiring direct to warehouse delivery,
accounts are serviced by our distribution network. Our sales team
will continue to secure distribution with both national and
regional accounts, while our distributor partners add to our
distribution with independent grocery and convenience stores in
their respective territories.
Source and Availability of Raw Materials
Beginning in May 2016,
Niagara began handling all aspects of production of
AquaBall™, including the procurement of all raw materials.
Prior to May 2016, we utilized
a variety of suppliers to purchase raw materials for the
AquaBall™.
During
2016, we relied significantly on one supplier for 100% of our
purchases of certain raw materials for Bazi®. Bazi, Inc. has
sourced these raw materials from this supplier since 2007 and does
not anticipate any issues with the supply of these raw
materials.
We
own the formulas for both AquaBall™ Naturally Flavored Water
and Bazi® Energy Shot, and we believe that our purchasing
requirements can be readily met from alternative sources, if
necessary.
Competition
The
industries in which we operate are highly competitive.
AquaBall™ Naturally Flavored Water competes most directly
with other beverages marketed directly to children. We also compete
with other manufacturers of functional beverages, and with
manufacturers of more traditional beverages, such as juice and
soda.
Our
primary competition for AquaBall™ is in the
estimated $2.0 billion market for products marketed directly
to children, including CapriSun®, Honest Kids, Good to Grow,
Tummy Ticklers, Kool-aid and others. General competition in the
beverage industry includes products owned by multinational
corporations with significant financial resources, including
Vitamin Water, owned by Coca-Cola, and Sobe and Propel, both owned
by Pepsi Co. Bazi® competitors include Steaz®, Guayaki
Yerba Mate, POM Wonderful®, as well as sports and energy
drinks including Gatorade®, Red Bull®, 5-Hour
Energy®, RockStar®, Monster®, Powerade®,
Accelerade® and All Sport®. Indirect competition for the
AquaBall™ and Bazi® includes soft drinks and juice
products, such as Sunny Delight® and other fruit drinks. These
competitors can use their resources and scale to rapidly respond to
competitive pressures and changes in consumer preferences by
introducing new products, reducing prices or increasing promotional
activities. Many of our competitors have longer operating histories
and have substantially greater financial and other resources than
we do. They, therefore, have the advantage of established
reputations, brand names, track records, back office and managerial
support systems and other advantages that we cannot duplicate in
the near future. Moreover, many competitors, by virtue of their
longevity and capital resources, have established lines of
distribution to which we do not have access, and are not likely to
duplicate in the near term, if ever.
Intellectual Property
We
rely on the AquaBall™ patent, AquaBall™ and
Bazi® trademarks and licensing agreements to market our
products and make them stand out among our
competitors.
Patents and Trademarks
We
were granted the patent for AquaBall™’s stackable,
spherical drink container in 2009, via GT Beverage Company, LLC,
who we purchased on March 31, 2012. In 2016, we stopped using this
bottle and, instead, switched to a bottle specifically designed for
us by Niagara Bottling. In 2016, we took an impairment charge on
the value of the spherical drink container patent.
We
maintain trademark protection for AquaBall™ and have federal
trademark registration for Bazi®. This trademark registration
is protected for a period of ten years and then is renewable
thereafter if still in use.
Licensing Agreements
We first entered into licensing agreements with
Disney Consumer Products, Inc. and an 18-month licensing agreement
with Marvel Characters, B.V. (collectively, the
“Licensing
Agreements”) in 2012.
Each Licensing Agreement allows us to feature popular Disney and
Marvel characters on AquaBall™ Naturally Flavored Water,
allowing AquaBall™ to stand out among other beverages
marketed towards children. Under the terms and conditions of the
Licensing Agreements, we work with the Disney and Marvel teams to
create colorful, eye-catching labels that surround the entire
spherical shape of each AquaBall™. Once the label designs are
approved, we work with Disney and Marvel to set retail calendars,
rotating the placement of different AquaBall™ designs over
the course of the year.
In 2015, the Company and Disney entered into
a renewed Licensing Agreement, which extended the Company’s
license with Disney through March 31, 2017 (the
“Disney
Agreement”). The terms of
the Disney Agreement entitle Disney to receive a royalty rate of 5%
on sales of AquaBall™ Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$450,870 over the period from April 1, 2015 through March 31, 2017.
In addition, the Company is required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the agreement. The Company is required to spend a
total of $820,000 on advertising and promotional opportunities over
the term of the Disney Agreement. During the year ended December
31, 2016, the Company paid a total of $129,597 to Disney pursuant
to the Disney Agreement.
On August 22, 2015, the
Company and Marvel entered
into a renewed Licensing Agreement to extend the Company's license
to feature certain
Marvel characters on bottles of AquaBall™ Naturally
Flavored Water through December 31, 2017. The Marvel Agreement requires the Company to pay
to Marvel a 5% royalty rate
on sales of AquaBall™ Naturally Flavored Water adorned with
Marvel characters, paid quarterly, through December 31, 2017, with
a total guarantee of $200,000. The total royalty paid to Marvel during the year
ended December 31, 2016 was $100,000.
Government Regulations
The
production, distribution and sale in the United States of our
products are subject to various U.S. federal and state regulations,
including but not limited to: the Federal Food, Drug and Cosmetic
Act, including as amended by the Dietary Supplement Health and
Education Act of 1994; the Occupational Safety and Health Act;
various environmental statutes; and a number of other federal,
state and local statutes and regulations applicable to the
production, transportation, sale, safety, advertising, marketing,
labeling and ingredients of such products.
Certain
states and localities prohibit the sale of certain beverages unless
a deposit or tax is charged for containers. These requirements vary
by each jurisdiction. Similar legislation has been proposed in
certain other states and localities, as well as by Congress. We are
unable to predict whether such legislation will be enacted or what
impact its enactment would have on our business, financial
condition or results of operations.
All
of our facilities in the United States are subject to federal,
state and local environmental laws and regulations. Although
compliance with these provisions has not had any material adverse
effect on our financial or competitive position, compliance with or
violation of any current or future regulations and legislation
could require material expenditures or have a material adverse
effect on our financial results.
We believe that current and reasonably foreseeable governmental
regulation will have minimal impact on our business.
Research and Development
No
expenses were recorded on research and development for the year
ended December 31, 2016. We are working with certain third parties
on the development of possible future products, but these projects
are funded by the respective third parties. Upon execution of the
Niagara Agreement in October 2015, we completed the development of
an improved “clean label” formulation of
AquaBall™, which remains sugar and calorie free but
eliminated all preservatives, and is produced using a hot-fill
process. We completed the transition of AquaBall™ to the new,
preservative-free formulation and begin distribution from Niagara
facilities in June 2016.
During
2006, Bazi® was developed and was launched in January 2007.
This product did not require FDA or other regulatory approval.
During 2009, new ingredients and productions methods were
researched to integrate into existing products or new products.
Since 2012, Bazi® has been and is now being sold solely online
in 12, 24, 36, 48 and 144 packs.
Employees
We
had 13 full-time employees and one part-time employee as of
December 31, 2016.
Compliance with Environmental Laws
In
California, we are required to collect redemption values from our
retail customers and to remit such redemption values to the State
of California Department of Resources Recycling and Recovery based
upon the number of cans and bottles of certain carbonated and
non-carbonated products sold. In certain other states where our
products are sold, we are also required to collect deposits from
our customers and to remit such deposits to the respective
jurisdictions based upon the number of cans and bottles of certain
carbonated and non-carbonated products sold in such
states.
Available Information
As a public company, we are required to file our
annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements on Schedule 14A and
other information (including any amendments) with the Securities
and Exchange Commission (the “SEC”). You may read and copy such material at
the SEC’s Public Reference Room located at 100 F Street,
N.E., Washington, D.C. 20549, on official business days during the
hours of 10:00 a.m. to 3:00 p.m. You may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. You can also find the Company’s SEC filings
at the SEC’s website at http://www.sec.gov.
Our Internet address is www.truedrinks.com.
Information contained on our website is not part of this annual
report on Form 10-K. Our SEC filings (including any amendments)
will be made available free of charge on www.truedrinks.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
ITEM 1A. RISK FACTORS
We
are subject to various risks that could have a negative effect on
the Company and its financial condition. These risks could cause
actual operating results to differ from those expressed in certain
“forward looking statements’ contained in this Annual
Report on Form 10-K as well as in other
communications.
Risks Related to the Company
We have a history of operating losses and, despite consummation of
recent financings, we require additional financing to satisfy our
current contractual obligations and execute our business
plan.
We
have not been profitable since inception. We had a net loss of
$5,445,563 and $11,990,563 during the years ending December 31,
2016 and 2015, respectively. Additionally, sales of
AquaBall™ Naturally Flavored Water are significantly below
levels necessary to achieve positive cash flow.
Although
we have recently consummated equity and debt financings that have
resulted in aggregate gross proceeds of approximately $6 million
for the year ended December 31, 2016, our cash position was
approximately $224,876 at December 31, 2016, and we used $5,665,992
of cash for operations during the year ended December 31, 2016. To
continue as a going concern, and to satisfy our contractual
obligations under the Niagara Agreement, we need to secure proceeds
from the sale of additional debt or equity securities, whether in a
private or public offering, in the near term. No assurances can be
given that we will be successful in our attempts to generate
proceeds to fund our operations. In the event we are unable to
raise additional capital through the issuance of additional debt or
equity securities, we will be unable to continue as a going
concern.
We face substantial uncertainties in executing our business
plan.
We
must attain certain objectives in order to successfully execute our
business plan over, including certain sales and distribution of
AquaBall™ Naturally Flavored Water required by the minimum
volume requirements for each 12-month period under the Niagara
Agreement. Failure to sustain sales sufficient to meet our
Annual Commitment to Niagara will have a material adverse impact on
our business, and no assurances can be given that we will be
successful in our efforts.
We
believe that, in order to execute our business plan and achieve
sales growth, we must, among other things, successfully recruit
additional personnel in key positions, develop a larger
distribution network, establish a broader customer base and
increase awareness of our brand name. In order to implement any of
these initiatives, we will be required to materially increase
our operating expenses, which may require additional working
capital. If we are unable to secure additional working capital, we
will be unable to accomplish our objectives, and if we are unable
to accomplish one or more of these objectives, our business may
fail.
Our licensing agreements with Disney Consumer Products, Inc. and
Marvel Characters, B.V. are critical components of the marketing of
the AquaBall™ line, and there is no guarantee the
licensing agreements will be renewed at the end of each
agreement’s term.
We currently have licensing agreements with Disney Consumer
Products, Inc. and Marvel Characters, B.V. that allow us to place
popular Disney and Marvel characters on labels of
AquaBall™ Naturally Flavored Water. The use of these
characters, including Disney Princesses and Spider-Man, is critical
to making AquaBall™ stand out among our competitors.
These licensing agreements have varying terms, the Disney Agreement
expires on March 31, 2017 and the Marvel Agreement expires on
December 31, 2017, and there is no guarantee we will be able to
renew these agreements upon expiration, nor are we able to
guarantee that we will have licensing agreements with other
companies when the Disney Agreement and Marvel Agreement
expire.
Certain large shareholders may have certain personal interests that
may affect the Company.
As a result of securities held by Mr. Vincent C.
Smith, the Vincent C. Smith, Jr. Annuity Trust 2015-1 (the
“Smith Trust”), and Red Beard, an entity affiliated with
Mr. Smith, Mr. Smith may be deemed the beneficial owner of, in the
aggregate, approximately 48% of the Company’s outstanding
voting securities. As a result, Mr. Smith, the Smith Trust
and/or Red Beard has the potential ability to exert influence over
both the actions of the Board of Directors and the outcome of
issues requiring approval by the Company’s
shareholders. This concentration of ownership may have effects
such as delaying or preventing a change in control of the Company
that may be favored by other shareholders or preventing
transactions in which shareholders might otherwise recover a
premium for their shares over current market
prices.
Our limited operating history makes it difficult to evaluate our
prospects.
We
have a limited operating history on which to evaluate our business
and prospects. Our current flagship product, AquaBall™
Naturally Flavored Water, was formulated and introduced to the
public for sale in 2012. Our other product, Bazi® All Natural
Energy, has had limited market success. There can be no assurance
that we will achieve significant sales as a result of us focusing
our sales efforts on the AquaBall™ product, or that our
new sales model with be successful.
We
also may not be successful in addressing our other operating
challenges, such as developing brand awareness and expanding our
market presence through retail sales and our direct-to-consumer and
online sales strategy. Our prospects for profitability must be
considered in light of our evolving business model. These factors
make it difficult to assess our prospects.
We are affected by extensive laws, governmental regulations,
administrative determinations, court decisions and similar other
constraints, which can make compliance costly and subject us to
enforcement actions by governmental agencies.
The
formulation, manufacturing, packaging, labeling, holding, storage,
distribution, advertising and sale of our products are affected by
extensive laws, governmental regulations and policies,
administrative determinations, court decisions and similar
constraints at the federal, state and local levels, both within the
United States and in any country where we conduct business. There
can be no assurance that we, or our independent distributors, will
be in compliance with all of these regulations. A failure by us or
our distributors to comply with these laws and regulations could
lead to governmental investigations, civil and criminal
prosecutions, administrative hearings and court proceedings, civil
and criminal penalties, injunctions against product sales or
advertising, civil and criminal liability for the Company and/or
its principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to the Company or its principals. In addition, the adoption
of new regulations and policies or changes in the interpretations
of existing regulations and policies may result in significant
new compliance costs or discontinuation of product sales, and may
adversely affect the marketing of our products, resulting in
decreases in revenues.
Our ability to increase sales is dependent on growing in our
existing markets as well as expanding into new markets in other
countries. As we expand into foreign markets, we will become
subject to different political, cultural, exchange rate, economic,
legal and operational risks. We may invest significant amounts in
these expansions with little success.
We
currently are focusing our marketing efforts in the United States
and, to a lesser extent, Canada. We believe that our future growth
will come from both the markets that we are currently operating in
and other international markets. We do not have any history of
international expansion, and therefore have no assurance that any
efforts will result in increased revenue. Additionally, we may need
to overcome significant regulatory and legal barriers in order to
sell our products, and we cannot give assurance as to whether our
distribution method will be accepted. These markets may require
that we reformulate our product to comply with local customs and
laws. However, there is no guarantee that the reformulated product
will be approved for sale by these regulatory agencies or attract
local distributors.
We are currently dependent on a single manufacturer for the
production of AquaBall™, and we do not independently analyze
our products before distribution. If we are not able to ensure
timely product deliveries, potential distributors and customers
may not order our products, and our revenues
may decrease. In addition, any errors in our product
manufacturing could result in product recalls, significant legal
exposure, and reduced revenues and the loss of
distributors.
We
rely entirely on Niagara to manufacture our flagship product,
AquaBall™ Naturally Flavored Water. In the event Niagara is
unable to satisfy our supply requirements, manufacture our products
on a timely basis, fill and ship our orders promptly, provide
services at competitive costs or offer reliable products and
services, our revenues and relationships with our independent
distributors and customers would be adversely impacted. In the
event Niagara becomes unable or unwilling to continue to provide us
with products in required volumes and at suitable quality levels,
we would be required to identify and obtain acceptable replacement
manufacturing sources. There is no assurance that we would be able
to obtain alternative manufacturing sources on a timely basis.
Additionally, Niagara sources the raw materials for
AquaBall™, and if we were to use alternative manufacturers we
may not be able to duplicate the exact taste and consistency
profile of the product from Niagara. An extended interruption in
the supply of our products would result in decreased product sales
and our revenues would likely decline.
Although
we require Niagara to verify the accuracy of the contents of our
products, we do not have the expertise or personnel to directly
monitor the production of products. We rely exclusively, without
independent verification, on certificates of analysis regarding
product content provided by Niagara and limited safety testing by
them. We cannot be assured that Niagara will continue to supply
products to us reliably in the compositions we require. Errors in
the manufacture of our products could result in product recalls,
significant legal exposure, adverse publicity, decreased revenues,
and loss of distributors and endorsers.
We face significant competition from existing suppliers of products
similar to ours. If we are not able to compete with these companies
effectively, we may not be able to achieve
profitability.
We
face intense competition from numerous resellers, manufacturers and
wholesalers of liquid nutrition drinks similar to ours, from both
retail and online providers. We consider the significant competing
products in the U.S. market for the AquaBall™ to be
Capri-Sun, Good to Grow, Bug Juice, and other alternatives marketed
towards children, and for Bazi® to be Red Bull®,
Monster®, RockStar®, and 5 Hour Energy®. Most
of our competitors have longer operating histories, established
brands in the marketplace, revenues significantly greater than ours
and better access to capital than us. We expect that these
competitors may use their resources to engage in various
business activities that could result in reduced sales of our
products. Companies with greater capital and research capabilities
could re-formulate existing products or formulate new products that
could gain wide marketplace acceptance, which could have a
depressive effect on our future sales. In addition, aggressive
advertising and promotion by our competitors may require us to
compete by lowering prices because we do not have the resources to
engage in marketing campaigns against these competitors, and the
economic viability of our operations likely would be
diminished.
Adverse publicity associated with our products or ingredients, or
those of similar companies, could adversely affect our sales and
revenues.
Adverse
publicity concerning any actual or purported failure of our Company
to comply with applicable laws and regulations regarding any aspect
of our business could have an adverse effect on the public
perception of our Company. This, in turn, could negatively affect
our ability to obtain financing, endorsers and attract distributors
or retailers for the AquaBall™ and/or Bazi®, which
would have a material adverse effect on our ability to generate
sales and revenues.
Our
distributors’ and customers’ perception of the safety
and quality of our products or even similar products distributed by
others can be significantly influenced by national media attention,
publicized scientific research or findings, product liability
claims and other publicity concerning our products or similar
products distributed by others. Adverse publicity, whether or not
accurate, that associates consumption of our products or any
similar products with illness or other adverse effects, will likely
diminish the public’s perception of our products. Claims that
any products are ineffective, inappropriately labeled or have
inaccurate instructions as to their use, could have a material
adverse effect on the market demand for our products, including
reducing our sales and revenues.
Our products may not meet health and safety standards or could
become contaminated.
We
have adopted various quality, environmental, health and safety
standards. We do not have control over all of the third parties
involved in the manufacturing of our products and their compliance
with government health and safety standards. Even if our
products meet these standards they could otherwise become
contaminated. A failure to meet these standards or contamination
could occur in our operations or those of our bottlers,
distributors or suppliers. This could result in expensive
production interruptions, recalls and liability claims. Moreover,
negative publicity could be generated from false, unfounded or
nominal liability claims or limited recalls. Any of these failures
or occurrences could negatively affect our business and financial
performance.
The sale of our products involves product liability and related
risks that could expose us to significant insurance and loss
expenses.
We face an inherent risk of exposure to product liability claims if
the use of our products results in, or is believed to have resulted
in, illness or injury. Most of our products contain combinations of
ingredients, and there is little long-term experience with the
effect of these combinations. In addition, interactions of these
products with other products, prescription medicines and
over-the-counter drugs have not been fully explored or understood
and may have unintended consequences. While our third-party
manufacturers perform tests in connection with the
formulations of our products, these tests are not designed to
evaluate the inherent safety of our products.
Although
we maintain product liability insurance, it may not be
sufficient to cover all product liability claims and such claims
that may arise, could have a material adverse effect on our
business. The successful assertion or settlement of an uninsured
claim, a significant number of insured claims or a claim exceeding
the limits of our insurance coverage would harm us by adding
further costs to our business and by diverting the attention of our
senior management from the operation of our business. Even if we
successfully defend a liability claim, the uninsured litigation
costs and adverse publicity may be harmful to our
business.
Any
product liability claim may increase our costs and adversely
affect our revenues and operating income. Moreover, liability
claims arising from a serious adverse event may increase our
costs through higher insurance premiums and deductibles, and
may make it more difficult to secure adequate insurance
coverage in the future. In addition, our product liability
insurance may fail to cover future product liability claims,
which, if adversely determined, could subject us to substantial
monetary damages.
The success of our business will depend upon our ability to create
brand awareness.
The
market for functional beverages is already highly competitive, with
many well-known brands leading the industry. Our ability to compete
effectively and generate revenue will be based upon our ability to
create awareness of our products distinct from those of our
competitors. It is imperative that we are able to convey to
consumers the benefits of our products. However, advertising
and packaging and labeling of such products will be limited by
various regulations. Our success will be dependent upon our
ability to convey to consumers that our products are superior to
those of our competitors.
We must continue to develop and introduce new products to
succeed.
The
functional beverage and nutritional supplement industry is subject
to rapid change. New products are constantly introduced to the
market. Our ability to remain competitive depends on our ability to
enhance existing products, continue to develop and manufacture new
products in a timely and cost effective manner, to accurately
predict market transitions, and to effectively market our products.
Our future financial results will depend to a great extent on the
successful introduction of several new products. We cannot be
certain that we will be successful in selecting, developing,
manufacturing and marketing new products or in enhancing existing
products.
The
success of new product introductions depends on various factors,
including the following:
●
proper new product selection;
●
successful sales and marketing efforts;
●
timely delivery of new products;
●
availability of raw materials;
●
pricing of raw materials;
●
regulatory allowance of the products; and
●
customer acceptance of new products.
We may from time to time write off obsolete inventories resulting
in higher expenses and consequently greater net
losses.
As
we sometimes produce product adorned with characters on a
promotional schedule, over production of a certain character set
could result in write-downs of our inventories. A change in
ingredients or labeling requirements could also result in the
obsolescence of certain inventory. Write-downs of this type could
make it more difficult for us to achieve profitability. We incurred
write-downs against inventory of $576,559 and $385,232 for the
years ended December 31, 2016 and December 31, 2015,
respectively.
Product returns could require us to incur significant additional
expenses, which would make it difficult for us to achieve
profitability.
We
have not established a reserve in our financial statements for
product returns. However, we may experience product returns as we
focus on the AquaBall™ line of products and expand our
market presence nationwide. We will continue to analyze our returns
to determine if a reserve is necessary. If our reserves prove to be
inadequate, we may incur significant expenses for product
returns. As we gain more operating experience, we may need to
establish a reserve for product returns.
If we are not able to adequately protect our intellectual property,
then we may not be able to compete effectively and we
may not be profitable.
Our
existing proprietary rights may not afford remedies and
protections necessary to prevent infringement, reformulation,
theft, misappropriation and other improper use of our products by
competitors. We own the formulations contained in our products
and we consider these product formulations our critical proprietary
property, which must be protected from competitors. We do not have
any patents for our product formulations because we do not believe
they are necessary to protect our proprietary rights. Although
trade secret, trademark, copyright and patent laws generally
provide such protection and we attempt to protect ourselves through
contracts with manufacturers of our products, we may not be
successful in enforcing our rights. In addition, enforcement of our
proprietary rights may require lengthy and expensive
litigation. We have attempted to protect some of the trade names
and trademarks used for our products by registering them with the
U.S. Patent and Trademark Office, but we must rely on common law
trademark rights to protect our unregistered trademarks. Common law
trademark rights do not provide the same remedies as are granted to
federally registered trademarks, and the rights of a common law
trademark are limited to the geographic area in which the trademark
is actually used. Our inability to protect our intellectual
property could have a material adverse impact on our ability to
compete and could make it difficult for us to achieve a
profit.
Compliance with changing corporate governance regulations and
public disclosures may result in additional risks and
exposures.
Changing
laws, regulations and standards relating to corporate governance
and public disclosure, including the Sarbanes-Oxley Act of 2002 and
new regulations from the SEC, have created uncertainty for public
companies such as ours. These laws, regulations, and standards are
subject to varying interpretations in many cases and as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are
likely to continue to result in, increased expenses and significant
management time and attention.
Loss of key personnel could impair our ability to
operate.
Our
success depends on hiring, retaining and integrating senior
management and skilled employees. We are currently dependent
on certain current key employees, specifically Kevin Sherman, our
Chief Executive Officer and Chief Marketing Officer, who are vital
to our ability to grow our business and achieve
profitability. As with all personal service providers, our
officers can terminate their relationship with us at will. Our
inability to retain these individuals may result in our
reduced ability to operate our business.
Risks Related to Our Common Stock
A limited trading market currently exists for our securities, and
we cannot assure you that an active market will ever develop, or if
developed, will be sustained.
There
is currently a limited trading market for our securities on the OTC
Pink Marketplace. An active trading market for our Common Stock may
not develop. Consequently, we cannot assure you when and if an
active-trading market in our shares will be established, or whether
any such market will be sustained or sufficiently liquid to enable
holders of shares of our Common Stock to liquidate their investment
in our company. If an active public market should develop in the
future, the sale of unregistered and restricted securities by
current shareholders may have a substantial impact on any such
market.
If, and when, then shares of Common Stock underlying our
outstanding derivative securities are issued, our shareholders will
experience immediate and substantial dilution in the book value of
their investment.
We currently have 199,693,811 shares of Common
Stock issued and outstanding. If, and when, holders of our
outstanding derivative securities, which securities include Series
B Convertible Preferred Stock (“Series B
Preferred”), Series C
Preferred, Series D Preferred and any warrants that remain
outstanding after the completion of the Warrant Exchange Program,
decide to exercise or convert those securities into Common Stock,
the number of shares of our Common Stock issued and outstanding
could increase by as much as 60%. Conversion of all or a portion of
our outstanding derivative securities would have a substantial and
material dilutive effect on our existing stockholders and on our
earnings per share.
If we issue additional shares of Common Stock in the future, it
will result in the dilution of our existing
shareholders.
Our
Articles of Incorporation authorize the issuance of up to 300.0
million shares of Common Stock. The issuance of any such shares of
Common Stock will result in a reduction in value of our outstanding
Common Stock. If we do issue any such additional shares of Common
Stock, such issuance also will cause a reduction in the
proportionate ownership and voting power of all other shareholders.
Further, any such issuance may result in a change of control of our
corporation.
The price of our securities could be subject to wide fluctuations
and your investment could decline in value.
The
market price of the securities of a company such as ours with
little name recognition in the financial community and without
significant revenues can be subject to wide price swings. The
market price of our securities may be subject to wide changes in
response to quarterly variations in operating results,
announcements of new products by us or our competitors, reports by
securities analysts, volume trading, or other events or factors. In
addition, the financial markets have experienced significant price
and volume fluctuations for a number of reasons, including the
failure of certain companies to meet market expectations. These
broad market price swings, or any industry-specific market
fluctuations, may adversely affect the market price of our
securities.
Companies
that have experienced volatility in the market price of their stock
have been the subject of securities class action litigation. If we
were to become the subject of securities class action litigation,
it could result in substantial costs and a significant diversion of
our management’s attention and resources.
Because
our Common Stock may be classified as “penny stock,”
trading may be limited, and the share price could decline.
Moreover, trading of our Common Stock, if any, may be limited
because broker-dealers would be required to provide their customers
with disclosure documents prior to allowing them to participate in
transactions involving our Common Stock. These disclosure
requirements are burdensome to broker-dealers and may discourage
them from allowing their customers to participate in transactions
involving our Common Stock.
We have issued preferred stock with rights senior to our Common
Stock, and may issue additional preferred stock in the future, in
order to consummate a merger or other transaction necessary to
continue as a going concern.
Our
Articles of Incorporation authorizes the issuance of up to
5.0 million shares of preferred stock, par value $0.001
per share, without shareholder approval and on terms established by
our directors, of which 2.75 million shares have been
designated as Series B Preferred, 200,000 shares have been
designated as Series C Preferred and 50,000 shares have been
designated as Series D Preferred. We may issue additional
shares of preferred stock in order to consummate a financing or
other transaction, in lieu of the issuance of Common
Stock. The rights and preferences of any such class or series
of preferred stock would be established by our board of directors
in its sole discretion and may have dividend, voting, liquidation
and other rights and preferences that are senior to the rights of
the Common Stock.
You should not rely on an investment in our Common Stock for the
payment of cash dividends.
Because
of our significant operating losses and because we intend to retain
future profits, if any, to expand our business, we have never paid
cash dividends on our Common Stock and do not anticipate paying any
cash dividends in the foreseeable future. You should not make an
investment in our Common Stock if you require dividend income. Any
return on investment in our Common Stock would only come from an
increase in the market price of our stock, which is uncertain and
unpredictable.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Facilities
The
Company leases its corporate office in Irvine, California on a
one-year term. The Company moved into a new office in January 2016.
In January 2017, the Company extended its lease from an expiration
date of December 31, 2016 to September 30, 2017. Total rent expense
related to the Company's operating lease for the year ended
December 31, 2016 was $57,179. Total remaining payments on the
lease through September 30, 2017 are $28,458.
Insurance
We
maintain commercial general liability, including product liability
coverage, and property insurance. Our policy provides for a general
liability limit of $2.0 million per occurrence, and $10 million
annual aggregate umbrella coverage.
ITEM 3. 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.
ITEM 4. MINE SAFETY
DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our
Common Stock is traded on the OTC Pink Marketplace under the symbol
“TRUU.”
The
following table sets forth high and low sales prices for our Common
Stock for the calendar quarters indicated as reported by the OTC
Pink Marketplace. These prices represent quotations between dealers
without adjustment for retail markup, markdown, or commission and
may not represent actual transactions.
|
|
High
|
Low
|
|
2016
|
|
|
|
First
Quarter ended March 31, 2016
|
$0.19
|
$0.11
|
|
Second
Quarter ended June 30, 2016
|
$0.20
|
$0.11
|
|
Third
Quarter ended September 30, 2016
|
$0.19
|
$0.08
|
|
Fourth
Quarter ended December 31, 2016
|
$0.13
|
$0.08
|
|
|
|
|
|
2015
|
|
|
|
First
Quarter ended March 31, 2015
|
$0.25
|
$0.12
|
|
Second
Quarter ended June 30, 2015
|
$0.20
|
$0.14
|
|
Third
Quarter ended September 30, 2015
|
$0.40
|
$0.14
|
|
Fourth
Quarter ended December 31, 2015
|
$0.22
|
$0.06
|
Holders
At March 31, 2017, there were
199,693,811 shares of our Common Stock outstanding, and
approximately 220 shareholders of record. At March 31, 2017,
there were 1,292,870 shares of
our Series B Preferred, 106,704 shares of our Series C Preferred
and 35,250 shares of our Series D Preferred outstanding held by 29,
five and 20 shareholders of record,
respectively.
Dividends
We
did not declare any dividends on Common Stock for the years ended
December 31, 2016 and 2015. Our Board of Directors does not intend
to distribute dividends in the near future. Instead, we
plan to retain any earnings to finance the development and
expansion of our business. The declaration, payment and amount
of any future dividends will be made at the discretion of the Board
of Directors, and will depend upon, among other things, the results
of our operations, cash flows and financial condition, operating
and capital requirements, and other factors as the Board of
Directors considers relevant. There is no assurance that future
dividends will be paid, and if dividends are paid, there is no
assurance with respect to the amount of any such
dividend.
We
pay dividends on our Series B Preferred stock
quarterly.
Transfer Agent
Our
Transfer Agent and Registrar for our Common Stock is Corporate
Stock Transfer located in Denver, Colorado.
ITEM 6. SELECTED FINANCIAL
DATA
As
a “smaller reporting company” as defined by the rules
and regulations of the SEC, we are not required to provide this
information.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion and analysis in
conjunction with our financial statements, including the notes
thereto contained in this Annual Report. This discussion contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of a
variety of certain factors, including those set forth under
“Risk Factors Associated with Our Business” and
elsewhere in this Annual Report.
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 the following critical
accounting policies affect our more significant judgments and
estimates used in the preparation of our financial
statements.
Revenue Recognition
In accordance with ASC Topic 605 (Staff Accounting
Bulletin 104 “Revenue Recognition in
Financial Statements”),
revenue is recognized at the point of shipment, at which time title
is passed. Net sales include sales of products, sales of marketing
tools to independent distributors and freight and handling charges.
With the exception of retail customers, we receive the net sales
price from all of our orders in the form of cash or credit card
payment prior to shipment. Retail customers with approved credit
have been extended payment terms of net 30 days, with a few
exceptions.
Allowance for Doubtful Accounts
We
estimate losses on receivables based on known troubled accounts and
historical experience of losses incurred. Based on our estimations,
we recorded an allowance for doubtful accounts of approximately
$118,000 as of December 31, 2016.
Inventory
The
Company purchases for resale a vitamin-enhanced flavored water
beverage and a liquid dietary supplement.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or market (net realizable value). Cost includes shipping
and handling fees and costs, which are subsequently expensed to
cost of sales. The Company provides for estimated losses from
obsolete or slow-moving inventories, and writes down the cost of
inventory at the time such determinations are made. Reserves are
estimated based on inventory on hand, historical sales activity,
industry trends, the retail environment, and the expected net
realizable value.
The
Company maintained inventory reserves of $110,000 and $0 as of
December 31, 2016 and December 31, 2015, respectively. 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:
|
|
December 31,
2016
|
December 31,
2015
|
|
Purchased
materials
|
$89,358
|
$689,703
|
|
Finished
goods
|
339,554
|
869,016
|
|
Allowance
for obsolescence reserve
|
(110,000)
|
-
|
|
Total
|
$318,912
|
$1,558,719
|
Stock Based Compensation
The Company recognizes the cost of employee
services received in exchange for awards of equity instruments
based on the grant-date fair value of those awards in accordance
with ASC Topic 718, which requires compensation costs related to
share-based transactions, including employee stock options, to be
recognized in the financial statements based on fair value, and the
SEC’s Staff Accounting Bulletin No. 107
(“SAB
107”) interpreting ASC
Topic 718 and the valuation of share-based payments for public
companies. The Company records compensation expense on a
straight-line basis. The fair value of options granted are
estimated at the date of grant using a Black-Scholes option pricing
model with assumptions for the risk-free interest rate, expected
life, volatility, dividend yield and forfeiture
rate.
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 first, and the estimated value
of our interlocking spherical bottle patent acquired on March 31,
2012. The Company’s intangible assets are amortized over
their estimated useful remaining lives. The Company evaluates the
useful lives of its intangible assets annually and adjusts the
lives according to the expected useful life. As AquaBall™ is
now packaged in a new bottle designed by Niagara Bottling, we have
evaluated our options with our interlocking spherical bottle
patent. As of December 2016, we have recorded an impairment to the
bottle patent of $679,411. We have adjusted the carrying value of
this patent to $250,000.
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.
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 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.
Results of Operations – Fiscal Years Ended December 31, 2016
and 2015
Net Sales
Net
sales for the year ended December 31, 2016 was $2,575,448 compared
to $6,121,097 during the same period in 2015, a decrease of
58%. The year over year decrease in net sales is a result of the
transition from the old formulation of AquaBall™ to the new
formulation manufactured by Niagara. We anticipate net sales will
increase during the year ended December 31, 2017, when compared to
the year ended December 31, 2016, as we expand distribution of our
new, preservative-free formulation of AquaBall™.
In addition to launching the new,
preservative-free formulation of AquaBall™, we revamped our
sales staff during the year ended December 31, 2016. We hired Jeff
Culbertson as our Executive Vice President of Sales in April, 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 throughout fiscal 2017. As
of March 2017, we have secured distributor partners in 44 states,
and we are working actively in filling in the remaining
territories. 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
|
Year Ended
December 31, 2016
(% of Sales)
|
|
AquaBall™
|
92%
|
|
Bazi®
|
8%
|
Gross Profit (Loss) and Gross Margin
Gross profit
for the year ended December 31, 2016 was $321,863 as compared
to a gross loss of $160,990 for the year ended December 31,
2015. Gross profit as a percentage of revenue (gross margin)
during the year ended December 31, 2016 was 12%. 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. Although gross margins were relatively low during the first
two quarters of fiscal 2016, gross margins increased significantly
in the third and fourth quarters to 35% and 33% of revenue for the
three months ended September 30, 2016 and December 31, 2016,
respectively. 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 year ended
December 31, 2017 as we work to reduce inefficiencies in the
manufacturing process with Niagara and increase distribution of our
new preservative-free AquaBall™ in the grocery, convenience,
drug and mass channels. 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
Selling,
general and marketing expenses were $8,607,958, or 334% of net
sales, for the year ended December 31, 2016, as compared to
$10,548,884, or 172% of net sales for the year ended December 31,
2015. This year over year decrease of $1,940,926 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. Our total selling expenses decreased in hand with our reduced
level of sales in 2016, as well. 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. This has far more than offset an
increase in the average distance of our shipments, as we now ship
from one production facility in Dallas, rather than three different
facilities. We anticipate focusing our marketing expenses on
promoting our brand at our retail locations to drive both trial and
brand awareness in 2017.
Interest Expense
Interest
expense for the year ended December 31, 2016 was $39,789 as
compared to $257,389 for the year ended December 31, 2015. Interest
expense for the 2016 period consists of interest and fees due
on promissory notes issued in the third quarter of
2015.
Other Expense
Other
expense for the year ended December 31, 2016 was $685,849, as
compared to other expense of $2,285,629 for the year ended December
31, 2015. The 2016 total included an impairment charge of $679,411
on our spherical bottle patent while the 2015 total included a
$2,285,792 charge for warrants issued in connection with a personal
guaranty supporting our Bottling Agreement with Niagara
Bottling.
Net Loss
Our
net loss for the year ended December 31, 2016 was $5,445,563 as
compared to a net loss of $11,990,563 for the year ended December
31, 2015. On a per share basis, our loss, after dividends on
outstanding shares of Series B Preferred, was $0.05 and $0.16 per
share for the years ended December 31, 2016 and December 31, 2015,
respectively.
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, these increases may not occur, may
take longer than anticipated, or may not be sufficient to produce
net income in any subsequent quarters.
Liquidity and Capital Resources
Our
auditors have included a paragraph in their report on our
consolidated financial statements, included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2016, indicating
that there is substantial doubt as to the ability of the Company to
continue as a going concern. The accompanying 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 year ended December 31, 2016, the Company incurred
a net loss of $5,445,563. At December 31, 2016, the Company had
negative working capital of $6,162,213 and an accumulated deficit
of $35,794,206. The Company had negative cash flow from operations
of $5,667,413 and $10,433,069 during the year ended December 31,
2016 and 2015, respectively. Although the Company raised
approximately $6 million from the sale of shares of Series C
Preferred during the year ended December 31, 2016, additional
capital will be necessary to advance the marketability of the
Company's products to the point at which the Company can sustain
operations. Management's plans are to continue to contain expenses,
expand distribution and sales of its AquaBall™ Naturally
Flavored Water as rapidly as economically possible, and raise
capital through equity and debt offerings to execute the
Company’s business plan and achieve profitability from
continuing operations. The accompanying 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 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.
Recent Capital Raising Activity
January 2016 Note
Exchange. On January 20, 2016,
the Company and holders of Secured Notes in the principal amount of
$500,000 entered into Note Exchange Agreements pursuant to which
the holders agreed to convert the outstanding principal balance of
their Secured Notes into an aggregate total of 4,413 shares of
Series C Preferred and warrants to purchase up to an agate total of
1,029,413 shares of Common Stock for $0.17 per share. Neither
holder received warrants to purchase shares of the Company’s
Common Stock in connection with their respective Secured Notes, and
agreed to waive any unpaid interest accrued under the Secured Notes
prior to the execution of the Note Exchange
Agreement.
April 2016 Series C
Offering. On April 13, 2016,
the Company and Red Beard entered into a securities purchase
agreement, pursuant to which Red Beard agreed to purchase an
aggregate total of 50,000 shares of Series C Preferred for $100 per
share over the course of two closings. The Company issued 25,000
shares of Series C Preferred to Red Beard on April 13, 2016. As
additional consideration, investors will receive five-year warrants
to purchase up to an aggregate total of approximately 33.3 million
shares of Common Stock for $0.15 per share. On April 13, 2016, the
Company issued to Red Beard warrants to purchase approximately 16.7
million shares of Common Stock.
On
July 13, 2016, the securities purchase agreement was amended to
modify the closing schedule for the remaining 25,000 shares of
Series C Preferred to be purchased. As amended, 10,000 shares of
Series C Preferred were purchased on July 15, 2016, and the
remaining 25,000 shares were purchased between August 31, 2016 and
September 13, 2016.
Series D Offering and Warrant
Exchange. On February 8, 2017,
the Company and Series D Investors entered into the Series D
Purchase Agreement, wherein the Company may offer and sell to
Series D Investors up to 50,000 shares of Series D Preferred for
$100 per share. As additional consideration, Series D Investors
will also receive Series D Warrants to purchase up to 200% of the
Conversion Shares issuable upon conversion of shares of Series D
Preferred purchased under the Series D Offering for $0.15 per
share. To date, the Company has issued an additional 5,000 shares
of Series D Preferred and Series D Warrants to purchase up to an
aggregate total of 6,666,669 shares of Common Stock. The issuance
of the shares of Series D Preferred to date has resulted in gross
proceeds to the Company of approximately $3.7
million.
Beginning
on February 8, 2017, the Company and certain holders of Outstanding
Warrants entered into Exchange Agreements, pursuant to which each
holder agreed to cancel their respective Outstanding Warrants in
exchange for one-half of a share of Common Stock for every share of
Common Stock otherwise issuable upon exercise of Outstanding
Warrants. To date the Company has issued 73,106,466 shares of
Common Stock, in exchange for the cancellation of 146,212,905
Outstanding Warrants, and expects to issue up to 74 million shares
of Common Stock in exchange for the cancellation of 148 million
Outstanding Warrants, including the Warrants issued in connection
with the Series D Offering, over the course of the Warrant Exchange
Program.
Off-Balance Sheet Items
We
had no off-balance sheet items as of December 31,
2016.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A
smaller reporting company is not required to provide the
information required by this item.
ITEM 8. FINANCIAL
STATEMENTS
The
audited consolidated financial statements of True Drinks Holdings,
Inc., including the notes thereto, together with the report thereon
of Squar Milner LLP, independent registered public accounting firm,
are included in this annual report on Form 10-K as a separate
section beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. 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, which we refer to as 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 Annual Report on Form 10-K. 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)
|
Management's Annual Report on Internal Control over Financial
Reporting.
|
Section
404(a) of the Sarbanes-Oxley Act of 2002 requires that management
document and test the Company's internal control over financial
reporting and include in this Annual Report on Form 10-K a report
on management's assessment of the effectiveness of our internal
control over financial reporting.
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) of the Exchange Act. Under
the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial
Officer, we conducted an evaluation of the effectiveness of our
internal control over financial reporting based upon the framework
in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(“COSO”). Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our
internal control over financial reporting was not effective based
on the material weakness indicated below:
We
lack segregation of duties, which stems from our early stage status
and limited capital resources to hire additional financial and
administrative staff.
Our
plan to remediate this material weakness, subject to monetary
constraints, is to hire additional personnel and/or utilize outside
consultants to provide an acceptable level of segregation of
duties.
This
Annual Report on Form 10-K does not include an attestation report
of the Company’s registered public accounting firm regarding
internal control over financing reporting. Management’s
report was not subject to attestation by the Company’s
registered public accounting firm pursuant to a provision in the
Dodd-Frank Financial Reform Act that exempts public companies with
market capitalization not exceeding $75 million from having to
comply with that provision of the Sarbanes-Oxley Act.
|
(c)
|
Changes in internal controls over financial reporting.
|
The Company’s Chief Executive Officer and Chief Financial
Officer have determined that there have been no changes, in the
Company’s internal control over financial reporting during
the period covered by this report identified in connection with the
evaluation described in the above paragraph that have materially
affected, or are reasonably likely to materially affect,
Company’s internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE
OFFICERS
Directors and Executive Officers
The
following sets forth certain information regarding each of our
directors and executive officers:
|
Name
|
|
Age
|
|
Position
|
|
Kevin Sherman
|
|
46
|
|
Chief Executive Officer, Chief Marketing Officer and
Director
|
|
Daniel Kerker
|
|
44
|
|
Chief Financial Officer, Treasurer and Secretary
|
|
Robert Van Boerum
|
|
40
|
|
Chief Operations Officer
|
|
Ramona Cappello
|
|
57
|
|
Chair
|
|
Scot Cohen
|
|
47
|
|
Director
|
|
Neil LeVecke
|
|
49
|
|
Director
|
|
James J. Greco
|
|
59
|
|
Director
|
Directors
hold office until the next annual meeting of stockholders following
their election unless they resign or are removed as provided in the
bylaws. Our officers serve at the discretion of our Board of
Directors.
The
following is a summary of our executive officers’ and
directors’ business experience.
Executive Officers
Kevin
Sherman, Chief Executive Officer, Chief Marketing Officer and
Director. Mr. Sherman has
served as the Chief Marketing Officer, managing the brand
development of AquaBall™ Naturally Flavored Water since he
joined the Company in October 2012. Mr. Sherman joined the
Company’s board of directors in September 2015, and was
appointed as Chief Executive Officer in December 2015. Prior to
joining True Drinks, Mr. Sherman was the Vice President Strategy
and Network Development and President of Retail for Bazi, Inc. He
was instrumental in the development of Bazi’s All-Natural
formula and spearheaded the concept of all-natural energy. Prior to
Bazi, Mr. Sherman served as the Senior Manager of Network
Development of Product Partners LLC from May 2008 to May 2009,
Chief Operating Officer of Hand & Associates from January 2008
to May 2008, and as the director of development and principal of
Holy Innocents School from August 2007 to December 2007. Mr.
Sherman also served as the principal of Saints Peter and Paul
School from January 2004 to August 2007. Mr. Sherman holds a B.A.
from Gordon College, and a M.A. from Loyola Marymount
University.
Daniel
Kerker, Chief Financial Officer. Mr. Kerker is a professional with over 15
years of experience in finance and accounting in both private and
public entities. He spent seven years as Director of Finance at
Anheuser-Busch Sales of Los Angeles, an Anheuser-Busch-owned
distributor with over $200 million in annual sales, leaving in
2010. Prior to joining True Drinks, Inc., Mr. Kerker spent two
years working as CFO for Environmental Packaging Technologies in
Houston, Texas, and Regeneca, Inc. in Irvine, California. Mr.
Kerker became Chief Financial Officer of True Drinks on March 1,
2012. Mr. Kerker earned a Bachelor of Science in Finance from
California State University, Northridge and an MBA in Finance from
UCLA’s Anderson School of Management, where he was a Harold
M. Williams Fellow for graduating at the top of his class and won
the J. Fred Preston Award for Achievement in
Finance.
Robert Van
Boerum, Chief Operations Officer. Mr.
Van Boerum was appointed to serve as the Company’s Chief
Operations Officer in September, 2015. Mr. Van Boerum has been an
employee of the Company since 2012, and has handled a wide range of
responsibilities, including marketing, operations, and information
technology. Prior to his time with the Company, Mr. Van Boerum
served Chief Information Officer for Regeneca International, Inc.
from 2011 to 2012, and as Vice President of Corporate Strategy for
AL International (JCOF) from 2009 to 2011. Mr. Van Boerum holds a
B.S. in Management Information Systems form the University of
Nevada- Las Vegas, and a MBA from San Diego State
University.
Board of Directors
Ramona
Cappello, Chair. Ms. Cappello
was appointed to the Board in July 2015 and as Chair of the Board
in November 2015. Ms. Cappello is currently the Chief Executive
Officer Sun Harvest Salt, LLC, a company she founded in 2014. Prior
to Sun Harvest Salt, Ms. Cappello served as Chief Executive Officer
and co-founder of Corazonas Foods from 2006 until the sale of
Corazonas Foods in 2012, departing in 2013 at the end of her
contract. Ms. Cappello was also a senior executive with Mauna Loa
Macadamia Nut Company until its sale to Hershey Foods, and has
served in various positions for other food and beverage companies
including Nestle, Celestial Seasonings and Kendall-Jackson
Wineries. In addition to her responsibilities with Sun Harvest
Salt, Ms. Cappello has served on the University of Southern
California Board of Trustees since 2014, is a member of the USC
Associates and Marshall Partners, and serves on the board of
Catholic Big Brothers and Big Sisters of Los Angeles. Additionally,
she currently serves on the Board of Directors for Nielsen Massey
Vanillas, Inc. Ms. Cappello holds a bachelor’s degree in
business from the University of Southern California Marshall School
of Business, where she graduated a class
valedictorian.
The
Board of Directors believes Ms. Cappello’s experience in
executive roles with consumer products companies and her experience
in corporate governance will provide the Board with invaluable
insight and guidance as the Company continues to expand the sales
of the AquaBall™ Naturally Flavored Water to both existing
and new retail accounts.
Scot
Cohen, Director. Mr.
Cohen was appointed to the Board in March 2013 and is the Founder
and Managing Partner of V3 Capital Partners, a private investment
firm focused on early-stage companies primarily in the consumer
products industry, and Co-Manager of Red Fortune Fund, a private
equity fund based in Hong Kong. Mr. Cohen also is the Founder of
Petro River Oil LLC and Chairman of Petro River Oil Corp (OTCBB:
PTRC), a publicly traded oil and gas producer with assets in Kansas
and Oklahoma, and Petro Spring, a global oil and gas technology
solutions provider. Prior to creating V3 Capital Partners, Mr.
Cohen was the Founder and Managing Partner at Iroquois Capital
Opportunity Fund, a special situations private equity investment
fund, and a Co-Founder of Iroquois Capital, a hedge fund with
investments in small and micro-cap private and public companies.
Mr. Cohen is active in philanthropic activities with numerous
charities including the Jewish Enrichment Council and is a Founder
and the Chairman of the National Foundation for Veteran
Redeployment, a 501(c)3 non-profit organization whose mission is to
help unemployed veterans prepare for and enter new careers in the
oil and gas industry. Mr. Cohen holds a Bachelor of Science degree
from Ohio University in 1991.
The
Board of Directors believes Mr. Cohen’s success with multiple
private investment firms, his extensive contacts within the
investment community and financial expertise will assist the
Company’s efforts to raise capital to fund the continued
implementation of the Company’s business plan.
Neil
LeVecke, Director. Mr. LeVecke is the President of LeVecke
Corporation, a wholesale distributor and bottler of spirits and
wine products. Representing a third generation in the family
business, he has worked every position in the company since
starting in 1993. Mr. LeVecke graduated from Loyola Marymount
University in 1990.
The
Board of Directors believes Mr. LeVecke’s 22 years in the
wholesale beverage distributing and bottling industry will provide
the Board with invaluable insight and guidance as the Company
continues to expand the sales of the AquaBall™ Naturally
Flavored Water to both existing and new retail
accounts.
James J.
Greco, Director. Mr. Greco is
President and Chief Executive Officer of Pilgrim Holdings, LLC, a
position he has held since October 2001. Mr. Greco previously
served as Chief Operating Officer of Newk's Franchise Company, LLC
from July 2014 until October 2016, as well as President from
January 2016 until October 2016. Prior to his time with
Newk’s
Franchise Company, Mr. Greco served as the Chief Executive Officer
and President of Sbarro LLC from January 2012 until October 2013,
and as the Chief Executive Officer of Bruegger's Enterprises, Inc.
from August 2003 to December 2011. Mr. Greco currently serves as a
director of the Palm Beach County Food Bank, as well as an
operating advisor for Lincoln Road Global Management. Mr. Greco is
a member of the Connecticut and Florida bars. He earned a B.A. in
Economics from Georgetown University and a J.D. from the University
of Miami, School of Law. He has also completed International
Studies at City University, London, England.
The
Board of Directors believes Mr. Greco’s extensive experience
in the food industry will assist the Company as it seeks to expand
the distribution of AquaBall™ and eliminate inefficiencies in
Niagara’s production process.
Kevin
Sherman, Director. See above.
The
Board of Directors believes Mr. Sherman’s long-standing
service to the Company and its predecessor, Bazi, Inc., provide the
Board with the guidance necessary to continue to expand the
Company’s distribution networks, and promote brand awareness
of AquaBall™ Naturally Flavored Water.
There
have been no events under any bankruptcy act, no criminal
proceedings and no judgments or injunctions material to the
evaluation of the ability and integrity of any director or nominee
during the past ten years.
Board of Directors
Attendance at Meetings
The
Board held four meetings, and did not act by unanimous written
consent during the year ended December 31, 2016. Each director
attended at least 75% of Board meetings during the year ended
December 31, 2016. We have no formal policy with respect to the
attendance of Board members at annual meetings of shareholders but
encourage all incumbent directors and director nominees to attend
each annual meeting of shareholders.
Independent Directors
The
Board believes that a majority of its members should be independent
directors. The Board has determined that, other than Mr. Sherman
and Mr. Cohen, all of its current directors are independent
directors as defined by the rules and regulations of the NASDAQ
Stock Market.
The
Board has determined that Mr. Cohen satisfies the definition of an
“audit committee financial expert” under SEC rules and
regulations. This designation does not impose any duties,
obligations or liabilities on Mr. Cohen that are greater than
those generally imposed on them as members of the Audit Committee
and the Board, and his designation as an audit committee financial
expert does not affect the duties, obligations or liability of any
other member of the Audit Committee or the Board.
Board Committees and Charters
The
Board has a standing Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee. The Board appoints
the members and chairpersons of these committees. The majority of
the members of these committees have been determined by the Board
to be independent. In addition, each member of these committees has
been determined by the Board to be independent. Each committee has
a written charter approved by the Board. Copies of each committee
charter are available on the Company’s website at
www.truedrinks.com/investor-relations/ and by clicking on the
“Corporate
Governance” tab.
Audit Committee
|
Members:
|
Mr.
Scot Cohen (Chair)
Ms.
Ramona Cappello
Mr.
Neil LeVecke
|
|
Number of Meetings in 2016:
|
One
|
|
Functions:
|
This
committee assists the Board in fulfilling its legal and fiduciary
obligations in matters involving the Company’s accounting,
auditing, financial reporting, internal control and legal
compliance functions by approving the services performed by the
Company’s independent accountants and reviewing their reports
regarding the Company’s accounting practices and systems of
internal accounting controls. This committee is responsible for the
appointment, compensation, retention and oversight of the
independent accountants and for ensuring that the accountants are
independent of management.
|
Compensation Committee
|
|
|
|
Members:
|
Ms.
Ramona Cappello (Chair)
Mr.
Scot Cohen
|
|
Number of Meetings in 2016:
|
Two
|
|
|
|
|
Functions:
|
This
committee determines the Company’s general compensation
policies and practices. This committee also reviews and approves
compensation packages for the Company’s officers and, based
upon such review, recommends overall compensation packages for the
officers to the Board. This committee also reviews and determines
equity-based compensation for the Company’s directors,
officers, employees and consultants and administers the
Company’s 2013 Stock Incentive Plan.
|
Nominating and Corporate Governance Committee
|
|
|
|
Members:
|
Mr.
Neil LeVecke (Chair)
Ms.
Ramona Cappello
|
|
Number of Meetings in 2016:
|
One
|
|
Functions:
|
This
committee is responsible for making recommendations to the Board
regarding candidates for directorships and the size and composition
of the Board and for overseeing the Company’s corporate
governance guidelines and reporting and making recommendations to
the Board concerning corporate governance matters.
|
Board Leadership Structure
The
Board currently separates the roles of Chief Executive Officer and
Chair of the Board in recognition of the differences between the
two roles. The Chief Executive Officer is responsible for setting
the strategic direction of the Company and the day-to-day
leadership and performance of the Company, while the Chair of the
Board provides guidance to the Chief Executive Officer and sets the
agenda for the Board meetings and presides over meetings of the
Board. However, the Board believes it should be able to freely
select the Chair of the Board based on criteria that it deems to be
in the best interest of the Company and its stockholders, and
therefore one person may, in the future, serve as both the Chief
Executive Officer and Chair of the Board.
Board Role in Risk Assessment
Management,
in consultation with outside professionals, as applicable,
identifies risks associated with the Company’s operations,
strategies and financial statements. Risk assessment is also
performed through periodic reports received by the Audit Committee
from management, counsel and the Company’s independent
registered public accountants relating to risk assessment and
management. Audit Committee members meet privately in executive
sessions with representatives of the Company’s independent
registered public accountants. The Board also provides risk
oversight through its periodic reviews of the financial and
operational performance of the Company.
Code of Ethics
We
have adopted a Code of Ethics that applies to all of our directors,
officers and employees, a copy of which was attached as an exhibit
to our Annual Report on Form 10-K, filed with the SEC on March 31,
2011.
Section 16(a) Beneficial Ownership Reporting
Compliances
Section 16(a) of the Securities Exchange Act of
1934, as amended (the “Exchange
Act”) requires our
officers, directors, and persons who beneficially own more than ten
percent of our Common Stock to file reports of ownership and
changes in ownership with the SEC. Officers, directors, and
greater-than-ten-percent shareholders are also required by the SEC
to furnish us with copies of all Section 16(a) forms that they
file.
Based
solely upon a review of these forms that were furnished to us, we
believe that all reports required to be filed by these individuals
and persons under Section 16(a) were filed during the year ended
December 31, 2016 and that such filings were timely.
ITEM 11. EXECUTIVE
COMPENSATION
Summary Compensation Table
The
following table sets forth the compensation paid to the following
persons for our fiscal years ended December 31, 2016 and
2015:
|
(a)
|
our principal executive officer;
|
|
|
|
|
(b)
|
our most highly compensated executive officers who were serving as
an executive officer at the end of the fiscal year ended December
31, 2016 who had total compensation exceeding $100,000 (together,
with the principal executive officer, the
“Named
Executive Officers”);
and
|
|
|
|
|
(c)
|
any additional individuals who would have been considered Named
Executive Officers, but for the fact that they were not serving in
such capacity at the end of our most recently completed fiscal
year.
|
|
Name
and
Principal
Position
|
Year
|
Salary
($)
|
Bonus
($) |
Stock
Awards
($)
|
Option
Awards
($)
(1)
|
Non-Equity
Incentive Plan Compensation ($)
|
All
Other Compensation ($)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
Kevin Sherman,
|
2016
|
$229,167
|
$50,000
|
$-
|
$-
|
$-
|
$-
|
$279,167
|
|
Chief Executive Officer, Chief
Marketing Officer, Director
|
2015
|
$181,751
|
$53,300
|
$471,691
|
$(262,795)
|
$-
|
$-
|
$443,947
|
|
|
|
|
|
|
|
|
|
|
|
Daniel
Kerker
|
2016
|
$185,000
|
$5,000
|
$-
|
$-
|
$-
|
$-
|
$190,000
|
|
Chief Financial Officer
|
2015
|
$178,680
|
$63,959
|
$471,691
|
$(262,794)
|
$-
|
$-
|
$451,536
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Van Boerum
|
2016
|
$175,000
|
$5,000
|
$-
|
$-
|
$-
|
$-
|
$180,000
|
|
Chief Operations Officer
|
2015
|
$144,970
|
$38,433
|
$353,768
|
$(187,893)
|
$-
|
$-
|
$349,278
|
|
(1)
|
During the year ended December 31, 2015, all Named Executive
Officers exchanged their option awards for restricted Common Stock
awards, valued at the closing price of the Company's Common Stock
at the time of grant.
|
Employment Agreements
Kevin
Sherman. Mr. Sherman is employed as the Company’s
Chief Marketing Officer pursuant to a two-year employment
agreement, dated November 25, 2015 (the “Sherman
Agreement”). Under the terms and conditions of the
Sherman Agreement, Mr. Sherman receives: (i) a base salary of
$22,917 per month, subject to certain adjustments in the event the
Company achieves certain monthly sales objectives (“Target
Objectives”); (ii) a $3,000 per month housing allowance,
subject to termination in the event the Company achieves any of the
Target Objectives; (iii) a ‘retention bonus’ of
$100,000, of which $50,000 was paid to Mr. Sherman in November 2015
and the remaining $50,000 was paid in March, 2016; and (iv) an
aggregate total of approximately 2.3 million shares of restricted
stock, subject to certain vesting conditions (“Restricted
Shares”), which Restricted Shares represented approximately
3.25% of the issued and outstanding shares of the Company’s
Common Stock, including shares of Common Stock issuable upon
conversion of the Company’s outstanding shares of preferred
stock.
During
the second half of 2016, Mr. Sherman deferred a portion of his
monthly salary equivalent to a total of $100,000 annually. The
deferment began at the end of July, 2016 and is still in effect as
of March, 2016.
Mr.
Sherman is also eligible for an annual bonus equal to 30% of his
base salary, currently payable in restricted shares of the
Company’s Common Stock, which bonus will be awarded at the
sole discretion of the Company’s Compensation Committee.
During the year ended December 31, 2016, the Compensation Committee
did not award a bonus to Mr. Sherman for the period through
December 31, 2015.
In
addition to the annual bonus, in the event of a change in control
transaction, as defined in the Sherman Employment Agreement, Mr.
Sherman will be entitled to a bonus equal to 3.25% of the value of
the transaction resulting in a change in control, minus the fair
market value of all Restricted Shares issued to Mr. Sherman prior
to the date of the change in control transaction.
Mr.
Sherman’s employment may be terminated for
“Cause”, if Mr. Sherman (a) is convicted of any fraud
or embezzlement, (b) after written notice, willfully breaches or
habitually neglects his duties and responsibilities, (c) commits
acts of dishonesty, gross negligence or willful misconduct or (d)
violates any law or regulation relating to the business operations
of the Company that may have a material adverse effect on the
Company. If the Company terminates Mr. Sherman’s employment
for reasons other than for Cause, the Company shall pay a severance
in an amount equal to six months of Mr. Sherman’s base
salary.
Daniel
Kerker. Mr. Kerker is employed
as the Company’s Chief Financial Officer pursuant to an
Employment Agreement, dated March 1, 2012 (the
“Kerker
Agreement”) and effective
October 15, 2012. The term of the Kerker Agreement is for a period
of three years, which shall extend automatically for successive
one-year periods unless the Kerker Agreement is terminated by
either party. Mr. Kerker receives a base salary of $12,500 per
month until the earlier of September 1, 2012 or the Company
achieving $1,000,000 in monthly gross sales, in which case the base
salary shall be increased (a) to $15,000 per month, or (b) if the
Company achieves $2,000,000 in monthly gross sales, to $16,250 per
month. Mr. Kerker is also eligible to receive an annual bonus as
approved by the Board and shall be entitled to earn stock option
compensation to acquire a total of 430,043 shares of the
Company’s Common Stock over the term of the agreement. During
the year ended December 31, 2016, the Compensation Committee did
not award a bonus to Mr. Kerker for the period through December 31,
2015.
Mr.
Kerker’s employment may be terminated for
“Cause”, if Mr. Kerker (a) is convicted of any fraud or
embezzlement, (b) after written notice, willfully breaches or
habitually neglects his duties and responsibilities, (c) commits
acts of dishonesty, gross negligence or willful misconduct or (d)
violates any law or regulation relating to the business operations
of the Company that may have a material adverse effect on the
Company. If the Company terminates Mr. Kerker’s employment
for reasons other than for Cause, the Company shall pay a severance
in an amount equal to six months of Mr. Kerker’s base
salary.
Robert Van
Boerum. Mr. Van Boerum is
employed as the Company’s Chief Operations Officer pursuant
to a two-year employment agreement, dated September 11, 2015 (the
“Van
Boerum Agreement”). Under
the terms and conditions of the Van Boerum Agreement, Mr. Van
Boerum receives a base salary of $14,583.33 per month. Mr. Van
Boerum is also be eligible for an annual bonus equal to 30% of his
salary, which bonus will be awarded at the sole discretion of the
Company’s Compensation Committee, and is eligible to earn
stock option compensation at the discretion of the Compensation
Committee. During the year ended December 31, 2016, the
Compensation Committee did not award a bonus to Mr. Van Boerum for
the period through December 31, 2015.
The
Van Boerum Agreement may be terminated for “Cause”, if
Mr. Van Boerum (a) is convicted of any fraud or embezzlement, (b)
after written notice, willfully breaches or habitually neglects his
duties and responsibilities, (c) commits acts of dishonesty, gross
negligence or willful misconduct or (d) violates any law or
regulation relating to the business operations of the Company that
may have a material adverse effect on the Company. If the Company
terminates Mr. Van Boerum’s employment for reasons other than
for Cause, the Company shall pay a severance in an amount equal to
six months of Mr. Van Boerum’s base salary.
Other
than as set forth above, there are no arrangements or
understandings between our Named Executive Officers and any other
person pursuant to which they were appointed as officers. None of
our Named Executive Officers has a family relationship that is
required to be disclosed under Item 401(d) of Regulation
S-K.
Director Compensation
Pursuant to the Company’s Director
Compensation Plan, non-employee directors
(“Outside
Directors”) shall receive
(a) a $30,000 annual retainer, payable in equal quarterly
installments in either cash or shares of Common Stock, (b)
additional committee retainers as determined by the Board and (c)
reimbursement for expenses related to Board meeting attendance and
committee participation. Directors that are also employees of the
Company do not receive additional compensation for serving on the
Board.
The
following table discloses certain information on concerning the
compensation of the Company’s non-employee directors for the
year ended December 31, 2016:
|
Name
(1)
|
Fees earned or
Paid in Cash
($)
|
Option
Awards
($)
|
Stock
Awards
($)
|
Total
($)
|
|
Ramona
Cappello (2)
|
$100,000
|
$-
|
$-
|
$100,000
|
|
Neil
LeVecke
|
$30,000
|
$-
|
$-
|
$30,000
|
|
Scot
Cohen
|
$30,000
|
$-
|
$-
|
$30,000
|
|
(1)
|
Mr. Greco is not listed in this table, as he was appointed to the
Board on February 6, 2017 and, as such, did not receive any
compensation from the Company during the year ended December 31,
2016.
|
|
(2)
|
During the year ended December 31, 2016, Ramona Cappello earned
$50,000 as Chair of the Board of Directors. She also earned $50,000
in additional fees as the result of a $5,000 per month consulting
agreement.
|
Outstanding Equity Awards as of December 31, 2016
The
following table sets forth all equity awards held by our Named
Executive Officers at December 31, 2016.
|
|
Stock Awards
|
||||
|
Name
|
Number of shares or units of stock that have not vested
(#)
|
Market Value of shares or units of stock that have not vested
($)
|
Equity incentive plan awards: Number of unearned shares, units or
other rights that have not vested (#)
|
Equity incentive plan awards: Market or Payout value of unearned
shares, units or other rights that have not vested ($)
|
|
|
Kevin
Sherman
|
799,423
|
(1)
|
$79,942
|
-
|
$-
|
|
Daniel
Kerker
|
1,798,706
|
(2)
|
$179,870
|
-
|
$-
|
|
Robert
Van Boerum
|
1,442,779
|
(2)
|
$144,278
|
-
|
$-
|
|
(1)
(2)
|
Non-vested shares are scheduled to vest on September 30,
2017.
Non-vested shares are scheduled to vest evenly over three years
beginning on September 30, 2017.
|
Equity Compensation Plan Information
The following table includes information as of December 31, 2016
for our equity compensation plans:
|
Plan category
|
Number of securities to be issued upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise price of outstanding options,
warrants and rights
|
Number of securities remaining available for future issuance under
equity compensation plans (excluding securities reflected in column
(a))
|
|
|
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
15,872,229
|
$0.15
|
757,771
|
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
|
Total
|
15,872,229
|
$0.15
|
757,771
|
2013 Stock Incentive
Plan. The 2013 Stock Incentive
Plan (the “2013 Plan”) was adopted by the Company’s Board
of Directors on December 31, 2013. The 2013 Plan reserves for
issuance 20.0 million shares of Common Stock for issuance to all
employees (including, without limitation, officers and directors
who are also employees) of the Company or any subsidiary of the
Company (each a “Subsidiary”), any non-employee director, consultants
and independent contractors of the Company or any Subsidiary, and
any joint venture partners (including, without limitation,
officers, directors and partners thereof) of the Company or any
Subsidiary. Awards under the 2013 Plan may be made in the form of:
(i) incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended, once the 2013 Plan
has been approved by a majority of the Company’s
stockholders; (ii) stock options that do not qualify as incentive
stock options; and/or (iii) awards of shares that are subject to
certain restrictions specified in the 2013
Plan.
During
the year ended December 31, 2016, the Company issued an aggregate
total of 2,000,000 restricted stock awards pursuant to the 2013
Plan. The Company also issued an aggregate total of 3,100,000 stock
option awards pursuant to the 2013 Plan.
Post-Employment Compensation, Pension Benefits, Nonqualified
Deferred Compensation
There
were no post-employment compensation, pension or nonqualified
deferred compensation benefits earned by the Named Executive
Officers during the year ended December 31, 2016.
ITEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS
MATTERS
As
of March 30, 2017, we had four classes of voting stock outstanding:
(i) Common Stock; (ii) Series B Preferred; (iii) Series C
Preferred; and (iv) Series D Preferred. The following tables set
forth information regarding shares of Series B Preferred, Series C
Preferred, Series D Preferred and Common Stock beneficially
owned as of March 30, 2017:
|
|
(i)
|
Each of
our officers and directors;
|
|
|
(ii)
|
All
officer and directors as a group; and
|
|
|
(iii)
|
Each
person known by us to beneficially own five percent or more of the
outstanding shares of our Series B Preferred, Series C Preferred,
Series D Preferred and Common Stock.
|
Percent
ownership is calculated based on 1,292,870 shares of Series B
Preferred, 106,704 shares of Series C Preferred, 35,250 shares of
Series D Preferred and 199,693,811 shares Common Stock outstanding
at March 30, 2017.
Beneficial Ownership of Series B Preferred
|
Name and
Address (1)
|
Series B Convertible Preferred Stock
|
% Ownership of Class (2)
|
|
Scot
Cohen (3)
|
135,000
|
10.44%
|
|
Total
Officers and Directors (1)
|
135,000
|
10.44%
|
|
|
|
|
|
First Bank &
Trust as custodian of Ronald L. Chez IRA
820 Church
Street
Evanston Illinois,
60201
|
425,000
|
32.87%
|
|
Wolfson Equities
LLC
1 State Street
Plaza, 29th Floor
New York, NY
10004
|
187,500
|
9.18%
|
|
Joe
Kolling
58 Beacon
Bay
Newport Beach, CA
92660
|
155,556
|
14.50%
|
|
V3 Capital Partners
LLC
20 East 20th
Street, Apt. 6
New York, NY
10003
|
118,750
|
12.03%
|
|
(1)
|
Each of
the Company’s officers and directors who do not hold shares
of Series B Preferred were excluded from this table. Unless
otherwise indicated, the address for each stockholder is 18662
MacArthur Blvd., Suite 110, Irvine, CA 92612.
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
|
|
(3)
|
Includes
3,750 shares held directly by Mr. Cohen, 118,750 shares held by V3
Capital Partners and 12,500 shares held by the Scot Jason Cohen
Foundation. Mr. Cohen is the Managing Partner of V3 Capital
Partners and is an officer of the Scot Jason Cohen
Foundation.
|
Beneficial Ownership of Series C Preferred
|
Name and
Address (1)
|
Series C Convertible Preferred Stock
|
% Ownership of Class (2)
|
|
Red Beard Holdings,
LLC
2560 East Chapman
Avenue #173
Orange, CA
92869
|
102,871
|
96.41%
|
|
(1)
|
Each of
the Company’s directors and officers was excluded from this
table, as none of our officers or directors hold shares of Series C
Preferred.
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
|
Beneficial Ownership of Series D Preferred
|
Name and
Address (1)
|
Series D Convertible Preferred Stock
|
% Ownership of Class (2)
|
|
Scot
Cohen
|
4,000
|
11.35%
|
|
Total
Officers and Directors (1)
|
4,000
|
11.35%
|
|
|
|
|
|
Red Beard Holdings,
LLC
2560 East Chapman
Avenue #173
Orange, CA
92869
|
10,000
|
28.37%
|
|
Baker Court,
LLC
P.O. Box
6923
Incline Village, NV
89450
|
3,000
|
8.51%
|
|
First Bank &
Trust as custodian of Ronald L. Chez IRA
820 Church
Street
Evanston Illinois,
60201
|
2,000
|
5.67%
|
|
(1)
|
Each of
the Company’s officers and directors who do not hold shares
of Series D Preferred were excluded from this table. Unless
otherwise indicated, the address for each stockholder is 18662
MacArthur Blvd., Suite 110, Irvine, CA 92612.
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
|
Beneficial Ownership of Common Stock
|
Name,
Address and Title (if applicable) (1)
|
Shares of Common Stock (2)
|
Shares Issuable Upon Conversion of Preferred Stock (3)
|
Shares Issuable upon Exercise of Vested Stock Options
|
Total Number of Shares Beneficially Owned
|
% Ownership of Class (4)(5)
|
|
Kevin
Sherman
Chief Executive Officer and Director
|
4,431,270
|
–
|
–
|
4,431,270
|
2.22%
|
|
Daniel
Kerker
Chief Financial Officer, Treasurer and Secretary
|
4,537,869
|
–
|
–
|
4,537,869
|
2.27%
|
|
Robert Van
Boerum
Chief Operations Officer
|
1,000,000
|
–
|
–
|
2,923,706
|
1.46%
|
|
Ramona
Cappello
Chairman
|
–
|
–
|
166,667
|
166,667
|
*
|
|
Scot
Cohen (6)
Director
|
7,482,448
|
4,826,667
|
–
|
12,309,115
|
6.02%
|
|
Neil
LeVecke
Director
|
–
|
–
|
333,334
|
333,334
|
*
|
|
James Greco
(7)
Director
|
333,334
|
333,334
|
-
|
666,668
|
*
|
|
Total
officers and directors
|
19,708,627
|
5,160,001
|
500,001
|
25,368,629
|
12.35%
|
|
Vincent C.
Smith (8)
2560 East Chapman
Avenue #173
Orange, CA
92869
|
89,591,623
|
75,247,334
|
–
|
164,838,957
|
59.95%
|
|
Vincent C. Smith
Annuity Trust 2015-1 (9)
2560 East Chapman
Avenue #173
Orange, CA
92869
|
44,666,667
|
–
|
–
|
44,666,667
|
22.37%
|
|
Red Beard Holdings,
LLC (10)
2560 East Chapman
Avenue #173
Orange, CA
92869
|
28,358,289
|
75,247,334
|
–
|
103,605,623
|
37.68%
|
|
First Bank &
Trust as custodian of Ronald L. Chez IRA (11)
820 Church
Street
Evanston Illinois,
60201
|
3,092,382
|
8,133,334
|
–
|
11,225,716
|
5.40%
|
|
*
|
Less
than 1%
|
|
(1)
|
Unless
otherwise indicated, the address for each stockholder is 18662
MacArthur Blvd., Suite 110, Irvine, CA 92612.
|
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to
securities.
|
|
(3)
|
Includes
shares of Common Stock issuable upon conversion of shares of Series
B Preferred, Series C Preferred and/or Series D Preferred within 60
days of March 30, 2017.
|
|
(4)
|
Percentages
are rounded to nearest one-hundredth of one percent. Percentages
are based on 199,693,811 shares of Common Stock outstanding.
Options or other derivative securities that are presently
exercisable or exercisable within 60 days are deemed to be
beneficially owned by the person holding the options for the
purpose of computing the percentage ownership of that person, but
are not treated as outstanding for the purpose of computing the
percentage of any other person.
|
|
(5)
|
Pursuant
to the Certificate of Designation, shares of Series B
Preferred may not be converted or exercised, as applicable, to the
extent that the holder and its affiliates would own more than 9.99%
of the Company’s outstanding Common Stock after such
conversion. The Certificate of Designation also entitles each
share of Series B Preferred to vote, on an as converted basis,
along with the Common Stock; provided, however, that the Series
B Preferred may not be voted to the extent that the holder and its
affiliates would control more than 9.99% of the Company’s
voting power.
Pursuant
to Section 5 of the Third Amended and Restated Certificate of
Designations, Preferences, Rights and Limitations of the Series C
Convertible Preferred Stock (the “Series C Certificate of
Designation”), no holder of Series C Preferred may
exercise the voting rights otherwise attributable to the Series C
Preferred if such holder, together with any “affiliate” of
such Holder (as such term is defined in Rule 144 under the
Securities Act of 1933, as amended) or any person or entity deemed
to be part of a “group” with such holder (as such term
is used in Section 13(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”))) would
control in excess of 50% of the total voting power of the
outstanding shares of capital stock of the Company at the time of
such vote (the “Voting
Limitation”); provided, however,
that any holder of shares of Series C Preferred may waive the
Voting Limitation upon 60 days written notice to the
Company.
Ownership
percentages in this table were calculated in accordance with
Section 13(d) of the Exchange Act, and do not reflect any
adjustments due to the Voting Limitation.
|
|
(6)
|
Includes
securities held by V3 Capital Partners and the Scot Jason Cohen
Foundation. Mr. Cohen is the Managing Partner of V3 Capital
Partners and an officer of the Scot Jason Cohen Foundation, and has
dispositive and/or voting power over these shares.
|
|
(7)
|
Includes
securities held by Pilgrim Holdings, LLC. Mr. Greco is the
President and Chief Executive Officer of Pilgrim Holdings, LLC, and
has dispositive and/or voting power over these shares.
|
|
(8)
|
Based
on Company records and ownership information from Amendment No. 5
to Schedule 13D filed by Vincent C. Smith on April 25, 2016. Mr.
Smith is the trustee for the Vincent C. Smith Annuity Trust 2015-1
(the “Smith
Trust”) and manager of Red Beard Holdings, LLC
(“Red Beard”).
As such, Mr. Smith has dispositive power, and, subject to certain
limitations in the Series C Certificate of Designation, voting
power over, and may be deemed to be the beneficial owner of the
securities held by each of these entities.
|
|
(9)
|
Based
on Company records and ownership information from Amendment No. 5
to Schedule 13D filed by Vincent C. Smith on April 25, 2016. Mr.
Vincent C. Smith is the trustee of the Smith Trust, and has
dispositive and/or voting power over the shares.
|
|
(10)
|
Based
on ownership information from Amendment No. 5 to Schedule 13D filed
by Vincent C. Smith on April 25, 2016. Mr. Vincent C. Smith is
a manager of Red Beard Holdings, LLC, and has dispositive power,
and, subject to certain limitations in the Series C Certificate of
Designation (as described in Note 5 above), voting power over the
shares.
|
|
(11)
|
Based
on ownership information from Amendment No. 2 to Schedule 13D filed
by Individual Retirement Accounts for the benefit of Ronald L.
Chez, Ronald L. Chez Individually and the Chez Family Foundation on
December 8, 2014.
|
ITEM 13. CERTAIN RELATIONSHIPS,
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None.
ITEM 14. PRINCIPAL ACCOUNTANT FEES
AND SERVICES
Set forth below are fees billed or expected
to be billed to the Company by its independent registered public
accounting firm Squar Milner LLP ("Squar
Milner") for the years ended
December 31, 2016 and 2015 for the professional services performed
for the Company.
Audit Fees
The
following table presents fees for professional services billed by
Squar Milner for the fiscal years ended December 31, 2016 and
2015.
|
|
For the years ended
December 31,
|
|
|
|
2016
|
2015
|
|
Audit
fees
|
$68,265
|
$61,900
|
|
Tax
fees
|
-
|
-
|
|
All
other fees (consent fees)
|
-
|
16,300
|
|
Total
|
$68,625
|
$78,200
|
PART IV
ITEM
15. EXHIBITS
|
Exhibit No
|
|
Description
|
||
|
2.1
|
|
Agreement and Plan of Merger among Bazi International, Inc., Bazi
Acquisition Sub, Inc., GT Beverage Company, Inc. and MKM Capital
Advisors, LLC dated as of June 7, 2012, incorporated by reference
from Exhibit 2.1 to the Current Report on Form 8-K filed on June
21, 2012.
|
||
|
3.1
|
|
Articles of Incorporation, incorporated by reference from Exhibit
3.01 to Form SB-2 filed on February 27, 2001.
|
||
|
3.1.1
|
|
Certification of Amendment to the Articles of Incorporation
incorporated by reference to Exhibit 3.1.1 filed with
Form 10-QSB filed November 14, 2003.
|
||
|
3.2
|
|
Amended and Restated By-laws filed with Form 10-KSB on
March 3, 2005, as Exhibit 3.2, and incorporated herein by
reference.
|
||
|
3.3
|
|
Amendment to the Amended and Restated Bylaws of Bazi International,
Inc., incorporated by reference from Exhibit 3.1 to the Current
Report on Form 8-K filed on October 17, 2012.
|
||
|
3.3
|
|
Amended and Restated Articles of Incorporation filed with Form 8-K
on August 2, 2010 as Exhibit 3.1, and incorporated herein by
reference.
|
||
|
3.4
|
|
Certification of Amendment to the Article of Incorporation with
Form 8-K on May 20, 2011 as Exhibit 3.1, and incorporated
herein by reference.
|
||
|
3.5
|
|
Certificate of Amendment to the Articles of Incorporation,
incorporated herein by reference from Exhibit 3.1 to the Current
Report on Form 8-K filed January 22, 2013.
|
||
|
3.6
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holdings, Inc., dated February 6, 2014, incorporated
herein by reference from Exhibit 3.1 to the Current Report on Form
8-K filed February 6, 2014.
|
||
|
3.7
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holdings, Inc., dated June 10, 2015, incorporated
herein by reference from Exhibit 3.1 to the Current Report on Form
8-K filed June 25, 2015.
|
||
|
3.8
|
|
Amended and Restated By-laws filed with Form 10-Q on August
13, 2015, as Exhibit 3.2, and incorporated herein by
reference.
|
||
|
3.9
|
|
Certificate of Amendment to the Articles of Incorporation of True
Drinks Holding, Inc. dated December 30, 2015, incorporated Exhibit
3.1 to the Current Report on Form 8-K, file January 7,
2016.
|
||
|
4.1
|
|
Certificate of Designation, Preferences, Rights and Limitations of
Series A Convertible Preferred Stock of Bazi International, Inc.,
incorporated by reference from Exhibit 4.2 to the Current Report on
Form 8-K filed on October 17, 2012.
|
||
|
4.2
|
|
Certificate of Withdrawal of the Series A Convertible Preferred
Stock of True Drinks Holdings, Inc., dated February 18,
2015, incorporated by reference from Exhibit 3.3 to the
Current Report on Form 8-K filed on February 23, 2015.
|
||
|
4.3
|
|
Certificate of Designation, Preferences, Rights, and Limitations of
Series B Convertible Preferred Stock of True Drinks Holdings, Inc.,
incorporated by reference from Exhibit 3.1 to the Current Report on
Form 8-K, filed November 26, 2013.
|
||
|
4.4
|
|
First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series B Convertible Preferred Stock
of True Drinks Holdings, Inc., dated February 18, 2015,
incorporated by reference from Exhibit 3.2 to the Current Report on
Form 8-K filed on February 23, 2015.
|
||
|
4.5
|
|
Certificate of Designation, Preferences, Rights and Limitations of
the Series C Convertible Preferred Stock of True Drinks Holdings,
Inc., dated February 18, 2015, incorporated by reference from
Exhibit 3.1 to the Current Report on Form 8-K filed on February 23,
2015.
|
||
|
4.6
|
|
First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated March 26, 2015, incorporated
by reference from Exhibit 4.1 to the Current Report on Form 8-K
filed on April 1, 2015
|
||
|
4.7
|
|
Second Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series B Convertible
Preferred Stock of True Drinks Holdings, Inc., dated August 12,
2015, incorporated herein by reference from Exhibit 3.1 to the
Current Report on Form 8-K filed August 18, 2015
|
||
|
4.8
|
|
Amendment No. 1 to the Second Amended and Restated Certificate of
Designation, Preferences, Rights and Limitations of the Series C
Convertible Preferred Stock of True Drinks Holdings, Inc., dated
November 24, 2015, incorporated herein by reference from Exhibit
4.1 to the Current Report on Form 8-K filed December 1,
2015
|
||
|
4.8
|
|
Third Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series C Convertible Preferred Stock
of True Drinks Holdings, Inc., dated April 12, 2016, incorporated
herein by reference from Exhibit 4.1 to the Current Report on Form
8-K filed April 19, 2016.
|
||
|
4.9
|
|
Certificate of Designation, Preferences, Rights and Limitations of
the Series D Convertible Preferred Stock of True Drinks Holdings,
Inc., dated January 24, 2017, incorporated herein by reference from Exhibit 4.1
to the Current Report on Form 8-K filed February 15,
2017
|
||
|
10.1
|
|
Employment agreement with Dan Kerker, incorporated by reference to
Exhibit 10.4 filed with the Annual Report on Form 10-K, filed April
5, 2013.
|
||
|
10.2
|
|
Employment agreement with Kevin Sherman, incorporated by reference
from Exhibit 10.3 filed with the Annual Report on Form 10-K, filed
March 31, 2014.
|
||
|
10.3
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed November
26, 2013.
|
||
|
10.4
|
|
2013 Stock Incentive Plan, incorporated by reference from Exhibit
10.17 to the Annual Report on Form 10-K, filed March 31,
2014.
|
||
|
10.5
|
|
Form of Securities Purchase Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K, filed February 23, 2015.
|
||
|
10.6
|
|
Form of Amendment No. 1 to Securities Purchase Agreement,
dated March 27, 2015, incorporated by reference from
Exhibit 10.1 to the Current Report on Form 8-K filed on April
1, 2015
|
||
|
10.7
|
|
Form of Common Stock Purchase Warrant, dated February 20,
2015, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed February 23, 2015.
|
||
|
10.8
|
|
Form of Registration Rights Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.3 to the
Current Report on Form 8-K, filed February 23, 2015.
|
||
|
10.9
|
|
Form of Indemnification Agreement, dated February 20,
2015, incorporated by reference from Exhibit 10.4 to the
Current Report on Form 8-K, filed February 23, 2015.
|
||
|
10.10
|
|
Form of Note Exchange Agreement, dated March 27, 2015, incorporated
by reference from Exhibit 10.2 to the Current Report on Form
8-K filed on April 1, 2015
|
||
|
10.11
|
|
Form of Securities Purchase Agreement, dated August 13, 2015
incorporated by reference from Exhibit 10.1 to the Current Report
on Form 8-K, filed August 18, 2015
|
||
|
10.12
|
|
Form of Common Stock Purchase Warrant, dated August 13, 2015
incorporated by reference from Exhibit 10.2 to the Current Report
on Form 8-K, filed August 18, 2015
|
||
|
10.13
|
|
Form of Registration Rights Agreement, dated August 13, 2015,
incorporated by reference from Exhibit 10.3 to the Current Report
on Form 8-K, filed August 18, 2015
|
||
|
10.14
|
|
Form of Senior Subordinated Secured Promissory Note, incorporated
by reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed September 11, 2015
|
||
|
10.15
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed September 11, 2015
|
||
|
10.16
|
|
Employment Agreement, by and between the Company and Robert Van
Boerum, dated September 9, 2015, incorporated by reference from
Exhibit 10.3 to the Current Report on Form 8-K, filed September 11,
2015
|
||
|
10.17
|
|
Senior Secured Promissory Note, dated October 9, 2015, incorporated
by reference from Exhibit 10.2 to the Current Report on Form 8-K,
filed October 27, 2015
|
||
|
10.18
|
|
Personal Guaranty Warrant, dated October 9, 2015, incorporated by
reference from Exhibit 10.3 to the Current Report on Form 8-K,
filed October 27, 2015
|
||
|
10.19
|
|
Amendment No.1 to Securities Purchase Agreement, dated October 16,
2015, incorporated by reference from Exhibit 10.4 to the Current
Report on Form 8-K, filed October 27, 2015
|
||
|
10.20
|
|
Amendment No. 1 to Registration Rights Agreement, dated October 16,
2015, incorporated by reference from Exhibit 10.5 to the Current
Report on Form 8-K, filed October 27, 2015
|
||
|
10.21
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed December
1, 2015
|
||
|
10.22
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed December 1, 2015
|
||
|
10.23
|
|
Form of Registration Rights Agreement, incorporated by reference
from Exhibit 10.3 to the Current Report on Form 8-K, filed December
1, 2015
|
||
|
10.24
|
|
Employment Agreement, by and between True Drinks Holdings, Inc. and
Kevin Sherman, dated November 25, 2015, incorporated by reference
from Exhibit 10.4 to the Current Report on Form 8-K, filed December
1, 2015
|
|
10.25
|
|
Form of Note Exchange Agreement, filed herewith.
|
|
10.26
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed April
19, 2016.
|
|
10.27
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed April 19, 2016.
|
|
10.28
|
|
Form of Amendment No. 1 to the Registration Rights Agreement,
incorporated by reference from Exhibit 10.3 to the Current Report
on Form 8-K, filed April 19, 2016.
|
|
10.29
|
|
Form of Amendment No.1 to Securities Purchase Agreement, dated July
14, 2016, incorporated by reference from Exhibit 10.1 to the
Current Report on Form 8-K, filed July 20, 2016.
|
|
10.30
|
|
Form of Securities Purchase Agreement, incorporated by reference
from Exhibit 10.1 to the Current Report on Form 8-K, filed February
15, 2017.
|
|
10.31
|
|
Form of Warrant, incorporated by reference from Exhibit 10.2 to the
Current Report on Form 8-K, filed February 15, 2017.
|
|
10.32
|
|
Form of Warrant Exchange Agreement, incorporated by reference from
Exhibit 10.3 to the Current Report on Form 8-K, filed February 15,
2017.
|
|
14.1
|
|
Code of Ethics filed with Form 10-K on March 31, 2011 and
incorporated herein by reference.
|
|
14.2
|
|
Board Charter filed with Form 10-K on March 31, 2011 and
incorporated herein by reference.
|
|
21.1
|
|
Subsidiaries of True Drinks Holdings, Inc., incorporated by
reference from Exhibit 21.1 to the Annual Report on Form 10-K,
filed April 2, 2015
|
|
31.1
|
|
Certification of CEO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
31.2
|
|
Certification of CFO as Required by Rule 13a-14(a)/15d-14, filed
herewith.
|
|
32.1
|
|
Certification of CEO as Required by Rule 13a-14(a) and Rule
15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of
Title 18 of the United States Code, filed herewith.
|
|
32.2
|
|
Certification of CFO as Required by Rule 13a-14(a) and Rule
15d-14(b) (17 CFR 240.15d-14(b)) and Section 1350 of Chapter 63 of
Title 18 of the United States Code, filed herewith.
|
|
|
|
|
|
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
|
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, there unto duly
authorized.
|
Registrant
Date: March 31, 2017
|
|
True Drinks Holdings, Inc.
/s/
Kevin Sherman
|
|
|
|
Kevin Sherman
|
|
|
|
Chief Executive Officer (Principal Executive Officer), Chief
Marketing Officer, Director
|
|
Date: March 31, 2017
|
|
/s/
Daniel Kerker
|
|
|
|
Daniel Kerker
|
|
|
|
Chief Financial Officer (Principal Financial Officer)
|
In
accordance with the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates
indicated.
|
Date: March 31, 2017
|
|
/s/
Kevin Sherman
|
|
|
|
Kevin Sherman
|
|
|
|
Chief Executive Officer, Chief Marketing Officer,
Director
|
|
Date: March 31, 2017
|
|
/s/
Ramona Cappello
|
|
|
|
Ramona Cappello
|
|
|
|
Chair
|
|
|
|
|
|
Date: March 31, 2017
|
|
/s/
Scot Cohen
|
|
|
|
Scot Cohen
|
|
|
|
Director
|
|
|
|
|
|
Date: March 31, 2017
|
|
/s/
Neil LeVecke
|
|
|
|
Neil LeVecke
|
|
|
|
Director
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
True Drinks Holdings, Inc.
Irvine, CA
We have audited the accompanying consolidated balance sheets of
True Drinks Holdings, Inc. (the “Company”) as of
December 31, 2016 and 2015, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for
the years then ended. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of True Drinks Holdings, Inc. as of December 31, 2016 and
2015, and the results of its operations and its cash flows for the
years then ended, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 1, the accompanying consolidated financial
statements have been prepared assuming that the Company will
continue as a going concern. As of and for the year ended December
31, 2016, the Company incurred a net loss of $5,445,562, has
negative working capital of $6,162,213, and an accumulated deficit
of $35,794,206. A significant amount of additional capital will be
necessary to advance the marketability of the Company's products to
the point at which the Company can sustain operations. These
conditions, among others, raise substantial doubt about the
Company's ability to continue as a going concern. Management's
plans regarding these matters are also described in Note 1. The
accompanying consolidated financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
/s/
Squar Milner LLP
March
31, 2017
Newport
Beach, California
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED BALANCE
SHEETS
December 31, 2016 and 2015
|
|
2016
|
2015
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$15,306
|
$376,840
|
|
Accounts
receivable, net
|
536,817
|
1,843,415
|
|
Inventory,
net
|
318,912
|
1,558,719
|
|
Prepaid
expenses and other current assets
|
127,258
|
75,923
|
|
Total
Current Assets
|
998,293
|
3,854,897
|
|
|
|
|
|
Restricted Cash
|
209,570
|
209,360
|
|
Property and Equipment, net
|
11,064
|
4,530
|
|
Patents, net
|
250,000
|
1,070,588
|
|
Goodwill
|
3,474,502
|
3,474,502
|
|
Total Assets
|
$4,943,429
|
$8,613,877
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable and accrued expenses
|
$1,258,252
|
$1,623,046
|
|
Debt
|
109,682
|
1,336,819
|
|
Derivative
liabilities
|
5,792,572
|
6,199,021
|
|
Total
Current Liabilities
|
7,160,506
|
9,158,886
|
|
|
|
|
|
Commitments and
Contingencies (Note
7)
|
|
|
|
|
|
|
|
Stockholders’
Deficit:
|
|
|
|
Common
Stock, $0.001 par value, 300,000,000 and 120,000,000 shares
authorized, 119,402,009 and 111,434,284 shares issued and
outstanding at December 31, 2016 and December 31, 2015,
respectively
|
119,402
|
111,434
|
|
Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,750,000 shares authorized, 1,292,870 and
1,317,870 shares issued and outstanding at December 31, 2016 and
December 31, 2015, respectively
|
1,293
|
1,318
|
|
Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 and 150,000 shares authorized,
109,352 and 48,853 shares issued and outstanding at December 31,
2016 and December 31, 2015, respectively
|
109
|
49
|
|
Additional
paid in capital
|
33,456,325
|
29,690,834
|
|
Accumulated
deficit
|
(35,794,206)
|
(30,348,644)
|
|
|
|
|
|
Total
Stockholders’ Deficit
|
(2,217,077)
|
(545,009)
|
|
|
|
|
|
Total Liabilities and Stockholders’ Deficit
|
$4,943,429
|
$8,613,877
|
The accompanying notes are an integral part of these consolidated
financial statements.
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2016 and 2015
|
|
2016
|
2015
|
|
Net Sales
|
$2,575,448
|
$6,121,097
|
|
|
|
|
|
Cost of Sales
|
2,253,585
|
6,282,087
|
|
|
|
|
|
Gross Profit (Loss)
|
321,863
|
(160,990)
|
|
|
|
|
|
Operating Expenses
|
|
|
|
Selling
and marketing
|
3,782,941
|
5,073,211
|
|
General
and administrative
|
4,825,017
|
5,475,673
|
|
Total
operating expenses
|
8,607,958
|
10,548,884
|
|
|
|
|
|
Operating Loss
|
(8,286,095)
|
(10,709,874)
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
Change
in fair value of derivative liabilities
|
3,566,170
|
1,262,329
|
|
Interest
expense
|
(39,789)
|
(257,389)
|
|
Other
expense
|
(685,848)
|
(2,285,629)
|
|
|
2,840,533
|
(1,280,689)
|
|
|
|
|
|
Net Loss
|
$(5,445,562)
|
$(11,990,563)
|
|
|
|
|
|
Dividends on Preferred Stock
|
$263,588
|
$271,838
|
|
|
|
|
|
Net loss attributable to common stockholders
|
$(5,709,150)
|
$(12,262,401)
|
|
|
|
|
|
Net loss per common share
|
|
|
|
Basic and
diluted
|
$(0.05)
|
$(0.16)
|
|
|
|
|
|
Weighted average common shares
|
|
|
|
outstanding, basic
and diluted
|
115,292,366
|
75,346,961
|
The accompanying notes are an integral part of these consolidated
financial statements.
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ EQUITY
(DEFICIT)
For the Years Ended December 31, 2016 and 2015
|
|
Common Stock
|
Preferred Stock Series B
|
Preferred Stock Series C
|
Additional Paid-In
|
Accumulated
|
Total Stockholders' Equity
|
|||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficit)
|
|
Balance –
December 31, 2014
|
48,622,675
|
$48,623
|
1,490,995
|
$1,491
|
-
|
$-
|
$18,388,212
|
$(18,358,081)
|
$80,245
|
|
Conversion
of Preferred Stock to Common Stock
|
55,947,335
|
55,947
|
(173,125)
|
(173)
|
(79,766)
|
(79)
|
(55,695)
|
-
|
-
|
|
Issuance
of Preferred Stock Series C for debt conversions, net of warrants
issued
|
-
|
-
|
-
|
-
|
12,148
|
12
|
835,514
|
-
|
835,526
|
|
Issuance
of Common Stock for services
|
2,413,811
|
2,414
|
-
|
-
|
-
|
-
|
485,412
|
-
|
487,826
|
|
Issuance
of Preferred Stock Series C for cash, net of warrants
issued
|
-
|
-
|
-
|
-
|
116,471
|
116
|
8,750,478
|
-
|
8,750,594
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
1,055,448
|
-
|
1,055,448
|
|
Dividends
declared on Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(271,838)
|
-
|
(271,838)
|
|
Issuance
of Common Stock for Employee Bonuses
|
2,187,818
|
2,188
|
-
|
-
|
-
|
-
|
216,594
|
-
|
218,782
|
|
Issuance
of Common Stock for dividends on Preferred Stock
|
1,512,645
|
1,512
|
-
|
-
|
-
|
-
|
287,459
|
-
|
288,971
|
|
Issuance
of Restricted Common Stock to Employees
|
750,000
|
750
|
-
|
-
|
-
|
-
|
(750)
|
-
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(11,990,563)
|
(11,990,563)
|
|
Balance – December 31, 2015
|
111,434,284
|
$111,434
|
1,317,870
|
1,318
|
48,853
|
$49
|
$29,690,834
|
$(30,348,644)
|
$(545,009)
|
|
Conversion
of Preferred Stock to Common Stock
|
3,009,335
|
3,009
|
(25,000)
|
(25)
|
(3,914)
|
(4)
|
(2,980)
|
-
|
-
|
|
Issuance
of Preferred Stock Series C for debt conversions, net of warrants
issued
|
-
|
-
|
-
|
-
|
4,413
|
4
|
407,228
|
-
|
407,232
|
|
Issuance
of Common Stock for services
|
200,000
|
200
|
-
|
-
|
-
|
-
|
17,800
|
|
18,000
|
|
Issuance
of Preferred Stock Series C for cash, net of warrants
issued
|
-
|
-
|
-
|
-
|
60,000
|
60
|
2,932,987
|
-
|
2,933,047
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
370,695
|
-
|
370,695
|
|
Dividends
declared on Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
(265,009)
|
-
|
(265,009)
|
|
Issuance
of Common Stock for cash exercise of warrants
|
300,000
|
300
|
-
|
-
|
-
|
-
|
44,700
|
-
|
45,000
|
|
Issuance
of Common Stock for dividends on Preferred Stock
|
1,838,390
|
1,839
|
-
|
-
|
-
|
|
262,690
|
-
|
264,529
|
|
Issuance
of Restricted Common Stock to Employees
|
2,620,000
|
2,620
|
|
|
-
|
-
|
(2,620)
|
-
|
-
|
|
Net
Loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(5,445,562)
|
(5,445,562)
|
|
Balance – December 31, 2016
|
119,402,009
|
$119,402
|
1,292,870
|
$1,293
|
109,352
|
$109
|
$33,456,325
|
$(35,794,206)
|
$(2,217,077)
|
TRUE DRINKS HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
For the Years Ended December 31, 2016 and 2015
|
|
2016
|
2015
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$(5,445,562)
|
$(11,990,563)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
|
5,241
|
3,087
|
|
Amortization
|
141,177
|
148,026
|
|
Impairment
of patent
|
679,411
|
-
|
|
Provision
for bad debt expense
|
8,029
|
(51,769)
|
|
Change
in estimated fair value of derivative liabilities
|
(3,566,170)
|
(1,262,329)
|
|
Fair
value of warrants issued for guaranty
|
-
|
2,263,783
|
|
Fair
value of stock issued for services
|
18,000
|
487,826
|
|
Fair
value of stock issued for bonuses
|
-
|
218,782
|
|
Stock
based compensation
|
370,695
|
1,055,448
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
1,298,569
|
(1,447,937)
|
|
Inventory
|
1,239,807
|
(195,276)
|
|
Prepaid
expenses and other current assets
|
(51,335)
|
552,752
|
|
Accounts
payable and accrued expenses
|
(365,274)
|
(214,899)
|
|
Net cash used in operating activities
|
(5,667,412)
|
(10,433,069)
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
Change
in restricted cash
|
(210)
|
(76,162)
|
|
Purchase
of property and equipment
|
(11,775)
|
(3,030)
|
|
Net cash used in investing activities
|
(11,985)
|
(79,192)
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Proceeds
from warrants exercised for cash
|
45,000
|
-
|
|
Proceeds
from issuance of Series C Preferred Stock, net
|
6,000,000
|
11,999,958
|
|
Net
repayments on line-of –credit facility
|
(377,137)
|
|
|
Proceeds
from notes payable
|
-
|
1,103,817
|
|
Repayments
on notes payable
|
(350,000)
|
(2,883,000)
|
|
Net cash provided by financing activities
|
5,317,863
|
10,220,775
|
|
|
|
|
|
NET DECREASE IN CASH
|
(361,534)
|
(291,486)
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS – beginning
of year
|
376,840
|
668,326
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS – end of
year
|
$15,306
|
$376,840
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
Cash
paid for interest
|
$41,758
|
$179,056
|
|
Non-cash financing and investing activities:
|
|
|
|
Conversion
of preferred stock to common stock
|
$2,980
|
$55,695
|
|
Conversion
of notes payable and accrued interest to Series C preferred
stock
|
$500,000
|
$1,214,207
|
|
Dividends
paid in common stock
|
$264,529
|
$288,971
|
|
Dividends
declared but unpaid
|
$265,099
|
$271,838
|
|
Warrants
issued in connection with Series C offering
|
$3,066,953
|
$3,249,364
|
|
Warrants
issued in connection with debt conversions
|
$92,768
|
$378,681
|
|
Issuance
of restricted stock
|
$2,620
|
$-
|
The accompanying notes are an integral part of these consolidated
financial statements.
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
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
January Note Exchange.
On
January 20, 2016, the Company and Note Investors holding Secured
Notes in the principal amount of $500,000 entered into Note
Exchange Agreements pursuant to which the Note Investors agreed to
convert 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
1,029,701 shares of Common Stock for $0.17 per share.
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.
Creation of Series D Convertible Preferred Stock
On January 24, 2017, the Company filed the
Certificate of Designation, Preferences, Rights and Limitations of
the Series D Convertible Preferred Stock (the
“Certificate of
Designation”) with the
Nevada Secretary of State, designating 50,000 shares of the
Company's preferred stock, par value $0.001 per share, as Series D
Convertible Preferred Stock (the “Series D
Preferred”).
Each share of Series D Preferred has a stated
value of $100 per share, and, following the expiration of the 20
day calendar day period set forth in Rule 14c-2(b) under the
Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), commencing upon
the distribution of an Information Statement on Schedule 14C to the
Company's stockholders, each share of Series D Preferred is
convertible, at the option of each respective holder, into that
number of shares of the Company’s Common Stock equal to the
stated value, divided by $0.15 per share (the
“Conversion
Shares”). The Certificate
of Designation also gives the Company the option to require the
conversion of the Series D Preferred into Conversion Shares in the
event: (i) there are sufficient authorized shares of Common Stock
reserved as Conversion Shares; (ii) the Conversion Shares are
registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Conversion
Shares are freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company's Common Stock is at least $0.62 per share for 10
consecutive trading days.
Series D Offering
On February 8, 2017 (the
“Initial
Investment Date”), the
Company and certain accredited investors (the
“Series D
Investors”) entered into
a Securities Purchase Agreement (the “Series D Purchase
Agreement”), wherein the
Company may offer and sell to Series D Investors up to 50,000
shares of Series D Preferred for $100 per share (the
“Series D
Offering”). As additional
consideration, Series D Investors will also receive five-year
warrants (the “Series D
Warrants”), to purchase
up to 200% of the Conversion Shares issuable upon conversion of
shares of Series D Preferred purchased under the Series D Offering
for $0.15 per share. In accordance with the terms and conditions of
the Series D Purchase Agreement, all Series D Warrants issued in
connection with the Series D Offering will be exchanged for shares
of Common Stock pursuant to the Warrant Exchange Program, as
further described below.
On the Initial Investment Date, the Company issued to Series D
Investors an aggregate total of 31,750 shares of Series D
Preferred, as well as Series D Warrants to purchase up to an
aggregate total of 42,333,341 shares of Common Stock. Between the
Initial Investment Date and the date of this Annual Report, the
Company has issued an additional 5,000 shares of Series D Preferred
and Series D Warrants to purchase up to an aggregate total of
6,666,669 shares of Common Stock. The issuance of the shares of
Series D Preferred to date has resulted in gross proceeds to the
Company of approximately $3.7 million.
Warrant Exchange
Beginning on February 8, 2017, the Company and
certain holders of outstanding Common Stock purchase warrants (the
“Outstanding
Warrants”), entered into
Warrant Exchange Agreements (each, an “Exchange
Agreement”), pursuant to
which each holder agreed to cancel their respective Outstanding
Warrants in exchange for one-half of a share of Common Stock for
every share of Common Stock otherwise issuable upon exercise of
Outstanding Warrants (the “Warrant Exchange
Program”). The Company
expects to issue up to 71.7 million shares of Common Stock in
exchange for the cancellation of 143.4 million Outstanding
Warrants, including the Warrants issued in connection with the
Series D Offering, over the course of the Warrant Exchange
Program.
To date the Company has issued 73,106,453 shares of Common Stock,
in exchange for the cancellation of 146,212,905 Outstanding
Warrants.
Basis of Presentation and Going Concern
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. For the year ended December 31, 2016, the Company
incurred a net loss of $5,445,562. At December 31, 2016, the
Company has negative working capital of $6,162,213 and an
accumulated deficit of $35,794,206. A significant amount of
additional capital will be necessary to advance the marketability
of the Company's products to the point at which the Company can
sustain operations. These conditions, among others, raise
substantial doubt about the Company's ability to continue as a
going concern. Management's plans are to continue to raise capital
through equity and debt offerings, and to expand sales as rapidly
as economically viable. The accompanying consolidated financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
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.
Revenue Recognition
In accordance with
Staff Accounting Bulletin ("SAB") No. 104
“Revenue
Recognition in Financial Statements”, revenue is
recognized at the point of shipment, and the customer takes title
and assumes risk of loss, collection of the relevant receivable is
reasonably assured, persuasive evidence of an arrangement exists
and the price is fixed or determinable. Net sales include sales of
products, slotting fees, discounts and freight and handling
charges. With approved credit, we provide wholesale customers
payment terms of up to net 30 days. Amounts received for unshipped merchandise are
recorded as customer deposits and are included in accrued
expenses.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with original maturities of three months or less, to be
cash equivalents. The Company maintains cash with high credit
quality financial institutions. At certain times, such amounts may
exceed Federal Deposit Insurance Corporation
(“FDIC”) insurance limits. The Company has not
experienced any losses on these amounts.
Restricted Cash
At December 31, 2016, the Company had $209,570 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 Disney
Agreement, as more fully described in Note 9,
“Licensing
Agreements,”
below.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to our customers based on an
evaluation of their financial condition; generally, collateral is
not required. An estimate of uncollectible amounts is made by
management based upon historical bad debts, current customer
receivable balances, age of customer receivable balances, the
customer’s financial condition and current economic trends,
all of which are subject to change. Actual uncollected amounts have
historically been consistent with the Company’s expectations.
Receivables are charged off against the reserve for doubtful
accounts when, in management’s estimation, further collection
efforts would not result in a reasonable likelihood of receipt, or
later as proscribed by statutory regulations.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound and the risk of loss
is minimal.
All
production of AquaBall™ is done by Niagara 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.
During
2016, we relied significantly on one supplier for 100% of our
purchases of certain raw materials for Bazi®. Bazi, Inc. has
sourced these raw materials from this supplier since 2007 and does
not anticipate any issues with the supply of these raw
materials.
We
did not have any significant concentrations in either sales or
accounts receivable during the year ended December 31, 2016, while
one customer represented 79% of the Company’s accounts
receivable and 47% of sales during the year ended December 31,
2015. No other customers exceeded 10% of the Company’s sales
or accounts receivable during the year ended December 31, 2016 or
2015.
A
significant portion of our revenue comes from sales of the
AquaBall™ Naturally Flavored Water. For the year ended
December 31, 2016 and 2015, sales of AquaBall™ accounted for
92% and 97% of the Company’s total revenue,
respectively.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable and accrued expenses, and notes
payable. Management believes that the carrying amount of these
financial instruments approximates their fair values, due to their
relatively short-term nature.
The
carrying amount of the Company’s debt is considered a level 3
liability, based on inputs that are unobservable.
Inventory
The
Company purchases for resale a vitamin-enhanced flavored water
beverage and a liquid dietary supplement.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or market (net realizable value). Cost includes shipping
and handling fees and costs, which are subsequently expensed to
cost of sales. The Company provides for estimated losses from
obsolete or slow-moving inventories, and writes down the cost of
inventory at the time such determinations are made. Reserves are
estimated based on inventory on hand, historical sales activity,
industry trends, the retail environment, and the expected net
realizable value.
The
Company maintained inventory reserves of $110,000 and $0 as of
December 31, 2016 and December 31, 2015, respectively. 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:
|
|
December 31,
2016
|
December 31,
2015
|
|
Purchased
materials
|
$89,358
|
$689,703
|
|
Finished
goods
|
339,554
|
869,016
|
|
Allowance
for obsolescence reserve
|
(110,000)
|
-
|
|
Total
|
$318,912
|
$1,558,719
|
Property and Equipment
Property
and equipment are stated at cost. The Company provides for
depreciation of property and equipment using the straight-line
method based on estimated useful lives of between three and ten
years. Property and equipment is not significant to the
consolidated financial statements as of or for the years ended
December 31, 2016 and 2015.
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. An impairment was not deemed necessary in
2016 or 2015.
Goodwill and identifiable intangible assets
As
a result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value.
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly to future cash flows.
Identifiable intangible assets are reviewed for impairment whenever
events and circumstances indicate the carrying value of such assets
or liabilities may not be recoverable and exceed their fair value.
If an impairment loss exists, the carrying amount of the
identifiable intangible asset is adjusted to a new cost basis. The
new cost basis is amortized over the remaining useful life of the
asset. Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses. During the year ended
December 31, 2016 we recognized impairment on identifiable
intangible assets of $679,411 related to the interlocking spherical
bottle patent acquired in the acquisition of GT Beverage Company,
Inc. As of December 31, 2015, no impairment had been recognized on
identifiable intangible assets.
Income Taxes
The Company accounts for income taxes in
accordance with FASB Accounting Standards Codification 740
(“ASC
Topic 740”). Under the
asset and liability method of ASC Topic 740, deferred tax assets
and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets and liabilities are
measured using enacted tax rates in effect for the year in which
those temporary differences are expected to be recovered or
settled.
Stock-Based Compensation
Total
stock-based compensation expense, for all of the Company’s
stock-based awards recognized for the year ended December 31, 2016
and 2015 was $370,695 and $1,055,448, respectively.
The Company uses a Black-Scholes option-pricing
model (the “Black-Scholes
Model”) to estimate the
fair value of the stock option 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. The expected life is based
on the contractual term of the option and expected employee
exercise and post-vesting employment termination behavior.
Currently it is based on the simplified approach provided by SAB
107. 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
below).
Shares,
warrants and options issued to non-employees for services are
accounted for at fair value, based on the fair value of instrument
issued or the fair value of the services received, whichever is
more readily determinable.
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 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
We
compute earnings (loss) per share using the two-class method, as
unvested restricted common stock contains nonforfeitable rights to
dividends and meets the criteria of a participating security. Under
the two-class method, earnings are allocated between common stock
and participating securities. The presentation of basic and diluted
earnings per share is required only for each class of common stock
and not for participating securities. As such, we present basic and
diluted earnings per share for our one class of common
stock.
The
two-class method includes an earnings allocation formula that
determines earnings per share for each class of common stock
according to dividends declared and undistributed earnings for the
period. A company’s reported net earnings is reduced by the
amount allocated to participating securities to arrive at the
earnings allocated to common stockholders for purposes of
calculating earnings per share. At December 31, 2016 and 2015, the
Company had 198,957,185 and 120,573,694 shares of Common Stock
equivalents outstanding, respectively.
Unvested
restricted common stock, common stock options, and the Warrants are
antidilutive and excluded from the computation of diluted earnings
per share if the assumed proceeds upon exercise or vesting are
greater than the cost to reacquire the same number of shares at the
average market price during the period. For the years ended
December 31, 2016 and 2015, the impact of all outstanding unvested
shares of restricted common stock, common stock options, and the
Warrants are excluded from diluted loss per share as their impact
would be antidilutive.
The
Company has evaluated its business to determine if it has multiple
segments and has determined that it operates under a single
segment.
Research and Development
Research
and development costs are expensed as incurred.
Recent Accounting Pronouncements
In
May 2014, the FASB issued ASU No. 2014-09 “Revenue from
Contracts with Customers,” which amended the FASB Accounting
Standards Codification (“ASC”) and created a new Topic ASC
606, “Revenue from Contracts with Customers”
(“ASC 606”).
This amendment prescribes that an entity should recognize revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled to in exchange for those goods or services.
The amendment supersedes the revenue recognition requirements in
ASC Topic 605, “Revenue Recognition,” and most
industry-specific guidance throughout the Industry Topics of the
Codification. For the Company’s annual and interim reporting
periods the mandatory adoption date of ASC 606 is January 1, 2018,
and there will be two methods of adoption allowed, either a full
retrospective adoption or a modified retrospective adoption. In
August 2015, the FASB issued ASU 2015-14, which deferred the
effective date of ASU 2014-09 to the first quarter of 2018. In
March 2016, April 2016, May 2016, and December 2016, the FASB
issued ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20,
respectively, as clarifications to ASU 2014-09. ASU 2016-08
clarifies how to identify the unit of accounting for the principal
versus agent evaluation, how to apply the control principle to
certain types of arrangements, such as service transactions, and
reframed the indicators in the guidance to focus on evidence that
an entity is acting as a principal rather than as an agent. ASU
2016-10 clarifies the existing guidance on identifying performance
obligations and licensing implementation. ASU 2016-12 adds
practical expedients related to the transition for contract
modifications and further defines a completed contract, clarifies
the objective of the collectability assessment and how revenue is
recognized if collectability is not probable, and when non-cash
considerations should be measured. ASU 2016-20 corrects or improves
guidance in thirteen narrow focus aspects of the guidance. The
effective dates for these ASUs are the same as the effective date
for ASU No. 2014-09, for the Company’s annual and interim
periods beginning January 1, 2018. These ASU’s also require
enhanced disclosures regarding the nature, amount, timing, and
uncertainty of revenue and cash flows. The Company will adopt the
new revenue standards in its first quarter of 2018. The Company has
not selected a transition method. The Company is still completing
the assessment of the impact of these ASUs on its consolidated
financial statements; however at the current time the Company does
not expect that the adoption of these ASUs will have a material
impact on its consolidated financial statements, financial
condition or results of operations.
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic
330): Simplifying the Measurement of Inventory”
(“ASU
2015-11”). ASU 2015-11 requires that inventory within
the scope of this standard be measured at the lower of cost and net
realizable value. Net realizable value is the estimated selling
price in the ordinary course of business, less reasonably
predictable costs of completion, disposal, and transportation. The
amendments in this update do not apply to inventory that is
measured using last-in, first-out (LIFO) or the retail inventory
method. The amendments apply to all other inventory, which includes
inventory that is measured using first-in, first-out (FIFO) or
average cost. ASU 2015-11 will be effective for the Company’s
annual and interim reporting periods beginning January 1, 2017,
with early adoption permitted. The Company is currently evaluating
the impact of this ASU; however the Company does not expect that
the adoption of ASU 2015-11 will have a material impact on its
consolidated financial statements, financial condition or results
of operations.
On February 25, 2016, the FASB issued 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
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 reporting periods beginning January 1,
2018. The Company is currently evaluating the effect this guidance
will have on our financial statements and related
disclosures.
In
November 2016, the FASB issued ASU No. 2016-18, Statement of Cash
Flows (Topic 230): Restricted Cash (“ASU 2016-18”). ASU 2016-18
requires that a statement of cash flows explain the change during
the period in the total of cash, cash equivalents, and amounts
generally described as restricted cash or restricted cash
equivalents. ASU 2016-18 will become effective for us beginning
April 1, 2018, or fiscal 2019. ASU 2016-18 is required to be
applied retrospectively. Upon the adoption, amounts described as
restricted cash will be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period amounts
shown on the statements of cash flows.
NOTE 2 – STOCKHOLDERS’ 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 Common Stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series 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, 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 year ended December 31, 2016, the Company declared $263,588 in
dividends on outstanding shares of its Series B Preferred. The
Company issued a total of 1,838,390 shares of Common Stock to pay
$264,529 of cumulative unpaid dividends. As of December 31, 2016,
there remained $66,080 in cumulative unpaid dividends on the Series
B Preferred.
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
During
2015, the Company and certain accredited investors entered into
securities purchase agreements to purchase up to 117,648 shares of
Series C Preferred Stock. The Company issued an aggregate total of
116,471 shares of Series C Preferred during 2015 for prices ranging
from $100 per share to $113.33 per share for a total gross proceeds
of approximately $12 million. As additional consideration for
participating in this offering, the purchasers were issued
five-year warrants to purchase an aggregate total of 26,449,913
shares of Common Stock, exercisable at $0.15 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 $3,249,364, was recorded to derivative liabilities
during the year ended December 31, 2015.
On
March 27, 2015, holders of outstanding notes totaling $1,147,000
and accrued interest totaling $67,207 agreed to exchange all
remaining principal and accrued interest into shares of Series C
Preferred on substantially similar terms to those offered in the
February 2015 offering of Series C Preferred. As a result of the
execution of certain Exchange Agreements and the consummation of
March Note Exchange, the Company issued an aggregate total of
12,148 shares of Series C Preferred and five-year warrants to
purchase an aggregate total of 2,834,536 shares of Common Stock for
$0.15 per share. Each warrant issued in connection with the March
Note Exchange contains a price-protection feature that adjusts the
exercise price in the event of certain dilutive issuances of
securities. Such price-protection feature results in the warrants
being classified as a derivative liability and, as such, the value
of all warrants issued in connection with the March Note Exchange,
totaling $378,681, was recorded to derivative liabilities during
the year ended December 31, 2015.
On
October 9, 2015, the Company issued to Vincent C. Smith a five-year
warrant to purchase 17,500,000 shares of Common Stock for $0.188
per share as consideration for the execution of a personal guaranty
of True Drinks’ obligations under the Niagara Agreement. The
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 the warrant issued
totaling $2,263,783, was recorded to derivative liabilities and is
included in other expense in the accompanying consolidated
statements of operations as of December 31, 2015.
During
the year ended December 31, 2015, the Company issued 2,413,811
shares of Common Stock in connection with certain consulting
agreements. The Company expensed the fair value of the Common Stock
issued of $487,826.
On
April 22, 2015, the Company cancelled 2,593,912 options to certain
former Directors of the Company. The Company replaced these stock
options with 2,594,914 warrants, 1,120,478 of these warrants had an
exercise price of $0.25 per share, and 1,474,436 of the warrants
had an exercise price of $0.38 per share. The expiration date of
1,120,478 of the warrants is November 12, 2016, and the expiration
date on 1,474,436 of the warrants is March 9, 2018.
On
October 9, 2015, the Company issued five-year warrants for 884,209
shares at an exercise price of $0.19 per share in exchange for
services. The warrants vest over a 12-month period. As of December
31, 2015, 221,053 warrant shares had vested and $19,895 was
expensed accordingly.
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 Secured Notes in the
principal amount of $500,000 entered into Note Exchange Agreements,
pursuant to which these holders exchanged the outstanding principal
balance of their Secured Notes into an aggregate total of 4,413
shares of Series C Preferred and five-year warrants to purchase up
to an aggregate total of 1,029,413 shares of Common Stock for $0.17
per share. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $92,768, was recorded to
derivative liabilities.
During
2016, the Company issued 60,000 shares of Series C Preferred for
$100 per share over the course of three separate
closings.
As
additional consideration for participating in the April Series C
Offering, the Purchasers received five-year warrants to purchase up
to an aggregate total of approximately 33.3 million shares of
Common Stock for $0.15 per share. At the completion of the April
Series C Offering, the Company had issued warrants to purchase up
to an aggregate total of approximately 33.4 million shares of
Common Stock. Each warrant contains a price-protection feature that
adjusts the exercise price in the event of certain dilutive
issuances of securities. Such price-protection feature is
determined to be a derivative liability and, as such, the value of
all such warrants issued, totaling $2,856,678, was recorded to
derivative liabilities.
NOTE 3 – STOCK OPTIONS AND WARRANTS
Warrants
A
summary of the Company’s warrant activity for the years ended
December 31, 2016 and 2015 is presented below:
|
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
|
Outstanding, December 31, 2014
|
16,375,270
|
$0.40
|
|
Granted
|
50,543,837
|
0.16
|
|
Exercised
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Outstanding, December 31, 2015
|
66,919,107
|
$0.18
|
|
Granted
|
36,696,083
|
0.15
|
|
Exercised
|
(300,000)
|
0.15
|
|
Expired
|
(1,918,774)
|
1.23
|
|
Outstanding, December 31, 2016
|
101,396,416
|
$0.15
|
As
of December 31, 2016, the Company had the following outstanding
warrants to purchase shares of its Common Stock:
|
Warrants Outstanding
|
Weighted Average
Exercise Price Per Share
|
Weighted Average
Remaining Life (Yrs.)
|
|
99,494,347
|
$0.15
|
4.11
|
|
427,633
|
$0.19
|
4.22
|
|
737,218
|
$0.25
|
1.69
|
|
737,218
|
$0.38
|
1.69
|
|
101,396,416
|
$0.15
|
4.07
|
Non-Qualified Stock Options
The
Company granted options to purchase an aggregate total of 3,460,000
shares of Common Stock during the year ended December 31, 2016. The
options vest evenly over a four-year period.
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.
|
|
2016
|
|
Expected
life
|
2.5
years
|
|
Estimated
volatility
|
75.0%
|
|
Risk-free
interest rate
|
0.66%
|
|
Dividends
|
-
|
Stock
option activity during the year ended December 31, 2016 is
summarized as follows:
|
|
Options Outstanding
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 31, 2015
|
-
|
$-
|
|
Exercised
|
-
|
-
|
|
Granted
|
3,820,000
|
0.15
|
|
Forfeited
|
720,000
|
0.15
|
|
Expired
|
-
|
-
|
|
Options outstanding at December 31, 2016
|
3,100,000
|
$0.15
|
Cancellation of Stock Options
and Issuance of Restricted Stock. Between June and July 2015, the Company and each
of the holders of all outstanding options to purchase shares of the
Company’s Common Stock agreed to cancel or forfeit their
options, such that, as of July 10, 2015, no options to purchase
shares of the Company’s Common Stock were
outstanding.
The cancellation of the stock options and issuance
of restricted stock was accounted for as a modification in
accordance with the provisions of ASC Topic 718 Compensation – Stock
Compensation. The Company
recorded approximately $1,055,000 of stock based compensation in
connection with the transaction.
Restricted Common Stock Awards
The Company granted
a total of 2,000,000 shares of restricted Common Stock pursuant to the terms and conditions
of the Company’s 2013 Stock Incentive Plan to certain
employees. The shares were
valued at $0.061 per share and a total of $122,000 will be expensed
over the vesting period. There were 500,000 shares which vested on
the grant date with the remaining shares vesting over 3
years. During the year ended
December 31, 2016, the Company issued 2,620,000 shares of
restricted stock under the plan. As of December 31, 2016, a total
of 5,079,908 shares were unvested out of the total of 16,142,229
granted shares.
The Company granted a total of 2,000,000 shares of
restricted Common Stock
pursuant to the terms and conditions of the Company’s 2013
Stock Incentive Plan to certain employees. The shares were valued at $0.061 per share and a
total of $122,000 will be expensed over the vesting period. There
were 500,000 shares which vested on the grant date with the
remaining shares vesting over 3 years. During the year
ended December 31, 2016, the Company issued 2,620,000 shares of
restricted stock under the plan.
A
summary of the Company’s restricted common stock activity for
the years ended December 31, 2016 and 2015 is presented
below:
|
|
Restricted Common Stock Awards
|
|
Outstanding, December 31, 2014
|
-
|
|
Granted
|
19,491,375
|
|
Forfeited
|
-
|
|
Outstanding, December 31, 2015
|
19,491,375
|
|
Granted
|
2,000,000
|
|
Forfeited
|
(5,349,146)
|
|
Outstanding, December 31, 2016
|
16,142,229
|
NOTE 4 – INTANGIBLE ASSETS
The
Company has incurred costs to trademark eight of its current
products and marketing nomenclatures. During 2015, the Company
purchased a patent in relation to the purchase of GT Beverage, and
also assumed the trademarks of Bazi Intl. Patents and trademarks
are being amortized over the lesser of their remaining life or 15
years.
Intangible
assets are:
|
|
December 31,
2016
|
December 31,
2015
|
|
Patents
and trademarks
|
$1,027,438
|
$1,706,849
|
|
Accumulated
amortization
|
(777,438)
|
(636,261)
|
|
|
$250,000
|
$1,070,588
|
Amortization
expense for the year ended December 31, 2016 and 2015 was $141,177
and $148,768, respectively. In 2016, the Company stopped using the
bottle associated with the spherical bottle patent. The Company is
evaluating its options for the patent. As such, the Company
estimated the value of the patent using a discounted cash flows
approach. This valuation lead to the Company recording an
impairment charge of $679,411 to the Patent. For these assets,
amortization expense over the next five years and thereafter is
expected to be as follows:
|
|
Patent and Trademark Amortization
|
|
2017
|
$37,975
|
|
2018
|
37,975
|
|
2019
|
37,975
|
|
2020
|
37,975
|
|
2021
|
37,975
|
|
2022
and thereafter
|
60,125
|
|
|
$250,000
|
NOTE 5 – INCOME TAXES
The Company does not have significant income tax
expense or benefit for the year ended December 31, 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 December 31, 2016 and 2015. Such tax net operating
loss carryforwards (“NOL”) approximated $33.0 million at December
31, 2016. Some or all of such NOL may be limited by Section 382 of
the Internal Revenue Code and will begin to expire in the year
2032.
The
provision for income taxes differs from the amounts which would be
provided by applying the statutory federal income tax rate of 34%
to the net loss before provision for income taxes for the years
ended December 31, 2016 and 2015 are as follows:
|
|
2016
|
2015
|
|
Income
tax expense (benefit) at statutory rate
|
$(1,851,491)
|
$(4,076,791)
|
|
Change
in valuation allowance
|
1,851,491
|
4,076,791)
|
|
Income
tax expense
|
$-
|
$-
|
The components of income tax expense (benefit) attributable to continuing operations are as follows:
|
|
2016
|
2015
|
|
Current
expense:
|
|
|
|
Federal
|
$-
|
$-
|
|
State
|
-
|
-
|
|
|
|
|
|
Deferred
expense (benefit):
|
|
|
|
Federal
|
$-
|
$-
|
|
State
|
-
|
-
|
|
|
|
|
|
Total
|
$-
|
$-
|
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 December 31, 2016 and 2015 as
follows:
|
|
2016
|
2015
|
|
Deferred
tax asset –NOL’s
|
$13,200,000
|
$11,040,000
|
|
Less
valuation allowance
|
(13,200,000)
|
(11,040,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
In
assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation
of future taxable income during the periods in which those
temporary differences become realizable. Management considers the
scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this
assessment. Based upon the history of the Company and projections
for future taxable income over the periods in which the deferred
tax assets are realizable, management believes it is not more
likely than not that the Company will realize the benefits of these
deductible differences and therefore a full valuation allowance
against the deferred tax assets has been established.
As
a result of the merger with Bazi Intl. on October 15, 2012, the
Company may have access to utilize a portion of the net operating
loss carryforwards of Bazi Intl., which, in total, were
approximately $25 million at the time of the merger. The Company is
uncertain as to the portion of the Bazi net operating loss
carryforwards that may be limited by Section 382 of the Internal
Revenue Code.
The
Tax Reform Act of 1986 contains provisions that limit the
utilization of net operating loss and tax credit carryforwards if
there has been a change of ownership as described in Section 382 of
the Internal Revenue Code. Such an analysis has not been performed
by the Company to determine the impact of these provisions on the
Company’s net operating losses, though management believes
the impact would be minimal, if any. A limitation under these
provisions would reduce the amount of losses available to offset
future taxable income of the Company.
ASC
740 prescribes a recognition threshold and measurement attribute
for the recognition and measurement of tax positions taken or
expected to be taken on income tax returns. ASC Topic 740 also
provides guidance on de-recognition of income tax assets and
liabilities, classification of current and deferred income tax
assets and liabilities, and accounting for interest and penalties
associated with tax positions.
Based
on management’s assessment of ASC Topic 740, management
concluded that the Company does not have any uncertain tax
positions as of December 31, 2016. There have been no income tax
related interest or penalties assessed or recorded and if interest
and penalties were to be assessed, the Company would charge
interest and penalties to income tax expense. It is not anticipated
that unrecognized tax benefits would significantly increase or
decrease within 12 months of the reporting date.
NOTE 6 – DEBT
A
summary of convertible notes payable as of December 31, 2016 and
2015 is as follows:
|
|
Amount
|
|
Outstanding, December 31, 2014
|
$4,030,000
|
|
Borrowings
|
1,470,000
|
|
Repayments
|
(3,498,000)
|
|
Conversions
to Series C Preferred Stock
|
(1,147,000)
|
|
Outstanding, December 31, 2015
|
$855,000
|
|
Borrowings
|
-
|
|
Repayments
|
(355,000)
|
|
Conversions
to Series C Preferred Stock
|
(500,000)
|
|
Outstanding, December 31, 2016
|
$-
|
A
summary the line-of-credit as of December 31, 2016 and 2015 is
as follows:
|
|
Amount
|
|
Outstanding, December 31, 2014
|
$233,000
|
|
Net
Borrowings
|
249,000
|
|
Outstanding, December 31, 2015
|
$482,000
|
|
Net
Repayments
|
(372,000)
|
|
Outstanding, December 31, 2016
|
$110,000
|
In
March 2015, the Company paid off approximately $2.7 million of the
Company’s $3.8 million in outstanding promissory notes.
Following these payments, the Company and each of the holders of
the remaining notes entered into Exchange Agreements, wherein the
holders agreed to exchange the remaining principal of $1,147,000
and accrued interest of any such notes into shares of Series C
Preferred on substantially similar terms to those offered in
connection with the issuance of shares of Series C Preferred and
warrants consummated in February 2015.
As described under Note 2,
“Shareholder’s
Equity” above, in
September 2015, the Company began a private offering to certain
accredited investors of: (i) Secured Notes in the aggregate
principal amount of up to $2.5 million; and (ii) and Note Warrants
to purchase that number of shares equal to 15% of the principal
amount of the Secured Note purchased by each investor, divided by
the ten-day average closing price of the Company’s Common
Stock. Each Secured Note accrues interest at a rate of 12% per
annum, and will mature one year from the date of issuance. As of
December 31, 2015, the Company had issued Secured Notes in the
aggregate principal amount of $855,000 and Note Warrants to
purchase an aggregate total of 280,265 shares of Common Stock.
On January 20, 2016, Secured Notes in the aggregate principal
amount of $500,000 were exchanged for shares of Series C Preferred
and warrants. See Note 2 “Stockholder’s
Equity”
above.
In
September 2015, the Company issued promissory notes to certain
related parties in the aggregate principal amount of $100,000. The
notes expired on October 31, 2015 and were paid. Upon repayment,
the Company paid a lender's fee to the related parties equal to 10%
of the principal amount.
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 December 31, 2016, the
total outstanding on the line-of-credit was $109,682 and the
Company did not have any availability to borrow. The line-of-credit
bears interest at Prime rate (3.5% as of December 31, 2016) plus
4.5% per annum, as well as a monthly fee of 0.50% on the average
amount outstanding on the line, and is secured by the accounts
receivables that are funded against. The line-of-credit matures on
July 31, 2017.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The
Company leases its corporate office in Irvine, California on a
one-year term. The current lease term is set to expire on September
30, 2017. Total rent expense related to the Company's operating
lease for the year ended December 31, 2016 was $57,159. Total
remaining payments on the lease through September 30, 2017 are
$28,458.
The
Company maintains employment agreements with certain key members of
management. The agreements provide for minimum base salaries,
eligibility for stock options, performance bonuses and severance
payments.
Legal Proceedings
From
time to time, claims are made against the Company in the ordinary
course of business, which could result in litigation. Claims and
associated litigation are subject to inherent uncertainties and
unfavorable outcomes could occur. In the opinion of management, the
resolution of these matters, if any, will not have a material
adverse impact on the Company’s financial position or results
of operations.
We
are currently not involved in any litigation that we believe could
have a material adverse effect on our financial condition or
results of operations.
NOTE 8 – 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
year ended December 31, 2016. The Company had no Level 1 or 2 fair
value measurements during 2016 or 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 December
31, 2016 and 2015:
|
|
|
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 - December 31, 2016
|
$5,792,572
|
$-
|
$-
|
$5,792,572
|
|
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 years ended December 31,
2016 and 2015:
|
|
Recurring Fair Value Measurements
|
||
|
|
Changes in Fair Value
Included in Net Loss
|
||
|
|
Other Income
|
Other Expense
|
Total
|
|
Derivative
liabilities - December 31, 2016
|
$3,566,170
|
$-
|
$3,566,170
|
|
Derivative
liabilities - December 31, 2015
|
$1,262,329
|
$-
|
$1,262,329
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the year ended December 31,
2016:
|
|
December 31, 2015
|
Recorded new Derivative Liabilities
|
Reclassification of Derivative Liabilities
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
December 31, 2016
|
|
Derivative
liabilities
|
$6,199,021
|
$3,159,721
|
$-
|
$(3,566,170)
|
$5,792,572
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the year ended December 31,
2015:
|
|
December 31, 2014
|
Recorded new Derivative Liabilities
|
Reclassification of Derivative Liabilities
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
December 31, 2015
|
|
Derivative
liabilities
|
$1,569,522
|
$5,891,828
|
$-
|
$(1,262,329)
|
$6,199,021
|
NOTE 9 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. and an 18-month licensing agreement
with Marvel Characters, B.V. (collectively, the
“Licensing
Agreements”) in 2012.
Each Licensing Agreement allows us to feature popular Disney and
Marvel characters on AquaBall™ Naturally Flavored Water,
allowing AquaBall™ to stand out among other beverages
marketed towards children. Under the terms and conditions of the
Licensing Agreements, we work with the Disney and Marvel teams to
create colorful, eye-catching labels that surround the entire
spherical shape of each AquaBall™. Once the label designs are
approved, we work with Disney and Marvel to set retail calendars,
rotating the placement of different AquaBall™ designs over
the course of the year.
In 2015, the Company and Disney entered into
a renewed Licensing Agreement, which extended the Company’s
license with Disney through March 31, 2017 (the
“Disney
Agreement”). The terms of
the Disney Agreement entitle Disney to receive a royalty rate of 5%
on sales of AquaBall™ Naturally Flavored Water adorned with
Disney characters, paid quarterly, with a total guarantee of
$450,870 over the period from April 1, 2015 through March 31, 2017.
In addition, the Company is required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the agreement. The Company is required to spend a
total of $820,000 on advertising and promotional opportunities over
the term of the Disney Agreement. During the year ended December
31, 2016, the Company paid a total of $129,597 to Disney pursuant
to the Disney Agreement.
On August 22, 2015, the
Company and Marvel entered
into a renewed Licensing Agreement to extend the Company's license
to feature certain
Marvel characters on bottles of AquaBall™ Naturally
Flavored Water through December 31, 2017. The Marvel Agreement requires the Company to pay
to Marvel a 5% royalty rate
on sales of AquaBall™ Naturally Flavored Water adorned with
Marvel characters, paid quarterly, through December 31, 2017, with
a total guarantee of $200,000. The total royalty paid to Marvel during the year
ended December 31, 2016 was $100,000.
NOTE 10 – SUBSEQUENT EVENTS
The
Company evaluated subsequent events through the date the
accompanying consolidated financial statements were issued and
determined that no subsequent event activity required additional
disclosure.
F-21