Charlie's Holdings, Inc. - Quarter Report: 2016 June (Form 10-Q)

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[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

[   ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT

Nevada		84-1575085
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[X]

					Page
PART I.	FINANCIAL INFORMATION
	ITEM 1.	Financial Statements			1
		Condensed Consolidated Balance Sheets as of June 30, 2016 (unaudited) and December 31, 2015			1
		Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015 (unaudited)			2
		Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)			3
		Notes to unaudited Condensed Consolidated Financial Statements			4
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
	ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk			19
	ITEM 4.	Controls and Procedures			19
PART II.	OTHER INFORMATION
	ITEM 1.		Legal Proceedings
	ITEM 1A.		Risk Factors		19
	ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds		20
	ITEM 3.		Defaults Upon Senior Securities		20
	ITEM 4.		Mine Safety Disclosures		20
	ITEM 5.		Other Information		20
	ITEM 6.		Exhibits		20
SIGNATURES					21

		June 30, 2016				December 31, 2015
ASSETS		(Unaudited)
Current Assets:
Cash and cash equivalents		$	712,549			$	376,840
Accounts receivable, net			205,305				1,843,415
Inventory, net			636,392				1,558,719
Prepaid expenses and other current assets			226,564				75,923
Total Current Assets			1,780,810				3,854,897
Restricted Cash			209,464				209,360
Property and Equipment, net			11,299				4,530
Patents, net			1,000,000				1,070,588
Goodwill			3,474,502				3,474,502
Total Assets		$	6,476,075			$	8,613,877
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable and accrued expenses		$	1,223,523			$	1,623,046
Debt			469,116				1,336,819
Derivative liabilities			8,002,671				6,199,021
Total Current Liabilities			9,695,310				9,158,886
Commitments and Contingencies (Note 7)
Stockholders’ Deficit:
Common Stock, $0.001 par value, 300,000,000 shares authorized, 113,048,441 and 111,434,284 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			113,049				111,434
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,500,000 shares authorized, 1,317,870 shares issued and outstanding at June 30, 2016 and December 31, 2015			1,318				1,318
Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 200,000 and 150,000 shares authorized, 87,217 and 48,853 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively			87				49
Additional paid in capital			32,032,771				29,690,834
Accumulated deficit			(35,366,460	)			(30,348,644	)
Total Stockholders’ Deficit			(3,219,235	)			(545,009	)
Total Liabilities and Stockholders’ Deficit		$	6,476,075			$	8,613,877

The accompanying notes are an integral part of these condensed consolidated financial statements.

			Three Months Ended June 30,								Six Months Ended June 30,
			2016				2015				2016				2015
Net Sales		$	482,969			$	2,083,921			$	1,066,267			$	2,848,896
Cost of Sales			522,703				2,142,012				1,256,114				2,762,740
Gross (Loss) Profit			(39,734	)			(58,091	)			(189,847	)			86,156
Operating Expenses
Selling and marketing			1,068,483				1,320,738				2,137,396				1,971,103
General and administrative			1,548,556				848,028				2,616,906				2,269,296
Total operating expenses			2,617,039				2,168,766				4,754,302				4,240,399
Operating Loss			(2,656,773	)			(2,226,857	)			(4,944,149	)			(4,154,243	)
Other Income (Expense)
Change in fair value of derivative liabilities			(1,164,905	)			(186,470	)			(25,540	)			(329,392	)
Interest income (expense)			(16,990	)			33				(29,204	)			(207,704	)
Other income (expense)			-				-				(18,923	)			-
			(1,181,895	)			(186,437	)			(73,667	)			(537,096	)
NET LOSS		$	(3,838,668	)		$	(2,413,294	)		$	(5,017,816	)		$	(4,691,339	)
Declared dividends on Preferred Stock		$	66,223			$	67,890			$	131,428			$	134,762
Net loss attributable to common stockholders		$	(3,904,891	)		$	(2,481,184	)		$	(5,149,244	)		$	(4,826,101	)
Loss per common share, basic and diluted		$	(0.03	)		$	(0.05	)		$	(0.05	)		$	(0.09	)
Weighted average common shares outstanding, basic and diluted			112,948,441				54,047,453				112,585,867				52,315,587

The accompanying notes are an integral part of these condensed consolidated financial statements.

		Six Months Ended June 30,
		2016				2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(5,017,816	)		$	(4,691,339	)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation			2,223				1,168
Amortization			70,588				65,673
Provision for bad debt expense			140,152				(49,225	)
Provision for inventory losses			110,000				-
Change in estimated fair value of derivative liabilities			25,540				329,392
Fair value of common stock issued for services			18,000				462,062
Stock based compensation			123,108				234,710
Change in operating assets and liabilities:
Accounts receivable			1,497,958				(1,272,159	)
Inventory			812,327				(510,568	)
Prepaid expenses and other current assets			(150,641	)			11,152
Accounts payable and accrued expenses			(462,510	)			555,484
Net cash used in operating activities			(2,831,071	)			(4,863,650	)
CASH FLOWS FROM INVESTING ACTIVITIES
Restricted cash			(104	)			(66	)
Purchase of property and equipment			(8,992	)			-
Net cash used in investing activities			(9,096	)			(66	)
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid			(1,421	)			-
Proceeds from warrants exercised for cash			45,000				-
Proceeds from issuance of Series C Preferred Stock			3,500,000				7,000,000
Borrowings on debt			36,075				235,792
Repayments on debt			(403,778	)			(2,986,118	)
Net cash provided by financing activities			3,175,876				4,249,674
NET DECREASE IN CASH			335,709				(614,042	)
CASH AND CASH EQUIVALENTS- beginning of period		$	376,840			$	668,326
CASH AND CASH EQUIVALENTS- end of period		$	712,549			$	54,284
SUPPLEMENTAL DISCLOSURES
Interest paid in cash		$	23,740			$	122,556
Non-cash financing and investing activities:
Conversion of preferred stock to common stock		$	699			$	2,222
Dividends paid in common stock		$	68,441			$	152,445
Dividends declared but unpaid		$	131,428			$	134,762
Conversion of notes payable and accrued interest to Series C preferred stock		$	500,000			$	1,214,206
Warrants issued in connection with Series C Preferred Offering		$	1,778,110			$	2,370,141

 

 

 

Inventory is comprised of the following:

		June 30, 2016 (unaudited)				December 31, 2015
Purchased materials		$	44,083			$	689,703
Finished goods			702,309				869,016
Allowance for obsolescence reserve			(110,000	)			-
Total		$	636,392			$	1,558,719

 

 

 

The fair value for restricted stock awards is calculated based on the stock price on the date of grant.

 

 

 

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.

 

 

 

 

As described under Note 2, “Shareholder’s Equity” above, in January 2016, the Company entered into Note Exchange Agreements with the holders of Secured Notes in the aggregate principal amount of $500,000, pursuant to which the Secured Note 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 agate total of 1,029,413 shares of Common Stock for $0.17 per share.

 

-	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.

 

						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 – June 30, 2016		$	8,002,671			$	-			$	-			$	8,002,671
Derivative liabilities – December 31, 2015		$	6,199,021			$	-			$	-			$	6,199,021

 

		Recurring Fair Value Measurements
		Changes in Fair Value Included in Net Loss
		Other Income				Other Expense				Total
Derivative liabilities – June 30, 2016		$	-			$	25,540			$	25,540
Derivative liabilities – June 30, 2015		$	-			$	329,392			$	329,392

		December 31, 2015				Recorded New Derivative Liabilities				Reclassification of Derivative Liabilities to Additional Paid in Capital				Change in Estimated Fair Value Recognized in Results of Operations				June 30, 2016
Derivative liabilities		$	6,199,021			$	1,778,110			$	-			$	25,540			$	8,002,671

		December 31, 2014				Recorded New Derivative Liabilities				Reclassification of Derivative Liabilities to Additional Paid in Capital				Change in Estimated Fair Value Recognized in Results of Operations				June 30, 2015
Derivative liabilities		$	1,569,522			$	2,370,141			$	-			$	329,392			$	4,269,055

 

 

 

 

The percentage that each product category represented of our net sales is as follows:

Product Category		Three Months Ended June 30, 2016 (% of Sales)
AquaBall™			90	%
Bazi®			10	%

The Company recorded a loss on the change in fair value of derivative liabilities for the three months ended June 30, 2016 of $1,164,905, as compared to a loss of $186,470 for the change in fair value of derivative liabilities for the three months ended June 30, 2015.

The percentage that each product category represented of our net sales is as follows:

Product Category		Six Months Ended June 30, 2016 (% of Sales)
AquaBall™			91	%
Bazi®			9	%

Sales, general and administrative expenses were $4,754,302 for the six months ended June 30, 2016, as compared to $4,240,399 for the six months ended June 30, 2015. These expenses remained relatively consistent from last year, including employee-related expenses, with the exception of a write-off of approximately $435,000 of materials related to our prior formulation of AquaBall™. While some of these materials may be utilized or sold, we cannot accurately assess their value.

 

 

 

We had no off-balance sheet items as of June 30, 2016.

 

(a)	Evaluation of disclosure controls and procedures.

(b)	Changes in internal controls over financial reporting.

 

(a)		EXHIBITS
31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a)
31.2		Certification of the Principal Financial and Accounting Officer pursuant to Rule 13a-14(a) and 15d-14(a)
32.1		Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification by the Principal Financial and Accounting Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

Date: August 15, 2016		TRUE DRINKS HOLDINGS, INC.
		By:	/s/ Kevin Sherman
		Kevin Sherman Chief Executive Officer and Director (Principal Executive Officer)
Date: August 15, 2016		By:	/s/ Daniel Kerker
		Daniel Kerker Chief Financial Officer (Principal Financial and Accounting Officer)

 

 

 

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