Charlie's Holdings, Inc. - Annual Report: 2017 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

[X]	ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file No. 001-32420

 

TRUE DRINKS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		84-1575085
(State of incorporation)		(I.R.S. Employer Identification Number)

 

2 Park Plaza, Suite 1200

Irvine, CA 92614

(Address of principal executive offices)

 

(949) 203-3500

(Issuer’s telephone number)

 

 Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock ($0.001 par value)		Over the Counter

 

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 [   ] No [X]

 

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	[   ]	Accelerated filer	[   ]
Non-accelerated filer	[   ]	Smaller reporting company	[X]
(Do not check if a smaller reporting company)
		Emerging growth company	[   ]

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, 2017, was approximately $12.5 million based on a closing market price of $0.11 per share.

 

There were 228,460,602 shares of the registrant’s common stock outstanding as of June 18, 2018.

 

 

TRUE DRINKS HOLDINGS, INC.

ANNUAL REPORT ON FORM 10-K

YEAR ENDED DECEMBER 31, 2017

 

TABLE OF CONTENTS

		Page
PART I
Item 1.	Description of Business	1
Item 1A.	Risk Factors	6
Item 1B.	Unresolved Staff Comments	12
Item 2.	Properties	12
Item 3.	Legal Proceedings	12
Item 4.	Mine Safety Disclosures	12
PART II
Item 5.	Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	13
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 8.	Financial Statements and Supplementary Data	19
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	19
Item 9A.	Controls and Procedures	19
Item 9B.	Other Information	19
PART III
Item 10.	Directors and Executive Officers	20
Item 11.	Executive Compensation	24
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	27
Item 13.	Certain Relationships, Related Transactions, and Director Independence	30
Item 14.	Principal Accountant Fees and Services	30
PART IV
Item 15.	Exhibits, Financial Statement Schedules	31
Signatures

 

 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 production and 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.

 

CERTAIN DISCUSSIONS WHICH FOLLOW REGARDING THE DESCRIPTION OF BUSINESS REFER TO THE OPERATING BUSINESS PRIOR TO THE END OF THE YEAR ENDED DECEMBER 31, 2017, AND DO NOT REFLECT THE OPERATING BUSINESS SUBSEQUENT TO THE END OF THE REPORTING PERIOD.

 

Overview

 

True Drinks Holdings, Inc. 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. Previously, our primary business was 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 distributed AquaBall® nationally through select retail channels, such as grocery stores, mass merchandisers, drug stores and online. We continue to 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 2 Park Plaza, Suite 1200, Irvine, CA 92614. Our telephone number is (949) 203-3500. Our corporate website address is http://www.truedrinks.com. Our common stock, par value $0.001 per share (“Common Stock”), is currently listed for quotation on the OTC Pink Marketplace under the symbol “TRUU.”

 

Recent Developments

 

Cessation of Production of AquaBall®, and Management’s Plan

 

Termination of Bottling Agreement and Issuance of Notes

 

On April 5, 2018 (the “Effective Date”), True Drinks settled all amounts due the Bottler under the terms of the Bottling Agreement (the “Settlement”). As of the Effective Date, the damage amount claimed by the Bottler under the Bottling Agreement was $18,480,620, which amount consisted of amounts due to the Bottler for product as well as amounts due for True Drink’s failure to meet certain minimum requirements under the Bottling Agreement (the “Outstanding Amount”). Concurrently, an affiliate of Red Beard and the Bottler agreed to terminate a personal guaranty of Red Beard’s obligations under the Bottling Agreement in an amount not to exceed $10.0 million (the “Affiliate Guaranty”) (the Bottling Agreement and the Affiliate Guaranty are hereinafter referred to as the “2015 Agreements”).

 

Under the terms of the Settlement, in exchange for the termination of the 2015 Agreements, the Bottler agreed to accept, among other things: (i) a promissory note in the principal amount of $4,644,906 (the “Principal Amount”), with a 5% per annum interest rate, to be compounded, annually (“Note One”), (ii) a promissory note with a principal amount equal to the Outstanding Amount (“Note Two”), and (iii) a cash payment of $2,185,158 (the “Cash Payment”).

 

The Principal Amount and all interest payments due under Note One shall be due and payable to the Bottler in full on or before the December 31, 2019 (the “Note Payment”). True Drinks, the Company and Red Beard are each jointly and severally responsible for all amounts due under Note One; provided, however, that in the event of a Change in Control Transaction, as defined in Note One, Red Beard will be the sole obligor for any amounts due under Note One.

 

Note Two shall have no force or effect except under certain conditions and shall be reduced by any payments made to the Bottler under the terms of the Settlement. True Drinks and the Company shall be jointly and severally responsible for all amounts due, if any, under Note Two, which shall automatically expire and terminate on December 31, 2019.

 

 

 

 

 

Our Products

 

As of December 31, 2017, we marketed and distributed products that offer a healthful, natural alternative to high sugar, high calorie and nutritionally deficient beverages. Our mission was to bring integrity back to the beverage industry and that honesty applied to every drop in every bottle. Our goal was to create and deliver beverages for families that encourage improved health, while being clear about what our products contain (and what they do not).

 

AquaBall® Naturally Flavored Water

 

Our flagship product was 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 was our licensing agreements with Disney, allowing each AquaBall® bottle to prominently feature various Disney characters.

 

AquaBall® was packaged in 10-ounce bottles, and was wrapped with colorful, eye-catching labels featuring popular movie and television characters. AquaBall® came in fruit punch, grape, strawberry lemonade and berry frost flavors and was sold primarily in grocery and convenience stores throughout the United States. During the year ended December 31, 2017, AquaBall® sales accounted for approximately 94% of the Company’s total revenue.

 

Bazi®

 

Bazi® All Natural Energy, is a liquid nutritional drink packed with eight different super fruits, including the Chinese jujube and seven other super fruits, 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 product’s energy delivery system. During the year ended December 31, 2017, Bazi® sales accounted for approximately 6% of the Company’s total revenue. Due to the ceased production of AquaBall® in early 2018, the Company currently anticipates that Bazi® sales will account for substantially all of the Company’s revenue in the near future.

 

 

Manufacturing and Distribution

 

Manufacturing

 

Beginning in May 2016, all production of AquaBall® moved to Niagara, pursuant to the terms and conditions of the Bottling Agreement. Niagara handled all aspects of production, including the procurement of all raw materials necessary to produce AquaBall®. In accordance with the terms of the Bottling Agreement, Niagara provided us with finished goods and billed us for product as it is shipped to customers. In addition to Niagara, we worked with a limited number of partners to repack bottles of AquaBall® into six-packs and our 15-pack club packages. As disclosed under the heading “Recent Developments” above, on April 5, 2018, we entered into the Settlement with Niagara, pursuant to which the Bottling Agreement was terminated. The decision to terminate the Bottling Agreement reflected management’s determination that we could not produce AquaBall® profitably under the Bottling Agreement.

 

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 2017, we signed with distributor partners in 47 states. We also greatly increased our sales organization to manage the distributor network. Upon implementing this plan, we experienced the expected sales increase in singles, but we found that our resulting pricing on multi-packs was too high and, thus, their sales lagged in many regions of the country. At the same time, our discounts and allowances increased considerably as did our labor costs. These conditions contributed to our decision to discontinue production of AquaBall® in early 2018.

 

Online Sales

 

Our e-commerce platform allowed consumers to purchase AquaBall® Naturally Flavored Water through Amazon.com, and still allows current and future consumers to purchase Bazi® Energy Shot through http://www.drinkbazi.com. Prior to discontinuing the production of AquaBall®, we drove 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 were 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. The Company managed key national accounts through our in-house national sales team. Our sales teams worked to secure national distribution with these customers through multiple avenues, including joint sales meetings with Disney 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. In 2017, with the exception of accounts requiring direct to warehouse delivery, accounts were serviced by our distribution network. Our sales team continued to secure distribution with both national and regional accounts, while our distributor partners added to our distribution with independent grocery and convenience stores in their respective territories.

 

Due to pricing issues caused by the distributor mark-up, our multi-pack sales did not meet expectations. In addition, most distributors failed to meet sales volumes necessary to make the relationships profitable. This contributed to the Company’s determination to discontinue the production of AquaBall® and significantly reduce our personnel in early 2018.

 

 

Source and Availability of Raw Materials

 

Beginning in May 2016 and until the cessation of production of AquaBall® in early 2018, Niagara handled 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 AquaBall®.

 

During 2017, we relied significantly on one supplier for 100% of our purchases of certain raw materials for Bazi®. Bazi, Inc. has sourced these raw materials from this supplier since 2007, and does not anticipate any issues with the supply of these raw materials.

 

We own the formulas for both AquaBall® Naturally Flavored Water and Bazi® All Natural Energy, 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 competed most directly with other beverages marketed directly to children. We also competed with other manufacturers of functional beverages, and with manufacturers of more traditional beverages, such as juice and soda.

 

Our primary competition for AquaBall® was 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 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, if ever. 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 have relied 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 both 2016 and 2017, we stopped using this bottle and, instead, switched to a bottle specifically designed for us by Niagara. 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 and an 18-month licensing agreement with Marvel Characters, B.V. (“Marvel”) (collectively, the “Licensing Agreements”) in 2012. Each Licensing Agreement allowed 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 worked with the Disney and Marvel teams to create colorful, eye-catching labels that surrounded the entire spherical shape of each AquaBall®. Once the label designs were approved, we worked with Disney and Marvel to set retail calendars, rotating the placement of different AquaBall® designs over the course of the year.

 

 

In March 2017, the Company and Disney entered into a renewed Licensing Agreement, which extended the Company’s license with Disney through March 31, 2019. The terms of the Disney Licensing Agreement entitle Disney to receive a royalty rate of 5% on sales of AquaBall® Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total guarantee of $807,000 over the period from April 1, 2017 through March 31, 2019. In addition, the Company is required to make a ‘common marketing fund’ contribution equal to 1% of sales due annually during the Licensing Agreement. During the years ended December 31, 2017 and 2016, the Company paid a total of $464,070 and $129,597, respectively, to Disney pursuant to the Licensing Agreement, and $130,000 was accrued and was due and payable to Disney under the License Agreement at December 31, 2017. As discussed above, in connection with the Company’s discontinued production of AquaBall®, the Company notified Disney of the Company’s desire to terminate the Licensing Agreement in early 2018.  As a result of management’s decision, and the Company’s failure to pay certain amounts due Disney under the terms of the Licensing Agreement, the Licensing Agreement has terminated, and Disney has claimed additional damages of approximately $178,000, net of $378,000 drawn from an irrevocable letter of credit posted in connection with the execution of the License Agreement. In addition, Disney has alleged that additional payments are due under the License Agreement for minimum royalty amounts required to be paid Disney through the remainder of the original term of the license agreement. While no assurances can be given, management is currently negotiating a discounted settlement of all amounts allegedly owed Disney under the license 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 required the Company to pay to Marvel a 5% royalty rate on sales of AquaBall® Naturally Flavored Water adorned with Marvel characters, paid quarterly, through December 31, 2017, with a total guarantee of $200,000 over the period from January 1, 2016 through December 31, 2017. The Company decided not to renew the Marvel Agreement for another term. Thus, the Licensing Agreement expired by its terms on December 31, 2017. The total royalty paid to Marvel during the year ended December 31, 2017 was $118,402.

 

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, 2017. Upon execution of the Bottling Agreement in October 2015, we completed the development of an improved “clean label” formulation of AquaBall®, which remained sugar and calorie free but eliminated all preservatives, and was 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.

 

Bazi® was developed during 2006, 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 sold solely online in 12, 24, 36, 48 and 144 packs.

 

Employees

 

We had ten full-time employees and one part-time employee as of December 31, 2017, and currently have one employee.

 

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

 

Our operating results in the past will not reflect our operating results in the future, which makes it difficult to evaluate our future business, prospects, and forecast revenue.

 

As a result of the Company’s decision to discontinue the production and sale of AquaBall®, our future revenue will substantially decline, and our operating results will vary significantly compared to past operating results. Factors that will significantly affect our operating results include the following:

 

 

We need additional financing.

 

Our core business product sales were and continue to be significantly below levels necessary to achieve positive cash flow. From inception to December 31, 2017, our aggregate net loss was $48,241,349. Our cash position was $76,534 at December 31, 2017, and is currently declining. We had negative working capital of $6,816,677 as of December 31, 2017. Subsequent to December 31, 2017 and as of May 31, 2018, we issued approximately $6.9 million in secured promissory notes (excluding Note Two, as defined above), which currently have an aggregate principal amount of $5.5 million, due December 31, 2019. To address our liquidity requirements, we have aggressively reduced expenses and have terminated substantially all of our employees, and also need to conduct additional debt or equity financings to meet our current and anticipated working capital needs as we execute management’s plan to restructure our accounts payable and our business. No assurances can be given that we will be successful in our attempts to issue additional debt or raise additional equity financing.

 

Our prospects for obtaining additional financing are uncertain and failure to obtain needed financing will result in our inability to continue as a going concern.

 

Our independent registered public accountants’ opinions on our 2016 and 2017 consolidated financial statements include an explanatory paragraph indicating substantial doubt about our ability to continue as a going concern. To continue as a going concern, we will have to find a distribution, production or licensed partner for our products, merge with or acquire a profitable company, induce our creditors to restructure their debt, forebear or to convert to equity, raise additional equity financing, and/or raise new debt financing. We may not accomplish these objectives. In the event we are unable to raise additional debt or equity financing, or otherwise improve our liquidity position, we will not be able to continue as a going concern and may need to seek the protection of the bankruptcy courts, and your investment may become worthless.

 

We are currently dependent on our ability to restructure our debt, and the willingness of our significant shareholder to continue to provide needed financing and fund our operations to continue as a going concern.

 

Our ability to continue as a going concern is dependent upon many factors, including the success of our ability to restructure our liabilities, which totaled $10,225,699 at December 31, 2017, which in turn is dependent on the willingness of Red Beard to finance our restructuring plan and continue to finance our capital requirements, and potential merger or acquisition opportunities. No assurances can be given that Red Beard will continue to provide necessary debt or equity capital, including the capital necessary to finance our restructuring plan. Our history of substantial operating losses and our negative working capital may result in Red Beard’s unwillingness to provide additional capital. If Red Beard is unwilling to commit additional capital, and we are otherwise unable to obtain additional financing, we will not be able to continue as a going concern, and may need to seek the protection of the bankruptcy courts, and your investment may become worthless.

 

 

 

 

We may not be able to repay our existing debt and any repayment of our debt with shares or by raising additional funds may result in significant dilution to our stockholders.

 

At December 31, 2017, we owed, including accrued but unpaid interest, an aggregate amount of approximately $2.8 million to Red Beard and other holders of our debt. Interest accrues on such debt at an annual interest rate of 8% through the maturity date of the promissory notes. We recently issued Secured Promissory Notes (the “Secured Notes”) in the aggregate principal amount of approximately $6.9 million (excluding Note Two, as defined above), which Secured Notes currently have an aggregate principal amount of $5.5 million, and which will mature on December 31, 2019. It is currently anticipated that the Company will issue Red Beard additional promissory notes to fund the Company’s restructuring plan and satisfy its immediate working capital needs. In the event Red Beard is unwilling to purchase additional promissory notes, and the Company is otherwise unable to consummate a financing, we will not be able to make the required payments to the holders of the secured promissory notes on the maturity date. In the event we are not able to close an equity or debt financing, and the holders of the secured promissory notes do not agree to restructure the notes, or otherwise convert the notes into shares of our Common Stock, or otherwise provide a waiver to defaults under the secured promissory notes, we will be unable to repay principal and accrued interest under the secured promissory notes upon maturity. As a result, we will not be able to continue as a going concern, and may need to seek the protection of the bankruptcy courts, and your investment may become worthless.

 

All of our assets are pledged to secure obligations under our outstanding indebtedness.

 

We have granted a continuing security interest in substantially all of our assets to the holders of certain of our secured promissory notes as security for our obligations under such promissory notes. If we default on any of our obligations under our secured promissory notes, the holders of the secured promissory notes will be entitled to exercise remedies available to them resulting from such default, including increasing the applicable interest rate on all amounts outstanding under the secured promissory notes, declaring all amounts due thereunder immediately due and payable, and assuming control of the pledged assets. Our ability to execute management’s plan would be materially harmed as a result of the secured note holders’ exercise of their remedies in the event of a default.

 

Our significant shareholder 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 74.7% of the Company’s outstanding voting securities, on an as converted basis. As a result, Mr. Smith, the Smith Trust and/or Red Beard has the ability to exert influence over both the actions of the Board of Directors, the outcome of issues requiring approval by the Company’s shareholders, as well as the execution of management’s plans. 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.

 

We will need to hire additional qualified accounting and administrative personnel in order to remediate a material weakness in our internal control over financial accounting, and we will need to expend additional resources and efforts that may be necessary to establish and to maintain the effectiveness of our internal control over financial reporting and our disclosure controls and procedures.

 

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, and the Sarbanes-Oxley Act of 2002. Our management is required to evaluate and disclose its assessment of the effectiveness of our internal control over financial reporting as of each year-end, including disclosing any “material weakness” in our internal control over financial reporting. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of its assessment, management has determined that there is a material weakness due to the lack of segregation of duties and, due to this material weakness, management concluded that, as of December 31, 2017 and 2016, our internal control over financial reporting was ineffective. Management also concluded that our disclosure controls and procedures were ineffective as of December 31, 2017 and 2016. These weaknesses were first identified in our Annual Report Form 10-K for the year ended December 31, 2012. Subsequent to the year ended December 31, 2017, we reduced our staff to one employee, and have outsourced our accounting and financial functions, further exacerbating our weaknesses in our internal control over financial reporting and our disclosure controls and procedures. These weaknesses have the potential to adversely impact our financial reporting process and our financial reports. We will need to hire qualified accounting and administrative personnel in order to resolve these material weaknesses.

 

Loss of our remaining personnel and contractors could impair our ability to execute our restructuring plan.

 

Our success depends on retaining our existing personnel and our current contractors, which includes former management. We are currently dependent on the continued employment of Robert Van Boerum, our existing principal executive officer, and our current contractors, which are vital to our ability to execute management’s restructuring plan. As with all personal service providers, Mr. Van Boerum can terminate his relationship with us at will, and our current contractors may terminate their relationship with us at any time. Our inability to retain these individuals may result in our reduced ability to execute management’s plans and operate our business.

 

 

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.

  

We are currently dependent on a single manufacturer for the production of Bazi®, and we do not independently analyze our products before sale. If we are not able to ensure timely product deliveries, potential customers may not order our products, and our limited 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 customers.

 

We rely entirely on Arizona Packaging and Production (“Arizona”) to manufacture our remaining product, Bazi®. In the event Arizona is unable to satisfy our supply requirements, manufacture our product 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 customers would be adversely impacted. In the event Arizona 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, Arizona sources the raw materials for Bazi®, 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 Arizona. An extended interruption in the supply of our products would result in decreased product sales and our revenue would likely decline.

 

Although we require Arizona 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 Arizona and limited safety testing by them. We cannot be assured that Arizona 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 Bazi®, from both retail and online providers. We consider the significant competing products in the U.S. market for the 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 revenue.

 

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 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 revenue.

 

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. 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.

 

Prior to discontinuing sales of AquaBall®, we maintained product liability insurance, however, it may not be sufficient to cover all product liability claims and such claims that may arise, which 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 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 revenue 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 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, 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:

 

 

 

 

 

 

 

 

We may from time to time write off obsolete inventories resulting in higher expenses and consequently greater net losses.

 

Prior to the Company’s decision to discontinue production of AquaBall®, we sometimes produced product adorned with characters on a promotional schedule, over production of a certain character set occasionally resulted 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 $228,210 and $576,559 for the years ended December 31, 2017 and December 31, 2016, respectively.

  

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.

 

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, the 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 228,460,602 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 52%. 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, and we currently intend to increase the number of authorized shares of our Common Stock to as much as 3.0 billion. 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 revenue 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

 

During the quarter ended September 30, 2017, the Company moved its corporate headquarters and entered into a new lease for the facility, which lease was scheduled to expire on March 31, 2019. Due to the Company’s financial condition and management’s plan, the lease was terminated on May 11, 2018. The Company is currently negotiating a fee to be paid to the lessee as consideration for the termination of the lease. Total rent expense related to this and our previous operating lease for the year ended December 31, 2017 was $65,765. Management is currently occupying office space located at 2 Park Plaza in Irvine California, which the Company rents for $500 per month.

 

Insurance

 

Prior to discontinuing sales of AquaBall®, we maintained commercial general liability, including product liability coverage, and property insurance. The policy provided for a general liability limit of $2.0 million per occurrence and $10.0 million annual aggregate umbrella coverage.

 

ITEM 3. LEGAL PROCEEDINGS

 

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
2017
First Quarter ended March 31, 2017	$0.13	$0.07
Second Quarter ended June 30, 2017	$0.17	$0.08
Third Quarter ended September 30, 2017	$0.15	$0.07
Fourth Quarter ended December 31, 2017	$0.07	$0.01
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

 

Holders

 

At June 18, 2018, there were 228,460,602 shares of our Common Stock outstanding, and approximately 225 shareholders of record. At June 18, 2018, there were 1,285,585 shares of our Series B Preferred, 105,704 shares of our Series C Preferred and 34,250 shares of our Series D Preferred outstanding held by 27, four and 19 shareholders of record, respectively.

 

Dividends

 

We pay dividends on our Series B Preferred stock quarterly. During the year ended December 31, 2017, the Company declared $261,793 in dividends on outstanding shares of its Series B Preferred. As of December 31, 2017, there remained $65,708 in cumulative unpaid dividends on the Series B Preferred. These dividends were paid by issuing 2,737,841 shares of the Company’s Common Stock in January 2018. We did not declare any dividends on Common Stock for the years ended December 31, 2017 and December 31, 2016. Our Board of Directors does not intend to distribute dividends in the near future. 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.

 

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.

 

 

Recent Developments

Cessation of Production of AquaBall®, and Management’s Plan.

 

Termination of Bottling Agreement and Issuance of Notes.

 

On April 5, 2018 (the “Effective Date”), True Drinks settled all amounts due the Bottler under the terms of the Bottling Agreement (the “Settlement”). As of the Effective Date, the damage amount claimed by the Bottler under the Bottling Agreement was $18,480,620, which amount consisted of amounts due to the Bottler for product as well as amounts due for True Drink’s failure to meet certain minimum requirements under the Bottling Agreement (the “Outstanding Amount”). Concurrently, an affiliate of Red Beard and the Bottler agreed to terminate a personal guaranty of Red Beard’s obligations under the Bottling Agreement in an amount not to exceed $10.0 million (the “Affiliate Guaranty”) (the Bottling Agreement and the Affiliate Guaranty are hereinafter referred to as the “2015 Agreements”).

 

Under the terms of the Settlement, in exchange for the termination of the 2015 Agreements, the Bottler agreed to accept, among other things: (i) a promissory note in the principal amount of $4,644,906 (the “Principal Amount”), with a 5% per annum interest rate, to be compounded, annually (“Note One”), (ii) a promissory note with a principal amount equal to the Outstanding Amount (“Note Two”), and (iii) a cash payment of $2,185,158 (the “Cash Payment”).

 

The Principal Amount and all interest payments due under Note One shall be due and payable to the Bottler in full on or before the December 31, 2019 (the “Note Payment”). True Drinks, the Company and Red Beard are each jointly and severally responsible for all amounts due under Note One; provided, however, that in the event of a Change in Control Transaction, as defined in Note One, Red Beard will be the sole obligor for any amounts due under Note One.

 

Note Two shall have no force or effect except under certain conditions and shall be reduced by any payments made to the Bottler under the terms of the Settlement. True Drinks and the Company shall be jointly and severally responsible for all amounts due, if any, under Note Two, which shall automatically expire and terminate on December 31, 2019.

 

In consideration for the guarantee of the Company’s obligations in connection with the Settlement, including as a joint and several obligor under the terms of Note One, the Company is obligated to issue Red Beard 348,367,950 shares of the Company’s Common Stock (the “Shares”), which Shares shall be issued at such time as the Company has amended its Articles of Incorporation to increase the number of authorized shares of Common Stock from 300.0 million to at least 2.0 billion (the “Amendment”), but in no event later than September 30, 2018. As a condition to the Company’s obligation to issue the Shares, Red Beard shall, and shall cause its affiliates to, execute a written consent of shareholders to approve the Amendment, and to take such other action as reasonably requested by the Company to effect the Amendment. 

 

In connection with the Settlement, and in order to make the Cash Payment described above, the Company issued to Red Beard a senior secured convertible promissory note (the “Red Beard Note”) in the principal amount of $2.25 million, which Red Beard Note accrues interest at a rate of 5% per annum. In May 2018, the Company sold its remaining AquaBall® inventory to Red Beard for an aggregate purchase price of approximately $1.4 million (the “Purchase Price”). As payment for the AquaBall® inventory, the principal amount of the Red Beard Note was reduced by the Purchase Price, and the current principal amount due under the Red Beard Note is approximately $848,814.

 

Pursuant to the terms of the Red Beard Note, Red Beard shall have the right, at its sole option, to convert the outstanding balance due into that number of fully paid and non-assessable shares of the Company’s Common Stock equal to the outstanding balance divided by $0.005 (the “Conversion Option”); provided, however, that the Company shall have the right, at its sole option, to pay all or a portion of the accrued and unpaid interest due and payable to Red Beard upon its exercise of the Conversion Option in cash. Such Conversion Option shall not be exercisable unless and until such time as the Company has filed the Amendment with the Nevada Secretary of State.

 

All outstanding principal and interest due under the terms of the Red Beard Note shall be due and payable to Red Beard in full on or before December 31, 2019, and shall be secured by a continuing security interest in substantially all of the Company’s assets.

 

 

 

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 $391,000 and $118,000 as of December 31, 2017 and 2016, respectively.

 

Inventory

 

As of December 31, 2017, the Company purchased 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 $93,000 and $110,000 as of December 31, 2017 and December 31, 2016, respectively. This inventory reserve is related to our inventory as of the years ended December 31, 2017 and 2016 against our forecasted inventory movement until such inventory must be retired due to aging.

 

Inventory is comprised of the following:

 

	December 31,   2017	December 31, 2016
Purchased materials	$29,012	$89,358
Finished goods	1,240,089	339,554
Allowance for obsolescence reserve	(93,000)	(110,000)
Total	$1,176,101	$318,912

 

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.

 

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, 2017 and 2016

 

The below disclosure included in this Management’s Discussion and Analysis of Financial Condition and Results of Operation discusses the Company’s financial results for the years ended December 31, 2017 and 2016, prior to management’s decision to cease production of AquaBall® and significantly reduce business operations. As a result of our decision to cease production of AquaBall® and significantly reduce personnel, the amounts reported in subsequent financial statements will materially change and will not be comparable with those of prior periods.

Net Sales

 

Net sales for the year ended December 31, 2017 were $3,823,334 compared to $2,575,448 during the same period in 2016, an increase of 48%. The year over year increase in net sales was primarily the result of chain authorizations secured by our sales team for shelf resets at retailers beginning in February 2017 and continuing through June 2017. These authorizations also allowed our team to secure distributor partners in 45 states. Many of these distributors received their initial shipments in February and March, with the remaining distributors having received their initial shipments in April through June. While our sales increased from 2016, sales of our multi-packs did not meet our expectations. Sales of single bottles in the grocery and convenience channel did perform as expected. We believe our multi-pack sales suffered due to high retail pricing due to the additional markup created by utilizing distributors.

 

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

 

Product Category	Year Ended December 31, 2017 (% of Sales)
AquaBall®	94%
Bazi®	6%

 

Gross Profit (Loss) and Gross Margin

 

Gross profit for the year ended December 31, 2017 was $771,190 as compared to a gross profit of $321,863 for the year ended December 31, 2016. Gross profit as a percentage of revenue (gross margin) during the year ended December 31, 2017 was 20%. This increase in gross profit was principally attributable to our relationship with Niagara, who assumed responsibility for shipping AquaBall® to customers, reducing our costs and improving product quality. It was also attributable to our shift away from focusing on the low-margin club channel to mainstream grocery and convenience channels.

 

 

 

Sales, General and Administrative Expense

 

Selling, general and marketing expenses were $15,213,900, or 398% of net sales, for the year ended December 31, 2017, as compared to $8,607,958, or 334% of net sales for the year ended December 31, 2016. This year over year increase of $6,605,942 was primarily the result of contract settlement expense totaling $4,514,569 related to the Niagara Settlement, increased direct selling expenses and marketing expenses at new retailers, each resulting from the first half of 2017 being a much more active selling season for AquaBall®. The 90% improvement in selling, general and marketing expenses as a percentage of sales was a result of more efficient shipping and storage of AquaBall®, and better performance in terms of sales per dollar of salaries and benefits. Due to the Company’s ceased production of AquaBall® and the significant reduction in personnel, the selling, general and marketing expenses as of the year ended December 31, 2017 are not indicative of future selling, general and administrative expenses, which expenses are currently anticipated to be substantially lower. The Company currently has one employee, and currently anticipates limited expenditures in the immediate future.

 

Interest Expense

 

Interest expense for the year ended December 31, 2017 was $158,419 as compared to $39,789 for the year ended December 31, 2016. Interest expense for the 2017 period consisted of interest and fees due on secured promissory notes issued in the third and fourth quarters of 2017, as well as a note payable to Niagara issued in the second quarter of 2017.

 

Other Income

 

Other income for the year ended December 31, 2017 was $1,995,567, as compared to $2,840,533 for the year ended December 31, 2016. We recorded a gain on the change in fair value of derivative liabilities of $2,331,888 for the year ended December 31, 2017 compared to a gain of $3,566,170 for the year ended December 31, 2016. Also, in 2017 we recorded an impairment charge of $130,000 compared to an impairment charge of $679,411 on our spherical bottle patent in 2016.

 

Net Loss

 

Our net loss for the year ended December 31, 2017 was $12,447,143 as compared to a net loss of $5,445,562 for the year ended December 31, 2016. On a per share basis, our loss, after dividends on outstanding shares of Series B Preferred, was $0.07 and $0.05 per share for the years ended December 31, 2017 and December 31, 2016, respectively.

 

We expect to continue to incur a net loss in subsequent periods.

 

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, 2017, 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, 2017, the Company incurred a net loss of $12,447,143. At December 31, 2017, the Company had negative working capital of $6,816,677 and an accumulated deficit of $48,241,349. The Company had negative cash flow from operations of $6,428,404 and $5,667,412 during the years ended December 31, 2017 and 2016, respectively. Although, during the years ended December 31, 2016 and 2017 the Company raised approximately $12.7 million from financing activities, including sale of shares of Series C Convertible Preferred Stock and Series D Convertible Preferred Stock, as well as certain Senior Secured Promissory Notes, additional capital is necessary to sustain the Company’s operations. Management is currently exploring, together with Red Beard, available options to maximize the value of AquaBall® as well as Bazi®, which may include entering into a license or similar agreement with a third party to continue the production, marketing and sale of AquaBall® and Bazi®. In addition, although no assurances can be given, management and Red Beard are exploring opportunities to consummate a transaction that would maximize the value of the Company as a fully reporting public operating company.

 

The accompanying condensed consolidated financial statements do not include any adjustments that will result in the event the Company is unsuccessful in securing the capital necessary to execute our business plan.

 

The Company has historically financed its operations through sales of equity and debt securities, and, to a lesser extent, cash flow provided by sales of its products. Despite recent sales of preferred stock and the issuance of Senior Secured Promissory Notes, funds generated from sales of our securities and cash flow provided by sales are insufficient to fund our operating requirements for the next twelve months. As a result, we require additional capital to continue operating as a going concern. No assurances can be given that we will be successful. In the event we are unable to obtain additional financing, we will not be able to fund our working capital requirements, and therefore will be unable to continue as a going concern.

 

 

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 aggregate 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 certain accredited investors entered into Securities Purchase Agreements, for the private placement of up to 50,000 shares of Series D Convertible Preferred Stock (“Series D Preferred”) for $100 per share. As additional consideration for participation in the private placement, investors received warrants to purchase up to 200% of the shares of Common Stock issuable upon conversion of shares of Series D Preferred purchased, with an exercise price of $0.15 per share (the “Series D Financing”).

 

During 2017, the Company issued an aggregate total of 45,625 shares of Series D Preferred, as well as warrants to purchase up to an aggregate total of 60,833,353 shares of Common Stock. The issuance of the shares of Series D Preferred during the year ended December 31, 2017 resulted in gross proceeds to the Company of $4.56 million. Each warrant issued during the Series D Financing contains a price protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued during the fiscal year, totaling $2,627,931, was recorded to derivative liabilities.

 

Warrant Exchange. Beginning on February 8, 2017, the Company and certain holders of outstanding Common Stock purchase warrants (the “Outstanding Warrants”), entered into Warrant Exchange Agreements, pursuant to which each holder agreed to cancel their respective Outstanding Warrants in exchange for one-half of a share of Common Stock for every share of Common Stock otherwise issuable upon exercise of Outstanding Warrants.

 

During the year ended December 31, 2017, the Company issued 79,023,138 shares of Common Stock in exchange for the cancellation of 158,080,242 Outstanding Warrants.

 

Secured Note Financing. On July 26, 2017, we commenced an offering of Senior Secured Promissory Notes (the “Secured Notes”) in the aggregate principal amount of up to $1.5 million to certain accredited investors (the “Secured Note Financing”). The amount available was subsequently raised to $2.3 million. As additional consideration for participating in the Secured Note Financing, investors received five-year warrants, exercisable for $0.15 per share, to purchase that number of shares of our Common Stock equal to 50% of the principal amount of the Secured Note purchased, divided by $0.15 per share. Between July 26, 2017 and December 31, 2017, we offered and sold Secured Notes in the aggregate principal amount of $2,050,000 and issued Warrants to purchase up to 6.8 million shares of Common Stock to participating investors.

 

The Secured Notes (i) bear interest at a rate of 8% per annum, (ii) have a maturity date of 1.5 years from the date of issuance, and (iii) are subject to a pre-payment and change in control premium of 125% of the principal amount of the Secured Notes at the time of pre-payment or change in control, as the case may be. To secure the Company’s obligations under the Secured Notes, the Company granted to participating investors a continuing security interest in substantially all of the Company’s assets pursuant to the terms and conditions of a Security Agreement (the “Security Agreement”).

 

2018 Note Issuance. Subsequent to the year ended December 31, 2017, in connection with the Settlement with Niagara, and in order to make the Cash Payment, the Company issued to Red Beard a senior secured convertible promissory note (the “Red Beard Note”) in the principal amount of $2.25 million, which was subsequently reduced to $848,814 in connection with the sale to Red Beard of all of the Company’s remaining AquaBall® inventory. The Red Beard Note accrues interest at a rate of 5% per annum. Pursuant to the terms of the Red Beard Note, Red Beard shall have the right, at its sole option, to convert the outstanding balance due into that number of fully paid and non-assessable shares of the Company’s Common Stock equal to the outstanding balance divided by 0.005 (the “Conversion Option”); provided, however, that the Company shall have the right, at its sole option, to pay all or a portion of the accrued and unpaid interest due and payable to Red Beard upon its exercise of the Conversion Option in cash. Such Conversion Option shall not be exercisable unless and until such time as the Company has amended its Articles of Incorporation to increase the number of authorized shares of Common Stock from 300.0 million to at least 2.0 billion.

All outstanding principal and interest due under the terms of the Red Beard Note shall be due and payable to Red Beard in full on or before December 31, 2019. All amounts due under the Red Beard Note shall be secured by a continuing security interest in substantially all of the Company’s assets, as set forth in the Security Agreement entered into by and between the Company and Red Beard.

 

Off-Balance Sheet Items

 

We had no off-balance sheet items as of December 31, 2017.

 

 

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, our 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 as of December 31, 2017. Subsequent to December 31, 2017, Messrs. Greco, Kerker and Sherman each resigned from their respective positions as executive officers of the Company. Messrs. Greco and Sherman continue to serve on the Company’s Board of Directors.

 

Name		Age		Position
James J. Greco (1)		60		Chief Executive Officer and Director
Daniel Kerker (2)		44		Chief Financial Officer, Treasurer and Secretary
Kevin Sherman (3)		47		Chief Marketing Officer, President and Director
Robert Van Boerum (4)		41		Chief Operations Officer
Ramona Cappello		58		Chairman
Scot Cohen		48		Director
Neil LeVecke		50		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

 

James J. Greco, Chief Executive Officer and Director. Mr. Greco was appointed to serve as the Company’s Chief Executive Officer in April 2017. 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.

 

Daniel Kerker, Chief Financial Officer. Mr. Kerker is a professional with over 20 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.

 

Kevin Sherman, President, Director and Former Chief Executive Officer. Mr. Sherman managed the brand development of AquaBall® Naturally Flavored Water since he joined the company in 2012. Mr. Sherman has served as Chief Marketing Officer and Chief Executive Officer, joined the Company’s Board of Directors in September 2015, and accepted the role of President of True Drinks in April 2017. 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 an M.A. from Loyola Marymount University.

 

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 commenced employment with the Company in 2012, and handled a wide range of responsibilities, including marketing, operations, and information technology. Prior to his time with the Company, Mr. Van Boerum served as 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 an 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 of 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 provides the Board with invaluable insight, experience and guidance given the industry in which the Company participates.

 

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. 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 his 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 provides the Board with relevant and valuable insight and guidance.

 

James J. Greco, Director. See above.

 

The Board of Directors believes Mr. Greco’s extensive management experience in the food industry assists the Company in the execution of its business plan.

 

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 its products.

 

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 eight meetings, and acted by unanimous written consent two times during the year ended December 31, 2017. Each director attended at least 75% of Board meetings during the year ended December 31, 2017. 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 has determined that Ms. Cappello and Mr. LeVecke 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 2017:	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 2017:	Four
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 2017:	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 Principal Executive Officer and Chair of the Board in recognition of the differences between the two roles. The Principal 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 Principal 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 Principal 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 each of our officers and directors failed to file certain reports due under Section 16(a) during the year ended December 31, 2017.

 

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, 2017 and 2016:

 

(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, 2017 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 (1)	Year	Salary ($)	Bonus($)	Stock Awards ($)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	All Other Compensation ($)	Total ($)
James J. Greco, (2)	2017	$63,462	$-	$125,000	$189,009	$-	$-	$377,471
Chief Executive Officer and Director
Kevin Sherman,	2017	$268,621	$-	$-	$307,140	$-	$36,000	$611,761
President, Director and Former Chief Executive Officer	2016	$229,167	$50,000	$-	$-	$-	$-	$279,167
Daniel Kerker	2017	$187,285	$-	$-	$165,368	$-	$-	$352,653
Chief Financial Officer	2016	$185,000	$5,000	$-	$-	$-	$-	$190,000
Robert Van Boerum	2017	$170,108	$-	$-	$118,131	$-	$-	$288,239
Chief Operations Officer	2016	$175,000	$5,000	$-	$-	$-	$-	$180,000

 

(1)

Includes the positions held by those individuals listed below as of December 31, 2017. As set forth above, subsequent to the year end, Messrs. Greco, Sherman and Kerker resigned from their positions as executive officers of the Company, and Mr. Van Boerum was appointed as the Company’s Principal Executive Officer and Principal Financial Officer.

 

Employment Agreements

 

James J. Greco. Mr. Greco was employed as the Company’s Chief Executive Officer pursuant to an Employment Agreement, dated April 13, 2017 (the “Greco Agreement”), under which Mr. Greco is entitled to annual base salary of $250,000, payable in accordance with the Company’s existing payroll practices beginning in October 2017. Under the terms and conditions of the Greco Agreement, Mr. Greco received: (i) a guaranteed bonus in the form of 1,302,084 shares of the Company’s restricted common stock (the “Bonus Award”), which Bonus Award vested in full on December 31, 2017; (ii) stock options to purchase up to 6,300,315 shares of the Company’s Common Stock, an amount equal to 2% of the Company’s issued and outstanding shares of Common Stock (including preferred stock on an as-converted basis), which options will vest annually over a four-year period beginning on the date of the Greco Agreement, or in full upon a Change of Control (as defined in the Greco Agreement); and (iii) stock options to purchase up to 9,450,474 shares of the Company’s Common Stock, vesting of which will begin in 2018 and vest annually over three years, conditioned on the Company’s achievement of certain performance goals.

 

 

Pursuant to the Greco Agreement, Mr. Greco’s employment may be terminated for “Cause,” if Mr. Greco (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. Greco’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to three times Mr. Greco’s monthly base salary per year of service, capped at a maximum amount equal to Mr. Greco’s annual salary.

 

As stated above, Mr. Greco resigned from his as Chief Executive Officer on May 15, 2018.

 

Kevin Sherman. Mr. Sherman was employed as the Company’s President 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 3.8 million shares of restricted stock, subject to certain vesting conditions (“Restricted Shares”), which Restricted Shares represented approximately 1.7% 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 ended as of July 2017.

 

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, 2017, the Compensation Committee did not award a bonus to Mr. Sherman for the period through December 31, 2016.

 

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.

 

Pursuant to the Sherman Agreement, 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.

 

As stated above, Mr. Sherman resigned from his position as President and Chief Marketing Officer on April 25, 2018.

 

Daniel Kerker. Mr. Kerker was 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, 2017, the Compensation Committee did not award a bonus to Mr. Kerker for the period through December 31, 2016. Mr. Kerker’s base salary was increased to $16,667 per month in August 2017.

 

Pursuant to the Kerker Agreement, 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.

 

As stated above, Mr. Kerker resigned from his positions as Chief Financial Officer, Treasurer and Secretary on March 6, 2018.

 

Robert Van Boerum. Mr. Van Boerum was 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 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, 2017, the Compensation Committee did not award a bonus to Mr. Van Boerum for the period through December 31, 2016.

 

 

Pursuant to its terms, 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.

 

Mr. Van Boerum was appointed to serve as the Company’s Principal Executive Officer and Principal Financial Officer upon Mr. Greco’s resignation, both of which positions he continues to hold.

 

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 concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2017:

 

Name	Fees earned or Paid in Cash ($)	Option Awards ($)	Stock Awards ($)	Total ($)
Ramona Cappello (1)	$12,500	$3,900	$45,000	$61,400
Neil LeVecke (2)	$-	$3,900	$35,000	$38,900
Scot Cohen (3)	$-	$3,900	$160,000	$163,900

 

(1)	During the year ended December 31, 2017, Ramona Cappello earned $45,000 as Chair of the Board of Directors. She also earned $25,000 in additional fees as the result of a $5,000 per month consulting agreement, payable 50% in cash and 50% in shares of Common Stock. She was also granted 130,000 options with a value on grant date of $3,900.
(2)	During the year ended December 31, 2017, Neil LeVecke earned $35,000 as a Director of the Board of Directors. He was also granted 130,000 options with a value on grant date of $3,900.
(3)	During the year ended December 31, 2017, Scot Cohen earned $35,000 as a Director of the Board of Directors. He also earned $160,000 in additional fees for consulting services, which were paid in shares of Common Stock. He was also granted 130,000 options with a value on grant date of $3,900.

 

Outstanding Equity Awards as of December 31, 2017

 

The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2017:

 

	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 ($)	Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)	Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($)
James J. Greco	6,300,315	(1)	$-	9,450,474	$-
Daniel Kerker	2,813,137	(2)	$-	-	$-
Robert Van Boerum	1,975,852	(3)	$-	-	$-

 

(1)	Non-vested shares vest equally over 4 years. First vesting date is April 13, 2018. Equity Incentive plan awards vest equally over three years beginning December 31, 2018 and are earned upon hitting mutually agreed upon financial targets set at the beginning of each year.
(2)	Non-vested shares vest as follows: 1,137,569 on September 30, 2018, 1,137,568 on September 30, 2019, and 538,000 on September 30, 2020.
(3)	Non-vested shares vest as follows: 818,927 on September 30, 2018, 818,925 on September 30, 2019, and 338,000 on September 30, 2020.

 

 

Equity Compensation Plan Information

 

The following table includes information as of December 31, 2017 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	16,630,000	$0.08	-
Equity compensation plans not approved by security holders	28,494,843	$0.06	16,505,157
Total	45,124,843	$0.07	16,505,157

 

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 initially reserved 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. On September 29, 2017, the Board of Directors increased the number of shares reserved for issuance under the plan to a total of 65.0 million shares of Common Stock.

 

During the year ended December 31, 2017, the Company issued an aggregate total of 1,302,084 restricted stock awards pursuant to the 2013 Plan. The Company also issued an aggregate total of 41,390,782 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, 2017.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 

 

As of June 18, 2018, 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 June 18, 2018:

 

	(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 1,285,585 shares of Series B Preferred, 105,704 shares of Series C Preferred, 34,250 shares of Series D Preferred and 228,460,602 shares Common Stock outstanding at June 18, 2018.

 

 

Beneficial Ownership of Series B Preferred

 

Name and Address (1)	Series B Convertible Preferred Stock	% Ownership of Class (2)
Scot Cohen (3)	135,000	10.50%
Total Officers and Directors (1)	135,000	10.50%
First Bank & Trust as custodian of Ronald L. Chez IRA 820 Church Street Evanston Illinois, 60201	425,000	33.06%
Wolfson Equities LLC 1 State Street Plaza, 29th Floor New York, NY 10004	187,500	14.58%
Joe Kolling 58 Beacon Bay Newport Beach, CA 92660	155,556	12.10%
V3 Capital Partners LLC 20 East 20th Street, Apt. 6 New York, NY 10003	118,750	9.24%

  

(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 2 Park Plaza, Suite 1200, Irvine, CA 92614.
(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	97.32%

 

(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	11.68%
James Greco (3)	500	1.46%
Total Officers and Directors (1)	4,500	13.14%
Red Beard Holdings, LLC 2560 East Chapman Avenue #173 Orange, CA 92869	10,000	29.20%
Baker Court, LLC P.O. Box 6923 Incline Village, NV 89450	3,000	8.76%
First Bank & Trust as custodian of Ronald L. Chez IRA 820 Church Street Evanston Illinois, 60201	2,000	5.84%

 

(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 2 Park Plaza, Suite 1200, Irvine, CA 92614.
(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 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.

 

 

 

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)
James Greco (6) Director	1,635,418	2,000,000	1,575,079	5,210,497	2.25%
Kevin Sherman Director	532,999	-	10,238,012	10,771,011	4.51%
Robert Van Boerum Principal Executive Officer and Principal Financial Officer	-	-	1,961,854	1,961,854	0.85%
Ramona Cappello Chairman	-	-	333,334	333,334	0.15%
Scot Cohen (7) Director	7,699,315	18,160,000	-	25,859,315	10.17%
Neil LeVecke Director	-	-	333,334	333,334	0.15%
Total officers and directors	9,867,732	20,160,000	14,441,613	44,469,345	16.90%
Vincent C. Smith (8) 2560 East Chapman Avenue #173 Orange, CA 92869	89,591,623	451,484,000	-	541,075,623	70.31%
Vincent C. Smith Annuity Trust 2015-1 (9) 2560 East Chapman Avenue #173 Orange, CA 92869	44,666,667	-	-	44,666,667	19.55%
Red Beard Holdings, LLC (10) 2560 East Chapman Avenue #173 Orange, CA 92869	28,358,289	451,484,000	-	479,842,289	67.75%
First Bank & Trust as custodian of Ronald L. Chez IRA (11) 820 Church Street Evanston Illinois, 60201	3,092,382	14,800,000	-	17,892,382	7.26%

 

*	Less than 1%

 

(1)	Unless otherwise indicated, the address for each stockholder is 2 Park Plaza, Suite 1200, Irvine, CA 92614.

 

(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 June 18, 2018.

 

(4)

Percentages are rounded to nearest one-hundredth of one percent. Percentages are based on 220,889,432 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 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.

 

(7)	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.

 

(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, 2017 and 2016 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, 2017 and 2016.

 

	For the years ended December 31,
	2017	2016
Audit fees	$94,800	$68,265
Tax fees	-	-
All other fees (consent fees)	-	-
Total	$94,800	$68,625

 

 

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, incorporated by reference to the Annual Report on Form 10-K, filed March 31, 2017.
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
10.33		Employment Agreement, by and between True Drinks Holdings, Inc. and James J. Greco, dated April 13, 2017, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed April 18, 2017
10.34		Form of Senior Secured Promissory Note, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed August 1, 2017
10.35		Form of Warrant, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed August 1, 2017
10.36		Form of Security Agreement, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed August 1, 2017
10.37		Secured Promissory Note, incorporated by reference from Exhibit 10.1 to the Current Report on Form 8-K, filed April 11, 2018
10.38		Secured Promissory Note, incorporated by reference from Exhibit 10.2 to the Current Report on Form 8-K, filed April 11, 2018
10.39		Secured Promissory Note, incorporated by reference from Exhibit 10.3 to the Current Report on Form 8-K, filed April 11, 2018
10.40		Security Agreement, incorporated by reference from Exhibit 10.4 to the Current Report on Form 8-K, filed April 11, 2018
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
23		Consent of Squar Milner LLP, dated June 26, 2018, filed herewith
31		Certification of Principal Executive Officer and Principal Financial Officer as Required by Rule 13a-14(a)/15d-14, filed herewith
32		Certification of Principal Executive Officer and Principal Financial Officer 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, as amended, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, there unto duly authorized.

 

Registrant   Date: June 26, 2018		True Drinks Holdings, Inc.   /s/ Robert Van Boerum
		Robert Van Boerum
		Principal Executive Officer and Principal Financial Officer

 

In accordance with the Securities Exchange Act of 1934, as amended, 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: June 26, 2018		/s/ James J. Greco
		James J. Greco
		Director

 

Date: June 26, 2018		/s/ Kevin Sherman
		Kevin Sherman
		President, Director

 

Date: June 26, 2018		/s/ Ramona Cappello
		Ramona Cappello
		Chair
Date: June 26, 2018		/s/ Scot Cohen
		Scot Cohen
		Director
Date: June 26, 2018		/s/ Neil LeVecke
		Neil LeVecke
		Director

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the shareholders and the board of directors

True Drinks Holdings, Inc.

Irvine, CA

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of True Drinks Holdings, Inc. and its subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and its total liabilities exceed its total assets. 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. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ Squar Milner LLP

 

We have served as the Company's auditor since 2012.

  

June 26, 2018

Newport Beach, California

 

 

 

 

TRUE DRINKS HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

 

	2017	2016
ASSETS
Current Assets:
Cash and cash equivalents	$76,534	$15,306
Accounts receivable, net	55,469	536,817
Inventory, net	1,176,101	318,912
Prepaid expenses and other current assets	80,918	127,258
Total Current Assets	1,389,022	998,293
Restricted Cash	-	209,570
Property and Equipment, net	5,896	11,064
Patents, net	-	250,000
Goodwill	3,474,502	3,474,502
Total Assets	$4,869,420	$4,943,429
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable and accrued expenses	$7,432,799	$1,258,252
Debt, Short-term	764,563	109,682
Derivative liabilities	8,337	5,792,572
Total Current Liabilities	8,205,699	7,160,506
Debt, long-term	2,050,000	-
Total liabilities	10,255,699	7,160,506
Commitments and Contingencies (Note 7)
Stockholders’ Deficit:
Common Stock, $0.001 par value, 300,000,000 shares authorized, 218,151,591 and 119,402,009 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively	218,152	119,402
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,285,585 and 1,292,870 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively	1,285	1,293
Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 200,000 shares authorized, 105,704 and 109,352 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively	106	109
Preferred Stock – Series D (liquidation preference $100 per share), $0.001 par value, 50,000 and 0 shares authorized, 34,250 and 0 shares issued and outstanding at December 31, 2017 and December 31, 2016, respectively	34	-
Additional paid in capital	42,635,493	33,456,325
Accumulated deficit	(48,241,349)	(35,794,206)
Total Stockholders’ Deficit	(5,386,279)	(2,217,077)
Total Liabilities and Stockholders’ Deficit	$4,869,420	$4,943,429