Charlie's Holdings, Inc. - Quarter Report: 2019 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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[X]
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2019
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT
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For the transition period from _________ to
_________
Commission file number 001-32420
TRUE DRINKS HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Nevada
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84-1575085
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(State or Other Jurisdiction of Incorporation
or Organization)
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(IRS Employer Identification No.)
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1007 Brioso Drive, Costa Mesa, CA 92627
(Address of Principal Executive Offices)
(949) 531-6855
(Registrant’s Telephone Number, Including Area
Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No
[ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
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 such
files).
Yes [X] No [ ]
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.
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Large accelerated filer
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[ ]
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Accelerated filer
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[ ]
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Non-accelerated filer
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[X]
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Smaller reporting company
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[X]
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Emerging growth company
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[ ]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
[ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-12 of the Exchange Act). Yes
[ ] No [X]
Securities registered pursuant to Section 12(b) of the
Act:
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Title
of each class
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Trading
Symbol(s)
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Name
of each exchange on which registered
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Common
Stock, par value $0.001 per share
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TRUU
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OTC
Pink Marketplace
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The number of shares of the registrant’s common stock, par
value $0.001 per share, issued and outstanding on May 15, 2019 was
4,972,698,672.
TRUE DRINKS HOLDINGS,
INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
INDEX
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PART I
TRUE DRINKS HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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March 31,
2019
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December 31,
2018
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ASSETS
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Current
Assets:
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Cash
and cash equivalents
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$401
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$43,181
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Accounts
receivable, net
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1,173
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990
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Inventory,
net
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25,657
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2,035
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Prepaid
expenses and other current assets
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-
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6,712
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Total
Current Assets
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27,231
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52,918
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Property and Equipment, net
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-
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1,129
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Goodwill
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1,576,502
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1,576,502
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Total Assets
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$1,603,733
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$1,630,549
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LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
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Current
Liabilities:
|
|
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Accounts
payable and accrued expenses
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$710,615
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$1,095,579
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Debt
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3,394,497
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7,813,786
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Derivative
liabilities
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-
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879,257
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Total
Current Liabilities
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4,105,112
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9,788,622
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Commitments and
Contingencies (Note
5)
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Stockholders’
Deficit:
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Common
Stock, $0.001 par value, 7,000,000,000 shares authorized,
511,229,641 and 245,684,343 shares issued and outstanding at March
31, 2019 and December 31, 2018, respectively
|
511,230
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245,685
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Preferred
Stock – Series B (liquidation preference of $4 per share),
$0.001 par value, 2,750,000 shares authorized, 1,285,585 shares
issued and outstanding at March 31, 2019 and December 31,
2018
|
1,285
|
1,285
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Preferred
Stock – Series C (liquidation preference $100 per share),
$0.001 par value, 200,000 shares authorized, 105,704 shares
issued and outstanding at March 31, 2019 and December 31,
2018
|
106
|
106
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Preferred
Stock – Series D (liquidation preference $100 per share),
$0.001 par value, 50,000 shares authorized, 34,250 shares
issued and outstanding at March 31, 2019 and December 31,
2018
|
34
|
34
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Additional
paid in capital
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50,145,370
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43,715,465
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Accumulated
deficit
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(53,159,404)
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(52,120,648)
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Total
Stockholders’ Deficit
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(2,501,379)
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(8,158,073)
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Total Liabilities and Stockholders’ Deficit
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$1,603,733
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$1,630,549
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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Three
Months Ended
March 31,
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2019
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2018
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|
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Net
Sales
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$28,014
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$301,626
|
|
|
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Cost
of Sales
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14,145
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309,505
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Gross
Profit (Loss)
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13,869
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(7,879)
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Operating
Expenses
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Selling and
marketing
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20,692
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176,140
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General and
administrative
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217,543
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872,999
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Total operating
expenses
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238,235
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1,049,139
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Operating
Loss
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(224,366)
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(1,057,018)
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Other
Income (Expense)
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Change in fair
value of derivative liabilities
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(975,430)
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-
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Interest
expense
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(192,932)
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(64,267)
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Other
income
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353,972
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408,900
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Total (Expense)
Other Income
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(814,390)
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344,633
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NET LOSS
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$(1,038,756)
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$(712,385)
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Declared dividends on Preferred Stock
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64,279
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64,279
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Net
loss attributable to common stockholders
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$(1,103,035)
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$(776,664)
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Net
loss per common share
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Basic and
diluted
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$(0.00)
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$(0.00)
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Weighted
average common shares outstanding
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Basic and
diluted
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486,287,708
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220,643,334
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ DEFICIT
For the Three Months Ended March 31, 2019 and 2018
(Unaudited)
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Common Stock
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Preferred Stock
Series B
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Preferred Stock
Series C
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Preferred Stock
Series D
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Additional
Paid-In
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Accumulated
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Total Stockholders'
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||||
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
|
Deficit
|
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Balance – December 31, 2018
|
245,684,343
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$245,685
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1,285,585
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$1,285
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105,704
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$106
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34,250
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$34
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$43,715,465
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$(52,120,648)
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$(8,158,073)
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Stock-based
compensation
|
-
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-
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-
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-
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-
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-
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-
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-
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16,881
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-
|
16,881
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Dividends
declared on Preferred Stock
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-
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-
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-
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-
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-
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-
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-
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-
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(64,279)
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-
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(64,279)
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Issuance
of Common Stock for dividends on Preferred Stock
|
15,677,348
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15,677
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-
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-
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-
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-
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-
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-
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51,459
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-
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67,136
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Issuance
of Restricted Common Stock to employees
|
1,500,000
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1,500
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-
|
-
|
-
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-
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-
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-
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(1,500)
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-
|
-
|
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Assumption
of debt by related party
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
4,821,025
|
-
|
4,821,025
|
|
Reclassification
of derivative liability
|
248,367,950
|
248,368
|
-
|
-
|
-
|
-
|
-
|
-
|
1,606,319
|
-
|
1,854,687
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(1,038,756)
|
(1,038,756)
|
|
Balance – March 31, 2019
|
511,229,641
|
$511,230
|
1,285,585
|
$1,285
|
105,704
|
$106
|
34,250
|
$34
|
$50,145,370
|
$(53,159,404)
|
$(2,501,379)
|
|
|
Common Stock
|
Preferred Stock
Series B
|
Preferred Stock
Series C
|
Preferred Stock
Series D
|
Additional
Paid-In
|
Accumulated
|
Total Stockholders'
|
||||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
|
Balance – December 31, 2017
|
218,151,591
|
$218,152
|
1,285,585
|
$1,285
|
105,704
|
$106
|
34,250
|
$34
|
$42,635,493
|
$(48,241,349)
|
$(5,386,279)
|
|
Stock-based
compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
220,009
|
-
|
220,009
|
|
Dividends
declared on Preferred Stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(64,279)
|
-
|
(64,279)
|
|
Issuance
of Common Stock for dividends on Preferred Stock
|
2,737,841
|
2,738
|
-
|
-
|
-
|
-
|
-
|
-
|
62,970
|
-
|
65,708
|
|
Debt
discount recorded in connection with borrowings on
debt
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
250
|
-
|
250
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(712,385)
|
(712,385)
|
|
Balance – March 31, 2018
|
220,889,432
|
$220,890
|
1,285,585
|
$1,285
|
105,704
|
$106
|
34,250
|
$34
|
$42,854,443
|
$(48,953,734)
|
$(5,876,976)
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS,
INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended
March
31,
|
|
|
|
2019
|
2018
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$(1,038,756)
|
$(712,385)
|
|
Adjustments to
reconcile net loss to net cash used in operating
activities
|
|
|
|
Depreciation
|
1,129
|
1,234
|
|
Accretion of debt
discount
|
125,617
|
17,862
|
|
Provision for bad
debt expense
|
-
|
103,522
|
|
Change in estimated
fair value of derivative liabilities
|
975,430
|
-
|
|
Stock based
compensation
|
16,881
|
220,009
|
|
Change in operating
assets and liabilities:
|
|
|
|
Accounts
receivable, net
|
(183)
|
(104,890)
|
|
Inventory,
net
|
(23,622)
|
278,382
|
|
Prepaid expenses
and other current assets
|
6,712
|
44,115
|
|
Accounts payable
and accrued expenses
|
(205,988)
|
(409,336)
|
|
Net
cash used in operating activities
|
(142,780)
|
(561,487)
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
Net borrowings on
line-of-credit facility
|
-
|
83,131
|
|
Proceeds from notes
payable
|
100,000
|
415,000
|
|
Net
cash provided by financing activities
|
100,000
|
498,131
|
|
|
|
|
|
NET DECREASE IN CASH
|
(42,780)
|
(63,356)
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS- beginning of
period
|
43,181
|
76,534
|
|
|
|
|
|
CASH AND CASH
EQUIVALENTS- end of
period
|
$401
|
$13,178
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
Interest paid in
cash
|
$-
|
$432
|
|
Non-cash
financing and investing activities:
|
|
|
|
Dividends paid in
common stock
|
$67,136
|
$65,708
|
|
Dividends declared
but unpaid
|
$64,279
|
$64,279
|
|
Debt discount
recorded in connection with borrowings on debt
|
$-
|
$250
|
|
Restricted stock
issuance
|
$1,500
|
$-
|
|
Extinguishment of
warrant and derivative liabilities
|
$1,854,687
|
$-
|
|
Assumption of debt
and accrued interest by related party
|
$4,821,025
|
$-
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 2019
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Business
Overview
True Drinks
Holdings, Inc. (the “Company,” “us” or “we”) was incorporated in the state of Nevada
in January 2001 and is the holding company for True Drinks, Inc.
(“True Drinks”), a company incorporated in the state of
Delaware in January 2012 that specialized in all-natural,
vitamin-enhanced drinks. Prior to the first quarter of 2018, our
primary business was the development, marketing, sale and
distribution of AquaBall® Naturally Flavored Water. We
distributed AquaBall® nationally through select retail
channels, such as grocery stores, mass merchandisers, drug stores
and online. Although, as noted
below, we had discontinued the production, distribution and sale of
AquaBall®, as of March 31, 2019 we continued to market and distribute Bazi® All
Natural Energy, a liquid nutritional supplement drink, which was
distributed online and through our existing database of
customers.
As
discussed in detail in Note 9 – Subsequent Events, on April 26, 2019,
the Company entered into a Securities Exchange Agreement with each
of the members of Charlie’s Chalk Dust, LLC, a Delaware
limited liability company (“CCD”), and certain direct
investors, pursuant to which the Company acquired all outstanding
membership interests of CCD beneficially owned by its members in
exchange for Company securities (the “Exchange”). As a result, CCD
became a wholly owned subsidiary of the Company.
Since the date of the Exchange, the Company’s primary
business is the development, marketing and distribution of high
quality vapor products. The Company now distributes its vapor
products both domestically and internationally through select
distributors, specialty retailers and third-party online
resellers.
Cessation of Production of AquaBall®, and Management’s
Plan
During
the first quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“Bottler” or “Niagara”), and True Drinks (the
“Bottling
Agreement”). In addition, the Company notified Disney
Consumer Products, Inc. (“Disney”) of the Company’s
desire to terminate its licensing agreement with Disney
(“Disney
License”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of management’s decision, and the Company’s
failure to pay certain amounts due Disney under the terms of the
Disney License, the Disney License terminated, and Disney claimed
amounts due of approximately $178,000, net of $378,000 drawn from
an irrevocable letter of credit posted in connection with the
execution of the Disney License. In addition, Disney sought
additional payments for minimum royalty amounts required to be paid
Disney through the remainder of the term of the Disney License. On
July 17, 2018, the Company and Disney entered into a settlement and
release whereby in exchange for a payment to Disney of $42,000, the
parties agreed to release each other from any and all claims
related to the Disney License.
In
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for an aggregate purchase price of approximately $1.44
million (the “Purchase
Price”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “Red Beard
Note”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018. As of March 31, 2019, the Company
owed Red Beard $569,741 in principal and accrued but unpaid
interest pursuant to the Red Beard Note. On April 26, 2019,
subsequent to the quarter ended March 31, 2019, Red Beard converted
all amounts due under the terms of the Red Beard Note into shares
of Common Stock. See Note 9
– Subsequent
Events for additional
information regarding the conversion of the Red Beard Note into
Common Stock.
As of
March 31, 2019, the Company had reduced its staff to one employee,
and had contracted with former management and other professionals
to continue operations. In addition, the Company had taken other
steps to minimize general, administrative and other operating
costs, while maintaining only those costs and expenses necessary to
maintain sales of Bazi® and otherwise continue operations
while the Board of Directors and the Company’s principal
stockholder explored certain opportunities, as more particularly
described below. Management also worked to reduce accounts payable
by negotiating settlements with creditors, including Disney,
utilizing advances from Red Beard aggregating approximately
$605,000 as of March 31, 2019, and focused on negotiating with its
remaining creditors to settle additional accounts
payable.
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”). On January 14, 2019, the Company, True
Drinks and Red Beard entered into an Assignment and Assumption
Agreement, pursuant to which the Company and True Drinks assigned,
and Red Beard assumed, all outstanding rights and obligations of
the Company and True Drinks under the terms of Note One. As a
result, all obligations of the Company and True Drinks under Note
One, including for the payment of amounts due thereunder, were
assigned to Red Beard.
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 agreed to issue
Red Beard 348,367,950 shares of the Company’s Common Stock
(the “Shares”),
which Shares were to be issued at such time as the Company 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 executed,
and caused its affiliates to execute, a written consent of
shareholders to approve the Amendment. As discussed below, on
November 15, 2018, the Company amended its Articles of
Incorporation to increase the number of authorized shares of Common
Stock to 7.0 billion, thereby triggering the Company’s
obligation to issue the Shares to Red Beard.
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrued interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard had the right, at its sole
option, to convert the outstanding balance due under the Red Beard
Note 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 had
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. Pursuant to the terms of the Red Beard Note, such
Conversion Option could not be exercisable unless and until such
time as the Company filed the Amendment with the Nevada Secretary
of State, which occurred on November 15, 2018. As a result of the
Increase in Authorized, Red Beard was able exercise its Conversion
Option under the Red Beard Note at any time, which it elected to do
on April 26, 2019 in connection with the Exchange, as more
particularly discussed below in Note 9 – Subsequent Events.
Food Labs Promissory Note
On
September 18, 2018, the Company and Food Labs, Inc.
(“Food Labs”)
entered into an agreement, pursuant to which the Company sold and
issued to Food Labs a promissory note in the principal amount of
$50,000 (the “Food Labs
Note”). The Food Labs Note (i) accrued interest at a
rate of 5% per annum, (ii) included an additional lender’s
fee equal to $500, or 1% of the principal amount, and (iii) was
scheduled to mature on December 31, 2019. Food Labs is controlled
by Red Beard. See Note 9
– Subsequent
Events for additional
information regarding the sale of the Food Labs Note to Red Beard,
and the subsequent conversion of all amounts due under the Food
Labs Note into shares of Common Stock, thereby terminating the Food
Labs Note.
Increase in Authorized Shares of Common Stock
On November 15, 2018, the Company filed a
Certificate of Amendment to its Articles of Incorporation with the
Secretary of State of the State of Nevada to increase the total
number of shares of Common Stock authorized for issuance thereunder
from 300.0 million to 7.0 billion shares (the
“Increase in
Authorized”).
As a result of the
Increase in Authorized, Red Beard could exercise its Conversion
Option under the Red Beard Note at any time, which it elected to do
on April 26, 2019 in connection with
the Exchange, as more particularly discussed below in Note 9
– Subsequent
Events.
Red Beard Line-of-Credit
On November 19,
2018, the Company entered into a line-of-credit with Red Beard,
effective October 25, 2018, pursuant to which the Company could
borrow up to $250,000 (the “Red Beard LOC”);provided, however, that Red Beard
could, in its sole discretion, decline to provide additional
advances under the Red Beard LOC upon written notice the Company of
its intent to decline to make such advances. Interest accrued on
the outstanding principal of amount of the Red Beard LOC at a rate
of 8% per annum;provided,
however, that upon the occurrence of an Event of Default, as
defined in the Red Beard LOC, the accrual of interest would have
increased to a rate of 10% per annum. Prior to December 31, 2019
(the “Maturity
Date”), Red Beard had
the right, at its sole option, to convert the outstanding principal
balance, plus all accrued but unpaid interest due under the Red
Beard LOC (the “Outstanding
Balance”) into that number of shares of Common Stock
equal to the Outstanding Balance divided by $0.005. As of March 31,
2019, the Company had borrowed a total of $605,000 under the Red
Beard LOC, which was increased to $655,000 as of April 11, 2019. On
April 26, 2019, Red Beard converted all amounts due under the Red
Beard LOC into shares of Common Stock, thereby terminating the Red
Beard LOC, as more particularly discussed in Note 9 –
Subsequent
Events.
Note Extensions
On January 28,
2019, the Company entered into agreements with the holders of three
Senior Secured Promissory Notes (the “Notes”) to extend the maturity date of each of
the Notes by 60 days (the “Extension
Agreements”). The Notes
were each issued between July 25, 2017 to July 31, 2017, originally
matured six months after issuance, had an aggregate principal
balance of $750,000, and accrued interest at a rate of 8% per
annum. As a result of the Extension Agreements, the Notes matured
on March 26, 2019, March 31, 2019 and April 1, 2019,
respectively. On April 26, 2019, in connection with the
Exchange, Red Beard purchased each of the Notes, and thereafter
converted al amounts due under the Notes into shares of Common
Stock, thereby terminating the Notes, as more particularly
discussed in Note 9 – Subsequent
Events.
Basis of
Presentation and Going
Concern
The accompanying condensed consolidated balance
sheet as of December 31, 2018, which has been derived from audited
financial statements included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2018, and the
accompanying interim condensed consolidated financial statements
have been prepared by management pursuant to the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for interim financial reporting. These
interim condensed consolidated financial statements are unaudited
and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments and accruals)
necessary to fairly present the Company’s financial
condition, results of operations and cash flows as of and for the
periods presented in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”). Operating results for the three-month
period ended March 31, 2019 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2019,
or for any other interim period during such year. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been omitted in
accordance with the rules and regulations of the SEC, although the
Company believes that the disclosures made are adequate to make the
information not misleading. The accompanying condensed consolidated
financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in
the Company’s Annual Report on Form 10-K for the fiscal year
ended December 31, 2018, filed with the SEC on April 1,
2019.
The
accompanying condensed consolidated financial statements have been
prepared in conformity with GAAP, which contemplates continuation
of the Company as a going concern. As of and for the three months
ended March 31, 2019, the Company had a net loss of $1,038,756,
negative working capital of $4,077,881, and an accumulated deficit
of $53,159,404. The Company had $401 in cash at March 31,
2019. The
Company currently requires additional capital to execute its
business plan, marketing and operating plan, and therefore sustain
operations, which capital may not be available on favorable terms,
if at all. The accompanying
condensed consolidated financial statements do not include any
adjustments that will result if the Company is unable to secure the
capital necessary to execute its business, marking or operating
plan.
Principles of Consolidation
The
accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries as of
March 31, 2019, including True Drinks, Inc., Bazi, Inc. and GT
Beverage Company, LLC. All inter-company accounts and transactions
have been eliminated in the preparation of these condensed
consolidated financial statements.
Because
CCD became a wholly owned subsidiary of the Company subsequent to
the quarter ended March 31, 2019, the financial statements do not
include the accounts of CCD.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expense during
the reporting period. Significant estimates made by management
include, among others, deferred tax asset valuation allowances and
the realization of long-lived and intangible assets, including
goodwill. Actual results could differ from those
estimates.
Revenue Recognition
In May 2014, the
Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”)
2014-09, Revenue from Contracts with Customers (Topic 606), (ASC
606). The underlying principle of ASC 606 is to recognize revenue
to depict the transfer of goods or services to customers at the
amount expected to be collected. ASC 606 creates a five-step model
that requires entities to exercise judgment when considering the
terms of contract(s), which includes (1) identifying the
contract(s) or agreement(s) with a customer, (2) identifying our
performance obligations in the contract or agreement, (3)
determining the transaction price, (4) allocating the transaction
price to the separate performance obligations, and (5) recognizing
revenue as each performance obligation is satisfied. The Company
adopted ASC 606 effective January 1, 2018, and adoption of such
standard had no effect on previously reported
balances.
Recognition of sales of the products sold by the Company
since the adoption of the new standard has had no quantitative
effect on the financial statements. However, the guidance requires
additional disclosures to help users of financial statements better
understand the nature, amount, timing, and uncertainty of revenue
that is recognized.
The Company previously recognized and continues to recognize
revenue when risk of loss transferred to our customers and
collection of the receivable was reasonably assured, which
generally occurs when the product is shipped. A product is not
shipped without an order from the customer and credit acceptance
procedures performed.
Under the new guidance, revenue is recognized when control of
promised goods or services is transferred to our customers, in an
amount that reflects the consideration we expect to be entitled to
in exchange for those goods or services. As of March 31, 2019, the
Company did not have any significant contracts with customers
requiring performance beyond delivery. All orders had a written
purchase order that was reviewed for credit worthiness, pricing and
other terms before fulfillment begins. Shipping and handling
activities were performed before the customer obtained control of
the goods and therefore represented a fulfillment activity rather
than a promised service to the customer. Revenue and costs of sales
were recognized when placed under the customer’s control.
Control of the products that we sell, transfers to the customer
upon shipment from our facilities, and the Company’s
performance obligations are satisfied at that time.
All products sold by the Company as of March 31, 2019 were beverage
products. The products were offered for sale as finished goods
only, and there were no performance obligations required
post-shipment for customers to derive the expected value from them.
Contracts with customers contained no incentives or discounts that
could cause revenue to be allocated or adjusted over
time.
As of March 31, 2019, the Company did not allow for returns,
although it did for damaged products, if support for the damage
that occurred pre-fulfillment was provided, returns were permitted.
Damaged product returns were insignificant. Due to the
insignificant amount of historical returns as well as the
standalone nature of the Company’s products and assessment of
performance obligations and transaction pricing for its sales
contracts, the Company does not currently maintain a contract asset
or liability balance for obligations. The Company assess its
contracts and the reasonableness of its conclusions on a quarterly
basis
Cash and Cash Equivalents
The Company considers all highly liquid
investments with original maturities of three months or less, to be
cash equivalents. The Company maintains cash with high credit
quality financial institutions. At certain times, such amounts may
exceed Federal Deposit Insurance Corporation
(“FDIC”) insurance limits. The Company has not
experienced any losses on these amounts.
Accounts Receivable
The
Company records its trade accounts receivable at net realizable
value. This value includes an appropriate allowance for estimated
sales returns and allowances, and uncollectible accounts to reflect
any losses anticipated and charged to the provision for doubtful
accounts. Credit is extended to the Company’s customers based
on an evaluation of their financial condition; generally,
collateral is not required. An estimate of uncollectible amounts is
made by management based upon historical bad debts, current
customer receivable balances, age of customer receivable balances,
the customer’s financial condition and current economic
trends, all of which are subject to change. Actual uncollected
amounts have historically been consistent with the Company’s
expectations. Receivables are charged off against the reserve for
doubtful accounts when, in management’s estimation, further
collection efforts would not result in a reasonable likelihood of
receipt, or later as proscribed by statutory
regulations.
Concentrations
The
Company has no significant off-balance sheet concentrations of
credit risk, such as foreign exchange contracts, options contracts
or other foreign hedging arrangements. The Company maintains the
majority of its cash balances with two financial institutions.
There are funds in excess of the federally insured amount, or that
are subject to credit risk, and the Company believes that the
financial institutions are financially sound and the risk of loss
is minimal.
Prior to the termination of the Bottling Agreement
in early 2018, all production of AquaBall® was done by
Niagara. Niagara handled all aspects of production, including the
procurement of all raw materials necessary to produce
AquaBall®. We utilized two facilities to handle any necessary
repackaging of AquaBall® into six packs or 15-packs for club
customers.
During
the first quarter of 2019, 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.
No
customer made up more than 10% of accounts receivable at March 31,
2019 or December 31, 2018.
All of the
Company’s revenue during the three months ended March 31,
2019 was derived from the sale of Bazi.
Inventory
As of March 31, 2019, the Company purchased for
resale a liquid dietary supplement. Prior to the termination of the
Bottling Agreement and the discontinued production of
AquaBall® in the quarter
ended June 30, 2018, the Company also purchased for resale a
vitamin-enhanced flavored water beverage.
Inventories
are stated at the lower of cost (based on the first-in, first-out
method) or 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 $0 as of March 31, 2019
and December 31, 2018.
Inventory
is comprised of the following:
|
|
March 31,
2019
|
December 31,
2018
|
|
Purchased
materials
|
$13,155
|
$-
|
|
Finished
goods
|
12,502
|
2,035
|
|
Total
|
$25,657
|
$2,035
|
Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever
changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. For purposes of evaluating the
recoverability of long-lived assets, the recoverability test is
performed using undiscounted net cash flows estimated to be
generated by the asset. No impairment was deemed necessary during
the quarter ended March 31, 2019.
Goodwill and Identifiable Intangible Assets
As
a result of acquisitions, we have goodwill and other identifiable
intangible assets. In business combinations, goodwill is generally
determined as the excess of the fair value of the consideration
transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and
liabilities assumed as of the acquisition date. Accounting for
acquired goodwill in accordance with GAAP requires significant
judgment with respect to the determination of the valuation of the
acquired assets and liabilities assumed in order to determine the
final amount of goodwill recorded in business combinations.
Goodwill is not amortized, rather, it is evaluated for impairment
on an annual basis, or more frequently when a triggering event
occurs between annual tests that would more likely than not reduce
the fair value of the reporting unit below its carrying value. Such
impairment evaluations compare the reporting unit’s estimated
fair value to its carrying value.
Identifiable
intangible assets consist primarily of customer relationships
recognized in business combinations. Identifiable intangible assets
with finite lives are amortized over their estimated useful lives,
which represent the period over which the asset is expected to
contribute directly or indirectly to future cash flows.
Identifiable intangible assets are reviewed for impairment whenever
events and circumstances indicate the carrying value of such assets
or liabilities may not be recoverable and exceed their fair value.
If an impairment loss exists, the carrying amount of the
identifiable intangible asset is adjusted to a new cost basis. The
new cost basis is amortized over the remaining useful life of the
asset. Tests for impairment or recoverability require significant
management judgment, and future events affecting cash flows and
market conditions could adversely impact the valuation of these
assets and result in impairment losses.
Beneficial Conversion Feature of Convertible Debt
The Company accounts for convertible debt in
accordance with the guidelines established by FASB ASC 470-20,
“Debt with Conversion and Other Options.” The
Beneficial Conversion Feature (“BCF”) gives the debt holder the ability to
convert debt into Common Stock at a price per share that is less
than the trading price to the public on the date of the debt. The
beneficial value is calculated as the intrinsic value (the market
price of the stock at the commitment date in excess of the
conversion rate) of the beneficial conversion feature of the debt,
and is recorded as a discount to the related debt and an addition
to additional paid in capital. The discount is amortized over the
remaining outstanding period of related debt using the interest
method.
Income Taxes
As
the Company’s calculated provision (benefit) for income tax
is based on annual expected tax rates, no income tax expense was
recorded for the three-month period ended March 31, 2019 and 2018.
At March 31, 2019, the Company had tax net operating loss
carryforwards and a related deferred tax asset, which had a full
valuation
allowance.
Stock-Based Compensation
For
the three-month periods ended March 31, 2019 and 2018, general and
administrative expense included stock based compensation expense of
$16,881 and $220,009, respectively.
The Company uses a Black-Scholes option-pricing
model (the “Black-Scholes
Model”) to estimate the
fair value of outstanding stock options and warrants not accounted
for as derivatives. The use of a valuation model requires the
Company to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on the historical
volatility of the Company’s stock price over the contractual
term of the option or warrant. The expected life is based on the
contractual term of the option or warrant and expected exercise
and, in the case of options, post-vesting employment termination
behavior. Currently, our model inputs are based on the simplified
approach provided by Staff Accounting Bulletin
(“SAB”) 110. The risk-free interest rate is based
on U.S. Treasury zero-coupon issues with a remaining term equal to
the expected life assumed at the date of the
grant.
The
fair value for restricted stock awards is calculated based on the
stock price on the date of grant.
Fair Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts
receivable, accounts payable and accrued expense, and debt.
Management believes that the carrying amount of these financial
instruments approximates their fair values, due to their relatively
short-term nature.
Derivative Instruments
A derivative is an instrument whose value is
“derived” from an underlying instrument or index such
as a future, forward, swap, option contract, or other financial
instrument with similar characteristics, including certain
derivative instruments embedded in other contracts
(“embedded
derivatives”) and for
hedging activities. As a matter of policy, the Company does not
invest in financial derivatives or engage in hedging transactions.
However, the Company has entered into complex financing
transactions that involve financial instruments containing certain
features that have resulted in the instruments being deemed
derivatives or containing embedded derivatives. Derivatives and
embedded derivatives, if applicable, are measured at fair value
using the binomial lattice- (“Binomial
Lattice”) pricing model
and marked to market and reflected on our consolidated statement of
operations as other (income) expense at each reporting
period.
Basic and Diluted Income (Loss) Per Share
Our computation of earnings per share
(“EPS”) includes basic and diluted EPS. Basic EPS
is measured as the income (loss) available to common stockholders
divided by the weighted average common shares outstanding for the
period. Diluted (loss) income per share reflects the potential
dilution, using the treasury stock method, that could occur if
securities or other contracts to issue common stock were exercised
or converted into common stock or resulted in the issuance of
common stock that then shared in the income (loss) of the Company
as if they had been converted at the beginning of the periods
presented, or issuance date, if later. In computing diluted income
(loss) per share, the treasury stock method assumes that
outstanding options and warrants are exercised and the proceeds are
used to purchase common stock at the average market price during
the period. Options and warrants may have a dilutive effect under
the treasury stock method only when the average market price of the
common stock during the period exceeds the exercise price of the
options and warrants. Potential common shares that have an
antidilutive effect (i.e., those that increase income per share or
decrease loss per share) are excluded from the calculation of
diluted EPS.
Income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares
of Common Stock outstanding during the respective periods. Basic
and diluted income (loss) per common share is the same for periods
in which the Company reported an operating loss because all
converted preferred shares, warrants and stock options outstanding
are anti-dilutive. At March 31, 2019 and 2018, we excluded
113,872,026 and 116,674,110 shares of Common Stock
equivalents, respectively,
as their effect would have been
anti-dilutive.
Recent Accounting Pronouncements
Except
as noted below, the Company has reviewed all recently issued, but
not yet effective accounting pronouncements and has concluded that
there are no recently issued, but not yet effective pronouncements
that may have a material impact on the Company’s future
financial statements.
On
February 25, 2016, the FASB issued ASU 2016-2,
“Leases” (Topic 842), which is intended to improve
financial reporting for lease transactions. This ASU will require
organizations that lease assets, such as real estate, airplanes and
manufacturing equipment, to recognize on their balance sheet the
assets and liabilities for the rights to use those assets for the
lease term and obligations to make lease payments created by those
leases that have terms of greater than 12 months. The
recognition, measurement, and presentation of expense and cash
flows arising from a lease by a lessee primarily will depend on its
classification as finance or operating lease. This ASU will also
require disclosures to help investors and other financial statement
users better understand the amount and timing of cash flows arising
from leases. These disclosures will include qualitative and
quantitative requirements, providing additional information about
the amounts recorded in the financial statements. The ASU is
effective for the Company for the year ending December 31, 2019 and
interim reporting periods within that year, and early adoption is
permitted. On January 1, 2019, the Company adopted this standard,
which had no impact on the Company’s consolidated financial
statements.
NOTE 2 — SHAREHOLDERS’ EQUITY
Securities
As of March 31, 2019,
our authorized capital stock consisted of 7.0 billion shares of
Common Stock, and 5.0 million shares of preferred stock,
$0.001 par value per share, of which 2.75 million shares were
designated as Series B Convertible Preferred Stock
(“Series
B Preferred”),
200,000 shares were designated as Series C Convertible
Preferred Stock (“Series
C Preferred”) and 50,000
shares were designated as Series D Convertible Preferred Stock
(“Series
D Preferred”).
Subsequent to the
quarter ended March 31, 2019, the Certificates of Designation,
Preferences, Rights and Limitations of the Series B Preferred,
Series C Preferred and Series D Preferred (each, a
“COD”)
were amended, all issued and outstanding shares of Series B
Preferred, Series C Preferred and Series D Preferred were converted
into Common Stock, and Certificates of Withdrawal were filed with
the Secretary of State of the State of Nevada to eliminate each of
the foregoing series of preferred stock. Thereafter, the Company
filed Certificates of Designation with the Secretary of State of
the State of Nevada to designate two new series of preferred stock
– the Series A Convertible Preferred Stock and the Series B
Convertible Preferred Stock. See Note 9 – Subsequent
Events for additional
information regarding the amendments to the CODs, conversion and
elimination of our Series B, C and D Preferred, and the creation of
the two new series of preferred stock.
Below is a summary of the rights and preferences associated with
each type of security of the Company as of March 31,
2019.
Common
Stock. The holders of Common
Stock are entitled to receive, when and as declared by the Board of
Directors, dividends payable either in cash, in property or in
shares of Common Stock of the Company. Dividends have no cumulative
rights and dividends will not accumulate if the Board of Directors
does not declare such dividends.
Series B
Preferred. Each share of the
Company’s Series B Preferred
Convertible Stock (“Series
B Preferred”) had
a stated value of $4.00 per share (“Stated
Value”) and accrued
annual dividends equal to 5% of the Stated Value, payable by the
Company in quarterly installments, in either cash or shares of
Common Stock. At March 31, 2019, each share of Series B Preferred
was convertible, at the option of the holder, into that number of
shares of Common Stock equal to the Stated Value, divided by $0.25
per share (the “Series B Conversion
Shares”). The Company
also had the option to require the conversion of the Series B
Preferred into Series B Conversion Shares in the event: (i) there
were sufficient authorized shares of Common Stock reserved as
Series B Conversion Shares; (ii) the Series B Conversion Shares
were registered under the Securities Act of 1933, as amended (the
“Securities
Act”), or the Series B
Conversion Shares were freely tradable, without restriction, under
Rule 144 of the Securities Act; (iii) the daily trading volume of
the Company’s Common Stock, multiplied with the closing
price, equaled at least $250,000 for 20 consecutive trading days;
and (iv) the average closing price of the Company’s Common
Stock was at least $0.62 per share for 10 consecutive trading
days.
During
the three months ended March 31, 2019, the Company declared $64,279
in dividends on outstanding shares of its Series B Preferred. As of
March 31, 2019, there remained $64,279 in cumulative unpaid
dividends on the Series B Preferred.
Series
C Preferred. Each share of Series
C Preferred had a stated value of $100 per share, and as of the
quarter ended March 31, 2019, was convertible, at the option of
each respective holder, into that number of shares of Common Stock
equal to $100, divided by $0.025 per share (the
“Series
C Conversion Shares”). The Company
also had the option to require conversion of the Series C Preferred
into Series C Conversion Shares in the event: (i) there was
sufficient authorized shares of Common Stock reserved as Series C
Conversion Shares; (ii) the Series C Conversion Shares were
registered under the Securities Act, or the Series C Conversion
Shares were freely tradable, without restriction, under Rule 144 of
the Securities Act; and (iii) the average closing price of the
Company’s Common Stock was at least $0.62 per share for 10
consecutive trading day.
Series D
Preferred. Each share of Series
D Preferred had a stated value of $100 per share, and, following
the expiration of the 20 day calendar day period set forth in Rule
14c-2(b) under the Exchange Act, commencing upon the distribution
of an Information Statement on Schedule 14C to the Company’s
stockholders, each share of Series D Preferred was convertible, at
the option of each respective holder, into that number of shares of
the Company’s Common Stock equal to the stated value, divided
by $0.025 per share (the “Series D Conversion
Shares”). The Certificate
of Designation also gave the Company the option to require the
conversion of the Series D Preferred into Series D Conversion
Shares in the event: (i) there were sufficient authorized shares of
Common Stock reserved as Series D Conversion Shares; (ii) the
Series D Conversion Shares were registered under the Securities
Act, or the Series D Conversion Shares were freely tradable,
without restriction, under Rule 144 of the Securities Act; and
(iii) the average closing price of the Company’s Common Stock
was at least $0.62 per share for 10 consecutive trading
days.
Issuances of Securities
Between February 8, 2017 and August 21, 2017, the
Company issued an aggregate total of 45,625 shares of Series D
Preferred for $100 per share in a series of private placement
transactions (the “Series D
Financing”). As
additional consideration, investors in the Series D Financing
received warrants to purchase up to 60,833,353 shares of Common
Stock, an amount equal to 200% of the Series D Conversion Shares
issuable upon conversion of shares of Series D Preferred purchased
under the Series D Financing, exercisable for $0.15 per share. In
accordance with the terms and conditions of the Securities Purchase
Agreement executed in connection with the Series D Financing, all
warrants issued were exchanged for shares of Common Stock pursuant
to the Warrant Exchange Program (defined below). During the year
ended December 31, 2018, no shares of Series D Preferred were
converted to Common Stock.
NOTE 3 — WARRANTS AND STOCK BASED
COMPENSATION
Warrants
On July 26, 2017, the Company 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 the Company’s
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 March 31, 2018, the Company offered and sold Secured Notes in
the aggregate principal amount of $2,465,000 and issued Warrants to
purchase up to 8,216,671 shares of Common Stock to participating
investors.
A
summary of the Company’s warrant activity for the three
months ended March 31, 2019 is presented below:
|
|
Warrants
Outstanding
|
Weighted Average
Exercise Price
|
|
Outstanding, December 31, 2018
|
10,061,254
|
$0.15
|
|
Granted
|
-
|
-
|
|
Exercised
|
-
|
-
|
|
Expired
|
(1,416,950)
|
0.15
|
|
Outstanding, March 31, 2019
|
8,644,304
|
$0.15
|
As
of March 31, 2019, the Company had the following outstanding
warrants to purchase shares of its Common Stock:
|
Warrants Outstanding
|
Weighted Average
Exercise Price Per Share
|
Weighted Average
Remaining Life (Yrs.)
|
|
8,216,671
|
$0.15
|
3.53
|
|
427,633
|
0.19
|
1.47
|
|
8,644,304
|
$0.15
|
3.43
|
Stock-Based Compensation
Non-Qualified Stock Options
During
the quarter ended March 31, 2019, the Company did not grant any
stock options.
During
the three months ended March 31, 2018, the Company granted stock
options to purchase an aggregate 200,000 shares of Common
Stock. The Company also reset the exercise price and extended
the expiration date of options to certain employees and certain
members of the Company’s Board of Directors. The reset
options gave the holders the option to purchase an aggregate total
of 19,999,935 shares of Common Stock. The exercise prices were
reset to $0.025 per common share, and the expiration dates were
extended five years from the date of the reset. The original
exercise prices of these options were between $0.07 and $0.15 per
share, and the original expiration dates ranged from September 2021
to September 2022. The weighted average estimated fair value per
share of the stock options at grant date was $0.000 and $0.008 per
share, respectively. The value of the options for which the
exercise price was reset and the expiration date was extended in
2018 was also $0.008 per share. Such fair values were estimated
using the Black-Scholes stock option pricing model and the
following weighted average assumptions.
|
|
2018
|
|
Expected
life
|
30
months
|
|
Estimated
volatility
|
75%
|
|
Risk-free
interest rate
|
1.1%
|
|
Dividends
|
-
|
Stock
option activity during the three months ended March 31, 2019 is
summarized as follows:
|
|
Options
Outstanding
|
Weighted Average
Exercise Price
|
|
Options outstanding at December 31, 2018
|
91,759,826
|
$0.018
|
|
Exercised
|
-
|
-
|
|
Granted
|
-
|
-
|
|
Forfeited
|
-
|
-
|
|
Expired
|
-
|
-
|
|
Options outstanding at March 31, 2019
|
91,759,826
|
$0.18
|
Restricted Stock Awards
During
the three months ended March 31, 2019 and 2018, the Company did not
grant any restricted stock awards
under the Company’s 2013 Stock Incentive Plan, as
amended.
|
|
Restricted Common Stock Awards
|
|
Outstanding, December 31, 2018
|
1,500,000
|
|
Granted
|
-
|
|
Issued
|
(1,500,000)
|
|
Forfeited
|
-
|
|
Outstanding, March 31, 2019
|
-
|
NOTE 4 — DEBT
Line-of-Credit Facility
The
Company entered into a line-of-credit agreement with a financial
institution on June 30, 2014. The terms of the agreement allowed
the Company to borrow up to the lesser of $1.5 million or 85% of
the sum of eligible accounts receivables. The line of credit
agreement matured on July 31, 2018 and was not renewed by the
Company. At March 31, 2019, the total outstanding on the
line-of-credit was $0.
Food Labs Note Payable
As disclosed in
Note 1 above, on September 18, 2018, the Company issued a
promissory note to Food Labs in the principal amount of $50,000.
The Food Labs Note (i) accrued interest at a rate of 5% per annum,
(ii) included an additional lender’s fee equal to $500, or 1%
of the principal amount, and (iii) was scheduled to mature on
December 31, 2019. At March 31, 2019,
the total outstanding on the Food Labs Note was
$51,329.Subsequent to the
quarter ended March 31, 2019, Red Beard purchased the Food Labs
Note from Food Labs, and thereafter converted all amounts due under
the Food Labs note into shares of Common Stock. See Note 9
– Subsequent
Events for additional
information regarding the sale of the Food Labs Note to Red Beard,
and the subsequent conversion of all amounts due under the Food
Labs Note into Common Stock.
Note Payable
In April 2017, the Company converted approximately
$1,088,000 of accounts payable into a secured note payable
agreement with Niagara (the “Niagara
Note”). The Niagara Note
called for monthly payments of principal and interest totaling
$25,000 through December 2018, and monthly payments of
approximately $52,000 through maturity. The note bore interest at
8% per annum, was scheduled to mature in April 2019 and was secured
by the personal guarantee which secured the Bottling Agreement. As
of the date of the Niagara Settlement described in Note 1, the
remaining balance on the Niagara Note was $854,366 and was settled
in full in exchange for a new note payable.
As of March 31, 2019, and in connection with the
Niagara Settlement as further discussed in Note 1 above, the
Niagara Note was settled in full, and Note One was issued in the
principal amount of $4,644,906. Note One bore interest at 5% per
annum, and was scheduled to mature in December 2019. On
January 14, 2019, the Company, True Drinks and Red Beard entered
into an Assignment and Assumption Agreement, pursuant to which the
Company and True Drinks assigned, and Red Beard assumed, all
outstanding rights and obligations of the Company and True Drinks
under the terms of Note One. As a result, all obligations of the
Company and True Drinks under Note One, including for the payment
of amounts due thereunder, were assigned to Red
Beard.
In
April 2018, the Company issued a senior secured convertible
promissory note in the amount of $2,250,000 to Red Beard in order
to pay the initial payment of the Niagara Settlement. Also, in
April 2018, the Company sold its remaining AquaBall® inventory
to Red Beard for the Purchase Price of $1,436,113. As payment for
the Purchase Price, the principal amount of the note was reduced by
the Purchase Price, resulting in approximately $814,000 owed to Red
Beard under the terms of the Red Beard Note as of April 5, 2018.
The note bore interest at 5% per
annum, was scheduled to mature in December 2019 and was
secured by a continuing security interest in substantially all of
the Company’s assets.
Pursuant to the
terms of the Red Beard Note, Red Beard had 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 had 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. Pursuant to the terms of the Red Beard Note, such Conversion
Option was not to be exercisable unless and until such time as the
Company filed the Amendment with the Nevada Secretary of State,
which occurred on November 15,
2018. During the three months
ended March 31, 2019, a total of $125,617 of
the debt discount was amortized and recorded as
expense.
Subsequent to the quarter ended March 31, 2019,
Red Beard elected to convert the entire balance due under the Red
Beard Note into shares of Common Stock. See Note 9
– Subsequent
Events for additional
information regarding the conversion of the Red Beard Note into
Common Stock.
Secured Note Financing
As
disclosed in Note 3 above, on July 26, 2017, the Company commenced
an offering of Secured Notes in the aggregate principal amount of
up to $1.5 million to certain accredited investors. The amount
available was subsequently raised to $2.3 million. Between July 26,
2017 and March 31, 2018, the Company offered and sold Secured Notes
in the aggregate principal amount of $2,465,000 and issued warrants
to purchase up to 8,216,671 shares of Common Stock to participating
accredited investors. The warrants were valued at $127,466 and were
recorded as a discount to notes payable. During the three months
ended March 31, 2019, a total of $10,263 of the debt discount was
amortized and recorded as expense.
The Secured Notes (i) accrued interest at a rate
of 8% per annum, (ii) had a maturity date of 1.5 years from the
date of issuance, and (iii) were 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”). Subsequent
to the quarter ended March 31, 2019, the Secured Notes were each
sold to Red Beard, who thereafter converted the amounts due under
each of the Secured Notes into shares of Common Stock.
See Note 9
– Subsequent
Events for additional
information regarding the and conversion of the Secured
Notes.
In
addition, during the three months ended March 31, 2019, Red Beard
advanced the Company $100,000 to be used specifically to settle
certain accounts payable owing to certain creditors, and to provide
funds to pay certain operating, administrative and related costs to
continue operations. As of March 31, 2019, the Company had settled
approximately $850,000 in accounts payable to creditors, including
Disney, in consideration for the payment to such creditors of
approximately $210,000.
A
summary of the notes payable as of March 31, 2019 and December 31,
2018 is as follows:
|
|
Amount
|
|
Outstanding, December 31, 2018
|
$7,813,786
|
|
Borrowings
on notes payable
|
100,000
|
|
Amortization
of debt discount to interest expense
|
125,617
|
|
Assumption
of debt by related party
|
(4,644,906)
|
|
Outstanding March 31, 2019
|
$3,394,497
|
NOTE 5 — COMMITMENTS AND CONTINGENCIES
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 and the lessor recently agreed to settle all amounts
due under the old lease for an aggregate of $15,750 as
consideration for termination of the lease. Total rent expense
related to this and our previous operating lease for the three
months ended March 31, 2018 was $31,986. As of March 31, 2019,
management was occupying office space located at 2 Park Plaza in
Irvine California, which the Company rented for $500 per
month.
Legal
Proceedings
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are
unfounded and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
The
Irvine Company, LLC v. True Drinks, Inc. On September 10, 2018, The Irvine Company, LLC
(“Irvine”) filed a complaint against the Company in
the Superior Court of Orange County, located in Newport Beach,
California, alleging breach of contract related to the
Company’s early termination of its lease agreement with
Irvine in May 2018. Pursuant to the Complaint, Irvine sought to
recover approximately $74,000 in damages from the Company. In
November 2018, the Company and Irvine agreed to settle the lawsuit
for an aggregate of $15,750.
NOTE 6 – FAIR VALUE MEASUREMENTS
The
application of fair value measurements may be on a recurring or
nonrecurring basis depending on the accounting principles
applicable to the specific asset or liability or whether management
has elected to carry the item at its estimated fair value. FASB ASC
820-10-35 specifies a hierarchy of valuation techniques based on
whether the inputs to those techniques are observable or
unobservable. Observable inputs reflect market data obtained from
independent sources, while unobservable inputs reflect the
Company’s market assumptions. These two types of inputs
create the following fair value hierarchy:
- Level 1: Observable inputs
such as quoted prices in active markets;
- Level 2: Inputs, other than
the quoted prices in active markets, that are observable either
directly or indirectly; and
- Level 3: Unobservable inputs
in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
This
hierarchy requires the Company to use observable market data, when
available, and to minimize the use of unobservable inputs when
estimating fair value.
The Company assesses its recurring fair value
measurements as defined by FASB ASC 810. Liabilities measured at
estimated fair value on a recurring basis include derivative
liabilities. Transfers between fair value classifications occur
when there are changes in pricing observability levels. Transfers
of financial liabilities among the levels occur at the beginning of
the reporting period. There were no transfers
between Level 1, Level 2 and/or Level 3 during the three months
ended March 31, 2019. The Company had no Level 1 or 2 fair value
measurements at March 31, 2019 or December 31,
2018.
The
following table presents the estimated fair value of financial
liabilities measured at estimated fair value on a recurring basis
included in the Company’s financial statements as of March
31, 2019 and December 31, 2018:
|
|
|
Level 1
|
Level 2
|
Level 3
|
|
|
Total carrying value
|
Quoted market prices in active markets
|
Internal Models with significant observable market
parameters
|
Internal models with significant unobservable market
parameters
|
|
Derivative
liabilities – March 31, 2019
|
$-
|
$-
|
$-
|
$-
|
|
Derivative
liabilities – December 31, 2018
|
$879,257
|
$-
|
$-
|
$879,257
|
The
following table presents the changes in recurring fair value
measurements included in net loss for the three months ended
March 31, 2019 and 2018:
|
|
Recurring Fair Value Measurements
|
||
|
|
Changes in Fair Value
Included in Net Income
|
||
|
|
Other Income
|
Other Expense
|
Total
|
|
Derivative
liabilities – March 31, 2019
|
$-
|
$(975,430)
|
$(975,430)
|
|
Derivative
liabilities – March 31, 2018
|
$-
|
$-
|
$-
|
The
table below sets forth a summary of changes in the fair value of
our Level 3 financial liabilities for the three months ended
March 31, 2019:
|
|
December 31, 2018
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change
in Estimated Fair Value Recognized in Results of
Operations
|
March 31, 2019
|
|
Derivative
liabilities
|
$879,257
|
$-
|
$(1,854,687)
|
$975,430
|
$-
|
The table below sets forth a summary of changes in
the fair value of our Level 3 financial liabilities for
the three months ended March 31,
2018:
|
|
December 31, 2017
|
Recorded New Derivative
Liabilities
|
Reclassification of Derivative Liabilities to Additional Paid in
Capital
|
Change in Estimated Fair Value Recognized in Results of
Operations
|
March 31, 2018
|
|
Derivative
liabilities
|
$8,337
|
$-
|
$-
|
$-
|
$8,337
|
NOTE 7 – LICENSING AGREEMENTS
We first entered into licensing agreements with
Disney Consumer Products, Inc. (“Disney”) and an 18-month licensing agreement with
Marvel Characters, B.V. (“Marvel”) (collectively, the
“Licensing
Agreements”) in 2012.
Each Licensing Agreement 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.
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 License entitled 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 was required to make a ‘common
marketing fund’ contribution equal to 1% of sales due
annually during the Disney License. As discussed in Note 1 above,
in connection with the Company’s discontinued production of
AquaBall®, the Company
notified Disney of the Company’s desire to terminate the
Disney License in early 2018. As a result of the Company’s decision to
discontinue the production of AquaBall® and terminate
the Disney License, and considering amounts due, Disney drew from a
letter of credit funded by Red Beard in the amount of $378,000 on
or about June 1, 2018. Subsequently, Disney and the Company agreed
to a settlement and release of all claims related to the Disney
License in consideration for the payment to Disney of
$42,000.
NOTE 8 – INCOME TAXES
The Company did not
have significant income tax expense or benefit for the three months
ended March 31, 2019 or 2018. Tax net operating loss carryforwards
have resulted in a net deferred tax asset with a 100% valuation
allowance applied against such asset at March 31, 2019 and 2018.
Such tax net operating loss carryforwards
(“NOL”) approximated
$11,200,000 million at March 31,
2019. Some or all of such NOL may be limited by Section 382 of the
Internal Revenue Code.
The income tax effect of temporary differences between financial
and tax reporting and net operating loss carryforwards gives rise
to a deferred tax asset at March 31, 2019 and 2018 as
follows:
|
|
2019
|
2018
|
|
Deferred
tax asset –NOL’s
|
$11,200,000
|
$10,300,000
|
|
Less
valuation allowance
|
(11,200,000)
|
(10,300,000)
|
|
Net
deferred tax asset
|
$-
|
$-
|
NOTE 9 – SUBSEQUENT EVENTS
Management has reviewed and evaluated additional
subsequent events and transactions occurring after the balance
sheet date through the filing of this Annual Report on Form 10-K
and determined that, other than as disclosed below, no subsequent
events occurred. For additional information regarding the below
subsequent events, please refer to the Current Report on Form 8-K
filed with the SEC on April 30, 2019 (the
“8-K”),
as well as Amendment No. 1 to 8-K, filed with the SEC on May 1,
2019.
The Exchange
On April 26, 2019 (the “Closing
Date”), the Company
entered into a Securities Exchange Agreement (the
“Exchange
Agreement”), with each of
the members (“Members”) of CCD and certain direct investors
(“Direct
Investors”), pursuant to
which the Company acquired all outstanding membership interests of
CCD beneficially owned by the Members in exchange for the issuance
by the Company of units (“Units”), with such Units consisting of an
aggregate of (i) 15,655,538,349 shares of Common Stock (which
included the issuance of an aggregate of 1,396,305 shares a newly
created class of Series B Convertible Preferred Stock, par value
$0.001 per share (“New Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of Common Stock, issued
to certain individuals in lieu of Common Stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of Common Stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
Common Stock (the “Investor
Warrants,” and together
with the Common Stock, Series A Preferred and New Series B
Preferred, the “Securities”). As a result of the Exchange, CCD became
a wholly owned subsidiary of the Company.
The Investor Warrants have a term of five years,
and are exercisable at a price of $0.0044313 per share, subject to
certain adjustments. The Investor Warrants may be exercised at any
time at the option of the holder; provided,
however, that the Investor
Warrants shall not become exercisable unless and until such time
that the Company has amended its Amended and Restated Articles of
Incorporation, as amended (“Charter”), to increase the number of shares
authorized for issuance thereunder by a sufficient amount to allow
for the conversion and/or exercise of all Securities issued to the
Members and Direct Investors in the Exchange (the
“Increase in
Authorized”). In
addition, pursuant to the terms of the Investor Warrants, a holder
may not exercise any portion of the Investor Warrants in the event
that such exercise would result in the holder and its affiliates
beneficially owning in excess of 4.99% of the Company’s
issued and outstanding Common Stock immediately thereafter, which
limit may be increased to 9.99% at the election of the
holder.
As a condition to entering into the Exchange, the
Company was required to convert all of its currently issued and
outstanding Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, and Series D Convertible Preferred
Stock (collectively, the “Old
Preferred”), and existing
indebtedness, into shares of Common Stock. In addition, upon
consummation of the Exchange, CCD was provided with the right to
appoint two directors to the Company’s Board of
Directors.
In connection with the Exchange, the Company also
entered into Registration Rights Agreements (the
“Registration Rights
Agreements”) with each of
the Members and Direct Investors, pursuant to which the Company
agreed to use its best efforts to file a registration statement
with the SEC no later than 30 days after the Closing Date in order
to register, on behalf of the Members and Direct Investors, the
shares of Common Stock, shares of Common Stock issuable upon
conversion of the Series A Preferred and New Series B Preferred,
and shares of Common Stock issuable upon exercise of the Investor
Warrants.
Immediately prior to, and in connection with, the
Exchange, CCD consummated a private offering of membership
interests that resulted in net proceeds to CCD of approximately
$27.5 million (the “CCD
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the CCD Financing pursuant to an Engagement Letter
entered into by and between Katalyst, CCD and the Company on
February 15, 2019, which was thereafter amended on April 16, 2019.
As consideration for its services in connection with the CCD
Financing and Exchange, the Company issued to Katalyst and its
designees five-year warrants to purchase an aggregate of
930,869,848 shares of Common Stock at a price of $0.0044313 per
share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
As additional consideration for advisory services
provided in connection with the CCD Financing and Exchange, the
Company issued an aggregate of 902,661,671 shares of Common Stock
(the “Advisory
Shares”), including to
Scot Cohen, a member of the Company’s Board of Directors,
pursuant to a Subscription Agreement.
The
Exchange resulted in a change of control of the Company, with the
Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Exchange, and the Company’s current stockholders beneficially
owning approximately 14.3% of the issued and outstanding voting
securities, which includes the Advisory Shares. Together, Ryan
Stump and Brandon Stump, the founders of CCD and the
Company’s newly appointed Chief Executive Officer and Chief
Operating Officer, respectively, own in excess of 50% of the
Company’s issued and outstanding voting securities as a
result of the Exchange. Upon issuance of the Common Stock,
conversion of the Series A Preferred and New Series B Preferred,
and exercise of the Investor Warrants and Placement Agent Warrants
issued in connection with the Exchange, and assuming that the
Company’s Charter is further amended to effect the Increase
in Authorized, it is anticipated that the Company shall have an
aggregate of approximately 27.7 billion shares of Common Stock
issued and outstanding, of which approximately 24.3 billion shares
issued or issuable in connection with the Exchange are and shall be
restricted until such time as such shares are registered under the
Securities Act or an exemption therefrom is available to permit the
resale of such shares.
Debt Restructuring
On April 26, 2019, in connection with the
Exchange, Red Beard purchased substantially all outstanding
indebtedness of the Company, including, without limitation, the
Food Labs Note and Secured Notes. Thereafter, the Company entered
into a Debt Conversion Agreement with Red Beard, pursuant to which
Red Beard converted all indebtedness then held by Red Beard,
amounting to an aggregate of $4,227,250, into 1,070,741,474 shares
of the Company’s Common Stock (the “Debt
Conversion”). As a
result of the Debt Conversion, all indebtedness, liabilities and
other obligations of the Company held by and owed to Red Beard were
cancelled and deemed satisfied in full.
Restructuring of the Old Series B Preferred, Old Series C Preferred
and Old Series D Preferred
On April 26, 2019, in connection with the
Exchange, the Company filed Amendments to the Certificate of
Designation After Issuance of Class or Series with the Secretary of
State of the State of Nevada to amend the Certificates of
Designation, Preferences, Rights and Limitations, as amended (each,
a “COD”), of the Company’s Old Preferred,
consisting of Series B Convertible Preferred Stock
(“Old
Series B Preferred”),
Series C Convertible Preferred Stock (“Old Series C
Preferred”) and Series D
Convertible Preferred Stock (“Old Series D
Preferred”) (the
“Amendments”). Each of the CODs were amended to provide
the Company with the right, at its election, to convert all of the
issued and outstanding shares of Old Preferred into Common Stock,
at a price of $0.25 per share in the case of the Old Series B
Preferred, and $0.025 per share in the case of the Old Series C
Preferred and Old Series D Preferred. In addition, the Series B
Preferred COD was amended to remove Section 8 in its entirety,
which required the Company to redeem all outstanding shares of Old
Series B Preferred under certain circumstances.
Prior
to effecting each of the Amendments, the Company obtained written
consent from the holders of the requisite number of outstanding
shares of Old Series B Preferred, Old Series C Preferred and Old
Series D Preferred, as set forth in their respective CODs, to
effect such Amendments.
Immediately
after effecting the Amendments, the Company provided each holder of
the Old Series B Preferred, Old Series C Preferred and Old Series D
Preferred with a Mandatory Conversion Notice, pursuant to which the
Company converted all outstanding shares of the Old Preferred into
an aggregate of 580,385,360 shares of Common Stock.
Promptly
after distributing the Mandatory Conversion Notices to all holders
of the Old Preferred, the Company filed Certificates of Withdrawal
for each of the Old Series B Preferred, Old Series C Preferred and
Old Series D Preferred with the Secretary of State of the State of
Nevada, thereby eliminating the Old Series B Preferred, Old Series
C Preferred and Old Series D Preferred and returning them to
authorized but unissued shares of the Company’s preferred
stock.
Creation of Series A Preferred
On April 25, 2019, in connection with the
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series A Convertible Preferred Stock
(the “Series A
COD”) with the Secretary
of State of the State of Nevada, designating 300,000 shares of its
preferred stock as Series A Convertible Preferred Stock. Each share
of Series A Preferred has a stated value of $100 per share (the
“Series A Stated
Value”). The Series
A Preferred rank senior to all of the Company’s outstanding
securities, including the Company’s Series B Convertible
Preferred Stock.
The Series A Preferred provides the holders with
the right to receive a one-time dividend payment equal to 8% of the
Series A Stated Value (the “Series A
Dividend”), which Series
A Dividend shall be paid by the Company on the earlier to occur of
(i) when declared at the election of the Company, (ii) one year
from the date of issuance, or (iii) when a holder elects to convert
its shares of Series A Preferred into Common
Stock.
Each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of Common
Stock equal to the Series A Stated Value plus all accrued but
unpaid dividends, divided by $0.0044313, which conversion rate is
subject to adjustment in accordance with the terms of the Series A
COD; provided,
however, that holders of the
Series A Preferred may not convert any shares of Series A Preferred
into Common Stock unless and until the Company has effected the
Increase in Authorized. In addition, holders of Series A Preferred
are prohibited from converting Series A Preferred into Common Stock
if, as a result of such conversion, the holder, together with its
affiliates, would own more than 4.99% (or 9.99% upon the election
of the holder prior to the issuance of the Series A Preferred) of
the total number of shares of Common Stock then issued and
outstanding. Each share of Series A Preferred is convertible at the
option of the Company, at the same conversion rate set forth above,
at such time, if ever, that the Company’s Common Stock is
listed on the Nasdaq Stock Market and the Company has paid the
Series A Dividend. In addition, upon the occurrence of a Bankruptcy
Event (as defined in the Series A COD), the Company shall be
required to redeem, in cash, all outstanding shares of Series A
Preferred at a price equal to the conversion
amount; provided,
however, that holders of the
Series A Preferred shall have the right to waive, in whole or in
part, such right to receive payment upon the occurrence of a
Bankruptcy Event.
Holders of the Series A Preferred shall vote on an
as-converted basis along with holders of the Company’s Common
Stock on all matters presented to the Company’s
stockholders; provided,
however, that the number of
votes that any holder, together with its affiliates, may exercise
in connection with all of the Company securities held by such
holder shall not exceed 9.99% of the voting power of the Company.
In addition, pursuant to the Series A COD, the Company shall not
take the following actions without obtaining the prior consent of
at least a majority of the holders of the outstanding Series A
Preferred, voting separately as a single class: (i) amend the
Company’s Charter or bylaws, or file a certificate of
designation or certificate of amendment to any series of preferred
stock if such action would adversely affect the holders of the
Series A Preferred, (ii) increase or decrease the authorized number
of shares of Series A Preferred, (iii) create or authorize any
series of stock that ranks senior to, or on parity with, the Series
A Preferred, (iv) purchase, repurchase or redeem any shares of
junior stock, or (v) pay dividends on any junior or parity stock.
Furthermore, so long as at least 25% of the Series A Preferred
remain outstanding, holders of the Series A Preferred (other than
the Direct Investors) shall have a right to appoint two members to
the Company’s Board of Directors, and the Board shall not
consist of more than five members, unless the holders of a majority
of the outstanding Series A Preferred have consented to an increase
in such number.
Creation of New Series B Preferred
On April 26, 2019, in connection with the Exchange
and subsequent to filing a Certificate of Withdrawal for the Old
Series B Preferred, the Company filed the Certificate of
Designation, Preferences and Rights of the Series B Convertible
Preferred Stock (the “New Series B
COD”) with the Secretary
of State of the State of Nevada, designating 1.5 million shares of
its preferred stock as Series B Convertible Preferred
Stock. The New Series B Preferred ranks junior to the Series A
Preferred and senior to all of the Company’s other
outstanding securities.
The
New Series B Preferred is structured to act as a Common Stock
equivalent. Upon the Company amending its Charter to effect the
Increase in Authorized, each share of New Series B Preferred shall
be converted into 10,000 shares of Common Stock, subject to certain
adjustments. Shares of New Series B Preferred may not be converted
into Common Stock until the Increase in Authorized is effective.
Holders of the New Series B Preferred are not entitled to
dividends, unless the Company’s Board of Directors elects to
issue a dividend to holders of Common Stock.
Holders
of the New Series A Preferred vote on an as-converted basis along
with holders of the Company’s Common Stock on all matters
presented to the Company’s stockholders. In addition,
pursuant to the New Series B COD, the Company shall not take the
following actions without obtaining the prior consent of at least
50% of the holders of the outstanding New Series B Preferred,
voting separately as a single class: (i) amend the provisions
of the New Series B COD so as to adversely affect holders of the
New Series B Preferred, (ii) increase the authorized number of
shares of New Series B Preferred, or (iii) effect any distribution
with respect to junior stock, unless the Company also provides such
distribution to holders of the New Series B Preferred.
Brandon Stump Employment Agreement
On April 26, 2019, in connection with the
Exchange, Brandon Stump, a co-founder and the Chief Executive
Officer of CCD, was appointed as Chief Executive Officer of the
Company. In connection with his appointment as Chief Executive
Officer, the Company and Brandon Stump entered into an employment
agreement (the “B. Stump Employment
Agreement”), pursuant to
which Brandon Stump shall (i) serve as the Company’s Chief
Executive Officer for a term of three years, renewable for one-year
periods thereafter, during which time he shall report to the
Company’s Board of Directors; (ii) be subject to a
non-competition requirement for three years after his termination;
(iii) be subject to a non-solicitation requirement for one year
after his termination, and be entitled to receive the following
compensation for his services as Chief Executive Officer: (a) an
annual base salary of $500,000, which shall increase on an annual
basis by an amount not less than $25,000 per year, as determined by
the Compensation Committee of the Company’s Board of
Directors, (b) an annual cash bonus of up to $750,000 per year,
which cash bonus will be determined based on the Company’s
achievement of audited gross revenue targets of $35.0 million per
year, as more particularly set forth in the B. Stump Employment
Agreement, (c) certain milestone based bonuses, (d) an annual award
of shares of Common Stock having an aggregate value equal to
one-half of Brandon Stump’s annual base salary in effect for
such year, which shares shall vest quarterly in equal amounts over
a three year period commencing on the issuance date, (e)
participation in the Company’s retirement plan, if any, (f)
reimbursement of all reasonable business-related expenses incurred
by Brandon Stump, (e) full health insurance coverage for he and his
dependents, and at least $5.0 million of life insurance, (g) 21
paid vacation days per year, and (h) a monthly automobile allowance
of $750 per month.
The Company may terminate the B. Stump Employment
Agreement in the event of Brandon Stump’s death or
disability, or for Cause, as defined in the B. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Brandon Stump may
terminate the B. Stump Employment Agreement at any time for any
reason. In the event that his employment is terminated by him
without Good Reason, as defined in the B. Stump Employment
Agreement, or by the Company for Good Cause as a result of a Change
in Control, he shall be entitled to the following compensation: (i)
any earned but unpaid salary through the termination date, (ii)
unpaid and unreimbursed expenses, (iii) earned but unpaid bonuses,
and (iv) any accrued vacation days; provided,
however, that in the event that
the B. Stump Employment Agreement is terminated by Brandon Stump
for any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event his employment is
terminated by the Company without Cause or Brandon Stump terminates
it for Good Reason, as defined in the B. Stump Employment
Agreement, then he shall be entitled to the following compensation:
(i) all amounts due to him through the termination date, (ii) full
vesting of any and all previously granted equity-based incentive
awards, and (iii) health insurance coverage for a period of 18
months after the termination date. In addition, effective upon a
Change in Control, regardless of whether the B. Stump Employment
Agreement is terminated, his base salary for the year in which the
Change in Control occurred and any years thereafter shall
automatically increase by 20% and the milestone bonuses shall
automatically decrease by 30%.
Ryan Stump Employment Agreement
On April 26, 2019, in connection with the
Exchange, Ryan Stump, a co-founder and the Chief Operating Officer
of CCD, was appointed as Chief Operating Officer of the Company. In
connection with his appointment as Chief Operating Officer, the
Company and Ryan Stump entered into an employment agreement (the
“R.
Stump Employment Agreement”), pursuant to which Ryan Stump shall (i)
serve as the Company’s Chief Operating Officer for a term of
three years, renewable for one-year periods thereafter, during
which time he shall report to the Company’s Chief Executive
Officer; (ii) be subject to a non-competition requirement for three
years after his termination; (iii) be subject to a non-solicitation
requirement for one year after his termination, and be entitled to
receive the following compensation for his services as Chief
Operating Officer: (a) an annual base salary of $500,000, which
shall increase on an annual basis by amount that is not less than
$25,000 per year, as determined by the Compensation Committee of
the Company’s Board of Directors, (b) an annual cash bonus of
up to $750,000 per year, which cash bonus will be determined based
on the Company’s achievement of a gross revenue target of
$35.0 million per year, as more particularly set forth in the R.
Stump Employment Agreement, (c) certain milestone based bonuses,
(d) an annual award of shares of Common Stock having an aggregate
value equal to one-half of Ryan’s annual base salary in
effect for such year, which shares shall vest quarterly in equal
amounts over a three year period commencing on the issuance date,
(e) participation in the Company’s retirement plan, if any,
(f) reimbursement of all reasonable business-related expenses
incurred by Ryan Stump, (e) full health insurance coverage for he
and his dependents, and at least $5.0 million of life insurance,
(g) 21 paid vacation days per year, and (h) a monthly automobile
allowance of $750 per month.
The Company may terminate the R. Stump Employment
Agreement in the event of Ryan Stump’s death or disability,
or for Cause, as defined in the R. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Ryan Stump may terminate
the R. Stump Employment Agreement at any time for any reason. In
the event that his employment is terminated by him without Good
Reason, as defined in the R. Stump Employment Agreement, or by the
Company for Good Cause as a result of a Change in Control, he shall
be entitled to the following compensation: (i) any earned but
unpaid salary through the termination date, (ii) unpaid and
unreimbursed expenses, (iii) earned but unpaid bonuses, and (iv)
any accrued vacation days; provided,
however, that in the event that
the R. Stump Employment Agreement is terminated by Ryan Stump for
any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event that his
employment is terminated by the Company without Cause or he
terminates it for Good Reason, as defined in the R. Stump
Employment Agreement, then Ryan Stump shall be entitled to the
following compensation: (i) all amounts due to him through the
termination date, (ii) full vesting of any and all previously
granted equity-based incentive awards, and (iii) health insurance
coverage for a period of 18 months after the termination date. In
addition, effective upon a Change in Control, regardless of whether
the R. Stump Employment Agreement is terminated, his base salary
for the year in which the Change in Control occurred and any years
thereafter shall automatically increase by 20% and the milestone
bonuses shall automatically decrease by 30%.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
“forward-looking” statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. We intend
to identify forward-looking statements in this report by using
words such as “believes,” “intends,”
“expects,” “may,” “will,”
“should,” “plan,” “projected,”
“contemplates,” “anticipates,”
“estimates,” “predicts,”
“potential,” “continue,” or similar
terminology. These statements are based on our beliefs as well as
assumptions we made using information currently available to us. We
undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information,
future events, or otherwise. Because these statements reflect our
current views concerning future events, these statements involve
risks, uncertainties, and assumptions. Actual future results may
differ significantly from the results discussed in the
forward-looking statements. These risks include changes in demand
for our products, changes in the level of operating expense, our
ability to expand our network of customers, changes in general
economic conditions that impact consumer behavior and spending,
product supply, the availability, amount, and cost of capital to us
and our use of such capital, and other risks discussed in this
report. Additional risks that may affect our performance are
discussed under “Risk Factors” in the Company’s
Annual Report on Form 10-K for the fiscal year ended December 31,
2018.
The following discussion of the financial condition and results of
operations should be read in conjunction with the condensed
consolidated financial statements included elsewhere within this
Quarterly Report. Fluctuations in annual and quarterly results may
occur as a result of factors affecting demand for our products such
as the timing of new product introductions by us and by our
competitors and our customers’ political and budgetary
constraints. Due to such fluctuations, historical results and
percentage relationships are not necessarily indicative of the
operating results for any future period.
Overview
As
discussed in detail in Note 9 – Subsequent Events, on April 26, 2019,
the Company entered into a Securities Exchange Agreement with each
of the members of Charlie’s Chalk Dust, LLC, a Delaware
limited liability company (“CCD”), and certain direct
investors, pursuant to which the Company acquired all outstanding
membership interests of CCD beneficially owned by its members in
exchange for Company securities (the “Exchange”). As a result, CCD
became a wholly owned subsidiary of the Company.
Since the date of the Exchange, the Company’s primary
business is the development, marketing and distribution of high
quality vapor products. The Company now distributes its vapor
products both domestically and internationally through select
distributors, specialty retailers and third-party online
resellers.
As of March 31, 2019, our principal place of
business was 2 Park Plaza, Suite 1200, Irvine, California 92614,
which was changed to 1007
Brioso Drive, Costa Mesa, CA 92627 as of April 26, 2019. Our telephone number is
(949) 531-6855. 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.”
Cessation of Production of AquaBall®, and Management’s
Plan
During the first
quarter of 2018, due to the weakness in the sale of the
Company’s principal product, AquaBall® Naturally
Flavored Water, and continued substantial operating losses, the
Company’s Board of Directors determined to discontinue the
production of AquaBall®, and, as set forth below, terminate
the bottling agreement by and between Niagara Bottling LLC, the
Company’s contract bottling manufacturer (“Bottler” or “Niagara”), and True Drinks (the
“Bottling
Agreement”). In addition, the Company notified Disney
Consumer Products, Inc. (“Disney”) of the Company’s
desire to terminate its licensing agreement with Disney
(“Disney
License”), pursuant to which the Company was able to
feature various Disney characters on each AquaBall® bottle. As
a result of management’s decision, and the Company’s
failure to pay certain amounts due Disney under the terms of the
Disney License, the Disney License terminated, and Disney claimed
amounts due of approximately $178,000, net of $378,000 drawn from
an irrevocable letter of credit posted in connection with the
execution of the Disney License. In addition, Disney sought
additional payments for minimum royalty amounts required to be paid
Disney through the remainder of the term of the Disney License. On
July 17, 2018, the Company and Disney entered into a settlement and
release whereby in exchange for a payment to Disney of $42,000, the
parties agreed to release each other from any and all claims
related to the Disney License.
In April 2018, the
Company sold its remaining AquaBall® inventory to Red Beard
for an aggregate purchase price of approximately $1.44 million (the
“Purchase
Price”). As payment for the Purchase Price, the
principal amount of the senior secured convertible promissory note
issued to Red Beard by the Company in the principal amount of $2.25
million (the “Red Beard
Note”) was reduced by the Purchase Price, resulting in
approximately $814,000 owed to Red Beard under the terms of the Red
Beard Note as of April 5, 2018. As of March 31, 2019, the Company
owed Red Beard $569,741 in principal and accrued but unpaid
interest pursuant to the Red Beard Note. On April 26, 2019,
subsequent to the quarter ended March 31, 2019, Red Beard converted
all amounts due under the terms of the Red Beard Note into shares
of the Company’s Common Stock.
As of
March 31, 2019, the Company had reduced its staff to one employee,
and had contracted with former management and other professionals
to continue operations. In addition, the Company had taken other
steps to minimize general, administrative and other operating
costs, while maintaining only those costs and expenses necessary to
maintain sales of Bazi® and otherwise continue operations
while the Board of Directors and the Company’s principal
stockholder explored certain opportunities, as more particularly
described below. Management also worked to reduce accounts payable
by negotiating settlements with creditors, including Disney,
utilizing advances from Red Beard aggregating approximately
$605,000 as of March 31, 2019, and focused on negotiating with its
remaining creditors to settle additional accounts
payable.
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”). On January 14, 2019, the Company, True
Drinks and Red Beard entered into an Assignment and Assumption
Agreement, pursuant to which the Company and True Drinks assigned,
and Red Beard assumed, all outstanding rights and obligations of
the Company and True Drinks under the terms of Note One. As a
result, all obligations of the Company and True Drinks under Note
One, including for the payment of amounts due thereunder, were
assigned to Red Beard.
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 agreed to issue
Red Beard 348,367,950 shares of the Company’s Common Stock
(the “Shares”),
which Shares were to be issued at such time as the Company 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 executed,
and caused its affiliates to execute, a written consent of
shareholders to approve the Amendment. As discussed below, on
November 15, 2018, the Company amended its Articles of
Incorporation to increase the number of authorized shares of Common
Stock to 7.0 billion, thereby triggering the Company’s
obligation to issue the Shares to Red Beard.
In
connection with the Settlement, and in order to make the Cash
Payment described above, the Company issued the Red Beard Note to
Red Beard, which Red Beard Note accrued interest at a rate of 5%
per annum. In May 2018, as a result of the sale to Red Beard of the
Company’s remaining AquaBall® inventory, the principal
amount of the Red Beard Note was reduced by the Purchase
Price.
Pursuant to the
terms of the Red Beard Note, Red Beard had the right, at its sole
option, to convert the outstanding balance due under the Red Beard
Note 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 had
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. Pursuant to the terms of the Red Beard Note, such
Conversion Option could not be exercisable unless and until such
time as the Company has filed the Amendment with the Nevada
Secretary of State, which occurred on November 15, 2018. As a
result of the Increase in Authorized, Red Beard was able exercise
its Conversion Option under the Red Beard Note at any time, which
it elected to do on April 26, 2019 in connection with the
Exchange.
On
September 18, 2018, the Company and Food Labs, Inc.
(“Food Labs”)
entered into an agreement, pursuant to which the Company sold and
issued to Food Labs a promissory note in the principal amount of
$50,000 (the “Food Labs
Note”). The Food Labs Note (i) accrued interest at a
rate of 5% per annum, (ii) included an additional lender’s
fee equal to $500, or 1% of the principal amount, and (iii) was
scheduled to mature on December 31, 2019. Food Labs is controlled
by Red Beard. In connection with the Exchange, on April 26, 2019,
Red Beard purchased the Food Labs Note, and thereafter converted
all amounts due under the Food Labs Note into shares of Common
Stock, thereby terminating the Food Labs Note, as more specifically
discussed below.
Increase in Authorized Shares of Common Stock
On November 15, 2018, the Company filed a
Certificate of Amendment to its Articles of Incorporation with the
Secretary of State of the State of Nevada to increase the total
number of shares of Common Stock authorized for issuance thereunder
from 300.0 million to 7.0 billion shares (the
“Increase in
Authorized”).
As a
result of the Increase in Authorized, Red Beard could exercise its
Conversion Option under the Red Beard Note at any time, which it
elected to do on April 26, 2019 in
connection with the Exchange.
Red Beard Line-of-Credit
On
November 19, 2018, the Company entered into a line-of-credit with
Red Beard, effective October 25, 2018, pursuant to which the
Company could borrow up to $250,000 (the “Red Beard LOC”); provided, however, that Red Beard
could, in its sole discretion, decline to provide additional
advances under the Red Beard LOC upon written notice the Company of
its intent to decline to make such advances. Interest accrued on
the outstanding principal of amount of the Red Beard LOC at a rate
of 8% per annum; provided,
however, that upon the occurrence of an Event of Default, as
defined in the Red Beard LOC, the accrual of interest would have
increased to a rate of 10% per annum. Prior to December 31, 2019
(the “Maturity
Date”), Red Beard had
the right, at its sole option, to convert the outstanding principal
balance, plus all accrued but unpaid interest due under the Red
Beard LOC (the “Outstanding
Balance”) into that number of shares of Common Stock
equal to the Outstanding Balance divided by $0.005. As of March 31,
2019, the Company had borrowed a total of $605,000 under the Red
Beard LOC, which was increased to $655,000 as of April 11, 2019. On
April 26, 2019, Red Beard converted all amounts due under the Red
Beard LOC into shares of Common Stock, thereby terminating the Red
Beard LOC, as more specifically discussed below.
Note Extensions
On January 28,
2019, the Company entered into agreements with the holders of three
Senior Secured Promissory Notes (the “Notes”) to extend the maturity date of each of
the Notes by 60 days (the “Extension
Agreements”). The Notes
were each issued between July 25, 2017 to July 31, 2017, originally
matured six months after issuance, have an aggregate principal
balance of $750,000, and accrued interest at a rate of 8% per
annum. As a result of the Extension Agreements, the Notes matured
on March 26, 2019, March 31, 2019 and April 1, 2019,
respectively. On April 26, 2019, in connection with the
Exchange, Red Beard purchased each of the Notes, and thereafter
converted al amounts due under the Notes into shares of Common
Stock, thereby terminating the Notes, as more particularly
discussed below.
The Exchange
On April 26, 2019 (the “Closing
Date”), the Company
entered into a Securities Exchange Agreement (the
“Exchange
Agreement”), with each of
the members (“Members”) of CCD and certain direct investors
(“Direct
Investors”), pursuant to
which the Company acquired all outstanding membership interests of
CCD beneficially owned by the Members in exchange for the issuance
by the Company of units (“Units”), with such Units consisting of an
aggregate of (i) 15,655,538,349 shares of Common Stock (which
included the issuance of an aggregate of 1,396,305 shares a newly
created class of Series B Convertible Preferred Stock, par value
$0.001 per share (“New Series B
Preferred”), convertible
into an aggregate of 13,963,047,716 shares of Common Stock, issued
to certain individuals in lieu of Common Stock); (ii) 206,249
shares of a newly created class of Series A Convertible Preferred
Stock, par value $0.001 per share (“Series A
Preferred”), convertible
into an aggregate of 4,654,349,239 shares of Common Stock; and
(iii) warrants to purchase an aggregate of 3,102,899,493 shares of
Common Stock (the “Investor
Warrants,” and together
with the Common Stock, Series A Preferred and New Series B
Preferred, the “Securities”). As a result of the Exchange, CCD became
a wholly owned subsidiary of the Company.
The Investor Warrants have a term of five years,
and are exercisable at a price of $0.0044313 per share, subject to
certain adjustments. The Investor Warrants may be exercised at any
time at the option of the holder; provided,
however, that the Investor
Warrants shall not become exercisable unless and until such time
that the Company has amended its Amended and Restated Articles of
Incorporation, as amended (“Charter”), to increase the number of shares
authorized for issuance thereunder by a sufficient amount to allow
for the conversion and/or exercise of all Securities issued to the
Members and Direct Investors in the Exchange (the
“Increase in
Authorized”). In
addition, pursuant to the terms of the Investor Warrants, a holder
may not exercise any portion of the Investor Warrants in the event
that such exercise would result in the holder and its affiliates
beneficially owning in excess of 4.99% of the Company’s
issued and outstanding Common Stock immediately thereafter, which
limit may be increased to 9.99% at the election of the
holder.
As a condition to entering into the Exchange, the
Company was required to convert all of its currently issued and
outstanding Series B Convertible Preferred Stock, Series C
Convertible Preferred Stock, and Series D Convertible Preferred
Stock (collectively, the “Old
Preferred”), and existing
indebtedness, into shares of Common Stock. In addition, upon
consummation of the Exchange, CCD was provided with the right to
appoint two directors to the Company’s Board of
Directors.
In connection with the Exchange, the Company also
entered into Registration Rights Agreements (the
“Registration Rights
Agreements”) with each of
the Members and Direct Investors, pursuant to which the Company
agreed to use its best efforts to file a registration statement
with the SEC no later than 30 days after the Closing Date in order
to register, on behalf of the Members and Direct Investors, the
shares of Common Stock, shares of Common Stock issuable upon
conversion of the Series A Preferred and New Series B Preferred,
and shares of Common Stock issuable upon exercise of the Investor
Warrants.
Immediately prior to, and in connection with, the
Exchange, CCD consummated a private offering of membership
interests that resulted in net proceeds to CCD of approximately
$27.5 million (the “CCD
Financing”). Katalyst
Securities LLC (“Katalyst”) acted as the sole placement agent in
connection with the CCD Financing pursuant to an Engagement Letter
entered into by and between Katalyst, CCD and the Company on
February 15, 2019, which was thereafter amended on April 16, 2019.
As consideration for its services in connection with the CCD
Financing and Exchange, the Company issued to Katalyst and its
designees five-year warrants to purchase an aggregate of
930,869,848 shares of Common Stock at a price of $0.0044313 per
share (the “Placement Agent
Warrants”). The Placement
Agent Warrants have substantially the same terms as those set forth
in the Investor Warrants.
As additional consideration for advisory services
provided in connection with the CCD Financing and Exchange, the
Company issued an aggregate of 902,661,671 shares of Common Stock
(the “Advisory
Shares”), including to
Scot Cohen, a member of the Company’s Board of Directors,
pursuant to a Subscription Agreement.
The
Exchange resulted in a change of control of the Company, with the
Members and Direct Investors owning approximately 85.7% of the
Company’s outstanding voting securities immediately after the
Exchange, and the Company’s current stockholders beneficially
owning approximately 14.3% of the issued and outstanding voting
securities, which includes the Advisory Shares. Together, Ryan
Stump and Brandon Stump, the founders of CCD and the
Company’s newly appointed Chief Executive Officer and Chief
Operating Officer, respectively, own in excess of 50% of the
Company’s issued and outstanding voting securities as a
result of the Exchange. Upon issuance of the Common Stock,
conversion of the Series A Preferred and New Series B Preferred,
and exercise of the Investor Warrants and Placement Agent Warrants
issued in connection with the Exchange, and assuming that the
Company’s Charter is further amended to effect the Increase
in Authorized, it is anticipated that the Company shall have an
aggregate of approximately 27.7 billion shares of Common Stock
issued and outstanding, of which approximately 24.3 billion shares
issued or issuable in connection with the Exchange are and shall be
restricted until such time as such shares are registered under the
Securities Act or an exemption therefrom is available to permit the
resale of such shares.
Debt Restructuring
On April 26, 2019, in connection with the
Exchange, Red Beard purchased substantially all outstanding
indebtedness of the Company, including, without limitation, the
Food Labs Note and Secured Notes. Thereafter, the Company entered
into a Debt Conversion Agreement with Red Beard, pursuant to which
Red Beard converted all indebtedness then held by Red Beard,
amounting to an aggregate of $4,227,250, into 1,070,741,474 shares
of the Company’s Common Stock (the “Debt
Conversion”). As a
result of the Debt Conversion, all indebtedness, liabilities and
other obligations of the Company held by and owed to Red Beard were
cancelled and deemed satisfied in full.
Restructuring of the Old Series B Preferred, Old Series C Preferred
and Old Series D Preferred
On April 26, 2019, in connection with the
Exchange, the Company filed Amendments to the Certificate of
Designation After Issuance of Class or Series with the Secretary of
State of the State of Nevada to amend the Certificates of
Designation, Preferences, Rights and Limitations, as amended (each,
a “COD”), of the Company’s Old Preferred,
consisting of Series B Convertible Preferred Stock
(“Old
Series B Preferred”),
Series C Convertible Preferred Stock (“Old Series C
Preferred”) and Series D
Convertible Preferred Stock (“Old Series D
Preferred”) (the
“Amendments”). Each of the CODs were amended to provide
the Company with the right, at its election, to convert all of the
issued and outstanding shares of Old Preferred into Common Stock,
at a price of $0.25 per share in the case of the Old Series B
Preferred, and $0.025 per share in the case of the Old Series C
Preferred and Old Series D Preferred. In addition, the Series B
Preferred COD was amended to remove Section 8 in its entirety,
which required the Company to redeem all outstanding shares of Old
Series B Preferred under certain circumstances.
Prior
to effecting each of the Amendments, the Company obtained written
consent from the holders of the requisite number of outstanding
shares of Old Series B Preferred, Old Series C Preferred and Old
Series D Preferred, as set forth in their respective CODs, to
effect such Amendments.
Immediately
after effecting the Amendments, the Company provided each holder of
the Old Series B Preferred, Old Series C Preferred and Old Series D
Preferred with a Mandatory Conversion Notice, pursuant to which the
Company converted all outstanding shares of the Old Preferred into
an aggregate of 580,385,360 shares of Common Stock.
Promptly
after distributing the Mandatory Conversion Notices to all holders
of the Old Preferred, the Company filed Certificates of Withdrawal
for each of the Old Series B Preferred, Old Series C Preferred and
Old Series D Preferred with the Secretary of State of the State of
Nevada, thereby eliminating the Old Series B Preferred, Old Series
C Preferred and Old Series D Preferred and returning them to
authorized but unissued shares of the Company’s preferred
stock.
Creation of Series A Preferred
On April 25, 2019, in connection with the
Exchange, the Company filed the Certificate of Designation,
Preferences and Rights of the Series A Convertible Preferred Stock
(the “Series A
COD”) with the Secretary
of State of the State of Nevada, designating 300,000 shares of its
preferred stock as Series A Convertible Preferred Stock. Each share
of Series A Preferred has a stated value of $100 per share (the
“Series A Stated
Value”). The Series
A Preferred rank senior to all of the Company’s outstanding
securities, including the Company’s Series B Convertible
Preferred Stock.
The Series A Preferred provides the holders with
the right to receive a one-time dividend payment equal to 8% of the
Series A Stated Value (the “Series A
Dividend”), which Series
A Dividend shall be paid by the Company on the earlier to occur of
(i) when declared at the election of the Company, (ii) one year
from the date of issuance, or (iii) when a holder elects to convert
its shares of Series A Preferred into Common
Stock.
Each share of Series A Preferred is convertible,
at the option of the holder, into that number of shares of Common
Stock equal to the Series A Stated Value plus all accrued but
unpaid dividends, divided by $0.0044313, which conversion rate is
subject to adjustment in accordance with the terms of the Series A
COD; provided,
however, that holders of the
Series A Preferred may not convert any shares of Series A Preferred
into Common Stock unless and until the Company has effected the
Increase in Authorized. In addition, holders of Series A Preferred
are prohibited from converting Series A Preferred into Common Stock
if, as a result of such conversion, the holder, together with its
affiliates, would own more than 4.99% (or 9.99% upon the election
of the holder prior to the issuance of the Series A Preferred) of
the total number of shares of Common Stock then issued and
outstanding. Each share of Series A Preferred is convertible at the
option of the Company, at the same conversion rate set forth above,
at such time, if ever, that the Company’s Common Stock is
listed on the Nasdaq Stock Market and the Company has paid the
Series A Dividend. In addition, upon the occurrence of a Bankruptcy
Event (as defined in the Series A COD), the Company shall be
required to redeem, in cash, all outstanding shares of Series A
Preferred at a price equal to the conversion
amount; provided,
however, that holders of the
Series A Preferred shall have the right to waive, in whole or in
part, such right to receive payment upon the occurrence of a
Bankruptcy Event.
Holders of the Series A Preferred shall vote on an
as-converted basis along with holders of the Company’s Common
Stock on all matters presented to the Company’s
stockholders; provided,
however, that the number of
votes that any holder, together with its affiliates, may exercise
in connection with all of the Company securities held by such
holder shall not exceed 9.99% of the voting power of the Company.
In addition, pursuant to the Series A COD, the Company shall not
take the following actions without obtaining the prior consent of
at least a majority of the holders of the outstanding Series A
Preferred, voting separately as a single class: (i) amend the
Company’s Charter or bylaws, or file a certificate of
designation or certificate of amendment to any series of preferred
stock if such action would adversely affect the holders of the
Series A Preferred, (ii) increase or decrease the authorized number
of shares of Series A Preferred, (iii) create or authorize any
series of stock that ranks senior to, or on parity with, the Series
A Preferred, (iv) purchase, repurchase or redeem any shares of
junior stock, or (v) pay dividends on any junior or parity stock.
Furthermore, so long as at least 25% of the Series A Preferred
remain outstanding, holders of the Series A Preferred (other than
the Direct Investors) shall have a right to appoint two members to
the Company’s Board of Directors, and the Board shall not
consist of more than five members, unless the holders of a majority
of the outstanding Series A Preferred have consented to an increase
in such number.
Creation of New Series B Preferred
On April 26, 2019, in connection with the Exchange
and subsequent to filing a Certificate of Withdrawal for the Old
Series B Preferred, the Company filed the Certificate of
Designation, Preferences and Rights of the Series B Convertible
Preferred Stock (the “New Series B
COD”) with the Secretary
of State of the State of Nevada, designating 1.5 million shares of
its preferred stock as Series B Convertible Preferred
Stock. The New Series B Preferred ranks junior to the Series A
Preferred and senior to all of the Company’s other
outstanding securities.
The
New Series B Preferred is structured to act as a Common Stock
equivalent. Upon the Company amending its Charter to effect the
Increase in Authorized, each share of New Series B Preferred shall
be converted into 10,000 shares of Common Stock, subject to certain
adjustments. Shares of New Series B Preferred may not be converted
into Common Stock until the Increase in Authorized is effective.
Holders of the New Series B Preferred are not entitled to
dividends, unless the Company’s Board of Directors elects to
issue a dividend to holders of Common Stock.
Holders
of the New Series A Preferred vote on an as-converted basis along
with holders of the Company’s Common Stock on all matters
presented to the Company’s stockholders. In addition,
pursuant to the New Series B COD, the Company shall not take the
following actions without obtaining the prior consent of at least
50% of the holders of the outstanding New Series B Preferred,
voting separately as a single class: (i) amend the provisions
of the New Series B COD so as to adversely affect holders of the
New Series B Preferred, (ii) increase the authorized number of
shares of New Series B Preferred, or (iii) effect any distribution
with respect to junior stock, unless the Company also provides such
distribution to holders of the New Series B Preferred.
Brandon Stump Employment Agreement
On April 26, 2019, in connection with the
Exchange, Brandon Stump, a co-founder and the Chief Executive
Officer of CCD, was appointed as Chief Executive Officer of the
Company. In connection with his appointment as Chief Executive
Officer, the Company and Brandon Stump entered into an employment
agreement (the “B. Stump Employment
Agreement”), pursuant to
which Brandon Stump shall (i) serve as the Company’s Chief
Executive Officer for a term of three years, renewable for one-year
periods thereafter, during which time he shall report to the
Company’s Board of Directors; (ii) be subject to a
non-competition requirement for three years after his termination;
(iii) be subject to a non-solicitation requirement for one year
after his termination, and be entitled to receive the following
compensation for his services as Chief Executive Officer: (a) an
annual base salary of $500,000, which shall increase on an annual
basis by an amount not less than $25,000 per year, as determined by
the Compensation Committee of the Company’s Board of
Directors, (b) an annual cash bonus of up to $750,000 per year,
which cash bonus will be determined based on the Company’s
achievement of audited gross revenue targets of $35.0 million per
year, as more particularly set forth in the B. Stump Employment
Agreement, (c) certain milestone based bonuses, (d) an annual award
of shares of Common Stock having an aggregate value equal to
one-half of Brandon Stump’s annual base salary in effect for
such year, which shares shall vest quarterly in equal amounts over
a three year period commencing on the issuance date, (e)
participation in the Company’s retirement plan, if any, (f)
reimbursement of all reasonable business-related expenses incurred
by Brandon Stump, (e) full health insurance coverage for he and his
dependents, and at least $5.0 million of life insurance, (g) 21
paid vacation days per year, and (h) a monthly automobile allowance
of $750 per month.
The Company may terminate the B. Stump Employment
Agreement in the event of Brandon Stump’s death or
disability, or for Cause, as defined in the B. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Brandon Stump may
terminate the B. Stump Employment Agreement at any time for any
reason. In the event that his employment is terminated by him
without Good Reason, as defined in the B. Stump Employment
Agreement, or by the Company for Good Cause as a result of a Change
in Control, he shall be entitled to the following compensation: (i)
any earned but unpaid salary through the termination date, (ii)
unpaid and unreimbursed expenses, (iii) earned but unpaid bonuses,
and (iv) any accrued vacation days; provided,
however, that in the event that
the B. Stump Employment Agreement is terminated by Brandon Stump
for any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event his employment is
terminated by the Company without Cause or Brandon Stump terminates
it for Good Reason, as defined in the B. Stump Employment
Agreement, then he shall be entitled to the following compensation:
(i) all amounts due to him through the termination date, (ii) full
vesting of any and all previously granted equity-based incentive
awards, and (iii) health insurance coverage for a period of 18
months after the termination date. In addition, effective upon a
Change in Control, regardless of whether the B. Stump Employment
Agreement is terminated, his base salary for the year in which the
Change in Control occurred and any years thereafter shall
automatically increase by 20% and the milestone bonuses shall
automatically decrease by 30%.
Ryan Stump Employment Agreement
On April 26, 2019, in connection with the
Exchange, Ryan Stump, a co-founder and the Chief Operating Officer
of CCD, was appointed as Chief Operating Officer of the Company. In
connection with his appointment as Chief Operating Officer, the
Company and Ryan Stump entered into an employment agreement (the
“R.
Stump Employment Agreement”), pursuant to which Ryan Stump shall (i)
serve as the Company’s Chief Operating Officer for a term of
three years, renewable for one-year periods thereafter, during
which time he shall report to the Company’s Chief Executive
Officer; (ii) be subject to a non-competition requirement for three
years after his termination; (iii) be subject to a non-solicitation
requirement for one year after his termination, and be entitled to
receive the following compensation for his services as Chief
Operating Officer: (a) an annual base salary of $500,000, which
shall increase on an annual basis by amount that is not less than
$25,000 per year, as determined by the Compensation Committee of
the Company’s Board of Directors, (b) an annual cash bonus of
up to $750,000 per year, which cash bonus will be determined based
on the Company’s achievement of a gross revenue target of
$35.0 million per year, as more particularly set forth in the R.
Stump Employment Agreement, (c) certain milestone based bonuses,
(d) an annual award of shares of Common Stock having an aggregate
value equal to one-half of Ryan’s annual base salary in
effect for such year, which shares shall vest quarterly in equal
amounts over a three year period commencing on the issuance date,
(e) participation in the Company’s retirement plan, if any,
(f) reimbursement of all reasonable business-related expenses
incurred by Ryan Stump, (e) full health insurance coverage for he
and his dependents, and at least $5.0 million of life insurance,
(g) 21 paid vacation days per year, and (h) a monthly automobile
allowance of $750 per month.
The Company may terminate the R. Stump Employment
Agreement in the event of Ryan Stump’s death or disability,
or for Cause, as defined in the R. Stump Employment
Agreement; provided,
however, that at no time may
the Company terminate him without Cause. Ryan Stump may terminate
the R. Stump Employment Agreement at any time for any reason. In
the event that his employment is terminated by him without Good
Reason, as defined in the R. Stump Employment Agreement, or by the
Company for Good Cause as a result of a Change in Control, he shall
be entitled to the following compensation: (i) any earned but
unpaid salary through the termination date, (ii) unpaid and
unreimbursed expenses, (iii) earned but unpaid bonuses, and (iv)
any accrued vacation days; provided,
however, that in the event that
the R. Stump Employment Agreement is terminated by Ryan Stump for
any reason, he shall also be entitled to one year’s
severance, consisting of one year’s base salary, milestone
bonuses and certain other benefits. In the event that his
employment is terminated by the Company without Cause or he
terminates it for Good Reason, as defined in the R. Stump
Employment Agreement, then Ryan Stump shall be entitled to the
following compensation: (i) all amounts due to him through the
termination date, (ii) full vesting of any and all previously
granted equity-based incentive awards, and (iii) health insurance
coverage for a period of 18 months after the termination date. In
addition, effective upon a Change in Control, regardless of whether
the R. Stump Employment Agreement is terminated, his base salary
for the year in which the Change in Control occurred and any years
thereafter shall automatically increase by 20% and the milestone
bonuses shall automatically decrease by 30%.
Critical Accounting Polices and Estimates
Discussion
and analysis of our financial condition and results of operations
are based upon financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates; including those related
to collection of receivables, inventory obsolescence, sales returns
and non-monetary transactions such as stock and stock options
issued for services. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. We believe there have been no changes to
our critical accounting policies subsequent to the filing of our
Annual Report on Form 10-K for the year ended December 31,
2018.
Comparison
of the Three Months Ended March 31, 2019 to the Three Months Ended
March 31, 2018.
The
below disclosure included in this Management’s Discussion and
Analysis of Financial Condition discusses the Company’s
financial results for three months ended March 31, 2019 and 2018.
During the first quarter of 2018, management decided 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 during the first
quarter of 2018 and to terminate the Bottling Agreement and sell
our remaining AquaBall® inventory in the second quarter of
2018, as well as the consummation of the Exchange with the Members
of CCD and the Direct Investors in April 2019, the comparison to
the comparable period in 2018, and amounts reported in financial
statements subsequent to March 31, 2019, will materially change and
will not be comparable with prior comparable period.
Net Sales
Net
sales for the three months ended March 31, 2019 were $28,014,
compared with sales of $301,626 for the three months ended March
31, 2018, a 91% decrease. This decrease is the result of
management’s decision to cease sales of AquaBall®, with
all remaining AquaBall® inventory being sold in the quarter
ending June 30, 2018.
The
percentage that each product category represented of our net sales
is as follows:
|
Product Category
|
Three Months Ended
March 31, 2019
(% of Sales)
|
|
AquaBall®
|
-%
|
|
Bazi®
|
100%
|
Prior to the three months ended March 31, 2019,
the Company terminated the Bottling Agreement and ceased production
of AquaBall®. As a result, as of March 31, 2019 the
Company had limited continuing operations.
Gross Profit and Gross Margin
Gross profit for the three months ended March
31, 2019 was $13,869, compared to gross loss of $7,879 for the
three months ended March 31, 2018. Gross profit as a percentage of
revenue (gross margin) during the three months ended March 31, 2019
was 50%, compared to gross loss of 3% for the same period in
2018. This increase in gross
profit margin was a result of the Company’s cessation of the
production of AquaBall®, previously the Company’s
principal product, and the sale of all remaining inventory of
AquaBall® to Red Beard prior to the quarter ended March 31,
2019. All sales were composed of Bazi® for the three months
ended March 31, 2019.
Sales, General and Administrative Expense
Sales,
general and administrative expense was $238,235 for the three
months ended March 31, 2019, as compared to $1,049,139 for the
three months ended March 31, 2018. This period over period decrease
of $810,904 is the result of the Company’s cessation of the
production of AquaBall®, previously the Company’s
principal product, and the sale of all remaining inventory of
AquaBall® to Red Beard prior to the quarter ended March 31,
2019.
Change in Fair Value of Derivative Liabilities
During
the three months ended March 31, 2019, the Company reclassified all
remaining derivative liabilities to additional paid in capital. The
Company recorded a change in the fair value of these derivatives
liabilities as a loss of $975,430 prior to the reclassification.
The Company did not record a change in the fair value of these
derivative liabilities for the three months ended March 31,
2018.
Interest Expense
Interest
expense for the three months ended March 31, 2019 was $192,932, as
compared to interest expense of $64,267 for the three months ended
March 31, 2018.
Income Taxes
There
was no income tax expense recorded for the three months ended March
31, 2019 and 2018, as the Company’s calculated provision
(benefit) for income tax is based on annual expected tax rates. As
of March 31, 2019, the Company had tax net operating loss
carryforwards and a related deferred tax asset, offset by a full
valuation allowance.
Net Loss
Our
net loss for the three months ended March 31, 2019 was $1,038,756
as compared to a net loss of $712,385 for the three months ended
March 31, 2018. This year-over-year net loss increase of $326,371
consists of a decrease in operating loss of approximately $833,000
due to management’s decision to cease production and sales of
AquaBall® in early 2018 and the corresponding reduction in
personnel, as well as selling, general and administrative expense.
On a basic and diluted per share basis, there was loss of $0.00 per
share for the three months ended March 31, 2019 and
2018.
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, 2018, indicating that there is substantial doubt as to the
ability of the Company to continue as a going concern. The
accompanying condensed consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplates
continuation of the Company as a going concern. For the three
months ended March 31, 2019, the Company had net loss of
$1,038,756, negative working capital of $4,077,881, and an
accumulated deficit of $53,159,404.
Although, during the year ended December 31, 2018 and the three
months ended March 31, 2019, the Company raised approximately $1.0 million from financing
activities, including the sale of certain Senior Secured Promissory
Notes and the Food Labs Note, and received approximately $5.6
million in net proceeds as a result of the Exchange in April
2019, additional capital
is necessary to continue operations.
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 certain Senior Secured
Promissory Notes, the Food Labs Note and the Red Beard LOC, as well
as the Company’s receipt of approximately $5.6 million as a
result of the Exchange, 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.
Capital Raising Activities
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 Notes purchased by
the investor, divided by $0.15 per share (the
“Warrants”). We offered and sold Secured Notes in the
aggregate principal amount of $2,465,000 and issued Warrants to
purchase up to 8.2 million shares of Common Stock to participating
investors.
The Secured Notes (i) bore interest at a rate of
8% per annum, (ii) had a maturity date of 1.5 years from the date
of issuance, and (iii) were 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”). Subsequent
to the quarter ended March 31, 2019, on April 26, 2019, Red Beard
purchased the Secured Notes, and thereafter converted all amounts
due under the Secured Notes into shares of Common Stock, thereby
terminating the Secured Notes.
2018 Note Issuance.
Subsequent to the three months ended
March 31, 2018, 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 $813,887 in connection with the sale to Red Beard of all of the
Company’s remaining AquaBall® inventory. The Red Beard Note
accrued interest at a rate of 5% per annum. Pursuant to the terms
of the Red Beard Note, Red Beard had 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 had
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. Pursuant to the terms of
the Red Beard Note, such Conversion Option was not to 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, which occurred on
November 15, 2018. On April 26, 2019, in connection with the
consummation of the Exchange, Red Beard elected to convert all
amounts due under the Red Beard Note into shares of Common
Stock.
Food Labs
Note. On September 18, 2018,
the Company entered into an agreement with Food Labs, pursuant to
which the Company issued to Food Labs a promissory note in the
principal amount of $50,000. The Food Labs Note (i) accrued
interest at a rate of 5% per annum, (ii) included an additional
lender’s fee equal to $500, or 1% of the principal amount,
and (iii) was scheduled to mature on December 31, 2019. As
disclosed above, on April 26, 2019, in connection with the
Exchange, Red Beard purchased the Food Labs Note from Food Labs,
and thereafter converted all amounts due under the Food Labs Note
into shares of Common Stock, resulting in the termination of the
Food Labs Note.
Red Beard
Line-of-Credit. On November 19,
2018, the Company entered into the Red Beard LOC with Red Beard,
effective October 25, 2018, pursuant to which the Company could
borrow up to $250,000; provided, however, that Red Beard
could, in its sole discretion, decline to provide additional
advances under the Red Beard LOC upon written notice the Company of
its intent to decline to make such advances. Interest accrued on the outstanding principal of
the Red Beard LOC at a rate of 8% per annum; provided,
however, upon the occurrence of
an Event of Default, as defined in the Red Beard LOC, the accrual
of interest would have increased to a rate of 10% per annum. Prior
to the Maturity Date, Red Beard had the right, at its sole option,
to convert the Outstanding Balance due under the Red Beard LOC into
that number of shares of Common Stock equal to the Outstanding
Balance divided by $0.005, which it elected to do on April 26, 2019
in connection with the consummation of the
Exchange.
The
Exchange. On April 26, 2019,
subsequent to the quarter ended March 31, 2019, the Company
received approximately $5.6 million in net proceeds as a result of
the Exchange.
Off-Balance Sheet Items
We
had no off-balance sheet items as of March 31, 2019.
ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A smaller reporting company is not required to provide the
information required by this item.
ITEM 4. CONTROLS AND
PROCEDURES
|
(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, 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
officer, to allow timely decisions regarding required
disclosure.
Our
management, with the participation and supervision of our Principal
Executive and Principal Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the
end of the period covered by this Quarterly Report on Form 10-Q. In
designing and evaluating the disclosure controls and procedures,
management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition,
the design of disclosure controls and procedures must reflect the
fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of
possible controls and procedures relative to their
costs.
Based
on that evaluation, our Principal Executive and Principal Financial
Officer concluded that our disclosure controls and procedures were
not effective based on our material weakness in the form of (i)
lack of segregation of duties, (ii) the outsourcing of our external
accounting, administrative and compliance staff, both of which stem
from our limited capital resources to hire staff to provide these
duties, and (iii) the absence of internal staff with extensive
knowledge of SEC financial and GAAP reporting. As a result of the
lack of executive finance and accounting personnel within the
Company, internal controls related to preparation and review of the
Company’s financial statements and related disclosures were
not adequate.
|
(b)
|
Changes in internal controls over financial reporting.
|
The
Company’s Principal Executive and Financial Officer
determined that there have been no changes, in the Company’s
internal control over financial reporting during the period covered
by this report identified in connection with the evaluation
described in the above paragraph that have materially affected, or
are reasonably likely to materially affect, Company’s
internal control over financial reporting.
PART II
ITEM 1. LEGAL
PROCEEDINGS
From time to time, claims are made against the
Company in the ordinary course of business, which could result in
litigation. Claims and associated litigation are subject to
inherent uncertainties, and unfavorable outcomes could occur. In
the opinion of management, the resolution of these matters, if any,
will not have a material adverse impact on the Company’s
financial position or results of operations. Other than as set
forth below, there are no additional pending or threatened legal
proceedings at this time.
Delhaize America
Supply Chain Services, Inc. v. True Drinks, Inc. On May 8, 2018, Delhaize America
Supply Chain Services, Inc. (“Delhaize”) filed a complaint
against the Company in the General Court of Justice Superior Court
Division located in Wake County, North Carolina alleging breach of
contract, among other causes of action, related to contracts
entered into by and between the two parties. Delhaize is seeking in
excess of $25,000 plus interest, attorney’s fees and costs.
We believe the allegations are
unfounded and are defending the case vigorously. We believe the
probability of incurring a material loss to be
remote.
The
Irvine Company, LLC v. True Drinks, Inc. On September 10, 2018, The Irvine Company, LLC
(“Irvine”) filed a complaint against the Company in
the Superior Court of Orange County, located in Newport Beach,
California, alleging breach of contract related to the
Company’s early termination of its lease agreement with
Irvine in May 2018. Pursuant to the Complaint, Irvine sought to
recover approximately $74,000 in damages from the Company. In
November 2018, the Company and Irvine agreed to settle the lawsuit
for an aggregate of $15,750.
ITEM 1A. RISK
FACTORS
Our
results of operations and financial condition are subject to
numerous risks and uncertainties. Our business had changed
substantially since the filing of our Annual Report on Form 10-K
for the fiscal year ended December 31, 2018, filed on April 1,
2019, as a result of the Exchange. Consequently, many of the risk
factors included therein are no longer applicable or may no longer
accurately reflect our current business and/or financial results.
You should carefully consider the risk factors included in this
Quarterly Report on Form 10-Q, which have been fully amended and
restated to reflect the current facts and circumstances. You should
carefully consider these risk factors in conjunction with the other
information contained in this Quarterly Report on Form 10-Q. Should
any of these risks materialize, our business, financial condition
and future prospects will be negatively impacted. Moreover, such
risks could cause actual operating results to differ from those
expressed in certain “forward looking statements”
contained in this Quarterly Report on Form 10-Q as well as in other
communications.
Risks Related to the Company
Our operations are now primarily dependent on the business of CCD,
and our ability to achieve positive cash flow under our new
business plan is uncertain.
As
a result of the Exchange, our continued operations are now
primarily dependent on the business of CCD. Although CCD generated
net revenue of approximately $20.8 million for the year ended
December 31, 2018, and we anticipate substantially greater revenue
in 2019, there can be no guarantee that the Company will continue
to grow revenue or achieve positive cash flow in the
future.
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.
Until
recently, our business was comprised primarily of the development,
marketing, sale and distribution of all-natural, vitamin-enhanced
drinks. As a result of the Company’s decision to consummate
the Exchange, our future revenue will substantially differ from
past revenue, and our operating results will vary significantly
compared to past operating results. It is too early to predict
whether consumers will accept, and continue to use on a regular
basis, the Company’s new products, due in part to the fact
that we have had limited recent operating history as a combined
entity with CCD. Factors that will significantly affect our
operating results include, without limitation, the
following:
●
the
expected increase in revenue due to the addition of those products
developed and marketed by CCD prior to the Exchange, as well as any
products that we may release in the future, to our revenue
stream;
●
our
decision in early 2018 to discontinue the production and sale of
AquaBall®, that in the years ended December 31, 2018 and 2017,
contributed approximately $1,767,802 and $3,581,142 in revenue,
respectively;
●
our
previous sole reliance on sales of Bazi®, that in the years
ended December 31, 2018 and 2017, contributed approximately
$179,250 and $242,192 in revenue to the Company, respectively;
and
●
the
restructuring of substantially all of our previously outstanding
debt and shares of preferred stock on April 26, 2019, in connection
with the Exchange.
Although we believe that, as a result of the Exchange and the
restructuring of our prior debt, our cash resources are currently
sufficient, our long-term liquidity and capital requirements may be
difficult to predict, which may adversely affect our long-term cash
position.
Prior
to the Exchange, our core business product sales were significantly
below levels necessary to achieve positive cash flow. In addition,
we had significant liabilities, amounting to approximately $9.6
million as of December 31, 2018. However, as a result of the
acquisition of CCD as our wholly owned subsidiary, CCD’s
historical results of operations, and the restructuring of
substantially all of our outstanding debt on April 26, 2019, we
currently believe that our cash resources are sufficient to fund
our operations for the next twelve months, although no assurances
can be given. However, if we are
required to seek additional financing in the future in order to
fund our operations, retire indebtedness and otherwise carry out
our business plan, there can be no assurance that such financing
will be available on acceptable terms, or at all, and there can be
no assurance that any such arrangement, if required or otherwise
sought, would be available on terms deemed to be commercially
acceptable and in our best interests.
Our business is difficult to evaluate because we have recently
significantly modified our product offerings and customer
base.
As
a result of the Exchange, we have recently modified our operations,
engaging in the sale of new products in a new market through new
distributors and new lines of business. There is a risk that we
will be unable to successfully integrate the newly acquired
businesses with our current structure. Our estimates of capital,
personnel and equipment required for our newly acquired businesses
are based on the historical experience of management and businesses
they are familiar with. Our management has limited direct
experience in operating a business of our current size, as well as
one that is publicly traded.
Our products could fail to attract or retain users or generate
revenue and profits.
As a
result of the Exchange, our customer base has changed
significantly. Our ability to develop, increase, and engage our new
customer base and to increase our revenue depends heavily on our
ability to continue to evolve our existing products and to create
successful new products, both independently and in conjunction with
developers or other third parties. We may introduce significant
changes to our existing products or acquire or introduce new and
unproven products, including using technologies with which we have
little or no prior development or operating experience. If new or
enhanced products fail to engage our customers, or if we are
unsuccessful in our monetization efforts, we may fail to attract or
retain customers or to generate sufficient revenue, operating
margin, or other value to justify our investments, and our business
may be adversely affected.
Our significant stockholders may have certain personal interests
that may affect the Company.
Together, Brandon Stump and Ryan Stump, the
founders of CCD and our newly appointed Chief Executive Officer and
Chief Operating Officer, respectively, currently own in excess of
50% of the Company’s issued and outstanding voting securities
as a result of the Exchange. As a result, Ryan Stump and
Brandon Stump have the ability to exert influence over both the
actions of our Board of Directors, the outcome of issues requiring
approval by our stockholders, 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 stockholders or preventing
transactions in which stockholders 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
Exchange Act 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 was a material
weakness due to the lack of segregation of duties and, due to this
material weakness, management concluded that, as of December 31,
2018 and 2017, our internal control over financial reporting was
ineffective. Management also concluded that our disclosure
controls and procedures were ineffective as of December 31, 2018
and 2017, as well as for the quarter ended March 31, 2019. These
weaknesses were first identified in our Annual Report on Form 10-K
for the year ended December 31, 2012. In 2018, we reduced our
staff to one employee, and outsourced our accounting and
financial functions, further exacerbating our weaknesses
in our internal control over financial reporting and our disclosure
controls and procedures. Although the number of employees has grown
as a result of the Exchange and the addition of CCD’s
operations, including the hiring of a new Chief Executive Officer
and Chief Financial Officer, we cannot assure you that we will have
sufficient resources to resolve these material weaknesses.
These weaknesses have the
potential to adversely impact our financial reporting
process and our financial reports. We will need to hire additional
qualified accounting and administrative personnel in order to
resolve these material weaknesses.
The loss of one or more of our key personnel or our failure to
attract and retain other highly qualified personnel in the future,
could harm our business.
We
currently depend on the continued services and performance of key
members of our management team, in particular, Ryan Stump and
Brandon Stump, CCD’s founders and our Chief Executive Officer
and Chief Operating Officer, respectively, and David Allen, our
Chief Financial Officer. If we cannot call upon them or
other key management personnel for any reason, our operations and
development could be harmed. We have not yet developed a succession
plan. Furthermore, as we grow, we will be required to hire and
attract additional qualified professionals such as accounting,
legal, finance, production, market and sales experts. We may not be
able to locate or attract qualified individuals for such positions,
which will affect our ability to grow and expand our
business.
We have no commercial manufacturing capacity and rely on
third-party contract manufacturers to produce commercial quantities
of our products.
We
do not have the facilities, equipment or personnel to manufacture
commercial quantities of our products and therefore must rely on
qualified third-party contract manufactures with appropriate
facilities and equipment to contract manufacture commercial
quantities of products. Any performance failure on the part of our
contract manufacturers could delay commercialization of any of our
products, depriving us of potential product revenue.
Failure
by our contract manufacturers to achieve and maintain high
manufacturing standards could result in product recalls or
withdrawals, delays or failures in testing or delivery, cost
overruns or other problems that could materially adversely affect
our business. Contract manufacturers may encounter difficulties
involving production yields, quality control and quality assurance.
If for some reason our contract manufacturers cannot perform as
agreed, we may be required to replace them. Although we believe
there are a number of potential replacements, we may incur added
costs and delays in identifying and obtaining any such
replacements.
The
inability of a manufacturer to ship orders of our products in a
timely manner or to meet quality standards could cause us to miss
the delivery date requirements of our customers for those items,
which could result in cancellation of orders, refusal to accept
deliveries or a reduction in purchase prices, any of which could
have a material adverse effect as our revenue would decrease and we
would incur net losses as a result of sales of the product, if any
sales could be made.
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 us and/or our
principals, bad publicity, and tort claims arising out of
governmental or judicial findings of fact or conclusions of law
adverse to us or our 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 revenue.
The business that we conduct outside the U.S. may be adversely
affected by international risk and uncertainties.
Although
our operations are based in the United States., we conduct business
outside of the United States and expect to continue to do so in the
future. Any business that we conduct outside of the United States
is subject to additional risks that may have a material adverse
effect on our ability to continue conducting business in certain
international markets, including, without limitation:
●
Potentially
reduced protection for intellectual property rights;
●
Unexpected
changes in tariffs, trade barriers and regulatory
requirements;
●
Economic
weakness, including inflation or political instability, in
particular foreign economies and markets;
●
Business
interruptions resulting from geo-political actions, including war
and terrorism or natural disasters, including earthquakes,
hurricanes, typhoons, floods and fires; and
●
Failure
to comply with Office of Foreign Asset Control rules and
regulations and the Foreign Corrupt Practices Act, or
FCPA.
These
factors or any combination of these factors may adversely affect
our revenue or our overall financial
performance.
Regulatory and Market Risks
As a
result of the Exchange, our current business is primarily involved
in the sale of products that contain nicotine. The general
market in which our products are sold faces significant
governmental and private sector actions, including efforts aimed at
reducing the incidence of use in minors and efforts seeking to hold
the makers and sellers of these products responsible for the
adverse health effects associated with them. More broadly, actions
by the Food and Drug Administration (“FDA”) and other federal, state or
local governments or agencies, may impact the consumer
acceptability of or access to our products (for example, through
product standards that may be proposed by the FDA for nicotine and
flavors), limit adult consumer choices, delay or prevent the launch
of new or modified products or products with claims of reduced
risk, require the recall or other removal of certain products from
the marketplace (for example, a determination by the FDA that one
or more products do not satisfy the statutory requirements for
substantial equivalence, because the FDA requires that
currently-marketed products proceed through the pre-market review
process or because the FDA otherwise determines that removal is
necessary for the protection of public health), restrict
communications to adult consumers, restrict the ability to
differentiate products, create a competitive advantage or
disadvantage for certain companies, impose additional
manufacturing, labeling or packaging requirements, interrupt
manufacturing or otherwise significantly increase the cost of doing
business, or restrict or prevent the use of specified products in
certain locations or the sale of products by certain retail
establishments. Any one or more of these actions may also have a
material adverse effect on our business. Each of our products is subject to intense
competition and changes in adult consumer preferences, which
may have a material adverse effect on our business.
Our products contain nicotine, which is considered to be a highly
addictive substance.
Certain
of our products contain nicotine, a chemical found in cigarettes,
e-cigarettes, certain other vapor products and other tobacco
products, which is considered to be highly addictive. The Family
Smoking Prevention and Tobacco Control Act, empowers the FDA to
regulate the amount of nicotine found in vapor products, but may
not require the reduction of nicotine yields of a vapor product to
zero. Any FDA regulation may require us to reformulate, recall and
or discontinue certain of the products we may sell from time to
time, which may have a material adverse effect on our ability to
market our products and have a material adverse effect on our
business, financial condition, results of operations, cash flows
and or future prospects.
Vapor products have become subject to regulation by the
FDA.
In 2016, the FDA
finalized a rule extending the regulatory authority to cover all
tobacco products, including vaporizers, vape pens, hookah pens,
e-cigarettes, e-pipes, and all other Electronic Nicotine Delivery
Systems (“ENDS”).
The FDA now regulates the manufacture, import, packaging, labeling,
advertising, promotion, sale, and distribution of ENDS. This
includes components and parts of ENDS, but excludes accessories.
Under the new guidance, any company that makes, modifies, mixes,
manufactures, fabricates, assembles, processes, labels, repacks,
relabels, or imports any tobacco product is considered a tobacco
product manufacturer.
However, recent statements by the
FDA have begun to clear up the agency’s position on
nicotine-free e-liquids and synthetic nicotine. According to court
statements made by the FDA, some devices that truly contain no
nicotine (or only synthetic nicotine) may not be subject to the
deeming regulations, depending on the circumstances in which they
are likely to be used. Some disposable, closed-system devices
with zero-nicotine or synthetic nicotine e-liquids may also escape
regulation as tobacco products if they meet certain further
criteria. We believe that certain of our products, which do not
contain nicotine, fall under this guidance and are not regulated by
the FDA. However, even if products currently fall outside the
scope of the deeming rule, the FDA could choose to regulate them
later.
The recent development of vapor products has not yet allowed the
medical profession to study the long-term health effects
attributable to the use of such products.
Because
vapor products have been developed and commercialized recently, the
medical profession has not yet had a sufficient period of time to
study the long-term health effects attributable to vapor product
use. As a result, there is currently no way of knowing whether or
not vapor products are safe for their intended use. If the medical
profession were to determine conclusively that vapor product usage
poses long-term health risks, the use of such products could
decline, which could have a material adverse effect on our
business, results of operations and financial
condition.
The market for vapor products is a niche market, subject to a great
deal of uncertainty, and is still evolving.
Vapor
products, having recently been introduced to market, are still at
an early stage of development, represent a niche market, are
evolving rapidly and are characterized by an increasing number of
market entrants. Our future sales and any future profits are
substantially dependent upon the widespread acceptance and use of
vapor products. Rapid growth in the use of, and interest in, vapor
products is recent, and may not continue on a lasting basis. The
demand and market acceptance for these products is subject to a
high level of uncertainty. Therefore, we are subject to all of the
business risks associated with a new enterprise in a niche market,
including risks of unforeseen capital requirements, failure of
widespread market acceptance of vapor products, in general or,
specifically our products, failure to establish business
relationships and competitive disadvantages as against larger and
more established competitors.
Possible yet unanticipated changes in federal and state law could
cause any of our current products, as well as products that we
intend to launch, containing hemp-derived cannabidiol
(“CBD”) oil to be illegal, or could otherwise
prohibit, limit or restrict any of our products containing
CBD.
We recently launched and commenced distribution of
certain premium vapor products containing hemp-derived CBD,
and we currently intend to develop and launch additional products
containing hemp-derived CBD in the future. Until 2014, when 7 U.S.
Code §5940 became federal law as part of the Agricultural Act
of 2014 (the “2014 Farm
Act”), products
containing oils derived from hemp, notwithstanding a minimal or
non-existing THC content, were classified as Schedule I illegal
drugs. The 2014 Farm Act expired on September 30, 2018, and was
thereafter replaced by the Agricultural Improvement Act of 2018 on
December 20, 2018 (the “2018 Farm
Act”), which amended
various sections of the U.S. Code, thereby removing hemp, defined
as cannabis with less than 0.3% THC, from Schedule 1 status under
the Controlled Substances Act, and legalizing the cultivation and
sale of industrial-hemp at the federal level, subject to compliance
with certain federal requirements and state law, amongst other
things. THC is the psychoactive component of plants in the cannabis
family generally identified as marihuana or marijuana. There is no
assurance that the 2018 Farm Act will not be repealed or amended
such that our products containing hemp-derived CBD would once again
be deemed illegal under federal law.
The
2018 Farm Act delegates the authority to the states to regulate and
limit the production of hemp and hemp derived products within their
territories. Although many states have adopted laws and regulations
that allow for the production and sale of hemp and hemp derived
products under certain circumstances, no assurance can be given
that such state laws may not be repealed or amended such that our
intended products containing hemp-derived CBD would once again be
deemed illegal under the laws of one or more states now permitting
such products, which in turn would render such intended products
illegal in those states under federal law even if the federal law
is unchanged. In the event of either repeal of federal or of state
laws and regulations, or of amendments thereto that are adverse to
our intended products, we may be restricted or limited with respect
to those products that we may sell or distribute, which could
adversely impact our intended business plan with respect to such
intended products.
Additionally,
the FDA has indicated its view that certain types of products
containing CBD may not be permissible under the FDCA. The
FDA’s position is related to its approval of Epidiolex, a
marijuana-derived prescription medicine to be available in the
United States. The active ingredient in Epidiolex is CBD. On
December 20, 2018, after the passage of the 2018 Farm Bill,
FDA Commissioner Scott Gottlieb issued a statement in which he
reiterated the FDA’s position that, among other things, the
FDA requires a cannabis product (hemp-derived or otherwise)
that is marketed with a claim of therapeutic benefit, or with any
other disease claim, to be approved by the FDA for its intended use
before it may be introduced into interstate commerce and that the
FDCA prohibits introducing into interstate commerce food products
containing added CBD, and marketing products containing CBD as a
dietary supplement, regardless of whether the substances are
hemp-derived. Although we believe our existing and planned CBD
product offerings comply with applicable federal and state laws and
regulations, legal proceedings alleging violations of such laws
could have a material adverse effect on our business, financial
condition and results of operations.
Sources of hemp-derived CBD depend upon legality of
cultivation, processing, marketing and sales of products derived
from those plants under state law.
Hemp-derived
CBD can only be legally produced in states that have laws and
regulations that allow for such production and that comply with the
2018 Farm Act, apart from state laws legalizing and regulating
medical and recreational cannabis or marijuana, which remains
illegal under federal law and regulations. We purchase all of our
hemp-derived CBD from licensed growers and processors in states
where such production is legal. As described in the preceding risk
factor, in the event of repeal or amendment of laws and regulations
which are now favorable to the cannabis/hemp industry in such
states, we would be required to locate new suppliers in states with
laws and regulations that qualify under the 2018 Farm Act. If we
were to be unsuccessful in arranging new sources of supply of our
raw ingredients, or if our raw ingredients were to become legally
unavailable, our intended business plan with respect to such
products could be adversely impacted.
Because our distributors may only sell and ship our products
containing hemp-derived CBD in states that have adopted
laws and regulations qualifying under the 2018 Farm Act, a
reduction in the number of states having such qualifying laws and
regulations could limit, restrict or otherwise preclude the sale of
intended products containing hemp-derived CBD.
The
interstate shipment of hemp-derived CBD from one state to another
is legal only where both states have laws and regulations that
allow for the production and sale of such products and that qualify
under the 2018 Farm Act. Therefore, the marketing and sale of our
intended products containing hemp-derived CBD is limited by such
factors and is restricted to such states. Although we believe we
may lawfully sell any of our finished products, including those
containing CBD, in a majority of states, a repeal or adverse
amendment of laws and regulations that are now favorable to the
distribution, marketing and sale of finished products we intend to
sell could significantly limit, restrict or prevent us from
generating revenue related to our products that contain
hemp-derived CBD. Any such repeal or adverse amendment of now
favorable laws and regulations could have an adverse impact on our
business plan with respect to such products.
Due to recent expansion into the CBD industry, we may have a
difficult time obtaining the various insurances that are desired to
operate our business, which may expose us to additional risk and
financial liability.
Insurance that is
otherwise readily available, such as general liability, and
directors and officer’s insurance, may become more difficult
for us to find, and more expensive, due to our recent launch of
certain products containing hemp-derived CBD. There are no
guarantees that we will be able to find such insurances in the
future, or that the cost will be affordable to us. If we are forced
to go without such insurances, it may prevent us from entering into
certain business sectors, may inhibit our growth, and may expose us
to additional risk and financial liabilities.
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 e-liquids similar to
those developed and sold by us, from both retail and online
providers. We face competition from direct and indirect
competitors, which arguably includes “big
tobacco,” “big pharma,” and other known and established or yet to be
formed vapor product manufacturing companies, each of whom pose a competitive threat to our
current business and future prospects. We compete against
“big tobacco,” who offers not only conventional tobacco
cigarettes and electronic cigarettes, but also smokeless tobacco
products such as “snus” (a form of moist ground
smokeless tobacco that is usually sold in sachet form that
resembles small tea bags), chewing tobacco and snuff. “Big
tobacco” has nearly limitless resources, global distribution
networks in place and a customer base that is fiercely loyal to
their brands. Furthermore, we believe that “big
tobacco” is likely to devote more attention and resources to
developing and offering electronic cigarettes or other vapor
products as the market for electronic cigarettes grows. Because of
their well-established sales and distribution channels, marketing
depth, financial resources, and proven expertise navigating complex
regulatory landscapes, “big tobacco” is better
positioned than small competitors like us to capture a larger share
of the vapor markets. We also face
competition from companies in the vapor market that are much
larger, better funded, and more established than
us.
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 by us 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 our products, which would have a material adverse
effect on our ability to generate sales and revenue.
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 manufacturers,
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.
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
and expand our brand awareness.
The
market we compete in is 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 and
expand 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.
Our
industry is subject to rapid change. New products are constantly
introduced to the market. Our ability to remain competitive depends
in part 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, without limitation, the following:
●
proper
new product selection;
●
successful
sales and marketing efforts;
●
timely
delivery of new products;
●
availability
of raw materials;
●
pricing
of raw materials;
●
regulatory
allowance of the products; and
●
customer
acceptance of new products.
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
currently have any patents for our product formulations. Although
trade secret, trademark, copyright and patent laws generally
provide a certain level of 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 expense 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 stockholders may have a substantial impact on any such
market.
If we issue additional shares of common stock in the future, it
will result in the dilution of our existing
stockholders.
Our
Charter currently authorizes the issuance of up to 7.0 billion
shares of common stock. Currently, as a result of our issuance of
derivative securities to certain individuals in connection with the
Exchange, we are obligated to reserve for issuance approximately
21.8 billion shares of our common stock in excess of the 7.0
billion shares authorized for issuance under our Charter. We
currently intend to amend our Charter, subject to stockholder
approval of such amendment, to increase the number of shares of
common stock authorized for issuance under our Charter by at least
a sufficient amount to allow for the conversion and/or exercise of
all of our outstanding derivative securities. The issuance of any
additional shares of our common stock, including those shares
issuable upon conversion and/or exercise of our outstanding
derivative securities, will result in significant dilution to our
stockholders and a reduction in value of our outstanding common
stock. 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 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,
orother 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.
Our
Charter authorizes the issuance of up to
5.0 million shares of preferred stock, par value $0.001
per share, without stockholder approval and on terms established by
our directors, of which 300,000 shares have been designated as
Series A Preferred and 1.5 million shares have been designated
as Series B Preferred. We may issue additional shares of
preferred stock in the future in order to consummate a financing or
other transaction, in lieu of the issuance of shares of our 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 may not be able to hold our securities in your regular
brokerage account.
In
the case of publicly-traded companies, it is common for a broker to
hold securities on your behalf, in “street name”
(meaning the broker is shown as the holder on the issuer’s
records and then you show up on the broker’s records as the
person the broker is holding for). Due to regulatory uncertainties,
certain brokers may not agree to hold securities of companies whose
products include hemp-derived CBD for their customers, meaning that
you may not be able to take advantage of the convenience of having
all your holdings reflected in one place.
You should not rely on an investment in our common stock for the
payment of cash dividends.
Because
of our previous 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 2. UNREGISTERED SALES
OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS
UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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(a)
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EXHIBITS
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Second Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series B Convertible
Preferred stock, dated April 26, 2019, incorporated by
reference from Exhibit 3.1 to the Current Report on Form 8-K, filed
April 30, 2019.
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Fourth Amended and Restated Certificate of Designation,
Preferences, Rights and Limitations of the Series C Convertible
Preferred stock, dated April 26, 2019, incorporated by
reference from Exhibit 3.2 to the Current Report on Form 8-K, filed
April 30, 2019.
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First Amended and Restated Certificate of Designation, Preferences,
Rights and Limitations of the Series D Convertible Preferred stock,
dated April 26, 2019, incorporated by reference from Exhibit
3.3 to the Current Report on Form 8-K, filed April 30,
2019.
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Certificate of Withdrawal of the Series B Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference from
Exhibit 3.4 to the Current Report on Form 8-K, filed April 30,
2019.
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Certificate of Withdrawal of the Series C Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference from
Exhibit 3.5 to the Current Report on Form 8-K, filed April 30,
2019.
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Certificate of Withdrawal of the Series D Convertible Preferred
Stock, dated April 26, 2019, incorporated by reference from
Exhibit 3.6 to the Current Report on Form 8-K, filed April 30,
2019.
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Certificate of Designations, Preferences and Rights of the Series A
Convertible Preferred Stock, dated April 25, 2019,
incorporated by reference from Exhibit 3.7 to the Current Report on
Form 8-K, filed April 30, 2019.
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Certificate of Designations, Preferences and Rights of the Series B
Convertible Preferred Stock, dated April 26, 2019,
incorporated by reference from Exhibit 3.8 to the Current Report on
Form 8-K, filed April 30, 2019.
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Form of Investor Warrant, dated April 26, 2019, incorporated
by reference from Exhibit 4.1 to the Current Report on Form 8-K,
filed April 30, 2019.
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Assignment
and Assumption Agreement, dated January 14, 2019, incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed January 22, 2019.
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Senior
Secured Note Extension Agreement, by and between True Drinks
Holdings, Inc. and Baker Court, LLC, dated January 28, 2019,
incorporated by reference from Exhibit 10.1 to the Current Report
on Form 8-K, filed February 1, 2019.
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Senior
Secured Note Extension Agreement, by and between True Drinks
Holdings, Inc. and Juliann M. Perrigo, dated January 28, 2019,
incorporated by reference from Exhibit 10.2 to the Current Report
on Form 8-K, filed February 1, 2019.
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Senior
Secured Note Extension Agreement, by and between True Drinks
Holdings, Inc. and Red Beard Holdings, LLC, dated January 28, 2019,
incorporated by reference from Exhibit 10.3 to the Current Report
on Form 8-K, filed February 1, 2019.
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Debt Conversion Agreement by and between True Drinks Holdings, Inc.
and Red Beard, LLC, dated April 26, 2019, incorporated by
reference from Exhibit 10.1 to the Current Report on Form 8-K,
filed April 30, 2019.
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Form of Exchange Agreement, dated April 26, 2019,
incorporated by reference from Exhibit 10.2 to the Current Report
on Form 8-K, filed April 30, 2019.
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Form of Registration Rights Agreement, dated April 26, 2019,
incorporated by reference from Exhibit 10.3 to the Current Report
on Form 8-K, filed April 30, 2019.
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Engagement Letter by and between True Drinks Holdings, Inc.,
Charlie’s Chalk Dust LLC and Katalyst Securities LLC, dated
February 15, 2019, incorporated by reference from Exhibit
10.4 to the Current Report on Form 8-K, filed April 30,
2019.
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Amendment to Engagement Letter, dated April 16, 2019,
incorporated by reference from Exhibit 10.5 to the Current Report
on Form 8-K, filed April 30, 2019.
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Subscription Agreement, dated April 26, 2019, incorporated
by reference from Exhibit 10.6 to the Current Report on Form 8-K,
filed April 30, 2019.
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Employment Agreement by and between True Drinks Holdings, Inc. and
Brandon Stump, dated April 26, 2019, incorporated by
reference from Exhibit 10.7 to the Current Report on Form 8-K,
filed April 30, 2019.
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Employment Agreement by and between True Drinks Holdings, Inc. and
Ryan Stump, dated April 26, 2019, incorporated by reference
from Exhibit 10.8 to the Current Report on Form 8-K, filed April
30, 2019..
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Certification of the Principal Executive Officer pursuant to Rule
13a-14(a) and 15d-14(a)
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Certification of the Principal Financial and Accounting Officer
pursuant to Rule 13a-14(a) and 15d-14(a)
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Certification by the Principal Executive Officer pursuant to 18
U.S.C. 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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Certification by the Principal Financial and Accounting Officer
pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
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101.INS
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XBRL
Instance Document
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101.SCH
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XBRL
Taxonomy Extension Schema
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase
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101.LAB
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XBRL Taxonomy Extension Label Linkbase
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase
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SIGNATURES
In
accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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Date: May 15, 2019
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TRUE DRINKS HOLDINGS, INC.
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By:
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/s/ Brandon
Stump
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Brandon Stump
Chief Executive Officer and Chairman
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/s/ David
Allen
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David Allen
Chief Financial Officer
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