Our Transfer Agent and Registrar for our common stock is Corporate Stock Transfer located in Denver, Colorado.
As a “smaller reporting company” as defined by the rules and regulations of the SEC, we are not required to provide this information.
The following discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Registration Statement. Readers are also urged to carefully review and consider the various disclosures made by us which attempt to advise interested parties of the factors which affect our business, including (without limitation) the disclosures made under the captions “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and in the audited consolidated financial statements and related notes included in our Annual Report on Form 10-K, filed with the SEC on April 2, 2015.March 24, 2016.
Discussion and analysis of our financial condition and results of operations are based upon financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates; including those related to collection of receivables, inventory obsolescence, sales returns and non-monetary transactions such as stock and stock options issued for services. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Inventories are stated at the lower of cost or market on a first-in first-out basis. Inventory is periodically reviewed and obsolete inventories are written off. No inventory was written off as obsolete for the period ended September 30, 2015 or December 31, 2014.2015. Prior to inventory becoming obsolete, inventory which is close to expiration is donated to charitable organizations.
Intangible assets consists of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products, customer list,first, and the estimated value of GT Beverage Company, LLC’s interlocking spherical bottle patent.patent acquired on March 31, 2012. The Company’s intangible assets, are amortized over their estimated useful remaining useful lives. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. No impairment was deemed necessary during the quarter ended September 30,as of December 31, 2015.
Goodwill represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually.
A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. As a matter of policy, the Company does not invest in financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions that involve financial instruments containing certain features that have resulted in the instruments being deemed derivatives or containing embedded derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives and embedded derivatives, if applicable, are measured at fair value using the binomial lattice (“Binomial Lattice”) pricing model and marked to market and reflected on our condensed consolidated statement of operations as other (income) expense at each reporting period. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security.
Results of Operations
Comparison of – Fiscal Years Ended December 31, 20142015 and 20132014
Net Sales
Net sales for the year ended December 31, 2014 were $4,693,4142015 was $6,121,097 compared to $2,649,473$4,693,414 during the same period in 2013,2014, an increase of 77%30%. This increase in net sales is attributable to the continued executionexpansion of our business plan, including sales ofretail accounts for AquaBall(TM) Naturally Flavored Water, to key retail accounts during the year ended December 31, 2014, including entrance into the club channel with significant sales at Sam’s Club, the commencement of sales to Target, and distribution to 280 Wal-Mart stores.
The percentage that each product category representeda growing base of our net sales is as follows:
Product Category | | Year Ended
December 31,
2014
% of Sales
| |
AquaBall(TMdirect-store-distributors in the second and fourth quarters of 2015.)
| | | 95 | % |
Bazi(R)
| | | 5 | % |
Gross Profit (Loss) and Gross Margin
Gross profitloss for the year ended December 31, 20142015 was $291,712,$160,990 as compared to $521,762gross profit of $291,712 for the year ended December 31, 2013.2014. Gross profitloss as a percentage of revenue (gross margin) during the year ended December 31, 20142015 was 6%3%. This figure was affected by negative gross profit experienced in the high costs of our raw materialssecond and fourth quarters due to a high mix of club packs for Sam’s Club.
Gross margin will likely remain at current or below current levels through the low volumesecond quarter of product manufactured2016, during the year. Additionally, the Company’s entrance into the club channel on a national leveltransition from our current bottling facilities to Niagara. We anticipate an increase in November 2014 resulted in a negative gross margin as early as the third quarter of 2016 as a result of decreased manufacturing costs once Niagara becomes the sole manufacturer of AquaBall(TM). At that time, Niagara will provide finished goods to the Company, and bill the Company for the fourth quarter. However, we expect our margins on sales in the club channelproduct as it is shipped to increase in 2015 due to increased volumes and the anticipated consistency of the club business.customers.
Sales, General and Administrative Expense
Sales, generalSelling and administrativemarketing expenses were $8,838,209$5,073,211, or 83% of net sales, for the year ended December 31, 20142015, as compared to $5,925,895$4,388,108, or 93% of net sales for the year ended December 31, 2013.2014. This increase is primarily due to higher marketing expense and marginal sales expense increases in costs related toas a result of increased sales, such asincluding freight for shipping orders to customers and license fees. There were also significant increases in marketing expenditure, and slight increases in payroll related expenses such as health insurance for employees during the 2014 period.
General and administrative expenses were $5,475,673, or 89% of net sales, for the year ended December 31, 2015, as compared to $4,450,101, or 95% of net sales, for the year ended December 31, 2014. This increase is due to an increase in salaries of approximately $480,000 and a $500,000 write off of deposits with co-packers related to equipment purchases in connection with to our transition to Niagara Bottling as our co-packer.
We expect sales, general and administrative expense to continue to increase in the first quarter of 2016, due primarily to the cost associated with transitioning manufacturing of AquaBall(TM) to Niagara, as well as increased marketing efforts associated with promoting the preservative free formulation of AquaBall(TM).
Interest Expense
Interest expense for the year ended December 31, 2014 was $202,773 as compared to $1,824,074 for the year ended December 31, 2013. The decrease was due to the Company’s repayment and conversion of its 2012 convertible note financing beginning in the fourth quarter of 2013, as well as the recording of shares issued and lender’s fees in connection with the issuance of the convertible notes being recorded to interest expense, and the commencement of certain private placements in June 2013. The 2013 figure includes $1,332,543 in accretion of the debt discount on notes payable created by the embedded conversion feature of the notes and the warrants issued with the notes to investors. In 2014, the interest figure was related to notes payable, a large portion of which originated in the fourth quarter.
Net Loss
Our net loss for the year ended December 31, 2014 was $8,116,603 as compared to a net loss of $7,122,135 for the year ended December 31, 2013. On a per share basis, our loss was $0.23 and $0.26 per share for the years ended December 31, 2014 and December 31, 2013, respectively. Although we experiences an increase in net sales during the year ended December 31, 2014 as compared to the same period in 2013, the increased period over period losses are primarily the result of the decrease in gross margins on sales as AquaBall(TM) Naturally Flavored Water entered the club channel, and the increase in sales and marketing expenses during the 2014 period. As explained above, we expect our margins on sales in the club channel to increase in 2015 due to increased volumes and the anticipated consistency of the club business.
Comparison of the Three Months Ended September 30, 2015 to the Three Months Ended September 30, 2014
Net sales for the three months ended September 30, 2015 were $1,323,730, compared with sales of $1,064,065 for the three months ended September 30, 2014, a 24% increase. The increase in sales for the three months ended September 30, 2015 is principally attributable to increased sales at Sam’s Club, the commencement of sales to Target, and increases in sales to our growing base of direct-store-distributors. We expect sales to remain consistent until the launch of our preservative free formulation from Niagara’s bottling facilities in the beginning of the second quarter of fiscal 2016.
The percentage that each product category represented of our net sales is as follows:
Product Category | | Three Months Ended
September 30, 2015
(% of Sales)
|
AquaBall(TM)
| | | 96 | % |
Bazi(R)
| | | 4 | % |
Gross profit for the three months ended September 30, 2015 was $135,508, compared to gross profit of $86,741 for the three months ended September 30, 2014. Gross profit as a percentage of revenue (gross margin) during three months ended September 30, 2015 was 10%. Gross profit as a percentage of revenue (gross margin) during three months ended September 30, 2014 was 8%. Gross profit will likely remain at current or below current levels during the transition from our current bottling facilities to Niagara.
Sales, General and Administrative Expense
Sales, general and administrative expenses were $3,332,053 for the three months ended September 30, 2015, as compared to $2,114,523 for the three months ended September 30, 2014. The 2015 total includes an increase in sales and marketing expenses in 2015, largely due to higher marketing expenditures. General and administrative expense may increase in subsequent quarters, due primarily to the cost associated with transitioning manufacturing of AquaBall(TM) to Niagara.
Change in Fair Value of Derivative Liabilities
The Company recorded a gain on the change in fair value of derivative liabilities for the three months ended September 30, 2015 of $1,079,335.
Interest expense for the three months ended September 30, 2015 was $15,456, as compared to interest income of $37,037 for the three months ended September 30, 2014.
There is no income tax expense recorded for the three months ended September 30, 2015 and 2014, due to the Company's net losses. As of September 30, 2015, the Company has tax net operating loss carryforwards and a related deferred tax asset, offset by a full valuation allowance.
Our net loss for the three months ended September 30, 2015 was $2,132,666, as compared to a net loss of $1,666,216 for the three months ended September 30, 2014. This year-over-year increase in net loss is primarily attributable to increased sales, general and administrative expenses during the quarter, offset, in part, by higher sales and gross profit. On a per share basis, our loss was $0.02 per share for the three months ended September 30, 2015, as compared to a loss of $0.05 per share for the three months ended September 30, 2014.
Comparison of the Nine Months Ended September 30, 2015 to the Nine Months Ended September 30, 2014
Net sales for the nine months ended September 30, 2015 were $4,172,626 compared to net sales of $2,875,739 for the nine months ended September 30, 2014. The increase in sales for the nine months ended September 30, 2015 is principally attributable to increased sales at Sam’s Club, the commencement of sales to Target, and increases in sales to our growing base of direct-store-distributors in the second quarter.
We continue to focus our efforts on expanding distribution of AquaBall(TM) Naturally Flavored Water, specifically in the club channel and to direct-store-distributors. However, we are unable to access certain key accounts due, in part, to the current formulation of AquaBall(TM). As previously stated, we expect sales to remain consistent until the launch of our preservative free formulation from Niagara’s bottling facilities in the beginning of the second quarter of fiscal 2016. Although we cannot predict the timing of any expected growth, we currently anticipate a growth in sales as early as mid-2016 from sales of AquaBall(TM) manufactured by Niagara, not only to our existing accounts, but to new accounts made accessible by the new, preservative free formula.
The percentage that each product category represented of our net sales is as follows:
Product Category | | Nine Months Ended
September 30, 2015
(% of Sales)
|
AquaBall(TM)
| | | 97 | % |
Bazi(R)
| | | 3 | % |
Gross profit for the nine months ended September 30, 2015 was $221,665. Gross profit as a percentage of revenue (gross margin) during nine months ended September 30, 2015 was 5%. Negative gross profit in the second quarter, due to a high mix of club packs and six pack production issues, contributed to the low gross margin for the period.
Gross profit will likely remain at current or below current levels throughout fiscal 2015 and the first quarter of 2016, during the transition from our current bottling facilities to Niagara. We anticipate an increase in gross profit as early as the second quarter of 2016 as a result of decreased manufacturing costs once Niagara becomes the sole manufacturer of AquaBall(TM).
Sales, General and Administrative Expense
Sales, general and administrative expenses were $7,572,452 for the nine months ended September 30, 2015 as compared to $5,814,966 for the nine months ended September 30, 2014. Sales and Marketing expenses increased due to higher marketing expenses and marginal sales expenses increases in hand with the increase in sales.
We expect sales, general and administrative expense to increase during the fourth quarter of 2015 and into fiscal 2016, due primarily to the cost associated with transitioning manufacturing of AquaBall(TM) to Niagara, as well as increased marketing efforts associated with promoting the preservative free formulation of AquaBall(TM).
Change in Fair Value of Derivative Liabilities
The Company recorded a gain for the change in fair value of derivative liabilities for the nine months ended September 30, 2015 of $749,943.
Interest Expense
Interest expense for the nine monthsyear ended September 30,December 31, 2015 was $223,160$257,389 as compared to $88,286$202,773 for the nine monthsyear ended September 30,December 31, 2014. Interest expense for the 2015 period consists of interest and fees due on promissory notes generated in late 2014 and in the third quarter of 2015, most of which were all either repaid or converted into shares of Series C Preferred in connection with the March Note Exchange in the first quarter of 2015 and the January Note Exchange during the nine months ended September 30, 2015.
first quarter of 2016.There is no income tax expense recorded for the periods ended September 30, 2015 and 2014, due to the Company's net losses. As of September 30, 2015, the Company has tax net operating loss carryforwards and a related deferred tax asset, offset by a full valuation allowance.
Other Expense
Other expense for the year ended December 31, 2015 was $2,285,629, as compared to other income of $11,508 for the year ended December 31, 2014. The increase in other expense is primarily due to the issuance of the Personal Guaranty Warrant for 17,500,000 shares of Common Stock valued at $2,263,783, issued for the execution of a personal guaranty of True Drinks’ obligations under the Niagara Agreement.
Net Loss
Our net loss for the nine monthsyear ended September 30,December 31, 2015 was $6,824,004$11,990,563 as compared to a net loss of $6,844,026$8,116,603 for the nine monthsyear ended September 30,December 31, 2014. On a per share basis, our loss, after dividends on outstanding shares of Series B Preferred, was $0.11$0.16 and $0.21$0.23 per share for the nine monthsyears ended September 30,December 31, 2015 and December 31, 2014, respectively.
Although we experienced an increase in net sales during the year ended December 31, 2015 as compared to the same period in 2014, the increased period over period losses are primarily the result of the decrease in gross margins on sales as AquaBall(TM) Naturally Flavored Water entered the club channel, and the increase in sales and marketing expenses during the 2015 period. We expect to continue to incur a net loss in subsequent periods, and plan to fund our operations using proceeds received from capital raising activities until our operations become profitable. Although we anticipate a growth in sales and gross margins as a result of the Niagara Agreement and the introduction of our new, preservative free formulation of AquaBall(TM), these increases may not occur, may take longer than anticipated, or may not be sufficient to produce net income in any subsequent quarters.
Liquidity and Capital Resources
Our auditors have included a paragraph in their report on our consolidated financial statements, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 included in this prospectus,2015, indicating that there is substantial doubt as to the ability of the Company to continue as a going concern. The condensedaccompanying consolidated financial statements included in this prospectus 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 and nine monthsyear ended September 30,December 31, 2015, the Company incurred a net loss of $2,132,666 and $6,824,004, respectively.$11,990,563. At September 30,December 31, 2015, the Company had negative working capital of $3,239,565$5,303,989 and an accumulated deficit of $25,182,085. Although,$30,348,644. The Company had negative cash flow from operations of $10,433,069 and $6,649,706 during the yearyears ended December 31, 2015 and 2014, and the nine-months ended September 30, 2015,respectively. Although the Company raised approximately $12.7$13 million in gross proceeds from the sale of shares of Series C Preferred and $800,000 from the issuance of certain senior subordinated secured promissory notes (the “Secured Notes”),during the year ended December 31, 2015, additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations, including satisfying our contractual obligations with Niagara.operations. Management's plans are to continue to contain expenses, expand distribution and sales of its AquaBall(TM) Naturally Flavored Water as rapidly as economically possible, and raise capital through equity and debt offerings to execute the Company’s business plan and achieve profitability from continuing operations. The accompanying condensed consolidated financial statements do not include any adjustments that might result in the event the Company is unsuccessful in its plans.
The Company has financed its operations through sales of equity and, to a lesser degree, cash flow provided by sales of AquaBall(TM). Despite recent sales of preferred stock as described below, funds generated from sales of shares of our preferred stock or other equity or debt securities, and cash flow provided by AquaBall(TM) sales aremay be insufficient to fund our operating requirements for the next twelve months. As a result, we willmay require additional capital to continue operating as a going concern. No assurances can be given that we will be successful. In the event we are unable to obtain additional financing in the short-term, we will not be able to fund our working capital requirements, and therefore will be unable to continue as a going concern.
Recent Capital Raising Activity
February 2015 Series C Offering, Note Payment and Note Exchange. On February 20, 2015, the Company and certain accredited investors entered into securities purchase agreements, pursuant to which the investors purchased 43,000 shares of Series C Preferred for $100 per share over the course of three separate closings. As additional consideration, each investor received five-year warrants, exercisable for $0.15 per share.
On March 27, 2015, the Company and certain accredited investors entered into an amendment to the February 2015 securities purchase agreements pursuant to which the Company sold to one investor 27,000 additional shares of Series C Preferred for gross proceeds of $2.7 million, which the Company subsequently used to satisfy approximately $2.7 million of the Company’s $3.8 million in outstanding promissory notes (the “Note Payments”). As additional consideration for the purchase of these additional shares of Series C Preferred, the investor received warrants to purchase shares of the Company’s common stockCommon Stock on terms substantially similar to the warrants issued in connection with the offering of shares of Series C Preferred in February 2015.
Following the Note Payments, the Company and each of the holders of promissory notes remaining after the Note Payments entered into Exchange Agreements, wherein the holders agreed to exchange all remaining principal and accrued interest of the remaining promissory notes into shares of Series C Preferred on substantially similar terms to those offered in the offering of shares of Series C Preferred in February 2015 (the “Note Exchange”). As a result of the execution of these Exchange Agreements and the consummation of the Note Exchange, the Company issued to the Holders an aggregate total of 12,148 shares of Series C Preferred and warrants to purchase approximately 2.8 million shares of common stockCommon Stock for $0.15 per share.
August 2015 Series C Offering. On August 13, 2015, the Company and Red Beard Holdings, LLC (“Red Beard”) entered into a securities purchase agreement, pursuant to which Red Beard purchased 17,648 shares of Series C Preferred for $113.33 per share over the course of three separate closings. As additional consideration for participating in this offering, Red Beard received warrants to purchase a total of 3,633,411 shares of common stock,Common Stock, exercisable for $0.17 per share. On October 16, 2015, the Company and Red Beard amended the securities purchase agreement in order to issue an additional 8,823 shares of Series C Preferred to Red Beard for gross proceeds to the Company of approximately $1.0 million. In connection with this amendment, Red Beard also received warrants to purchase approximately 1.81 million shares of common stock.Common Stock.
September 2015 Note Offering. On September 9, 2015, the Company began a private offering, to certain accredited investors of: (i) senior subordinated secured promissory notes ("Secured Notes") in the aggregate principal amount of up to $2.5 million; and (ii) and warrants to purchase that number of shares equal to 15% of the principal amount of the Secured Note purchased by each investor, divided by the ten-day average closing price of the Company’s common stock.Common Stock. Each Secured Note accrues interest at a rate of 12% per annum, and will mature one year from the date of issuance. To date, the Company has issued an aggregate total of $855,000 Secured Notes and warrants to purchase an aggregate total of 280,265 shares of common stock.Common Stock.
November 2015 Series C Offering. On November 25, 2015, the Company and Red Beard entered into a securities purchase agreement, pursuant to which Red Beard agreed to purchase up to 30,000 shares of Series C Preferred for $100 per share over the course of three separate closings between November 2015 and January 2016. As additional consideration for the purchase of the shares of Series C Preferred, Red Beard received five-year warrants, exercisable for $0.15 per share, to purchase that number of shares of the Company's common stockCommon Stock equal to 35% of the shares of common stockCommon Stock issuable upon conversion of the shares of Series C Preferred purchased.
January 2016 Note Exchange. On January 20, 2016, the Company and holders of Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the holders agreed to convert the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and warrants to purchase up to an aggregateagate total of 1,029,7011,029,413 shares of common stockCommon Stock for $0.17 per share. Neither holder received warrants to purchase shares of the Company’s common stockCommon Stock in connection with their respective Secured Notes, and agreed to waive any unpaid interest accrued under the Secured Notes prior to the execution of the Note Exchange Agreement.
Line-of-Credit Facility
TheApril 2016 Series C Offering. On April 13, 2016, the Company and Red Beard entered into a line-of-creditsecurities purchase agreement, with a financial institutionpursuant to which Red Beard agreed to purchase an aggregate total of 50,000 shares of Series C Preferred for $100 per share over the course of two closings. The Company issued 25,000 shares of Series C Preferred to Red Beard on June 30, 2014. The termsApril 13, 2016, and anticipates issuing the remaining 25,00 shares of the agreement allowSeries C Preferred on July 12, 2016. As additional consideration, investors will receive five-year warrants to purchase up to an aggregate total of approximately 33.3 million shares of Common Stock for $0.15 per share. On April 13, 2016, the Company issued to borrow upRed Beard warrants to the lesserpurchase approximately 16.7 million shares of $1.5 million or 85% of the sum of eligible accounts receivables. At September 30, 2015, the total outstanding on the line-of-credit approximated $167,000 and the Company had approximately $0 available to borrow. The line-of-credit bears interest at Prime rate (3.25% as of September 30, 2015) plus 4.50% per annum as well as a monthly fee of 0.50% on the average amount outstanding on the line.
Common Stock.
We had no off-balance sheet items as of September 30,December 31, 2015.
There have been no disagreements with our independent registered public accounting firm in regards to accounting and financial disclosure.
Directors and Executive Officers
The following sets forth certain information regarding each of our directors and executive officers:
Name | | Age | | Position |
| | | | Interim Chief Executive Officer Chief Marketing Officer and Director |
| | | | Chief Financial Officer, Treasurer and Secretary |
| | | | |
| | | | |
| | | | |
| | | | |
Directors hold office until the next annual meeting of stockholders following their election unless they resign or are removed as provided in the bylaws. Our officers serve at the discretion of our Board of Directors.
The following is a summary of our executive officers’ and directors’ business experience.
Executive Officers
Kevin Sherman, Interim Chief Executive Officer, Chief Marketing Officer and Director. Mr. Sherman, hasthe Company's Chief Executive Officer, served as the Company's Chief Marketing Officer, managing the brand development of AquaBall(TM) Naturally Flavored Water since he joinedjoining the Company in October 2012. Mr. Sherman joined the Company’s board of directors in September 2015, and was appointed as interim Chief Executive Officer in December 2015.2015 and agreed to serve as the Company’s Chief Executive Officer in April 2016. Prior to joining True Drinks, Mr. Sherman was the Vice President Strategy and Network Development and President of Retail for Bazi, Inc. He was instrumental in the development of Bazi’s All-Natural formula and spearheaded the concept of all-natural energy. Prior to Bazi, Mr. Sherman served as the Senior Manager of Network Development of Product Partners LLC from May 2008 to May 2009, Chief Operating Officer of Hand & Associates from January 2008 to May 2008, and as the director of development and principal of Holy Innocents School from August 2007 to December 2007. Mr. Sherman also served as the principal of Saints Peter and Paul School from January 2004 to August 2007. Mr. Sherman holds a B.A. from Gordon College, and a M.A. from Loyola Marymount University.
Daniel Kerker, Chief Financial Officer. Mr. Kerker is a professional with over 15 years of experience in finance and accounting in both private and public entities. He spent seven years as Director of Finance at Anheuser-Busch Sales of Los Angeles, an Anheuser-Busch-owned distributor with over $200 million in annual sales, leaving in 2010. Prior to joining True Drinks, Inc., Mr. Kerker spent two years working as interim CFO for Environmental Packaging Technologies in Houston, Texas, and Regeneca, Inc. in Irvine, California. Mr. Kerker became Chief Financial Officer of True Drinks on March 1, 2012. Mr. Kerker earned a Bachelor of Science in Finance from California State University, Northridge and an MBA in Finance from UCLA’s Anderson School of Management, where he was a Harold M. Williams Fellow for graduating at the top of his class and won the J. Fred Preston Award for Achievement in Finance.
Robert Van Boerum, Chief Operations Officer. Mr. Van Boerum was appointed to serve as the Company’s Chief Operations Officer in September, 2015. Mr. Van Boerum has been an employee of the Company since 2012, and has handled a wide range of responsibilities, including marketing, operations, and information technology. Prior to his time with the Company, Mr. Van Boerum served Chief Information Officer for Regeneca International, Inc. from 2011 to 2012, and as Vice President of Corporate Strategy for AL International (JCOF) formfrom 2009 to 2011. Mr. Van Boerum holds a B.S. in Management Information Systems form the University of Nevada- Las Vegas, and a MBA from San Diego State University.
Board of Directors
Ramona Cappello, Chairman. Ms. Cappello was appointed to the Board in July 2015 and as Chairman of the Board in November 2015. Ms. Cappello is currently the Chief Executive Officer Sun Harvest Salt, LLC, a company she founded in 2014. Prior to Sun Harvest Salt, Ms. Cappello served as Chief Executive Officer and co-founder of Corazonas Foods from 2006 until the sale of Corazonas Foods in 2014.2012, departing in 2013 at the end of her contract. Ms. Cappello was also a senior executive with Mauna Loa Macadamia Nut Company until its sale to Hershey Foods, and has served in various positions for other food and beverage companies including Nestle, Celestial Seasonings and Kendall-Jackson Wineries. In addition to her responsibilities with Sun Harvest Salt, Ms. Cappello has served on the University of Southern California Board of Trustees since 2014, is a member of the USC Associates and Marshall Partners, and serves on the board of Catholic Big Brothers and Big Sisters of Los Angeles. Additionally, she currently serves on the Board of Directors for Nielsen Massey Vanillas, Inc. Ms. Cappello holdholds a bachelor’s degree in business from the University of Southern California Marshall School of Business, where she graduated a class valedictorian.
The Board of Directors believes Ms. Cappello’s experience in executive roles with consumer products companies and her experience in corporate governance will provide the Board with invaluable insight and guidance as the Company continues to expand the sales of the AquaBall(TM) Naturally Flavored Water to both existing and new retail accounts.
Scot Cohen, Director. Mr. Cohen was appointed to the Board in March 2013 and is the Founder and Managing Partner of V3 Capital Partners, a private investment firm focused on early-stage companies primarily in the consumer products industry, and Co-Manager of Red Fortune Fund, a private equity fund based in Hong Kong. Mr. Cohen also is the Founder of Petro River Oil LLC and Chairman of Petro River Oil Corp (OTCBB: PTRC), a publicly traded oil and gas producer with assets in Kansas and Oklahoma, and Petro Spring, a global oil and gas technology solutions provider. Prior to creating V3 Capital Partners, Mr. Cohen was the Founder and Managing Partner at Iroquois Capital Opportunity Fund, a special situations private equity investment fund, and a Co-Founder of Iroquois Capital, a hedge fund with investments in small and micro-cap private and public companies. Mr. Cohen is active in philanthropic activities with numerous charities including the Jewish Enrichment Council and is a Founder and the Chairman of the National Foundation for Veteran Redeployment, a 501(c)3 non-profit organization whose mission is to help unemployed veterans prepare for and enter new careers in the oil and gas industry. Mr. Cohen holds a Bachelor of Science degree from Ohio University in 1991.
The Board of Directors believes Mr. Cohen’s success with multiple private investment firms, his extensive contacts within the investment community and financial expertise will assist the Company’s efforts to raise capital to fund the continued implementation of the Company’s business plan.
Neil LeVecke, Director. Mr. LeVecke is the President of LeVecke Corporation, a wholesale distributor and bottler of spirits and wine products. Representing a third generation in the family business, he has worked every position in the company since starting in 1993. Mr. LeVecke graduated from Loyola Marymount University in 1990.
The Board of Directors believes Mr. LeVecke’s 22 years in the wholesale beverage distributing and bottling industry will provide the Board with invaluable insight and guidance as the Company continues to expand the sales of the AquaBall(TM) Naturally Flavored Water to both existing and new retail accounts.
Kevin Sherman, Director. See above.
The Board of Directors believes Mr. Sherman’s long-standing service to the Company and its predecessor, Bazi, Inc., provide the Board with the guidance necessary to continue to expand the Company’s distribution networks, and promote brand awareness of AquaBall(TM) Naturally Flavored Water.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any director or nominee during the past ten years.
Attendance at Meetings
The Board held eight meetings, and acted four times by unanimous written consent during the year ended December 31, 2015. Each director attended at least 75% of Board meetings during the year ended December 31, 2015. We have no formal policy with respect to the attendance of Board members at annual meetings of shareholders but encourage all incumbent directors and director nominees to attend each annual meeting of shareholders.
Independent Directors
The Board believes that a majority of its members should be independent directors. The Board has determined that, other than Mr. Sherman, all of its current directors are independent directors as defined by the rules and regulations of the NASDAQ Stock Market.
The members of the Audit Committee and Compensation Committee of the Board each meet the independence standards established by the NASDAQ Stock Market and the SEC for audit committees and compensation committees. In addition, the Board has determined that Mr. Cohen satisfies the definition of an “audit committee financial expert” under SEC rules and regulations. These designations do not impose any duties, obligations or liabilities on Mr. Cohen that are greater than those generally imposed on them as members of the Audit Committee and the Board, and his designation as an audit committee financial expert does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.
Board Committees and Charters
The Board has a standing Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. The Board appoints the members and chairpersons of these committees. The majority of the members of these committees have been determined by the Board to be independent. In addition, each member of these committees has been determined by the Board to be independent. Each committee has a written charter approved by the Board. Copies of each committee charter are available on the Company’s website at www.truedrinks.com/investor-relations/ and by clicking on the “Corporate Governance” tab.
Audit Committee
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Members: | Mr. Scot Cohen (Chairman) Ms. Ramona Cappello Mr. Neil LeVecke |
Number of Meetings in 2015: | None |
Functions: | This committee assists the Board in fulfilling its legal and fiduciary obligations in matters involving the Company’s accounting, auditing, financial reporting, internal control and legal compliance functions by approving the services performed by the Company’s independent accountants and reviewing their reports regarding the Company’s accounting practices and systems of internal accounting controls. This committee is responsible for the appointment, compensation, retention and oversight of the independent accountants and for ensuring that the accountants are independent of management. Following the resignation of three of the Company's independent Board members between November 2014 and March 2015, the Board temporarily suspended the Audit Committee until there were sufficient independent directors to satisfy the independence requirements for Audit Committees as determined by the NASDAQ Stock Market Rules. During this time, the responsibilities of the Audit Committee were carried out by the full Board of Directors. The Audit Committee was reinstated in November 2015, and did not meet during the year ended December 31, 2015. |
Compensation Committee
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Members: | Ms. Ramona Cappello (Chairman) Mr. Scot Cohen |
Number of Meetings in 2015: | Three |
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Functions: | This committee determines the Company’s general compensation policies and practices. This committee also reviews and approves compensation packages for the Company’s officers and, based upon such review, recommends overall compensation packages for the officers to the Board. This committee also reviews and determines equity-based compensation for the Company’s directors, officers, employees and consultants and administers the Company’s 2013 Stock Incentive Plan. |
Nominating and Corporate Governance Committee
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Members: | Mr. Neil LeVecke (Chairman) Ms. Ramona Cappello |
Number of Meetings in 2015: | One |
Functions: | This committee is responsible for making recommendations to the Board regarding candidates for directorships and the size and composition of the Board and for overseeing the Company’s corporate governance guidelines and reporting and making recommendations to the Board concerning corporate governance matters. |
Board Leadership Structure
The Board currently separates the roles of Chief Executive Officer and Chairman of the Board in recognition of the differences between the two roles. The Chief Executive Officer is responsible for setting the strategic direction of the Company and the day-to-day leadership and performance of the Company, while the Chairman of the Board provides guidance to the Chief Executive Officer and sets the agenda for the Board meetings and presides over meetings of the Board. However, the Board believes it should be able to freely select the Chairman of the Board based on criteria that it deems to be in the best interest of the Company and its stockholders, and therefore one person may, in the future, serve as both the Chief Executive Officer and Chairman of the Board.
Board Role in Risk Assessment
Management, in consultation with outside professionals, as applicable, identifies risks associated with the Company’s operations, strategies and financial statements. Risk assessment is also performed through periodic reports received by the Audit Committee from management, counsel and the Company’s independent registered public accountants relating to risk assessment and management. Audit Committee members meet privately in executive sessions with representatives of the Company’s independent registered public accountants. The Board also provides risk oversight through its periodic reviews of the financial and operational performance of the Company.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers and employees, a copy of which is filedwas attached as an exhibit to this prospectus.our Annual Report on Form 10-K, filed with the SEC on March 31, 2011.
Summary Compensation Table
The following table sets forth the compensation paid to the following persons for our fiscal years ended December 31, 2015 and 2014:
(a) | our principal executive officer; |
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(b) | our most highly compensated executive officers who were serving as an executive officer at the end of the fiscal year ended December 31, 2015 who had total compensation exceeding $100,000 (together, with the principal executive officer, the “Named Executive Officers”); and |
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(c) | any additional individuals who would have been considered Named Executive Officers, but for the fact that they were not serving in such capacity at the end of our most recently completed fiscal year. |
Name and Principal Position | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) (1) | | Non-Equity Incentive Plan Compen-sation ($) | | All Other Compen- sation ($) | | Total ($) | | | Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) (1) | | Non-Equity Incentive Plan Compensation ($) | | All Other Compensation ($) | | Total ($) | |
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Kevin Sherman, Interim Chief Executive Officer, Chief Marketing Officer, Director | | 2015 | | $ | 181,751 | | $ | 53,300 | | $ | 471,691 | | $ | (262,795 | ) | | $ | - | | $ | - | | $ | 443,947 | | |
| 2014 | | $ | 156,250 | | $ | - | | $ | - | | $ | 262,795 | | $ | - | | $ | - | | $ | 419,045 | | |
Kevin Sherman, Chief Executive Officer, Director | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Daniel Kerker Chief Financial Officer | | 2015 | | $ | 178,680 | | $ | 63,959 | | $ | 471,691 | | $ | (262,794 | ) | | $ | - | | $ | - | | $ | 451,536 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | $ | 180,000 | | $ | - | | $ | - | | $ | 262,794 | | $ | - | | $ | - | | $ | 442,794 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Robert Van Boerum Chief Operations Officer | | 2015 | | $ | 144,970 | | | $ | 38,433 | | $ | 353,768 | | $ | (187,893 | ) | | $ | - | | $ | - | | $ | 349,278 | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | $ | 126,186 | | $ | - | | $ | - | | $ | 187,893 | | $ | - | | $ | - | | $ | 314,079 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Lance Leonard (2) | | 2015 | | $ | 229,125 | | $ | 126,523 | | $ | 302,500 | | $ | (375,188 | ) | | $ | - | | $ | - | | $ | 282,960 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Former Chief Executive Officer and Former Director | | 2014 | | $ | 250,000 | | $ | - | | $ | - | | $ | 375,188 | | $ | - | | $ | - | | | $ | 625,188 | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) | The Company uses a Black-Scholes option-pricing model (the “Black-Scholes Model”) to estimateDuring the fair valueyear ended December 31, 2015, all Named Executive Officers exchanged their option awards for restricted Common Stock awards, valued at the closing price of the stock option grant. The use of a valuation model requires the company to make certain assumptions with respect to selected model inputs. Expected volatility was calculated based on the historical volatility of the company’s stock price. In the future the average expected life will be based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Currently it is based on the simplified approach provided by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumedCompany's Common Stock at the datetime of the grant. The following were the factors used in the Black Sholes Model to calculate the compensation expense:
|
| | For the year ended
December 31, 2015
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Stock price volatility | | | 75 | % |
Risk-free rate of return | | | 0.66 | % |
Annual dividend yield | | | - | |
Expected life | | 30 months | |
(2) | Mr. Leonard resigned from the Company effective January 15, 2016. |
Employment Agreements
Kevin Sherman. Mr. Sherman is employed as the Company’s Chief MarketingExecutive Officer pursuant to a two-year employment agreement, dated November 25, 2015 (the “Sherman Agreement”). Under the terms and conditions of the Sherman Agreement, Mr. Sherman receives: (i) a base salary of $22,916.67$22,917 per month, subject to certain adjustments in the event the Company achieves certain monthly sales objectives (“Target Objectives”); (ii) a $3,000 per month housing allowance, subject to termination in the event the Company achieves any of the Target Objectives; (iii) a ‘retention bonus’ of $100,000, of which $50,000 was paid to Mr. Sherman in November 2015 and the remaining $50,000 will be payable in November 2016; and (iv) an aggregate total of approximately 2.3 million shares of restricted stock, subject to certain vesting conditions (“Restricted Shares”), which Restricted Shares represent approximately 3.25% of the issued and outstanding shares of the Company’s common stock, including shares of common stock issuable upon conversion of the Company’s outstanding shares of preferred stock (“Protected Interest”). In the event the Company issues additional shares of common stock, preferred stock or other securities convertible or exercisable for common stock, the Sherman Agreement provides that Mr. Sherman will be issued that number of additional Restricted Shares so that the total number of Restricted Shares beneficially owned by Mr. Sherman equals the Protected Interest.
Mr. Sherman is also eligible for an annual bonus equal to 30% of his base salary, currently payable in restricted shares of the Company’s common stock, which bonus will be awarded at the sole discretion of the Company’s Compensation Committee. During the year ended December 31, 2015, the Compensation Committee awarded a $53,300 bonus to Mr. Sherman for the period through December 31, 2014, which bonus was paid in 532,995 shares of common stock.
In addition to the annual bonus, in the event of a change in control transaction, as defined in the Sherman Employment Agreement, Mr. Sherman will be entitled to a bonus equal to 3.25% of the value of the transaction resulting in a change in control, minus the fair market value of all Restricted Shares issued to Mr. Sherman prior to the date of the change in control transaction.
Mr. Sherman’s employment may be terminated for “Cause”, if Mr. Sherman (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Sherman’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Sherman’s base salary.
Prior November 2015, Mr. Sherman was employed pursuant to an employment agreement which first took effect on October 1, 2014. Mr. Sherman received a base salary of $14,583.33$14,583 per month, and was eligible for an annual bonus as approved by the Board and shall be entitled to earn stock option compensation.
Daniel Kerker. Mr. Kerker is employed as the Company’s Chief Financial Officer pursuant to an Employment Agreement, dated March 1, 2012 (the “Kerker Agreement”) and effective October 15, 2012. The term of the Kerker Agreement is for a period of three years, which shall extend automatically for successive one-year periods unless the Kerker Agreement is terminated by either party. Mr. Kerker receives a base salary of $12,500 per month until the earlier of September 1, 2012 or the Company achieving $1,000,000 in monthly gross sales, in which case the base salary shall be increased (a) to $15,000 per month, or (b) if the Company achieves $2,000,000 in monthly gross sales, to $16,250 per month. Mr. Kerker is also eligible to receive an annual bonus as approved by the Board and shall be entitled to earn stock option compensation to acquire a total of 430,043 shares of the Company’s common stock over the term of the agreement. During the year ended December 31, 2015, the Compensation Committee awarded a $63,960 bonus to Mr. Kerker for the period through December 31, 2014, which bonus was paid in 639,594 shares of common stock.
Mr. Kerker’s employment may be terminated for “Cause”, if Mr. Kerker (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Kerker’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Kerker’s base salary.
Robert Van Boerum. Mr. Van Boerum is employed as the Company’s Chief Operations Officer pursuant to a two-year employment agreement, dated September 11, 2015 (the “Van Boerum Agreement”). Under the terms and conditions of the Van Boerum Agreement, Mr. Van Boerum receives a base salary of $14,583.33 per month. Mr. Van Boerum is also be eligible for an annual bonus equal to 30% of his salary, which bonus will be awarded at the sole discretion of the Company’s Compensation Committee, and is eligible to earn stock option compensation at the discretion of the Compensation Committee. During the year ended December 31, 2015, the Compensation Committee awarded a $38,433 bonus to Mr. Van Boerum for the period through December 31, 2014.
The Van Boerum Agreement may be terminated for “Cause”, if Mr. Van Boerum (a) is convicted of any fraud or embezzlement, (b) after written notice, willfully breaches or habitually neglects his duties and responsibilities, (c) commits acts of dishonesty, gross negligence or willful misconduct or (d) violates any law or regulation relating to the business operations of the Company that may have a material adverse effect on the Company. If the Company terminates Mr. Van Boerum’s employment for reasons other than for Cause, the Company shall pay a severance in an amount equal to six months of Mr. Van Boerum’s base salary.
Other than as set forth above, there are no arrangements or understandings between our executive officersNamed Executive Officers and any other person pursuant to which they were appointed as officers. NeitherNone of the Incomingour Named Executive Officers has a family relationship that is required to be disclosed under Item 401(d) of Regulation S-K.
Director Compensation
Pursuant to the Company’s Director Compensation Plan, non-employee directors (“Outside Directors”) shall receive (a) a $30,000 annual retainer, payable in equal quarterly installments in either cash or shares of common stock, (b) additional committee retainers as determined by the Board and (c) reimbursement for expenses related to Board meeting attendance and committee participation. Directors that are also employees of the Company do not receive additional compensation for serving on the Board.
The following table discloses certain information concerning the compensation of the Company’s non-employee directors for the year ended December 31, 2015:
Name | | Fees earned or Paid in Cash ($) | | | Option Awards ($) | | | Stock Awards ($) | | | Total ($) | |
| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
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(1) | Ms. Cappello was appointed to the Company’s Board of Directors, effective July 31, 2015. |
(2) | Mr. LeVecke was appointed to the Company’s Board of Directors on February 18, 2015. |
(3) | Messrs. Wistreich and Imbrogno each resigned from the Board of Directors on March 10, 2015. |
Outstanding Equity Awards as of December 31, 2015
The following table sets forth all equity awards held by our Named Executive Officers at December 31, 2015.
| | Stock Awards | | | Stock Awards |
Name | | Number of shares or units of stock that have not vested (#) | | Market value of shares or units of stock that have not vested ($) | | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) | | | Number of shares or units of stock that have not vested (#) | | Market Value of shares or units of stock that have not vested ($) | | Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) | | Equity incentive plan awards: Market or Payout value of unearned shares, units or other rights that have not vested ($) | |
| | | | | | | | | | | | | | | | | | |
Kevin Sherman | | | 2,398,275 | (1) | | $ | 290,191 | | – | | $ | – | | | 2,398,275 | (1) | | $ | 290,191 | | - | | $ | - | |
Daniel Kerker | | | 2,398,275 | (1) | | $ | 290,191 | | – | | $ | – | | | 2,398,275 | (1) | | $ | 290,191 | | - | | $ | - | |
Robert Van Boerum | | | 1,923,706 | (1) | | $ | 232,768 | | | – | | $ | – | | | 1,923,706 | (1) | | $ | 232,768 | | - | | $ | - | |
Lance Leonard | | | 3,672,268 | (2) | | $ | 444,344 | | – | | $ | – | | | 3,672,268 | (2) | | $ | 444,344 | | - | | $ | - | |
(1) | Non-vested shares are scheduled to vest equally in four annual installments, beginning on September 30, 2016. |
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(2) | Mr. Leonard resigned from the Company effective January 15, 2016. Upon resignation, Mr. Leonard forfeited all non-vested restricted stock awards. |
Cancellation of Stock Option Exercises and Cancellation of Stock Options
Between June and July 2015, the Company and each of the holders of all outstanding options to purchase shares of the Company’s common stockCommon Stock agreed to cancel and forfeit their options, such that, as of July 10, 2015, no options to purchase shares of the Company’s common stockCommon Stock were outstanding. There were no options exercised by the Named Executive Officers or Directors in fiscal 2015 before these cancellations.
On August 6, 2015, the Company’s board of directors authorized an issuance of an aggregate total of 19,491,375 shares of restricted common stockCommon Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees, including those that agreed to cancel previously issued stock options.
The cancellation of the stock options and issuance of restricted stock was accounted for as a modification in accordance with the provisions of ASC Topic 718 Compensation – Stock Compensation. The Company recorded approximately $1,055,000 of stock based compensation in connection with the transaction.
Equity Compensation Plan Information
The following table includes information as of December 31, 2015 for our equity compensation plans:
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | - | | | $ | - | | | | 508,625 | |
| | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | - | | | | - | | | | - | |
| | | | | | | | | | | | |
Total | | | - | | | $ | - | | | | 508,625 | |
Plan category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | | Weighted-average exercise price of outstanding options, warrants and rights | | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) | |
| | (a) | | | (b) | | | (c) | |
Equity compensation plans approved by security holders | | | – | | | $ | – | | | | 508,625 | |
| | | | | | | | | | | | |
Equity compensation plans not approved by security holders | | | – | | | | – | | | | – | |
| | | | | | | | | | | | |
Total | | | – | | | $ | – | | | | 508,625 | |
2013 Stock Incentive Plan. The 2013 Stock Incentive Plan (the “2013 Plan”) was adopted by the Company’s Board of Directors on December 31, 2013. The 2013 Plan reserves for issuance 20.0 million shares of common stock for issuance to all employees (including, without limitation, officers and directors who are also employees) of the Company or any subsidiary of the Company (each a “Subsidiary”), any non-employee director, consultants and independent contractors of the Company or any Subsidiary, and any joint venture partners (including, without limitation, officers, directors and partners thereof) of the Company or any Subsidiary. Awards under the 2013 Plan may be made in the form of: (i) incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, once the 2013 Plan has been approved by a majority of the Company’s stockholders; (ii) stock options that do not qualify as incentive stock options; and/or (iii) awards of shares that are subject to certain restrictions specified in the 2013 Plan.
Options to purchase an aggregate total of 11,999,998 shares of common stock were issued under the 2013 Plan during the year ended December 31, 2014, which options were subsequently canceled on July 1, 2015. During the year ended December 31, 2015, the Company issued an aggregate total of 15,389,451 restricted stock awards pursuant to the 2013 Plan.
Post-Employment Compensation, Pension Benefits, Nonqualified Deferred Compensation
There were no post-employment compensation, pension or nonqualified deferred compensation benefits earned by the Named Executive Officers during the year ended December 31, 2015.
None.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSNone.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDER MATTERS
As of February 12,May 3, 2016, we had three classes of voting stock outstanding: (i) Common Stock; (ii) Series B Preferred; and (iii) Series C Preferred. The following tables set forth information regarding shares of Series B Preferred, Series C Preferred and Common Stock beneficially owned as of February 12,May 3, 2016 by:
| (i) | Each of our officers and directors; |
| (ii) | All officer and directors as a group; and |
| (iii) | Each person known by us to beneficially own five percent or more of the outstanding shares of our Series B Preferred, Series C Preferred and Common Stock. Percent ownership is calculated based on 1,342,8701,317,870 shares of Series B Preferred, 68,48688,266 shares of Series C Preferred and 112,049,07112,049,107 shares Common Stock outstanding at February 12,May 3, 2016. |
Beneficial Ownership of Series B Preferred
Name and Address (1) | | Series B Convertible Preferred Stock (2)(3) | | % Ownership of Class (4) | | | Series B Convertible Preferred Stock(2)(3) | | % Ownership of Class (4) | |
Scot Cohen (5) | | 135,000 | | 10.05 | % | | 135,000 | | 10.24 | % |
Total Officers and Directors (1) | | 135,000 | | 10.05 | % | | 135,000 | | 10.24 | % |
| | | | | | | | | | |
First Bank & Trust as custodian of Ronald L. Chez IRA 820 Church Street Evanston Illinois, 60201 | | 425,000 | | 31.65 | % | | 425,000 | | 32.25 | % |
Wolfson Equities LLC 1 State Street Plaza, 29th Floor New York, NY 10004 | | 187,500 | | 13.96 | % | | 187,500 | | 9.01 | % |
Joe Kolling 58 Beacon Bay Newport Beach, CA 92660 | | 155,556 | | 11.58 | % | | 155,556 | | 14.23 | % |
V3 Capital Partners LLC 20 East 20th Street, Apt. 6 New York, NY 10003 | | 118,750 | | 8.84 | % | | 118,750 | | 11.80 | % |
* | Less than 1%
|
(1) | Each of the Company’s officers and directors who do not hold shares of Series B Preferred were excluded from this table. Unless otherwise indicated, the address for each stockholder is 1855218662 MacArthur Blvd., Suite 325,110, Irvine, CA 92612. |
(2) | Subject to the limitations in the Certificate of Designation, each share of Series B Preferred is convertible into that number of shares of Common Stock equal to the Stated Value, divided by the Conversion Price, as defined in the Certificate of Designation. As of September 30,December 31, 2015, the Conversion Price was $0.25. |
(3) | Pursuant to the Certificate of Designation, shares of Series B Preferred may not be converted or exercised, as applicable, to the extent that the holder and its affiliates would own more than 9.99% of the Company’s outstanding Common Stock after such conversion. The Certificate of Designation also entitles each share of Series B Preferred to vote, on an as converted basis, along with the Common Stock; provided, however, that the Series B Preferred may not be voted to the extent that the holder and its affiliates would control more than 9.99% of the Company’s voting power. |
(4) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. |
(5) | Includes 3,750 shares held directly by Mr. Cohen, 118,750 shares held by V3 Capital Partners and 12,500 shares held by the Scot Jason Cohen Foundation. Mr. Cohen is the Managing Partner of V3 Capital Partners and is an officer of the Scot Jason Cohen Foundation. |
Beneficial Ownership of Series C Preferred
Name and Address (1) | | Series C Convertible Preferred Stock | | | % Ownership of Class (2) | |
Red Beard Holdings, LLC 2560 East Chapman Avenue #173 Orange, CA 92869 | | | | | | | | |
Chris Turoci 974 Sandstone Dr. Glendora, CA 91740 | | | | | | | | |
Name and Address (1) | | Series C Convertible Preferred Stock | | | % Ownership of Class (2) | |
Red Beard Holdings, LLC 2560 East Chapman Avenue #173 Orange, CA 92869 | | | 56,471 | | | | 82.46 | % |
Christopher Turoci 974 Sandstone Dr. Glendora, CA 91740 | | | 7,868 | | | | 11.49 | % |
* | Less than 1%.
|
(1) | Each of the Company’s directors and officers was excluded from this table, as none of our officers or directors hold shares of Series C Preferred. |
(2) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. |
Beneficial Ownership of Common Stock
Name, Address and Title (if applicable) (1) | | Number of Shares (1) | | | % Ownership of Class (2) | |
Kevin Sherman Interim Chief Executive Officer, Chief Marketing Officer and Director | | | 2,887,942 | | | | 2.58 | % |
Daniel Kerker Chief Financial Officer, Treasurer and Secretary | | | 2,139,594 | | | | 1.91 | % |
Robert VanBoerum Chief Operations Officer | | | 1,000,000 | | | | * | |
Ramona Cappello Chairman | | | – | | | | * | |
Scot Cohen (3) Director | | | 6,545,834 | | | | 5.69 | % |
Neil LeVecke Director | | | – | | | | * | |
Total officers and directors (4) | | | 12,573,369 | | | | | |
Vincent C. Smith (5) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | 130,378,020 | | | | 66.79 | % |
Vincent C. Smith Annuity Trust 2015-1 (6) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | 60,300,000 | | | | 47.23 | % |
Red Beard Holdings, LLC (7) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | 50,097,246 | | | | 30.90 | % |
First Bank & Trust as custodian of Ronald L. Chez IRA (8) 820 Church Street Evanston Illinois, 60201 | | | 11,397,294 | | | | 9.43 | % |
Christopher Turoci (9) 974 Sandstone Dr. Glendora, CA 91740 | | | 9,524,033 | | | | 7.93 | % |
Name, Address and Title (if applicable) (1) | | Number of Shares (1) | | | % Ownership of Class (2) | |
Kevin Sherman Chief Executive Officer and Director | | | | | | | | |
Daniel Kerker Chief Financial Officer, Treasurer and Secretary | | | | | | | | |
Robert Van Boerum Chief Operations Officer | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total officers and directors (4) | | | | | | | | |
Vincent C. Smith (5)(6) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | | | | | | |
Vincent C. Smith Annuity Trust 2015-1 (7) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | | | | | | |
Red Beard Holdings, LLC (5)(8) 2560 East Chapman Avenue #173 Orange, CA 92869 | | | | | | | | |
First Bank & Trust as custodian of Ronald L. Chez IRA (9) 820 Church Street Evanston Illinois, 60201 | | | | | | | | |
Chris Turoci (10) 974 Sandstone Dr. Glendora, CA 91740 | | | | | | | | |
(1) | Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. All entries exclude beneficial ownership of shares issuable pursuant to warrants, options or other derivative securities that have not vested or that are not otherwise exercisable as of the date hereof or which will not become vested or exercisable within 60 days of February 12,May 3, 2016. |
(2) | Percentages are rounded to nearest one-hundredth of one percent. Percentages are based on 112,049,107 shares of common stockCommon Stock outstanding. Warrants, options or other derivative securities that are presently exercisable or exercisable within 60 days are deemed to be beneficially owned by the person holding the options for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person. |
(3) | Comprised of 3,610,000 shares held of record, 60,000 shares issuable upon conversion of 3,750 shares of Series B Preferred, 17,500 shares issuable upon exercise of warrants, 1,900,000 shares issuable upon conversion of 118,750 shares of Series B Preferred held by V3 Capital Partners, 700,000 shares issuable upon exercise of warrants held by V3 Capital Partners, 200,000 shares issuable upon conversion of 12,500 shares of Series B Preferred held by the Scot Jason Cohen Foundation and 58,334 shares issuable upon exercise of warrants held by the Scot Jason Cohen Foundation each of which are exercisable within 60 days of February 12,May 3, 2016. Mr. Cohen is the Managing Partner of V3 Capital Partners and an officer of the Scot Jason Cohen Foundation.Foundation, and has dispositive and/or voting power over these shares. |
(4) | Comprised of 9,637,536 shares of Common Stock held of record and an aggregate total of 2,935,834 shares issuable pursuant to certain derivative securities (as described above) each of which are exercisable within 60 days of February 12,May 3, 2016. |
(5) | Pursuant to Section 5 of the Third Amended and Restated Certificate of Designations, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C Certificate of Designation”), no holder of Series C Preferred may exercise the voting rights otherwise attributable to the Series C Preferred if such holder, together with any “affiliate” of such Holder (as such term is defined in Rule 144 under the Securities Act of 1933, as amended) or any person or entity deemed to be part of a “group” with such holder (as such term is used in Section 13(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”))) would control in excess of 50% of the total voting power of the outstanding shares of capital stock of the Company at the time of such vote (the “Voting Limitation”); provided, however, that any holder of shares of Series C Preferred may waive the Voting Limitation upon 60 days written notice to the Company.
Ownership percentages in this table were calculated in accordance with Section 13(d) of the Exchange Act, and do not reflect any adjustments due to the Voting Limitation. |
(6) | Based on Company records and ownership information from Amendment No. 4 to Schedule 13D filed by Vincent C. Smith on December 14, 2015. Mr. Smith is the trustee for the Vincent C. Smith Annuity Trust 2015-1 (the “Smith Trust”) and manager of Red Beard Holdings, LLC (“Red Beard”). As such, Mr. Smith has voting and/or dispositive power, and, subject to certain limitations in the Series C Certificate of Designation, voting power over, and may be deemed to be the beneficial owner of the securities held by each of these entities. In addition to the securities held by the Smith Trust and Red Beard, shares held by Mr. Smith include 17,500,000 shares issuable upon exercise of warrants, presently exercisable within 60 days of February 12,May 3, 2016, and 1,459,329 shares held by LB 2, LLC, an entity managed by Mr. Smith. |
(6)(7) | Based on Company records and ownership information from Amendment No. 4 to Schedule 13D filed by Vincent C. Smith on December 14, 2015. Includes 15,633,333 shares issuable upon exercise of warrants, which warrants are exercisable within 60 days of February 12,May 3, 2016. Mr. Vincent C. Smith is the trustee of the Smith Trust, and has votingdispositive and/or dispositivevoting power over the shares. |
(7)(8) | Based on ownership information from Amendment No. 4 to Schedule 13D filed by Vincent C. Smith on December 14, 2015. Includes 37,647,333 shares issuable upon conversion of 56,471 shares of Series C Preferred and 12,449,913 shares issuable upon exercise of warrants, each of which are exercisable within 60 days of February 12,May 3, 2016. Mr. Vincent C. Smith is a manager of Red Beard Holdings, LLC, and has dispositive power, and, subject to certain limitations in the Series C Certificate of Designation, voting and/or dispositive power over the shares. |
(8)(9) | Based on ownership information from Amendment No. 2 to Schedule 13D filed by Individual Retirement Accounts for the benefit of Ronald L. Chez, Ronald L. Chez Individually and the Chez Family Foundation on December 8, 2014. Includes 6,800,000 shares issuable upon conversion of 425,000 shares of Series B Preferred and 1,983,334 shares issuable upon exercise of warrants, each of which are exercisable within 60 days of February 12,May 3, 2016. |
(9)(10) | Comprised of 1,513,052 shares held of record, 5,245,333 shares issuable upon conversion of 7,868 shares of Series C Preferred, 720,000 shares issuable upon conversion of 45,000 shares of Series B Preferred and 2,045,648 shares issuable upon exercise of warrants, each of which are exercisable within 60 days of February 12,May 3, 2016. |
The Company’s authorized capital stock currently consists of 300.0 million shares of common stock, and 5.0 million shares of preferred stock, $0.001 par value per share, (the “Preferred Stock”), of which 2.75 million shares have been designated as Series B Convertible Preferred Stock (“Series B Preferred”) and 150,000200,000 shares have been designated as Series C Convertible Preferred Stock (“Series C Preferred”).
As of February 12,May 3, 2016, there were 112,049,107 shares of common stock outstanding. Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the Company’s stockholders. Holders of common stock are entitled to receive, ratably, any dividends that may be declared by our Board of Directors out of legally available funds, subject to any preferential dividend rights of any outstanding preferred stock. Upon the Company’s liquidation, dissolution or winding up of the Company, holders of our Common Stock are entitled to receive, ratably, the Company’s net assets available after the payment of all debts and other liabilities, and subject to the prior rights of any outstanding preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are also subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock which the Company may designate and issue in the future without further stockholder approval.
The Board is currently authorized, without further stockholder approval, to issue from time to time up to an aggregate of 5.0 million shares of Preferred Stockpreferred stock in one or more series and to fix or alter the designations, preferences, rights, qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, term of redemption (including sinking fund provisions), redemption price or prices, liquidation preferences and the number of shares constituting any series or designations without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of management without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others.
As of February 12,May 3, 2016, we had two outstanding series of Preferred Stock, the Series B Preferred and the Series C Preferred. Below is a summary of the terms of the Series B Preferred and Series C Preferred. For a full description of the rights and preferences associated with each series of Preferred Stock, please refer to the Series B Certificate of Designation and the Series C Certificate of Designation (each defined below), each available as an exhibit to our filings with the SEC.
Series B Convertible Preferred Stock
In November 2013, the Certificate of Designation, Preferences, Rights and Limitations of the Series B Convertible Preferred Stock (the “Series B Certificate of Designation”) was filed with the Nevada Secretary of State, and subsequently amended and restated in February 2015, in order to designate 2.75 million shares of our Preferred Stock as Series B Preferred. The following summarizes the current rights and preferences of the Series B Preferred:
Rank. The Series B Preferred ranks senior to our common stock, and on parity with the Series C Preferred.
Dividends. Holders of the Series B Preferred are entitled to receive cumulative dividends at the rate per share of 5% per annum, which dividends are currently payable in either cash or shares of common stock.
Voting Rights. Subject to certain restrictions in the Series B Certificate of Designation, the holders of the Series B Preferred are entitled to vote alongside holder of common stock, on an as-converted basis, on all matters as to which the approval of the stockholders may be required.
Liquidation. Upon any liquidation, dissolution, or winding-up of the Company, whether voluntary or involuntary (a “Liquidation”), the holders of Series B Preferred are entitled to receive out of the Company’s assets, whether capital or surplus, an amount equal to the stated value of the Series B Preferred ($4 per share), plus any accrued and unpaid dividends thereon, before any distribution or payment shall be made to the holders of any junior securities, including holders of our common stock. If the assets of the Company are insufficient to pay, in full, such amounts, then the entire assets to be distributed to the holders of the Series B Preferred shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
Conversion. Each share of Series B Preferred is convertible, at the option of the holder, into that number of shares of common stock equal to the stated value thereof, divided by $0.25 per share (the "Series B Conversion Shares"). The Company has the option to require the conversion of the Series B Preferred into Series B Conversion Shares in the event the daily trading volume of the Company's common stock, divided by the closing price, equals at least $250,000 for 20 consecutive trading days and the average closing price of the Company's common stock is at least $0.62 per share for 10 consecutive trading days.
Certain Price and Share Adjustments.
a) Stock Dividends and Stock Splits. If the Company (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of common stock on shares of common stock or any other common stock equivalents; (ii) subdivides outstanding shares of common stock into a larger number of shares; (iii) combines (including by way of a reverse stock split) outstanding shares of common stock into a smaller number of shares; or (iv) issues, in the event of a reclassification of shares of the common stock, any shares of capital stock of the Company, then the conversion price shall be adjusted accordingly.
b) Merger or Reorganization. If the Company is involved in any reorganization, recapitalization, reclassification, consolidation or merger in which the common stock is converted into or exchanged for securities, cash or other property than each shares of Series B Preferred shall be convertible into the kind and amount of securities, cash or other property that a holder of the number of shares of common stock issuable upon conversion of one share of Series B Preferred prior to any such merger or reorganization would have been entitled to receive pursuant to such transaction.
Series C Convertible Preferred Stock
In February 2015, the Certificate of Designation, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C Certificate of Designation”) was first filed with the Nevada Secretary of State, and latermost recently amended and restated in March 2015, August 2015 and amended in November 2015,April 2016, in order to designate 150,000200,000 shares of our preferred stock as Series C Preferred. The following summarizes the current rights and preferences of the Series C Preferred:
Rank. The Series C Preferred ranks senior to our common stock, and on parity with the Series B Preferred.
Voting Rights. TheSubject to certain limitations in the Series C Certificate of Designation, the holders of the Series C Preferred are entitled to vote alongside holder of common stock, on an as-converted basis, on all matters as to which the approval of the stockholders may be required.
Liquidation. Upon any Liquidation, the holders of Series C Preferred are entitled to receive out of the Company’s assets, whether capital or surplus, an amount equal to the stated value of the Series C Preferred ($100 per share), plus any accrued and unpaid dividends thereon, before any distribution or payment shall be made to the holders of any junior securities, including the common stock. If the Company’s assets are insufficient to pay, in full, such amounts, then the entire assets to be distributed to the holders of the Series C Preferred shall be ratably distributed among the holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
Conversion. Each share of Series C Preferred is convertible, at the option of the holder, into that number of shares of common stock equal to the stated value thereof, divided by $0.15 per share (the “Series C Conversion Shares”). The Company has the option to require the conversion of the Series C Preferred into Series C Conversion Shares in the event the average closing price of the Company's common stock is at least $0.62 per share for 10 consecutive trading days.
Certain Price and Share Adjustments.
a) Stock Dividends and Stock Splits. If the Company (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of common stock on shares of common stock or any other Common Stock equivalents; (ii) subdivides outstanding shares of common stock into a larger number of shares; (iii) combines (including by way of a reverse stock split) outstanding shares of common stock into a smaller number of shares; or (iv) issues, in the event of a reclassification of shares of the common stock, any shares of capital stock of the Company, then the conversion price shall be adjusted accordingly.
b) Merger or Reorganization. If the Company is involved in any reorganization, recapitalization, reclassification, consolidation or merger in which the common stock is converted into or exchanged for securities, cash or other property than each shares of Series C Preferred shall be convertible into the kind and amount of securities, cash or other property that a holder of the number of shares of common stock issuable upon conversion of one share of Series C Preferred prior to any such merger or reorganization would have been entitled to receive pursuant to such transaction.
DESCRIPTION OF SECURITIES TO BE REGISTERED
This prospectus relates to the registration of a total of 44,863,395 shares of common stock by the Company, on behalf of the Selling Stockholders listed on page 4238 of this prospectus (the “Registrable Securities”). Below is a description of the transactions by which the Company issued the Registrable Securities to the Selling Stockholders.
August 2015 Series C Offering
On August 13, 2015 (the “Initial Investment Date”), Red Beard Holdings, LLC (“Red Beard”) entered into a Securities Purchase Agreement (the “Purchase Agreement”), pursuant to which Red Beard agreed to purchase up to 17,648 shares of Series C Preferred for $113.33 per share (the “Shares”) over the course of three separate closings (the “Series C Offering”). The Company issued an aggregate total of 7,942 Shares on the Initial Investment Date, and 6,177 Shares on August 28, 2015 and the remaining 3,529 Shares on September 15, 2015. As additional consideration for the purchase of Shares in the Series C Offering, Red Beard received five-year warrants, originally exercisable for $0.17 per share (the “Exercise Price”), to purchase that number of shares of the Company's common stock equal to 35% of that number of shares of common stock determined by dividing (i) the Stated Value (as such term is defined in the Series C Amendment) of the Shares by (ii) the Exercise Price (the “Warrant Shares”).
In addition to the Purchase Agreement, the Company and Red Beard entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed to register the Warrant Shares issuable upon exercise of the Warrants, and the shares of common stock issuable upon conversion of the Shares, under the Securities Act on a Registration Statement on Form S-1 (the “RegistrationStatementRegistration Statement”) on or before February 13, 2016.
On October 16, 2015, the Company and Red Beard executed an amendment to the Purchase Agreement (the “Purchase Agreement Amendment”). Pursuant to the terms and conditions of the Purchase Agreement Amendment, the Company sold to Red Beard an additional 8,823 Shares for gross proceeds of approximately $1.0 million. As additional consideration for the purchase of the Shares, Red Beard received a Warrant to purchase approximately 1.81 million shares of the Company’s common stock.
The Company, Red Beard and Vincent C. Smith also entered into an amendment to the Registration Rights Agreement (the “Registration Rights Amendment”), in order to include within the definition of “Registrable Securities”: (i) the shares of common stock issuable upon conversion of the Shares and upon exercise of the Warrant issued in connection with the Purchase Agreement Amendment, and (ii) the shares of common stock issuable upon exercise of the Personal Guaranty Warrant, as defined below.
Niagara Agreement and Personal Guaranty
On October 9, 2015, our wholly owned subsidiary, True Drinks, Inc., a Delaware corporation (“True Drinks”), entered into a bottling agreement (the “Niagara Agreement”) with Niagara Bottling, LLC, a Delaware limited liability company (“Niagara”), pursuant to which Niagara will become the exclusive manufacturer of AquaBall(TM) Naturally Flavored Water for the next five years.
The Niagara Agreement requires the Company to deliver to Niagara its minimum volume requirements for the upcoming 12-month period on or before February 1st of each year (the “Annual Commitment”), which Annual Commitment may not be less than 3.2 million Cases (defined in the Niagara Agreement as a pack of 24 bottles of AquaBall(TM) Naturally Flavored Water) per purchase order. Subject to the terms and conditions of the Niagara Agreement, the Company will pay to Niagara $6.35 per Case manufactured, for an annual financial liability of approximately $20.3 million per year.
Mr. Vincent C. Smith, the Company’s largest shareholder, executed a personal guaranty of True Drinks’ obligations under the Niagara Agreement (the “Personal Guaranty”). As consideration for Mr. Smith’s execution of the Personal Guaranty, the Company issued to Mr. Smith a five-year warrant (the “Personal GuarantyWarrantGuaranty Warrant”), to purchase 17.5 million shares of the Company’s common stock for $0.188 per share.
As noted above, on October 16, 2015, the Company agreed to include the shares of common stock issuable upon exercise of the Personal Guaranty Warrant within the definition of “Registrable Securities” in the Registration Rights Amendment.
Issuance of Novelty Warrant
In October 2015, the Company engaged Novelty Capital Group LLC (“Novelty”) to provide the Company with certain advisory services related to investor relations. As consideration, the Company issued to Novelty a warrant (the “Novelty Warrant”) to purchase up to 884,211 shares of common stock for $0.19 per share, subject to a monthly vesting schedule over a 12-month period, provided the Company continued to engage Novelty. The Novelty Warrant also provided Novelty with piggyback registration rights.
On February 14, 2016, the Company terminated its engagement of Novelty. As of that date, a total of 294,737 shares had vested under the Novelty Warrant.
November Series C Offering and Adjustment of Exercise Price of the Warrants and Personal Guaranty Warrant
On November 25, 2015, the Company and Red Beard entered into a securities purchase agreement, pursuant to which Red Beard agreed to purchase up to 30,000 shares of Series C Preferred for $100 per share over the course of three separate closings between November 2015 and January 2016 (the “November Purchase Agreement”). As additional consideration for the purchase of the shares of Series C Preferred, Red Beard received five-year warrants, exercisable for $0.15 per share, to purchase that number of shares of the Company's common stock equal to 35% of the shares of common stock issuable upon conversion of the shares of Series C Preferred purchased.
Due to certain adjustment provisions in the Warrants and the Personal Guaranty Warrant, the issuance of the warrants pursuant to the November Purchase Agreement caused a decrease in the exercise price of the Warrants issued during private placement transactions between August 2015 and October 2015 and the Personal Guaranty Warrant to $0.15 per share. However, the exercise price of the Novelty Warrant remained unchanged.
On January 20, 2016, the Company and holders (the “Holders”) of Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the Holders agreed to convert the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and Warrants to purchase up to an agate total of 1,029,701 shares of common stock for $0.17 per share. Each Note Exchange Agreement provided piggyback registration rights to the Holders for the shares of common stock issuable upon conversion of the shares of Series C Preferred and upon exercise of the Warrants.
Pursuant to the terms and conditions of the Registration Rights Amendment, and certain provisions in the Note Exchange Agreement and the Novelty Warrant, the Company has agreed to register the Registrable Securities under the Securities Act. Accordingly, we filed a Registration Statement on Form S-1, of which this prospectus forms a part, with respect to the resale of the Registrable Securities from time to time. In addition, we agreed in the Registration Rights Agreement to use our best efforts to keep the registration statement effective until the Registrable Securities are sold or may be sold without registration or prospectus delivery requirements under the Securities Act, subject to certain restrictions.
Selling Stockholders Table
We filed a Registration Statement on Form S-1 with the SEC, of which this prospectus forms a part, with respect to the resale of the Registerable Securities from time to time under Rule 415 of the Securities Act. The Registerable Securities were registered to permit secondary public trading thereof. Subject to the restrictions described in this prospectus, the Selling Stockholders may offer the Registerable Securities for resale from time to time. In addition, subject to the restrictions described in this prospectus, the Selling Stockholders may sell, transfer or otherwise dispose of all or a portion of any Registerable Securities held in transactions exempt from the registration requirements of the Securities Act. See “Plan of Distribution” below for more information.
The table below presents information as of February 12,May 3, 2016, regarding the Selling Stockholders and the Registerable Securities the Selling Stockholders (and their donees, pledgees, assignees, transferees and other successors in interest) may offer and sell from time to time under this prospectus. More specifically, the following table sets forth as to the Selling Stockholders:
● | the number of shares of our common stock beneficially owned by each Selling Stockholders prior to the offering for resale of any of the shares of our common stock being registered by the registration statement of which this prospectus is a part; |
● | the number of shares of our common stock that may be offered for resale for the Selling Stockholders’ account under this prospectus; and |
● | the number and percent of shares of our common stock to be held by the Selling Stockholders after the offering of the resale securities, assuming all of the resale shares of common stock are sold by the Selling Stockholders and that the Selling Stockholders do not acquire any other shares of our common stock prior to their assumed sale of all of the resale shares. |
None of the Selling Stockholders has held a position as an officer or director of the company, nor has any Selling Stockholder had any material relationship of any kind with us or any of our affiliates. Except as otherwise indicated in the footnotes to the table, the Selling Stockholders possess sole voting and investment power with respect to the shares shown, and no Selling Stockholder is a broker-dealer or an affiliate of a broker-dealer.
The following table was prepared based on information supplied to us by the Selling Stockholder, as well as certain information known to us as of the date of this prospectus. Except as indicated below, the share amounts under the columns “Shares Beneficially Owned Before the Offering” and “Maximum Number of Shares Offered” consist of the Registrable Securities, and the share amounts under the columns “Shares Beneficially Owned after the Offering” assume all of the offered shares are sold pursuant to this prospectus.
| | Shares Beneficially Owned Prior to Offering* | | | Maximum Number of Shares Being Offered Pursuant to this Prospectus | | | Shares Beneficially Owned After Offering* | |
Name of Selling Security Holder (1) | | Number | | | Percent | | | | | | | | | | |
Red Beard Holdings, LLC (2) | | | 50,097,246 | | | | 32.02 | % | | | 23,097,245 | | | | 27,000,001 | | | | 20.25 | % |
Vincent C. Smith (3)(4) | | | 130,378,020 | | | | 68.77 | % | | | 17,500,000 | | | | 89,780,775 | | | | 60.26 | % |
Christopher Turoci (5) | | | 9,524,033 | | | | 8.33 | % | | | 2,382,981 | | | | 7,141,052 | | | | 6.38 | % |
Nadeem Ahmed (6) | | | 2,532,533 | | | | 2.38 | % | | | 1,588,432 | | | | 944,101 | | | | ** | |
Novelty Capital Group LLC (7) | | | 294,737 | | | | ** | | | | 294,737 | | | | – | | | | ** | |
| | Shares Beneficially Owned Prior to Offering* | | | Maximum Number of Shares Being Offered Pursuant to this Prospectus | | | Shares Beneficially Owned After Offering* | |
Name of Selling Security Holder (1) | | Number | | | Percent | | | | | | | | | | |
Red Beard Holdings, LLC (2) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Novelty Capital Group LLC (7) | | | | | | | | | | | | | | | | | | | | |
* | Beneficial ownership assumes the exercise of all derivative securities held by the Selling Stockholder. |
** | Less than 1%. |
(1) | Information concerning other Selling Stockholders will be set forth in one or more prospectus supplements from time to time, if required. |
(2) | See table titled “Security Ownership of Certain Beneficial Owners and Management” on p. 35 of this prospectus for information regarding securities held by Red Beard Holdings, LLC (“Red Beard”) prior to this offering. Shares offered pursuant to this prospectus consist of 17,647,333 shares of common stock issuable upon conversion of 26,471 shares of Series C Preferred and 5,449,912 shares issuable upon exercise of Warrants issued to Red Beard pursuant to the Purchase Agreement and Purchase Agreement Amendment. Vincent C Smith, Manager of Red Beard, has voting and dispositive power, and, subject to certain limitations in the Series C Certificate of Designation, voting power over these shares.the shares |
(3) | See table titled “Security Ownership of Certain Beneficial Owners and Management” on p. 35 of this prospectus for information regarding securities held by Mr. Smith held prior to this offering. Shares offered pursuant to this prospectus consist of 17,500,000 shares of Common Stock issuable upon exercise of the Personal Guaranty Warrant. |
(4) | Due to Mr. Smith’s role as Manager of Red Beard, shares beneficially owned prior to, and after this offering include shares held by Red Beard. |
(5) | See table titled “Security Ownership of Certain Beneficial Owners and Management” on p. 35 of this prospectus for information regarding securities held by Mr. Turoci held prior to this offering. Shares offered pursuant to this prospectus include 1,765,333 shares of Common Stock issuable upon conversion of 2,648 shares of Series C Preferred and 617,648 shares issuable upon exercise of Warrants issued to Mr. Turoci in connection with the Note Exchange. |
(6) | Shares beneficially owned prior to this offering include 699,334 shares of Common Stock issuable upon conversion of 1,049 shares of Series B Preferred and 244,767 shares issuable upon exercise of certain warrants issued to Mr. Ahmed. Shares offered pursuant to this prospectus include 1,176,667 shares of Common Stock issuable upon conversion of 1,765 shares of Series C Preferred and 411,765 shares issuable upon exercise of Warrants issued to Mr. Ahmed in connection with the Note Exchange. |
(7) | Shares offered pursuant to this prospectus consist of 294,737 shares of common stock issuable upon exercise of the Novelty Warrant. Jonathon Skeels, Managing Member of Novelty, has voting and dispositive power over these shares. |
Each Selling Stockholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock covered hereby on the OTC Pink Marketplace or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:
· | on any national securities exchange, market or quotation service on which our common stock may be listed or quoted at the time of sale; |
· | in transactions other than on these exchanges or systems or in the over-the-counter market; |
· | in ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; |
· | in block trades in which the broker-dealer will attempt to sell the securities as agent, but may position and resell a portion of the block as principal to facilitate the transaction; |
· | in purchases by a broker-dealer as principal and resale by the broker-dealer for its account; |
· | in an exchange distribution in accordance with the rules of the applicable exchange; |
· | in privately negotiated transactions; |
· | in put or call option transactions; |
· | in transactions involving short sales through broker-dealers; |
· | in transactions wherein the Selling Stockholder sells securities short themselves and delivers the securities to close out short positions; |
· | through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; |
· | in transactions that may involve crosses or block transactions; |
· | in transactions where broker-dealers may agree with the Selling Stockholders to sell a specified number of securities at a stipulated price per security; |
· | a combination of any such methods of sale; or |
· | in any other method permitted by applicable law. |
The Selling Stockholders may also sell shares under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with Rule 2440 of the Financial Industry Regulatory Authority, Inc.; and in the case of a principal transaction a markup or markdown in compliance with IM-2440 of the Financial Industry Regulatory Authority, Inc.
In connection with the sale of the common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended, in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute their shares of common stock.
The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act, including Rule 172 thereunder. The Selling Stockholders have advised us that there is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.
We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act, or any other rule of similar effect (assuming that the shares were at no time held by any affiliate of ours, and all warrants are exercised by “cashless exercise” as provided in each of the warrants) or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act, or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares of common stock covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act, and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
The consolidated financial statements as of December 31, 2015 and 2014, and for the yearyears then ended included in this prospectus and elsewhere in the registration statement have been audited by Squar Milner LLP (formerly Squar, Milner, Peterson, Miranda & Williamson, LLP,LLP), an independent registered public accounting firm, as indicated in their report with respect thereto, which report will be included herein in reliance upon the authority of said firm as experts in auditing and accounting in giving said reports.
The validity of our common stock offered hereby will be passed upon for us by Disclosure Law Group, San Diego, California.
INTERESTS OF NAMED EXPERTS AND COUNSEL
No expert or counsel named in this prospectus as having prepared or certified any part of this prospectus or having given an opinion upon the validity of the securities being registered or upon other legal matters in connection with the registration or offering of the common stock was employed for such purpose on a contingency basis, or had, or is to receive, in connection with this offering, a substantial interest, direct or indirect, in us or any of our subsidiaries, nor was any such person connected with us as a promoter, managing or principal underwriter, voting trustee, director, officer, or employee.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the SEC. This prospectus, which forms a part of that registration statement, does not contain all of the information included in the registration statement and the exhibits and schedules thereto as permitted by the rules and regulations of the SEC. For further information with respect to us and the shares of our common stock offered hereby, please refer to the registration statement, including its exhibits and schedules. Statements contained in this prospectus as to the contents of any contract or other document referred to herein are not necessarily complete and, where the contract or other document is an exhibit to the registration statement, each such statement is qualified in all respects by the provisions of such exhibit, to which reference is hereby made. You may review a copy of the registration statement at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. The registration statement can also be reviewed by accessing the SEC’s website at http://www.sec.gov. We are subject to the information and reporting requirements of the Securities Exchange Act of 1934 and, in accordance therewith, file periodic reports, proxy statements or information statements, and other information with the SEC. These reports can also be reviewed by accessing the SEC’s website.
You should rely only on the information provided in this prospectus, any prospectus supplement or as part of the registration statement filed on Form S-1 of which this prospective is a part, as such registration statement is amended and in effect with the SEC. We have not authorized anyone else to provide you with different information. We are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus, any prospectus supplement or any document incorporated by reference is accurate as of any date other than the date of those documents.
Index to Consolidated Financial Statements
| | Page | |
| | | |
| | | * | |
| | | | |
Consolidated Balance Sheets at December 31, 2014 and 2013 | | | F-1 | |
| | | | |
Consolidated Statements of Operations for the years ended December 31, 2014 and 2013 | | | F-2 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Notes to | | | | |
| | | | |
Condensed | | | F-21 | |
| | | | |
Condensed | | | F-22 | |
| | | | |
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 (unaudited) | | | F-23 | |
| | | | |
Notes to unaudited Condensed Consolidated Financial Statements | | | F-24 | |
*To be filled by amendment.
TRUE DRINKS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2014 and 2013
| | 2014 | | | 2013 | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Property and Equipment, net | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total Current Liabilities | | | | | | | | |
| | | | | | | | |
Commitments and Contingencies (Note 7) | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Common Stock, $0.001 par value, 120,000,000 and 40,000,000 shares authorized, 48,622,675 and 27,885,587 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | | | | | | | | |
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,490,995 and 1,776,923 shares issued and outstanding at December 31, 2014 and December 31, 2013, respectively | | | | | | | | |
Additional paid in capital | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total Stockholders’ Equity | | | | | | | | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | | | | | | | |
The accompanying notes are an integral part of these financial statements.
TRUE DRINKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
To the Years Ended December 31, 2014Board of Directors and 2013
Shareholders
True Drinks Holdings, Inc.
| | | 2014 | | | | 2013 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
General and administrative | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Change in fair value of derivative liabilities | | | | | | | | |
Interest expense- accretion of debt discount | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Dividends on Preferred Stock | | | | | | | | |
| | | | | | | | |
Net loss attributable to common stockholders | | | | ) | | | | |
| | | | | | | | |
Net loss per common share | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average common shares | | | | | | | | |
outstanding, basic and diluted | | | | | | | | |
Irvine, California
We have audited the accompanying consolidated balance sheets of True Drinks Holdings, Inc. (the "Company") as of December 31, 2015 and 2014 and the related consolidated statements of operations, stockholders' (deficit) equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company was not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of True Drinks Holdings, Inc. as of December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1, the accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As of and for the year ended December 31, 2015, the Company incurred a net loss of $11,990,563, has negative working capital of $5,303,989, and an accumulated deficit of $30,348,644. A significant amount of additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The accompanying notes are an integral partconsolidated financial statements do not include any adjustments that might result from the outcome of these financial statements.
this uncertainty.
/s/ Squar Milner LLP (formerly Squar, Milner, Peterson, Miranda & Williamson, LLP)
March 24, 2016
Newport Beach, California
TRUE DRINKS HOLDINGS, INC.
STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 20142015 and 20132014
| | Common Stock | | | Preferred Stock | | | Additional Paid-In Capital | | | Retained Earnings (Accumulated Deficit) | | | Total Stockholders' Equity | |
| | Shares | | | Amount | | | Shares | | | Amount | | | | | | | |
Balance – December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of Preferred Stock to Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Common Stock related to debt financing | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Common Stock for debt conversions | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Preferred Stock for debt conversions, net of warrants issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Elimination of derivative liability from conversion of debt to preferred stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Common Stock for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Preferred Stock for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Preferred Stock for cash, net of warrants issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance – December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Conversion of Preferred Stock to Common Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Preferred Stock for debt conversions, net of warrants issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Common Stock for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Preferred Stock for cash, net of warrants issued | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Issuance of Common Stock for settlement of debt | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cashless exercise of warrants | | | | | | | | | | | | | | | | | | | | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Dividends declared on Preferred Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Reclassification of Derivative liability | | | - | | | | - | | | | - | | | | - | | | | 44,751 | | | | - | | | | 44,751 | |
Issuance of Common Stock for dividends on Preferred Stock | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance – December 31, 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2015 | | | 2014 | |
ASSETS | | | | | | |
Current Assets: | | | | | | |
Cash | | $ | 376,840 | | | $ | 668,326 | |
Accounts receivable, net | | | 1,843,415 | | | | 343,709 | |
Inventory | | | 1,558,719 | | | | 1,363,443 | |
Prepaid expenses and other current assets | | | 75,923 | | | | 628,675 | |
Total Current Assets | | | 3,854,897 | | | | 3,004,153 | |
| | | | | | | | |
Restricted Cash | | | 209,360 | | | | 133,198 | |
Property and Equipment, net | | | 4,530 | | | | 4,587 | |
Patents, net | | | 1,070,588 | | | | 1,211,765 | |
Trademarks, net | | | - | | | | 6,849 | |
Goodwill | | | 3,474,502 | | | | 3,474,502 | |
Total Assets | | $ | 8,613,877 | | | $ | 7,835,054 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | | | | | | | |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 1,623,046 | | | $ | 1,922,285 | |
Debt | | | 1,336,819 | | | | 4,263,002 | |
Derivative liabilities | | | 6,199,021 | | | | 1,569,522 | |
Total Current Liabilities | | | 9,158,886 | | | | 7,754,809 | |
| | | | | | | | |
Commitments and Contingencies (Note 7) | | | | | | | | |
| | | | | | | | |
Stockholders’ (Deficit) Equity: | | | | | | | | |
Common Stock, $0.001 par value, 300,000,000 and 120,000,000 shares authorized, 111,434,284 and 48,622,675 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | | | 111,434 | | | | 48,623 | |
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,317,870 and 1,490,995 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | | | 1,318 | | | | 1,491 | |
Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 150,000 and 0 shares authorized, 48,853 and 0 shares issued and outstanding at December 31, 2015 and December 31, 2014, respectively | | | 49 | | | | - | |
Additional paid in capital | | | 29,690,834 | | | | 18,388,212 | |
Accumulated deficit | | | (30,348,644 | ) | | | (18,358,081 | ) |
| | | | | | | | |
Total Stockholders’ (Deficit) Equity | | | (545,009 | ) | | | 80,245 | |
| | | | | | | | |
Total Liabilities and Stockholders’ (Deficit) Equity | | $ | 8,613,877 | | | $ | 7,835,054 | |
The accompanying notes are an integral part of these financial statements.
TRUE DRINKS HOLDINGS, INC.
For the Years Ended December 31, 20142015 and 20132014
| | | 2014 | | | 2013 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Accretion of deferred financing costs | | | | | | | | |
Provision for bad debt expense | | | | ) | | | | |
Change in estimated fair value of derivative | | | | | | | | |
Amortization of debt discount | | | | | | | | |
Fair value of stock issued for services | | | | | | | | |
| | | | | | | | |
Changes in operating assets and liabilities: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Prepaid expenses and other current assets | | | | | | | | |
| | | | | | | | |
Accounts payable and accrued expenses | | | | | | | | |
Net cash used in operating activities | | | | | | | | |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Change in restricted cash | | | | | | | | |
Purchase of property and equipment | | | | | | | | |
Net cash used in investing activities | | | | | | | | |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from issuance of Series B Preferred Stock, net | | | | | | | | |
| | | | | | | | |
Deferred financing costs paid | | | | | | | | |
| | | | | | | (3,034,033 | |
Net cash provided by financing activities | | | | | | | | |
| | | | | | | | |
NET (DECREASE) INCREASE IN CASH | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | 2015 | | | | 2014 | |
Net Sales | | $ | 6,121,097 | | | $ | 4,693,414 | |
| | | | | | | | |
Cost of Sales | | | 6,282,087 | | | | 4,401,702 | |
| | | | | | | | |
Gross (Loss) Profit | | | (160,990 | ) | | | 291,712 | |
| | | | | | | | |
Operating Expenses | | | | | | | | |
Selling and marketing | | | 5,073,211 | | | | 4,388,108 | |
General and administrative | | | 5,475,673 | | | | 4,450,101 | |
Total operating expenses | | | 10,548,884 | | | | 8,838,209 | |
| | | | | | | | |
Operating Loss | | | (10,709,874 | ) | | | (8,546,497 | ) |
| | | | | | | | |
Other Expense | | | | | | | | |
Change in fair value of derivative liabilities | | | 1,262,329 | | | | 621,159 | |
Interest expense | | | (257,389 | ) | | | (202,773 | ) |
Other (expense) income | | | (2,285,629 | ) | | | 11,508 | |
| | | (1,280,689 | ) | | | 429,894 | |
| | | | | | | | |
Net Loss | | $ | (11,990,563 | ) | | $ | (8,116,603 | ) |
| | | | | | | | |
Dividends on Preferred Stock | | $ | 271,838 | | | $ | 434,096 | |
| | | | | | | | |
Net loss attributable to common stockholders | | $ | (12,262,401 | ) | | $ | (8,550,699 | ) |
| | | | | | | | |
Net loss per common share | | | | | | | | |
Basic and diluted | | $ | (0.16 | ) | | $ | (0.23 | ) |
| | | | | | | | |
Weighted average common shares | | | | | | | | |
outstanding, basic and diluted | | | 75,346,961 | | | | 36,429,303 | |
SUPPLEMENTAL DISCLOSURES | | | | | | | | |
| | | | | | | | |
Non-cash financing and investing activities: | | | | | | | | |
Conversion of preferred stock to common stock | | | | | | | | |
Conversion of notes payable and accrued interest to common stock | | | | | | | | |
Dividends paid in common stock | | | | | | | | |
| | | 434,096 | | | | | |
Reclassification of derivative liability | | | | | | | | |
Warrants issued in connection with Series B Offering | | | | | | | | |
Warrants issued as deferred financing costs | | | | | | | | |
Warrants issued as debt discount | | | | | | | | |
Elimination of derivative liability from conversion of debt to preferred stock | | | | | | | | |
Issuance of common stock for settlement of debt | | $ | 601,651 | | | $ | - | |
Cashless exercise of warrants | | $ | 78 | | | $ | - | |
The accompanying notes are an integral part of these financial statements.
TRUE DRINKS HOLDINGS, INC.
STOCKHOLDERS’ (DEFICIT) EQUITY
For the Years Ended December 31, 2015 and 2014
| | Common Stock | | Preferred Stock (Series B and C) | | | Additional Paid-In Capital | | Accumulated Deficit | | | Total Stockholders' (Deficit) Equity | |
| | Shares | | | Amount | | Shares | | | Amount | | | | | | |
Balance – December 31, 2013 | | | 27,885,587 | | $ | 27,886 | | | 1,776,923 | | | $ | 1,777 | | | $ | 14,751,170 | | $ | (10,241,478 | ) | | $ | 4,539,355 | |
Conversion of Preferred Stock to Common Stock | | | 16,021,632 | | | 16,022 | | | (1,001,352 | ) | | | (1,001 | ) | | | (15,021 | ) | | - | | | | - | |
Issuance of Preferred Stock for debt conversions, net of warrants issued | | | - | | | - | | | 204,732 | | | | 205 | | | | 619,154 | | | - | | | | 619,359 | |
Issuance of Common Stock for services | | | 1,751,270 | | | 1,751 | | | 5,692 | | | | 5 | | | | 542,775 | | | - | | | | 544,531 | |
Issuance of Preferred Stock for cash, net of warrants issued | | | - | | | - | | | 505,000 | | | | 505 | | | | 1,440,064 | | | - | | | | 1,440,569 | |
Issuance of Common Stock for settlement of debt | | | 2,004,002 | | | 2,004 | | | - | | | | - | | | | 599,647 | | | - | | | | 601,651 | |
Cashless exercise of warrants | | | 78,427 | | | 78 | | | - | | | | - | | | | (78 | ) | | - | | | | | |
Stock-based compensation | | | - | | | - | | | - | | | | - | | | | 497,271 | | | - | | | | 497,271 | |
Dividends declared on Preferred Stock | | | - | | | - | | | - | | | | - | | | | (434,096 | ) | | - | | | | (434,096 | ) |
Reclassification of Derivative liability | | | - | | | - | | | - | | | | - | | | | 44,751 | | | - | | | | 44,751 | |
Issuance of Common Stock for dividends on Preferred Stock | | | 881,757 | | | 882 | | | - | | | | - | | | | 342,575 | | | - | | | | 343,457 | |
Net Loss | | | - | | | - | | | - | | | | - | | | | - | | | (8,116,603 | ) | | | (8,116,603 | ) |
Balance – December 31, 2014 | | | 48,622,675 | | $ | 48,623 | | | 1,490,995 | | | $ | 1,491 | | | $ | 18,388,212 | | $ | (18,358,081 | ) | | $ | 80,245 | |
Conversion of Preferred Stock to Common Stock | | | 55,947,335 | | | 55,947 | | | (252,891 | ) | | | (252 | ) | | | (55,695) | | | - | | | | - | |
Issuance of Preferred Stock for debt conversions, net of warrants issued | | | - | | | - | | | 12,148 | | | | 12 | | | | 835,514 | | | - | | | | 835,526 | |
Issuance of Common Stock for services | | | 2,413,811 | | | 2,414 | | | - | | | | - | | | | 485,412 | | | - | | | | 487,826 | |
Issuance of Preferred Stock Series C for cash, net of warrants issued | | | - | | | - | | | 116,471 | | | | 116 | | | | 8,750,478 | | | - | | | | 8,750,594 | |
Stock-based compensation | | | - | | | - | | | - | | | | - | | | | 1,055,448 | | | - | | | | 1,055,448 | |
Dividends declared on Preferred Stock | | | - | | | - | | | - | | | | - | | | | (271,838 | ) | | - | | | | (271,838 | ) |
Issuance of Common Stock for Employee Bonuses | | | 2,187,818 | | | 2,188 | | | - | | | | - | | | | 216,594 | | | - | | | | 218,782 | |
Issuance of Common Stock for dividends on Preferred Stock | | | 1,512,645 | | | 1,512 | | | - | | | | - | | | | 287,459 | | | - | | | | 288,971 | |
Issuance of Restricted Stock to Employees | | | 750,000 | | | 750 | | | - | | | | - | | | | (750 | ) | | - | | | | - | |
Net Loss | | | - | | | - | | | - | | | | - | | | | - | | | (11,990,563 | ) | | | (11,990,563 | ) |
Balance – December 31, 2015 | | | 111,434,284 | | $ | 111,434 | | | 1,366,723 | | | $ | 1,367 | | | $ | 29,690,834 | | $ | (30,348,644 | ) | | $ | (545,009 | ) |
TRUE DRINKS HOLDINGS, INC.
For the Years Ended December 31, 2015 and 2014
| | | 2015 | | | 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | |
Net loss | | $ | (11,990,563 | ) | | $ | (8,116,603 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
Depreciation | | | 3,087 | | | | 6,161 | |
Amortization | | | 148,026 | | | | 182,843 | |
Provision for bad debt expense | | | (51,769 | ) | | | (48,473 | ) |
Change in estimated fair value of derivative liabilities | | | (1,262,329 | ) | | | (621,159 | ) |
Fair value of warrants issued for guaranty | | | 2,263,783 | | | | - | |
Fair value of stock issued for services | | | 487,826 | | | | 544,531 | |
Fair value of stock issued for bonuses | | | 218,782 | | | | - | |
Stock based compensation | | | 1,055,448 | | | | 497,271 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (1,447,937 | ) | | | (120,168 | ) |
Inventory | | | (195,276 | ) | | | (306,687 | ) |
Prepaid expenses and other current assets | | | 552,752 | | | | (37,241 | ) |
Accounts payable and accrued expenses | | | (214,899 | ) | | | 1,369,819 | |
Net cash used in operating activities | | | (10,433,069 | ) | | | (6,649,706 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
Change in restricted cash | | | (76,162 | ) | | | (133 | ) |
Purchase of property and equipment | | | (3,030 | ) | | | (2,349 | ) |
Net cash used in investing activities | | | (79,192 | ) | | | (2,482 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from issuance of Series B Preferred Stock, net | | | - | | | | 1,857,413 | |
Proceeds from issuance of Series C Preferred Stock, net | | | 11,999,958 | | | | - | |
Proceeds from debt | | | 1,103,817 | | | | 4,263,002 | |
Repayments on debt | | | (2,883,000 | ) | | | (1,936,667 | ) |
Net cash provided by financing activities | | | 10,220,775 | | | | 4,183,748 | |
| | | | | | | | |
NET DECREASE IN CASH | | | (291,486 | ) | | | (2,468,440 | ) |
| | | | | | | | |
CASH – beginning of year | | | 668,326 | | | | 3,136,766 | |
| | | | | | | | |
CASH – end of year | | $ | 376,840 | | | $ | 668,326 | |
SUPPLEMENTAL DISCLOSURES | | | | | | | | |
Cash paid for interest | | $ | 179,056 | | | $ | 7,944 | |
Non-cash financing and investing activities: | | | | | | | | |
Conversion of preferred stock to common stock | | $ | 55,695 | | | $ | 15,021 | |
Conversion of notes payable and accrued interest to common stock | | $ | - | | | $ | 818,926 | |
Conversion of notes payable and accrued interest to Series C preferred stock | | $ | 1,214,207 | | | $ | - | |
Dividends paid in common stock | | $ | 288,971 | | | $ | 343,457 | |
Dividends declared but unpaid | | $ | 271,838 | | | $ | 434,096 | |
Reclassification of derivative liability | | $ | - | | | $ | 44,751 | |
Warrants issued in connection with Series B offering | | $ | - | | | $ | 616,411 | |
Warrants issued in connection with Series C offering | | $ | 3,249,364 | | | $ | - | |
Warrants issued in connection with debt conversions | | $ | 378,681 | | | $ | - | |
Issuance of common stock for settlement of debt | | $ | - | | | $ | 601,651 | |
Cashless exercise of warrants | | $ | - | | | $ | 78 | |
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Overview
True Drinks Holdings, Inc. (the "Company", "us" or "we") was incorporated in the state of Nevada in January 2001 and is the holding company for True Drinks, Inc. (“True Drinks”), formed on January 19, 2012 in Delaware to create and commercialize all-natural, vitamin-enhanced drinks. Our primary business is the development, marketing, sale and distribution of our flagship product, AquaBall™ Naturally Flavored Water, a vitamin-enhanced, naturally flavored water drink packaged in our patented stacking spherical bottles. We distribute AquaBall™ nationally through select retail channels, such as grocery stores, mass merchandisers, drug stores, club stores and online. We also market and distribute Bazi® All Natural Energy, a liquid nutritional supplement drink, which is currently distributed through select retail channels, online, and through our existing database of customers.
Our principal place of business is 1855218662 MacArthur Boulevard, Suite 325,110, Irvine, California, 92612. Our telephone number is (949) 203-2500.203-3500. Our corporate website address is http://www.truedrinks.com. Our Common Stock, par value $0.001 (“Common Stock”) is currently listed for quotation on the Over-the-Counter marketplace (“OTCQB”)OTC Pink Marketplace under the symbol TRUU.
Recent Developments
Bottling Agreement with Niagara Bottling
Amendment to Series B Preferred Certificate of Designation. On February 18,October 9, 2015, the Company filed the First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of the Series B Convertible Preferred Stockwe entered into an agreement (the “Series B AmendmentNiagara Agreement”) with Niagara Bottling, LLC (“Niagara”), wherein Niagara will become the Nevada Secretaryexclusive manufacturer of StateAquaBall™ Naturally Flavored Water for the next five years. With Niagara, we have produced an improved “clean label” formulation of AquaBall™, which remains sugar and calorie free but has eliminated all preservatives.
The Niagara Agreement requires the Company to deliver to Niagara its minimum volume requirements for the upcoming 12-month period on or before February 1st of each year (the “Annual Commitment”), which Annual Commitment may not be less than 3.2 million Cases (defined in order to: (i) eliminate certain provisions pertainingthe Niagara Agreement as a pack of 24 bottles of AquaBall™ Naturally Flavored Water). Subject to the adjustmentterms and conditions of the conversion priceNiagara Agreement, the Company will pay Niagara $6.35 per Case manufactured, for an annual financial liability of approximately $20.3 million per year. We expect to begin delivering Cases manufactured by Niagara in second quarter of fiscal 2016.
Our largest shareholder, Mr. Vincent C. Smith, executed a personal guaranty of our obligations under the Niagara Agreement (the “Personal Guaranty”). In order to offset any financial obligation Mr. Smith may incur as a result of the Series B Convertible Preferred StockPersonal Guaranty, the Company issued to Red Beard Holdings, LLC, an entity affiliated with Mr. Smith (“Series B PreferredRed Beard”), a senior secured promissory note (the “Note”) and (ii) eliminate the protective provision preventingpursuant to which the Company from issuing securities seniorwill borrow any amounts paid to or pari passu in rank to the Series B Preferred without first receiving approval from holders of 66%Niagara by Mr. Smith as a result of the Personal Guaranty. Any amounts borrowed under the Note will be secured by a continuing security interest in substantially all of the Company’s assets, will accrue interest at 2.0%, plus the Maximum Rate (as such term is defined in the Note) and, subject to certain terms and conditions of the Note, will be due and payable within 10 years. As consideration for Mr. Smith’s execution of the Personal Guaranty, the Company issued and outstandingto Mr. Smith a five-year warrant (the “Personal Guaranty Warrant”), to purchase 17.5 million shares of Series B Preferred.the Company’s Common Stock for $0.188 per share. The Series B AmendmentPersonal Guaranty Warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the Personal Guaranty Warrant being classified as a derivative liability and, as such, the value, totaling $2,263,783, was approved byrecorded to derivative liabilities during the written consent of stockholders holding approximately 79% of the issued and outstanding shares of Series B Preferred.year ended December 31, 2015.
Extension of Licensing Agreements
During the quarter ended September 30, 2015, we entered into renewed Licensing Agreements with both Marvel Characters B.V. (“Marvel”) and Disney Consumer Products, Inc. (“Disney”), pursuant to which we secured licenses to feature certain Marvel and Disney characters on bottles of AquaBall™ Naturally Flavored Water through 2017. Our agreement with Marvel expires on December 31, 2017, and requires payment of a 5% royalty rate on sales of AquaBall™ Naturally Flavored Water adorned with Marvel characters, paid quarterly, with a total guarantee of $200,000. Our agreement with Disney expires on March 31, 2017, and requires payment of a 5% royalty rate on sales of AquaBall™ Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total guarantee of $450,870. We are also required to make an annual ‘common marketing fund’ contribution equal to 1% of our sales, and must spend a total of $820,000 on advertising and promotional opportunities over the term of the agreement with Disney.
Increase of Authorized Common Stock.
On June 10, 2015, we filed a Certificate of Amendment to our Articles of Incorporation to increase the total authorized shares of Common Stock from 120.0 million shares to 200.0 million shares, and on January 4, 2016, we filed a second Certificate of Amendment to our Articles of Incorporation to increase the total authorized shares of Common Stock from 200.0 million to 300.0 million shares.
Creation of Series C Convertible Preferred Stock. and Amendments to Series C Certificate of Designation
On February 18, 2015, the Companywe filed the Certificate of Designation, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C Certificate of Designation”) with the Nevada Secretary of State, designating 50,000 shares of the Company'sour preferred stock par value $0.001 per share, as Series C Convertible Preferred Stock (the “Series C Preferred”). Each share of Series C Preferred has a stated value of $100 per share (the “Stated Value”), and is convertible, at the option of each respective holder, into that number of shares of Common Stock equalWe subsequently filed amendments to the Stated Value, divided by $0.15 per share (the “Conversion Shares”). The Company also has the option to require conversion of the Series C Preferred into Conversion Shares in the event: (i) there are sufficient authorized shares of Common Stock reserved as Conversion Shares; (ii) the Conversion Shares are registered under the Securities Act of 1933, or the Conversion Shares are freely tradable, without restriction, under Rule 144 of the Securities Act; and (iii) the average closing price of the Company's Common Stock is at least $0.62 per share for 10 consecutive trading days.
Series C Offering. On February 20, 2015 (the “Initial Investment Date”), the Company and certain accredited investors (the “Investors”) entered into a Securities Purchase Agreement (the “PurchaseAgreement”) wherein the Investors agreed to purchase up to 43,000 shares of Series C Preferred for $100 per share in three separate closings (the “Series C Offering”). The Company issued an aggregate total of 18,000 shares of Series C Preferred on the Initial Investment Date, 15,000 shares on April 1, 2015 and anticipates issuing the remaining 10,000 shares on or before June 30, 2015. The Purchase Agreement also provides for the appointment of one member, designated by the Investors, to the Company’s Board of Directors. As additional consideration for participating in the Series C Offering, each Investor will receive five-year warrants (the “Warrants”), exercisable for $0.15 per share, to purchase that number of shares of the Company's Common Stock equal to 35% of the Conversion Shares issuable upon conversion of each Investor’s Shares (the “Warrant Shares”). In addition to the Purchase Agreement, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed to file a Registration Statement on Form S-1 with the Securities and Exchange Commission on or before July 1, 2015 in order to register the Warrant Shares issuable upon exercise of the Warrants, and the Conversion Shares issuable upon conversion of the Shares, under the Securities Act.
Amendment to Series C Certificate of Designation. On March 26,Designation in August 2015 the Company filed the First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations (the “Series C Amendment”) with the Nevada Secretary of StateNovember 2015 in order to increase the number of shares of the Company’s preferred stock designated as Series C Preferred from 50,000 to 90,000115,000 and to permit the transactions contemplated by the Note Payments and the Note Exchange, as described below.then 150,000 shares.
Note Payments and Note Exchange. Following the filing of the Series C Amendment, on March 27,Offerings. During the year ended December 31, 2015, the Company and the Investorscertain accredited investors entered into an amendmentsecurities purchase agreements to the Purchase Agreement (the “Purchase Agreement Amendment”) wherein the Company soldpurchase up to one of the Investors an additional 27,000117,648 shares of Series C Preferred (the “Additional Shares”),Stock. The Company issued an aggregate total of 116,471 shares of Series C Preferred during 2015 for prices ranging from $100 per share to $113.33 per share for a total gross proceeds of $2.7 million, which the Company subsequently used to satisfy approximately $2.7 million of the Company’s $3.8 million in outstanding secured promissory notes (the “Notes”) (the “Note Payments”).$12 million. As additional consideration for participating in this offering, the purchase of the Additional Shares, the Investor received additional Warrantspurchasers were issued five-year warrants to purchase Warrant Shares equalan aggregate total of 26,449,913 shares of Common Stock, exercisable at $0.15 per share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to 35%be a derivative liability and, as such, the Conversion Shares issuable upon conversionvalue of all such warrants issued, totaling $3,249,364, was recorded to derivative liabilities during the Additional Shares.year ended December 31, 2015.
Following theMarch Note Payments, the CompanyExchange. On March 27, 2015, holders of outstanding notes totaling $1,147,000 and each of the holders (the “Holders”) of the Notes remaining after the Note Payments entered into Note Exchange Agreements (the “Exchange Agreements”), wherein the Holdersaccrued interest totaling $67,207 agreed to exchange all remaining principal and accrued interest of any such Notes into shares of Series C Preferred on substantially similar terms to those offered in the February 2015 offering of Series C OfferingPreferred (the “March Note Exchange”). As a result of the execution of the Exchange Agreements and the consummation of theMarch Note Exchange, the Company issued to the Holders an aggregate total of 12,148 shares of Series C Preferred and Warrantsfive-year warrants to purchase approximately 2.8 million Warrant Shares.an aggregate total of 2,834,536 shares of Common Stock for $0.15 per share. Each warrant issued in connection with the March Note Exchange contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the warrants being classified as a derivative liability and, as such, the value of all warrants issued in connection with the March Note Exchange, totaling $378,681, was recorded to derivative liabilities during the year ended December 31, 2015.
Note Financing. On September 9, 2015, the Company began a private offering, to certain accredited investors (the “Note Investors”), of: (i) senior subordinated secured promissory notes (the “Secured Notes”) in the aggregate principal amount of up to $2.5 million; and (ii) and five-year warrants to purchase that number of shares equal to 15% of the principal amount of the Secured Note purchased by each Note Investor (“Note Warrants”), divided by the ten-day average closing price of the Company’s Common Stock (the “Note Financing”). Each Secured Note issued accrues interest at a rate of 12% per annum, and matures one year from the date of issuance. As of December 31, 2015, the Company had issued an aggregate total of 236,843 Note Warrants in connection with the issuance of the Secured Notes.
Consulting Agreement. During the year ended December 31, 2015, the Company issued 2,413,811 shares of Common Stock in connection with certain consulting agreements. The Company expensed the fair value of the Common Stock issued of $487,826 to consulting expense.
January Note Exchange. On January 20, 2016, the Company and Note Investors holding Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the Note Investors agreed to convert the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and five-year warrants to purchase up to an aggregate total of 1,029,701 shares of Common Stock for $0.17 per share.
Basis of Presentation and Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. For the year ended December 31, 2014,2015, the Company incurred a net loss of $8,116,603.$11,990,563. At December 31, 2014,2015, the Company has negative working capital of $4,750,656$5,303,989 and an accumulated deficit of $18,358,081.$30,348,644. A significant amount of additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans are to continue to raise capital through equity and debt offerings, and to expand sales as rapidly as economically viable. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries True Drinks, Inc., Bazi, Inc. and GT Beverage Company, LLC. All inter-company accounts and transactions have been eliminated in the preparation of these consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, provision for losses on accounts receivable, allowances for obsolete and slow moving inventory, stock compensation, deferred tax asset valuation allowances, derivative liabilities, and the realization of long-lived and intangible assets, including goodwill. Actual results could differ from those estimates.
Revenue Recognition
In accordance with Staff Accounting Bulletin ("SAB") No. 104 “Revenue Recognition in Financial Statements”, revenue is recognized at the point of shipment, at which time title is passed. Net sales include sales of products, slotting fees, discounts and freight and handling charges. With approved credit, we provide wholesale customers payment terms of up to net 30 days. Amounts received for unshipped merchandise are recorded as customer deposits and are included in accrued expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, to be cash equivalents. The Company maintains cash with high credit quality financial institutions. At certain times, such amounts may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not experienced any losses on these amounts. At December 31, 20142015 and 2013,2014, the Company had no cash equivalents.
Restricted Cash
TheAt December 31, 2015, the Company had $133,198 and $133,065$209,360 in restricted cash with a financial institution securing a letter of credit at December 31, 2014 and 2013, respectively.credit. The letter of credit matures in August 20152017 and was issued as part of the contractual obligations related to onethe Disney Agreement, as described above in Note 1, under the heading “Recent Developments.” The Company made an initial deposit of our licensing agreements$209,000 during the quarter ended September 30, 2015 to secure the new letter of credit in connection with the Disney Consumer Products, Inc.Agreement.
Accounts Receivable
We maintain an allowance for doubtful accounts, which is analyzed on a periodic basis to ensure that it is adequate to the best of management’s knowledge. Management develops an estimate of the allowance for doubtful accounts receivable based on its own judgment as to the perceived likelihood of ultimate payment. Although the Company expects to collect amounts due, actual collections may differ from these estimated amounts. The allowance for doubtful accounts was approximately $162,000$110,000 and $210,000$162,000 at December 31, 20142015 and December 31, 2013,2014, respectively.
Concentrations
The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with two financial institutions. There are funds in excess of the federally insured amount, or that are subject to credit risk, and the Company believes that the financial institutions are financially sound and the risk of loss is minimal.
We utilized a variety of suppliers to purchase raw materials for the AquaBall™ Naturally Flavored Water during the year ended December 31, 2014.2015. We anticipate that beginning in May 2016, all production of AquaBallTM will be completed by Niagara Bottling, LLC pursuant to the terms and conditions of our 5-year bottling agreement. Niagara will handle all aspects of production, including the procurement of all raw materials necessary to produce AquaBallTM.
During 2014,2015, 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.
One customer represented 79% of the Company’s accounts receivable and 47% of sales during the year ended December 31, 2015, while one customer represented 37% of the Company’s sales and three customers represented 44% of accounts receivable during the year ended December 31, 2014. No other customers exceeded 10% of the Company’s sales or accounts receivable during the year ended December 31, 2015 or 2014.
A significant portion of our revenue comes from sales of the AquaBall™ Naturally Flavored Water. For the year ended December 31, 20142015 and 2013,2014, sales of AquaBall™ accounted for 95%97% and 90% of the Company’s total revenue, respectively.
Fair Value Matters
The Company does not have any assets or liabilities carried at fair value on a recurring or non-recurring basis, except for derivative liabilities.
The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses, and notes payable. Management believes that the carrying amount of these financial instruments approximates their fair values, due to their relatively short-term nature.
Inventory
Inventory is stated at the lower of cost or market on a FIFO (first-in first-out) basis. Provision is made to reduce excess or obsolete inventory to the estimated net realizable value. The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.
Management reviews the carrying value of inventory in relation to its sales history and industry trends to determine an estimated net realizable value. Changes in economic conditions or customer demand could result in obsolete or slow moving inventory that cannot be sold or must be sold at reduced prices and could result in an inventory reserve. No inventoryInventory reserves were considered necessarynot significant as of December 31, 20142015 or 2013.2014.
Inventory is comprised of the following:
| | December 31, 2014 | | December 31, 2013 | | | December 31, 2015 | | | December 31, 2014 | |
| | | | | | | | $ | 689,703 | | | $ | 796,609 | |
| | | | | | | | | 869,016 | | | | 566,834 | |
| | | | | | | |
Total | | | $ | 1,558,719 | | | $ | 1,363,443 | |
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation of property and equipment using the straight-line method based on estimated useful lives of between three and ten years. Property and equipment is not significant to the consolidated financial statements as of or for the years ended December 31, 20142015 and 2013.2014.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows estimated to be generated by the asset. An impairment was not deemed necessary in 20142015 or 2013.2014.
Intangible Assets
Intangible assets consists of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products, customer list, and the estimated value of GT Beverage Company, LLC’s interlocking spherical bottle patent acquired on March 31, 2012. The Company’s intangible assets are amortized over their estimated remaining useful lives. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. No impairment was deemed necessary as of December 31, 20142015 or December 31, 2013.2014.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually.
Income Taxes
The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740 (“ASC Topic 740”), formerly Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS 109”). Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Stock-Based Compensation
Total stock-based compensation expense, for all of the Company’s stock-based awards recognized for the year ended December 31, 2015 and 2014 was $1,055,448 and 2013 was $497,271, and $794,165, respectively.
The Company uses a Black-Scholes option-pricing model (the “Black-Scholes Model”) to estimate the fair value of the stock option and warrants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the contractual term of the option. The expected life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Currently it is based on the simplified approach provided by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant (see Note 3 below).
Shares, warrants and options issued to non-employees for services are accounted for at fair value, based on the fair value of instrument issued or the fair value of the services received, whichever is more readily determinable.
Derivative Instruments
A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. As a matter of policy, the Company does not invest in financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions that involve financial instruments containing certain features that have resulted in the instruments being deemed derivatives or containing embedded derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives and embedded derivatives, if applicable, are measured at fair value using the binomial lattice- (“Binomial Lattice”) pricing model and marked to market and reflected on our consolidated statement of operations as other (income) expense at each reporting period. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security.
Net Loss Per Share
Earnings per share require presentation of both basic earnings per common share and diluted earnings per common share. Since the Company has a net loss for all periods presented, Common Stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive. At December 31, 20142015 and 2013,2014, the Company had 101,200,639120,573,694 and 72,900,08052,577,964 shares of Common Stock equivalents outstanding, respectively.
Research and Development
Research and development costs are expensed as incurred.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for annual reporting periods beginning afterthe Company for the year ending December 15, 2016,31, 2017 including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
On February 25, 2016, the FASB issued ASU 2016-2, "Leases" (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU is effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year, and early adoption is permitted. Management has not yet determined the effect of this ASU on the Company's financial statements.
NOTE 2 – SHAREHOLDERS’STOCKHOLDERS’ EQUITY
Securities
Common Stock. The holders of Common Stock are entitled to receive, when and as declared by the Board of Directors, dividends payable either in cash, in property or in shares of Common Stock of the Company. Dividends have no cumulative rights and dividends will not accumulate if the Board of Directors does not declare such dividends.
The holders of Series A Preferred were entitled to receive, when and as declared by the Board of Directors, dividends payable either in cash, in property or in shares of the Common Stock of the Company, in an amount equal to the aggregate amount of the dividend to which such shares of Series A Preferred would have been entitled had such share been converted into shares of Common Stock. The holders of Series A Preferred voted together with holders of Common Stock on an as-converted basis.. On January 18, 2013, upon the filing of the Amendment to the Articles of Incorporation, the Company converted 1,544,565 shares of Series A Preferred issued to former True Drinks shareholders into 25,304,017 shares of the Company’s Common Stock. In February 2015, the Company filed a Certificate of Elimination with the State of Nevada to eliminate the Series A Preferred Stock.
Series B Preferred. Each share of the Company’s Series B Preferred hadConvertible Stock (“Series B Preferred”) has a stated value of $4.00 per share (“Stated Value”) and accrued annual dividends equal to 5% of the Stated Value, payable by the Company in quarterly installments, in either cash or shares of Common Stock. Each share of Series B Preferred was convertible, at the option of the holder, into that number of shares of Common Stock equal to the Stated Value, divided by $0.25 per share (the “Series B Conversion Shares”). The Company also has the option to require the conversion of the Series B Preferred into Series B Conversion Shares in the event: (i) there were sufficient authorized shares of Common Stock reserved as Series B Conversion Shares; (ii) the Series B Conversion Shares were registered under the Securities Act, of 1933, as amended (the “Securities Act”), or the Series B Conversion Shares were freely tradable, without restriction, under Rule 144 of the Securities Act; (iii) the daily trading volume of the Company's Common Stock, multiplied with the closing price, equaled at least $250,000 for 20 consecutive trading days; and (iv) the average closing price of the Company's Common Stock was at least $0.62 per share for 10 consecutive trading days.
Between January and September 2013, the Company issued 268,800 shares of its Common Stock as offering costs relating to bridge loans made to the Company. Such loans have short-term maturities of approximately four months. The Company expensed the fair value of the Common Stock issued of $209,090 to interest expense duringDuring the year ended December 31, 2013.
In March 2013,2015, the Company issued 38,250declared $271,838 in dividends on outstanding shares of its Common Stock in connection with two consulting agreements.Series B Preferred. The Company expensed the fair value of the Common Stock issued of $38,250 to consulting expense during the year ended December 31, 2013.
Between April and May 2013, the Company issued a total of 860,8211,512,645 shares of its Common Stock to holderspay $288,971 of $860,818cumulative unpaid dividends. As of December 31, 2015, there remained $271,838 in outstanding convertible notes payable, lenders fees and accrued interest upon receiving conversion noticescumulative unpaid dividends on the underlying notes.
Between July and August 2013, the Company issued 76,364 shares of its Common Stock in connection with two consulting agreements. The Company expensed the fair value of the Common Stock issued of $84,000 to consulting expense during the year ended December 31, 2013.
In November 2013, the Company issued 1,495,000 shares of its Series B Preferred to certain accredited investors pursuant to subscription agreements in exchange for a total of $5,980,000 in cash, less cash fees of $496,854. The investors also received Warrants to purchase 6,976,667 shares of the Company’s Common Stock for $0.30 per share. The Company also issued 1,235,867 warrants to Merriman Capital, Inc. in connection with the investment. The total value of all such Warrants, $1,117,163, was recorded against Additional Paid In Capital.
In November 2013, the Company issued 264,423 shares of its Series B Preferred to holders of $975,434 in outstanding convertible notes payable, lenders fees and accrued interest upon receiving conversion notices on the underlying notes. In addition, investors received Warrants to purchase 1,138,070 shares of the Company’s Common Stock for $0.30 per share. The total value of these Warrants, $151,774, was recorded against Additional Paid In Capital. In addition, $64,970 of liability associated with a derivative on certain of the notes was recorded to Additional Paid In Capital.
In December 2013, the Company issued 17,500 shares of its Series B Preferred to certain directors on its Board of Directors in exchange for $70,000 in outstanding board fees. In addition, the directors also received Warrants to purchase 81,667 shares of the Company’s Common Stock for $0.30 per share.Preferred.
Series C Preferred. Each share of Series C Preferred has a stated value of $100 per share, and is convertible, at the option of each respective holder, into that number of shares of Common Stock equal to $100, divided by $0.15 per share (the “Series CConversion Shares”).The Company also has the option to require conversion of the Series C Preferred into Series C Conversion Shares in the event: (i) there are sufficient authorized shares of Common Stock reserved as Series C Conversion Shares; (ii) the Series C Conversion Shares are registered under the Securities Act of 1933, or the Series C Conversion Shares are freely tradable, without restriction, under Rule 144 of the Securities Act; and (iii) the average closing price of the Company's Common Stock is at least $0.62 per share for 10 consecutive trading days.
Issuances
Between January and February 2014, the Company issued 505,000 shares of its Series B Preferred to certain accredited investors pursuant to subscription agreements in exchange for total net proceeds of $1,857,413. The investors also received Warrantsfive-year warrants to purchase 2,356,667 shares of the Company’s Common Stock for $0.30 per share. The Company also issued 667,467 warrants to its capital advisors in connection with the investment. Each Warrantwarrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all Warrantswarrants issued totaling $416,844, was recorded to derivative liabilities. liabilities during the year ended December 31, 2014.
During 2014, holders of 1,001,352 shares of the Series B Preferred Stock converted those shares into 16,021,632 shares of Common Stock.
In May and July 2014, the Company issued 69,138 and 9,289 shares of Common Stock, respectively, pursuant to a cashless exercise of a total of 179,633 outstanding warrants.
During 2014, holders of $818,926 in outstanding principal, lender’s fees and interest on certain convertible notes payable exchanged this total for 204,732 shares of Series B Preferred and Warrantswarrants to purchase 921,596 shares of Common Stock for $0.30 per share. Each Warrantwarrant issued contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all Warrantswarrants issued totaling $199,567, was recorded to derivative liabilities.
During 2014, holders of 1,001,352 shares of the Series B Preferred Stock converted those shares into 16,021,632 shares of Common Stock.
In May and July 2014, the Company issued 69,138 and 9,289 shares of Common Stock, respectively, pursuant to a cashless exercise of a total of 179,633 outstanding warrants.
During 2014, holders of $818,926 in outstanding principal, lender’s fees and interest on certain convertible notes payable exchanged this total for 204,732 shares of Series B Preferred and Warrants to purchase 921,596 shares of Common Stock for $0.30 per share. The total value of all such Warrants,warrants, $199,567, was recorded against Additional Paid In Capital.
During 2014, the Company issued 1,751,270 shares of Common Stock and 5,692 shares of Series B Preferred Stock in connection with various consulting agreements. The Company expensed the fair value of the Common Stock issued of $544,531 to consulting expense.
During 2014, the Company issued 2,004,002 shares of Common Stock in consideration for the settlement of lawsuits and related legal payments.
Between January and December 2014,During 2015, the Company declared 434,096 in dividends on itsand certain accredited investors entered into securities purchase agreements to purchase up to 117,648 shares of Series BC Preferred shares.Stock. The Company issued an aggregate total of 116,471 shares of Series C Preferred during 2015 for prices ranging from $100 per share to $113.33 per share for a total gross proceeds of 849,202approximately $12 million. As additional consideration for participating in this offering, the purchasers were issued five-year warrants to purchase an aggregate total of 26,449,913 shares of Common Stock, exercisable at $0.15 per share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to pay $342,575be a derivative liability and, as such, the value of these dividends.all such warrants issued, totaling $3,249,364, was recorded to derivative liabilities during the year ended December 31, 2015.
On March 27, 2015, holders of outstanding notes totaling $1,147,000 and accrued interest totaling $67,207 agreed to exchange all remaining principal and accrued interest into shares of Series C Preferred on substantially similar terms to those offered in the February 2015 offering of Series C Preferred. As a result of the execution of certain Exchange Agreements and the consummation of March Note Exchange, the Company issued an aggregate total of 12,148 shares of Series C Preferred and five-year warrants to purchase an aggregate total of 2,834,536 shares of Common Stock for $0.15 per share. Each warrant issued in connection with the March Note Exchange contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the warrants being classified as a derivative liability and, as such, the value of all warrants issued in connection with the March Note Exchange, totaling $378,681, was recorded to derivative liabilities during the year ended December 31, 2015.
On October 9, 2015 the Company issued to Vincent C. Smith a five-year warrant to purchase 17,500,000 shares of Common Stock for $0.188 per share as consideration for the execution of a personal guaranty of True Drinks’ obligations under the Niagara Agreement. The warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of the warrant issued totaling $2,263,783, was recorded to derivative liabilities and is included in other expense in the accompanying consolidated statements of operations as of December 31, 2014, there remained $91,5212015.
During the year ended December 31, 2015, the Company issued 2,413,811 shares of Common Stock in cumulative unpaid dividends. These dividends were paid by issuing 449,720 shares in January 2015.connection with certain consulting agreements. The Company expensed the fair value of the Common Stock issued of $487,826.
On April 22, 2015, the Company cancelled 2,593,912 options to certain former Directors of the Company. The Company replaced these stock options with 2,594,914 warrants, 1,120,478 of these warrants had an exercise price of $0.25 per share, and 1,474,436 of the warrants had an exercise price of $0.38 per share. The expiration date of 1,120,478 of the warrants is November 12, 2016, and the expiration date on 1,474,436 of the warrants is March 9, 2018.
On October 9, 2015, the Company issued five-year warrants for 884,209 shares at an exercise price of $0.19 per share in exchange for services. The warrants vest over a 12-month period. As of December 31, 2015, 221,053 warrant shares had vested and $19,895 was expensed accordingly.
NOTE 3 – STOCK OPTIONS AND WARRANTS
Warrants
A summary of the Company’s warrant activity for the years ended December 31, 20142015 and 20132014 is presented below:
| | Warrants Outstanding | | | Weighted Average Exercise Price |
Outstanding, December 31, 2012 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding, December 31, 2013 | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding, December 31, 2014 | | | 16,375,270 | | | | | |
| | Warrants Outstanding | | | Weighted Average Exercise Price |
Outstanding, December 31, 2013 | | | 12,590,467 | | | $ | 0.55 | |
Granted | | | 4,022,936 | | | | 0.30 | |
Exercised | | | (179,633 | ) | | | 0.25 | |
Expired | | | (58,500 | ) | | | 25.09 | |
Outstanding, December 31, 2014 | | | 16,375,270 | | | $ | 0.40 | |
Granted | | | 50,543,837 | | | | 0.16 | |
Exercised | | | - | | | | - | |
Expired | | | - | | | | - | |
Outstanding, December 31, 2015 | | | 66,919,107 | | | $ | 0.18 | |
As of December 31, 2014,2015, 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.) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Warrants Outstanding | | | Weighted Average Exercise Price Per Share | | | Weighted Average Remaining Life (Yrs.) | |
| 61,453 | | | $ | 30.00 | | | | 0.06 | |
| 63,098,264 | | | $ | 0.15 | | | | 4.13 | |
| 1,120,479 | | | $ | 0.25 | | | | 1.74 | |
| 1,474,435 | | | $ | 0.38 | | | | 1.53 | |
| 1,164,476 | | | $ | 0.19 | | | | 4.76 | |
| 66,919,107 | | | $ | 0.18 | | | | 4.04 | |
Non-Qualified Stock Options
In 2014, the Company granted 8,859,131 stock options pursuant to option agreements with certain employees and directors. The grant date fair value of the options granted during the year ended December 31, 2014 was between $0.10 and $0.29 per share for a total of $1,304,296 to be expensed over the vesting periods of the options. In October, the Company reset certain options to certain employees and directors, adjusting the term of the options from 3 years to 7 years and adjusting the exercise price of the options from a range of $0.61 and $1.10 to an exercise price of $0.38. The difference between the options original fair value and their new fair values was $174,540 and will be expensed over the remaining vesting periods of the options. The fair values of the options were estimated using the Black-Scholes stock option pricing model and the following weighted average assumptions.
The weighted average estimated fair value per share of the stock options at grant date was $0.147 during the year ended December 31, 2014. The expected life of options granted is based on the “simplified method” described in ASC 718-10 due to changes in the vesting terms and the contractual life of current option grants. Assumed volatility is based on historical trading prices of the Company’s Common Stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected term of the options.
Non-Qualified Stock Options
No options were granted during the year ended December 31, 2015 and the Company and holders of all options to purchase shares of the Company’s Common Stock agreed to cancel or forfeit their options.
Stock option activity during the yearsyear ended December 31, 2014 and 20132015 is summarized as follows:
| | Number of Shares | | Weighted-Average Exercise Price | | | Options Outstanding | | Weighted Average Exercise Price | |
Options outstanding at December 31, 2012 | | | | | | | |
Options outstanding at December 31, 2014 | | | 12,379,593 | | $ | 0.37 | |
| | | | | | | - | | | - | |
| | | | | | | - | | | - | |
| | | | | | | | (12,379,593 | ) | | | 0.37 | |
| | | | | | | | | | - | | | - | |
Options outstanding at December 31, 2013 | | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | | |
| | | | | | | | |
Options outstanding at December 31, 2014 | | | | | | | | |
Options outstanding at December 31, 2015 | | | | - | | $ | - | |
Cancellation of Stock Options and Issuance of Restricted Stock. Between June and July 2015, the Company and each of the holders of all outstanding options to purchase shares of the Company’s Common Stock agreed to cancel or forfeit their options, such that, as of July 10, 2015, no options to purchase shares of the Company’s Common Stock were outstanding.
On August 6, 2015, the Company’s board of directors authorized an issuance of an aggregate total of 19,491,375 shares of restricted Common Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees, including those that agreed to cancel previously issued stock options. In December 2015, the Company issued 750,000 shares of restricted stock under the plan.
The following table summarizes information aboutcancellation of the Company’s stock options outstandingand issuance of restricted stock was accounted for as a modification in accordance with the provisions of December 31, 2014:ASC Topic 718 Compensation – Stock Compensation. The Company recorded approximately $1,055,000 of stock based compensation in connection with the transaction.
| | | Outstanding Options | | | | | | | |
| | | | | | Weighted Average | | | | | | Exercisable Options | |
| | | | | | Remaining | | | Aggregate | | | | | | Aggregate | |
Range of | | | | | | Contractual Life | | | Intrinsic | | | | | | Intrinsic | |
Exercise Prices | | | Number | | | (Years) | | | Value | | | Number | | | Value | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
NOTE 4 – INTANGIBLE ASSETS
The Company has incurred costs to trademark eight of its current products and marketing nomenclatures. During 2014,2015, the Company purchased a patent in relation to the purchase of GT Beverage, and also assumed the trademarks of Bazi Intl. Patents and trademarks are being amortized over the lesser of their remaining life or 15 years.
Intangible assets are:
| December 31, 2014 | | | December 31, 2013 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| December 31, 2015 | | | December 31, 2014 | |
Patents and trademarks | $ | 1,706,849 | | | $ | 1,706,849 | |
Accumulated amortization | | (636,261 | ) | | | (488,235 | ) |
| $ | 1,070,588 | | | $ | 1,218,614 | |
Amortization expense for the year ended December 31, 2015 and 2014 was $148,768 and 2013 was $182,843, and $191,177, respectively. For these assets, amortization expense over the next five years and thereafter is expected to be as follows:
| | Patent and Trademark Amortization | | | Patent and Trademark Amortization | |
| | | | | |
| | | | | $ | 141,177 | |
| | | | | 141,177 | |
| | | | | 141,177 | |
| | | | | 141,177 | |
| | | | | |
2020 | | | 141,177 | |
2021 and thereafter | | | | 364,703 | |
| | | | | | $ | 1,070,588 | |
NOTE 5 – INCOME TAXES
The Company does not have significant income tax expense or benefit for the year ended December 31, 20142015 or 2013.2014. Tax net operating loss carryforwards have resulted in a net deferred tax asset with a 100% valuation allowance applied against such asset at December 31, 20142015 and 2013.2014. Such tax net operating loss carryforwards (“NOL”) approximated $18.3$27.6 million at December 31, 2014.2015. Some or all of such NOL may be limited by Section 382 of the Internal Revenue Code.Code and will begin to expire in the year 2032.
The income tax effect of temporary differences between financial and tax reporting and net operating loss carryforwards gives rise to a deferred tax asset at December 31, 20142015 and 20132014 as follows:
| | 2014 | | 2013 | | | 2015 | | | 2014 | |
Deferred tax asset –NOL’s | | | | | | | | $ | 11,040,000 | | | $ | 6,800,000 | |
| | | | | | | | | | (11,040,000 | ) | | | (6,800,000 | ) |
| | | | | | | | $ | - | | | $ | - | |
At December 31, 2014, approximately $18.3 million of net operating loss carryforwards for federal and state income tax purposes were available to offset future taxable income through the year 2033, of which these net operating losses will begin to expire in the year 2032. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the history of the Company and projections for future taxable income over the periods in which the deferred tax assets are realizable, management believes it is not more likely than not that the Company will realize the benefits of these deductible differences and therefore a full valuation allowance against the deferred tax assets has been established.
As a result of the Mergermerger with Bazi Intl. on October 15, 2012, the Company may have access to utilize a portion of the net operating loss carryforwards of Bazi Intl., which, in total, were approximately $25 million at the time of the Merger.merger. The Company is uncertain as to the portion of the Bazi net operating loss carryforwards that may be limited by Section 382 of the Internal Revenue Code.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code. Such an analysis has not been performed by the Company to determine the impact of these provisions on the Company’s net operating losses, though management believes the impact would be minimal, if any. A limitation under these provisions would reduce the amount of losses available to offset future taxable income of the Company.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued ASC Topic 740 (formerly Interpretation No. 48, “Accounting for Uncertainties in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes”. ASC 740 prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken on income tax returns. ASC Topic 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions.
Based on management’s assessment of ASC Topic 740, management concluded that the Company does not have any uncertain tax positions as of December 31, 2014.2015. There have been no income tax related interest or penalties assessed or recorded and if interest and penalties were to be assessed, the Company would charge interest and penalties to income tax expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. The Company and its subsidiaries filehave several years of past due income tax returns. Until returns inare filed and the U.S. and various state jurisdictions and there are open statutesrelated statute of limitations are met (generally 3 years for taxing authoritiesfederal and 4 years for state), such past due returns remain open to audit the Company’s tax returns from 2008 through the current year.examination by applicable authorities.
NOTE 6 – DEBT
A summary of convertible notes payable as of December 31, 2015 and 2014 is as follows:
| | Amount | |
Outstanding, December 31, 2013 | | | | |
| | | | |
| | | | |
Conversions to common stock | | | | |
Outstanding, December 31, 2014 | | | | |
| | Amount | |
Outstanding, December 31, 2013 | | $ | 2,596,667 | |
Borrowings | | | 4,263,002 | |
Repayments | | | (1,936,667 | ) |
Conversions to Common Stock | | | (660,000 | ) |
Outstanding, December 31, 2014 | | $ | 4,263,002 | |
Borrowings | | | 1,103,817 | |
Repayments | | | (2,883,000 | ) |
Conversions to Series C Preferred Stock | | | (1,147,000 | ) |
Outstanding, December 31, 2015 | | $ | 1,336,819 | |
In January 2014,March 2015, the Company repaid $25,750paid off approximately $2.7 million of the Company’s $3.8 million in outstanding promissory notes. Following these payments, the Company and each of the holders of the remaining notes entered into Exchange Agreements, wherein the holders agreed to exchange the remaining principal lender’s feesof $1,147,000 and accrued interest of any such notes into shares of Series C Preferred on substantially similar terms to those offered in connection with certain notes payable.the issuance of shares of Series C Preferred and warrants consummated in February 2015.
During 2014, holdersAs described under Note 2, “Shareholder’s Equity” above, in September 2015, the Company began a private offering to certain accredited investors of: (i) Secured Notes in the aggregate principal amount of certain bridge financing notes, totaling $818,926 in outstandingup to $2.5 million; and (ii) and Note Warrants to purchase that number of shares equal to 15% of the principal lender’s fees and accrued interest, converted their notes into 204,732 sharesamount of the Secured Note purchased by each investor, divided by the ten-day average closing price of the Company’s Common Stock. Each Secured Note accrues interest at a rate of 12% per annum, and will mature one year from the date of issuance. As of December 31, 2015, the Company had issued Secured Notes in the aggregate principal amount of $855,000 and Note Warrants to purchase an aggregate total of 280,265 shares of Common Stock. Subsequent to December 31, 2015, Secured Notes in the aggregate principal amount of $500,000 were exchanged for shares of Series B Preferred.C Preferred and warrants. See Note 10 “Subsequent Events” below.
In November 2013, the Company secured a commercial term loan in the amount of $2.0 million from Avid Bank. The loan had a term of two years, accrued interest at 2.75% above prime, was secured by substantially all of the Company’s assets, and required an asset coverage ratio of assets to outstanding principal of 1.5. The outstanding balance of the term loan was $1,916,667 at December 31, 2013 and the loan was paid in full in April 2014.
In June 2014,September 2015, the Company issued unsecured promissory notes to certain accredited investors, resultingrelated parties in net proceedsthe aggregate principal amount of $100,000. The notes expired on October 31, 2015 and were paid. Upon repayment, the Company paid a lender's fee to the Company of $360,000. These promissory notes have a term of one year and carry an annual interest rate of 8%. The unsecured promissory notes were issued principallyrelated parties equal to provide liquidity necessitated as a result of the termination, and payment in full, of all amounts due and payable under the Avid Bank commercial term loan.
In November 2014, the Company issued an unsecured promissory note in the amount of $50,000 to an accredited investor. The note had a maturity date in December 2014. The note paid no interest but paid a lender’s fee of 10% of the principal amount. The note was repaid in January 2015.
Line-of-Credit Facility
Bottling Agreement with Niagara Bottling
On October 9, 2015, we entered into an agreement (the “Niagara Agreement”) with Niagara Bottling, LLC (“Niagara”), wherein Niagara will become the exclusive manufacturer of AquaBall™ Naturally Flavored Water for the next five years. With Niagara, we have produced an improved “clean label” formulation of AquaBall™, which remains sugar and calorie free but has eliminated all preservatives.
From time to time, claims are made against The Niagara Agreement requires the Company to deliver to Niagara its minimum volume requirements for the upcoming 12-month period on or before February 1st of each year (the “Annual Commitment”), which Annual Commitment may not be less than 3.2 million Cases (defined in the ordinary courseNiagara Agreement as a pack of business,24 bottles of AquaBall™ Naturally Flavored Water). Subject to the terms and conditions of the Niagara Agreement, the Company will pay Niagara $6.35 per Case manufactured, for an annual financial liability of approximately $20.3 million per year. We expect to begin delivering Cases manufactured by Niagara in second quarter of fiscal 2016.
Our largest shareholder, Mr. Vincent C. Smith, executed a personal guaranty of our obligations under the Niagara Agreement (the “Personal Guaranty”). In order to offset any financial obligation Mr. Smith may incur as a result of the Personal Guaranty, the Company issued to Red Beard Holdings, LLC, an entity affiliated with Mr. Smith (“Red Beard”), a senior secured promissory note (the “Note”) pursuant to which couldthe Company will borrow any amounts paid to Niagara by Mr. Smith as a result of the Personal Guaranty. Any amounts borrowed under the Note will be secured by a continuing security interest in litigation. Claimssubstantially all of the Company’s assets, will accrue interest at 2.0%, plus the Maximum Rate (as such term is defined in the Note) and, associated litigation are subject to inherent uncertaintiescertain terms and unfavorable outcomes could occur. Inconditions of the opinionNote, will be due and payable within 10 years. As consideration for Mr. Smith’s execution of management, the resolutionPersonal Guaranty, the Company issued to Mr. Smith a five-year warrant (the “Personal Guaranty Warrant”), to purchase 17.5 million shares of these matters, if any, will not have a material adverse impact on the Company’s financial position or results of operations.
On July 1, 2011,Common Stock for $0.188 per share. The Personal Guaranty Warrant contains a lawsuit was filedprice-protection feature that adjusts the exercise price in the United States District Court,event of certain dilutive issuances of securities. Such price-protection feature results in the Southern District of Ohio, Cincinnati Division, against GT Beverage Company, LLC (“GT LLC”) by Dominion Liquid Technologies, LLC. The lawsuit alleged that GT LLC breached terms ofPersonal Guaranty Warrant being classified as a 2010 co-packing agreement, which governedderivative liability and, as such, the relationship betweenvalue, totaling $2,263,783, was recorded to derivative liabilities during the parties. In July 2014, the Company settled this lawsuit for $350,000. The settlement was fully accrued for, and was paid for with 1,166,667 restricted shares of Common Stock.year ended December 31, 2015.
Extension of Licensing Agreements
On April 22, 2014, a lawsuit was filed inDuring the Superior Court of California, County of Orange, against the Company by Advantage Sales and Marketing, LLC. The plaintiff initially claimed damages of $92,064 for outstanding invoices. The lawsuit was settled for $69,000 in Januaryquarter ended September 30, 2015, and was fully accrued at December 31, 2014.
During 2014, the Company issued 837,335 restricted shares of Common Stock to settle a total of $251,651 in outstanding liabilities related to various legal expenses.
We are currently not involved in any litigation unless noted above that we believe could have a material adverse effect on our financial condition or results of operations. Other than described above, there is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of the Company or any of our subsidiaries, threatened against or affecting the Company, or our Common Stock in which an adverse decision could have a material adverse effect.
NOTE 8 – FAIR VALUE MEASUREMENTS
The application of fair value measurements may be on a recurring or nonrecurring basis depending on the accounting principles applicable to the specific asset or liability or whether management has elected to carry the item at its estimated fair value. FASB ASC 820-10-35 specifies a hierarchy of valuation techniques based on whether the inputs to those techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs create the following fair value hierarchy:
- Level 1: Observable inputs such as quoted prices in active markets;
- Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
- Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when estimating fair value.
The Company assesses its recurring fair value measurements as defined by FASB ASC 810. Liabilities measured at estimated fair value on a recurring basis include derivative liabilities. Transfers between fair value classifications occur when there are changes in pricing observability levels. Transfers of financial liabilities among the levels occur at the beginning of the reporting period. There were no transfers between Level 1, Level 2 and/or Level 3 during the year ended December 31, 2014. The Company had no Level 1 or 2 fair value measurements during 2013.
The following table presents the estimated fair value of financial liabilities measured at estimated fair value on a recurring basis included in the Company’s financial statements as of December 31, 2014:
| | | | | 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 | |
| | | | | | | | | | | | | | | | |
The following table presents the changes in recurring fair value measurements included in net loss for the year ended December 31, 2014:
| | Recurring Fair Value Measurements | |
| | Changes in Fair Value Included in Net Loss For the Year Ended December 31, 2014 | |
| | Revenues | | | Expenses | | | Total | |
| | | | | | | | | | | | |
The table below sets forth a summary of changes in the fair value of our Level 3 financial liabilities for the year ended December 31, 2014:
| | December 31, 2013 | | | Recorded new Derivative Liabilities | | | Reclassification of Derivative Liabilities | | | Change in Estimated Fair Value Recognized in Results of Operations | | | December 31, 2014 | |
| | | | | | | | | | | | | | | | | | | | |
NOTE 9 – LICENSING AGREEMENTS
We entered into a three-year licensing agreementrenewed Licensing Agreements with both Marvel Characters B.V. (“Marvel”) and Disney Consumer Products, Inc. (“Disney”) and an 18-month licensing agreement with Marvel Characters, B.V. ("Marvel") (the “Licensing Agreements”) in 2012. Each Licensing Agreement allows us, pursuant to which we secured licenses to feature popularcertain Marvel and Disney and Marvel characters on bottles of AquaBall™ Naturally Flavored Water allowingthrough 2017. Our agreement with Marvel expires on December 31, 2017, and requires payment of a 5% royalty rate on sales of AquaBall™ to stand out among other beverages marketed towards children. Under the terms and conditionsNaturally Flavored Water adorned with Marvel characters, paid quarterly, with a total guarantee of the Licensing Agreements, we work with the Disney and Marvel teams to create colorful, eye-catching labels that surround the entire spherical shape of each AquaBall™. Once the label designs are approved, we work$200,000. Our agreement with Disney expires on March 31, 2017, and Marvel to set retail calendars, rotating the placementrequires payment of different AquaBall™ designs over the course of the year. The terms of the Disney Licensing Agreement (“Disney Agreement”) stipulates a 5% royalty rate of 4% on the sales of AquaBall™ Naturally Flavored Water adorned with Disney characters, paid quarterly, with a total royalty guarantee of $231,600$450,870. We are also required to make an annual ‘common marketing fund’ contribution equal to 1% of our sales, and must spend a total of $820,000 on advertising and promotional opportunities over the term of the Disney Agreement which hasagreement with Disney.
Increase of Authorized Common Stock.
On June 10, 2015, we filed a term ending dateCertificate of March 31, 2015. In addition,Amendment to our Articles of Incorporation to increase the Company is requiredtotal authorized shares of Common Stock from 120.0 million shares to spend 1%200.0 million shares, and on January 4, 2016, we filed a second Certificate of sales on advertisingAmendment to our Articles of Incorporation to increase the total authorized shares of Common Stock from 200.0 million to 300.0 million shares.
Creation of Series C Preferred and promotional opportunities. The company and Disney are in discussionsAmendments to extend this agreement.Series C Certificate of Designation
The terms of the Marvel Licensing Agreement (“Marvel Agreement”) stipulates a royalty rate of 5% on the sales of AquaBall™ Naturally Flavored Water adorned with Marvel characters, paid quarterly. The Company recently extended the Marvel Agreement through the end of 2015. The total royalty guarantee for the period from January 1, 2014 through December 31, 2015 is $150,000.
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated subsequent events through the date the accompanying consolidated financial statements were issued. Subsequent to December 31, 2014, the following events occurred:
Amendment to Series B Preferred Certificate of Designation
On February 18, 2015, the Company filed the First Amended and Restated Certificate of Designation, Preferences, Rights and Limitations of the Series B Convertible Preferred Stock (the “Series B Amendment”) with the Nevada Secretary of State in order to: (i) eliminate certain provisions pertaining to the adjustment of the conversion price of the Series B Convertible Preferred Stock (“Series B Preferred”) and (ii) eliminate the protective provision preventing the Company from issuing securities senior to or pari passu in rank to the Series B Preferred without first receiving approval from holders of 66% of the issued and outstanding shares of Series B Preferred. The Series B Amendment was approved by the written consent of stockholders holding approximately 79% of the issued and outstanding shares of Series B Preferred.
Creation of Series C Convertible Preferred Stock
On February 18, 2015, the Companywe filed the Certificate of Designation, Preferences, Rights and Limitations of the Series C Convertible Preferred Stock (the “Series C Certificate of Designation”) with the Nevada Secretary of State, designating 50,000 shares of the Company'sour preferred stock par value $0.001 per share, as Series C Convertible Preferred Stock (the “Series C Preferred”). We subsequently filed amendments to the Series C Certificate of Designation in August 2015 and November 2015 in order to increase the number of shares of preferred stock designated as Series C Preferred from to 115,000 and then 150,000 shares.
Financing Activity
Series C Offerings. During the year ended December 31, 2015, the Company and certain accredited investors entered into securities purchase agreements to purchase up to 117,648 shares of Series C Preferred Stock. The Company issued an aggregate total of 116,471 shares of Series C Preferred during 2015 for prices ranging from $100 per share to $113.33 per share for a total gross proceeds of approximately $12 million. As additional consideration for participating in this offering, the purchasers were issued five-year warrants to purchase an aggregate total of 26,449,913 shares of Common Stock, exercisable at $0.15 per share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all such warrants issued, totaling $3,249,364, was recorded to derivative liabilities during the year ended December 31, 2015.
March Note Exchange. On March 27, 2015, holders of outstanding notes totaling $1,147,000 and accrued interest totaling $67,207 agreed to exchange all remaining principal and accrued interest into shares of Series C Preferred on substantially similar terms to those offered in the February 2015 offering of Series C Preferred (the “March Note Exchange”). As a result of the March Note Exchange, the Company issued an aggregate total of 12,148 shares of Series C Preferred and five-year warrants to purchase an aggregate total of 2,834,536 shares of Common Stock for $0.15 per share. Each warrant issued in connection with the March Note Exchange contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the warrants being classified as a derivative liability and, as such, the value of all warrants issued in connection with the March Note Exchange, totaling $378,681, was recorded to derivative liabilities during the year ended December 31, 2015.
Note Financing. On September 9, 2015, the Company began a private offering, to certain accredited investors (the “Note Investors”), of: (i) senior subordinated secured promissory notes (the “Secured Notes”) in the aggregate principal amount of up to $2.5 million; and (ii) and five-year warrants to purchase that number of shares equal to 15% of the principal amount of the Secured Note purchased by each Note Investor (“Note Warrants”), divided by the ten-day average closing price of the Company’s Common Stock (the “Note Financing”). Each Secured Note issued accrues interest at a rate of 12% per annum, and matures one year from the date of issuance. As of December 31, 2015, the Company had issued an aggregate total of 236,843 Note Warrants in connection with the issuance of the Secured Notes.
Consulting Agreement. During the year ended December 31, 2015, the Company issued 2,413,811 shares of Common Stock in connection with certain consulting agreements. The Company expensed the fair value of the Common Stock issued of $487,826 to consulting expense.
January Note Exchange. On January 20, 2016, the Company and Note Investors holding Secured Notes in the principal amount of $500,000 entered into Note Exchange Agreements pursuant to which the Note Investors agreed to convert the outstanding principal balance of their Secured Notes into an aggregate total of 4,413 shares of Series C Preferred and five-year warrants to purchase up to an aggregate total of 1,029,701 shares of Common Stock for $0.17 per share.
Basis of Presentation and Going Concern
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. For the year ended December 31, 2015, the Company incurred a net loss of $11,990,563. At December 31, 2015, the Company has negative working capital of $5,303,989 and an accumulated deficit of $30,348,644. A significant amount of additional capital will be necessary to advance the marketability of the Company's products to the point at which the Company can sustain operations. These conditions, among others, raise substantial doubt about the Company's ability to continue as a going concern. Management's plans are to continue to raise capital through equity and debt offerings, and to expand sales as rapidly as economically viable. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The accompanying financial statements include the accounts of the Company and its wholly owned subsidiaries True Drinks, Inc., Bazi, Inc. and GT Beverage Company, LLC. All inter-company accounts and transactions have been eliminated in the preparation of these consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates made by management include, among others, provision for losses on accounts receivable, allowances for obsolete and slow moving inventory, stock compensation, deferred tax asset valuation allowances, derivative liabilities, and the realization of long-lived and intangible assets, including goodwill. Actual results could differ from those estimates.
Revenue Recognition
In accordance with Staff Accounting Bulletin ("SAB") No. 104 “Revenue Recognition in Financial Statements”, revenue is recognized at the point of shipment, at which time title is passed. Net sales include sales of products, slotting fees, discounts and freight and handling charges. With approved credit, we provide wholesale customers payment terms of up to net 30 days. Amounts received for unshipped merchandise are recorded as customer deposits and are included in accrued expenses.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less, to be cash equivalents. The Company maintains cash with high credit quality financial institutions. At certain times, such amounts may exceed Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The Company has not experienced any losses on these amounts. At December 31, 2015 and 2014, the Company had no cash equivalents.
Restricted Cash
At December 31, 2015, the Company had $209,360 in restricted cash with a financial institution securing a letter of credit. The letter of credit matures in August 2017 and was issued as part of the contractual obligations related to the Disney Agreement, as described above in Note 1, under the heading “Recent Developments.” The Company made an initial deposit of $209,000 during the quarter ended September 30, 2015 to secure the new letter of credit in connection with the Disney Agreement.
Accounts Receivable
We maintain an allowance for doubtful accounts, which is analyzed on a periodic basis to ensure that it is adequate to the best of management’s knowledge. Management develops an estimate of the allowance for doubtful accounts receivable based on the perceived likelihood of ultimate payment. Although the Company expects to collect amounts due, actual collections may differ from these estimated amounts. The allowance for doubtful accounts was approximately $110,000 and $162,000 at December 31, 2015 and December 31, 2014, respectively.
Concentrations
The Company has no significant off-balance sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The Company maintains the majority of its cash balances with two financial institutions. There are funds in excess of the federally insured amount, or that are subject to credit risk, and the Company believes that the financial institutions are financially sound and the risk of loss is minimal.
We utilized a variety of suppliers to purchase raw materials for the AquaBall™ Naturally Flavored Water during the year ended December 31, 2015. We anticipate that beginning in May 2016, all production of AquaBallTM will be completed by Niagara Bottling, LLC pursuant to the terms and conditions of our 5-year bottling agreement. Niagara will handle all aspects of production, including the procurement of all raw materials necessary to produce AquaBallTM.
During 2015, 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.
One customer represented 79% of the Company’s accounts receivable and 47% of sales during the year ended December 31, 2015, while one customer represented 37% of the Company’s sales and three customers represented 44% of accounts receivable during the year ended December 31, 2014. No other customers exceeded 10% of the Company’s sales or accounts receivable during the year ended December 31, 2015 or 2014.
A significant portion of our revenue comes from sales of the AquaBall™ Naturally Flavored Water. For the year ended December 31, 2015 and 2014, sales of AquaBall™ accounted for 97% and 90% of the Company’s total revenue, respectively.
Fair Value Matters
The Company does not have any assets or liabilities carried at fair value on a recurring or non-recurring basis, except for derivative liabilities.
The Company’s financial instruments consist of cash, accounts receivable, accounts payable and accrued expenses, and notes payable. Management believes that the carrying amount of these financial instruments approximates their fair values, due to their relatively short-term nature.
Inventory
Inventory is stated at the lower of cost or market on a FIFO (first-in first-out) basis. Provision is made to reduce excess or obsolete inventory to the estimated net realizable value. The Company purchases for resale a vitamin-enhanced flavored water beverage and a liquid dietary supplement.
Management reviews the carrying value of inventory in relation to its sales history and industry trends to determine an estimated net realizable value. Changes in economic conditions or customer demand could result in obsolete or slow moving inventory that cannot be sold or must be sold at reduced prices and could result in an inventory reserve. Inventory reserves were not significant as of December 31, 2015 or 2014.
Inventory is comprised of the following:
| | December 31, 2015 | | | December 31, 2014 | |
Purchased materials | | $ | 689,703 | | | $ | 796,609 | |
Finished goods | | | 869,016 | | | | 566,834 | |
Total | | $ | 1,558,719 | | | $ | 1,363,443 | |
Property and Equipment
Property and equipment are stated at cost. The Company provides for depreciation of property and equipment using the straight-line method based on estimated useful lives of between three and ten years. Property and equipment is not significant to the consolidated financial statements as of or for the years ended December 31, 2015 and 2014.
Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the recoverability test is performed using undiscounted net cash flows estimated to be generated by the asset. An impairment was not deemed necessary in 2015 or 2014.
Intangible Assets
Intangible assets consists of the direct costs incurred for application fees and legal expenses associated with trademarks on the Company’s products, customer list, and the estimated value of GT Beverage Company, LLC’s interlocking spherical bottle patent acquired on March 31, 2012. The Company’s intangible assets are amortized over their estimated remaining useful lives. The Company evaluates the useful lives of its intangible assets annually and adjusts the lives according to the expected useful life. No impairment was deemed necessary as of December 31, 2015 or December 31, 2014.
Goodwill
Goodwill represents the future economic benefits arising from other assets acquired that are individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually.
Income Taxes
The Company accounts for income taxes in accordance with FASB Accounting Standards Codification 740 (“ASC Topic 740”). Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
Stock-Based Compensation
Total stock-based compensation expense, for all of the Company’s stock-based awards recognized for the year ended December 31, 2015 and 2014 was $1,055,448 and $497,271, respectively.
The Company uses a Black-Scholes option-pricing model (the “Black-Scholes Model”) to estimate the fair value of the stock option and warrants. The use of a valuation model requires the Company to make certain assumptions with respect to selected model inputs. Expected volatility is calculated based on the historical volatility of the Company’s stock price over the contractual term of the option. The expected life is based on the contractual term of the option and expected employee exercise and post-vesting employment termination behavior. Currently it is based on the simplified approach provided by SAB 107. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of the grant (see Note 3 below).
Shares, warrants and options issued to non-employees for services are accounted for at fair value, based on the fair value of instrument issued or the fair value of the services received, whichever is more readily determinable.
Derivative Instruments
A derivative is an instrument whose value is “derived” from an underlying instrument or index such as a future, forward, swap, option contract, or other financial instrument with similar characteristics, including certain derivative instruments embedded in other contracts (“embedded derivatives”) and for hedging activities. As a matter of policy, the Company does not invest in financial derivatives or engage in hedging transactions. However, the Company has entered into complex financing transactions that involve financial instruments containing certain features that have resulted in the instruments being deemed derivatives or containing embedded derivatives. The Company may engage in other similar complex debt transactions in the future, but not with the intention to enter into derivative instruments. Derivatives and embedded derivatives, if applicable, are measured at fair value using the binomial lattice- (“Binomial Lattice”) pricing model and marked to market and reflected on our consolidated statement of operations as other (income) expense at each reporting period. However, such new and/or complex instruments may have immature or limited markets. As a result, the pricing models used for valuation of derivatives often incorporate significant estimates and assumptions, which may impact the level of precision in the financial statements. Furthermore, depending on the terms of a derivative or embedded derivative, the valuation of derivatives may be removed from the financial statements upon conversion of the underlying instrument into some other security.
Net Loss Per Share
Earnings per share require presentation of both basic earnings per common share and diluted earnings per common share. Since the Company has a net loss for all periods presented, Common Stock equivalents are not included in the weighted average calculation since their effect would be anti-dilutive. At December 31, 2015 and 2014, the Company had 120,573,694 and 52,577,964 shares of Common Stock equivalents outstanding, respectively.
Research and Development
Research and development costs are expensed as incurred.
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606. This ASU outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance. This accounting standard is effective for the Company for the year ending December 31, 2017 including interim reporting periods within that reporting period. Early adoption is not permitted. The Company is currently evaluating the impact this accounting standard will have on the Company's financial position, results of operations or cash flows.
On February 25, 2016, the FASB issued ASU 2016-2, "Leases" (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU will require organizations that lease assets, such as real estate, airplanes and manufacturing equipment, to recognize on their balance sheet the assets and liabilities for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as finance or operating lease. This ASU will also require disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures will include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The ASU is effective for the Company for the year ending December 31, 2019 and interim reporting periods within that year, and early adoption is permitted. Management has not yet determined the effect of this ASU on the Company's financial statements.
NOTE 2 – STOCKHOLDERS’ EQUITY
Securities
Common Stock. The holders of Common Stock are entitled to receive, when and as declared by the Board of Directors, dividends payable either in cash, in property or in shares of Common Stock of the Company. Dividends have no cumulative rights and dividends will not accumulate if the Board of Directors does not declare such dividends.
Series A Preferred. On January 18, 2013, upon the filing of the Amendment to the Articles of Incorporation, the Company converted 1,544,565 shares of Series A Preferred issued to former True Drinks shareholders into 25,304,017 shares of the Company’s Common Stock. In February 2015, the Company filed a Certificate of Elimination with the State of Nevada to eliminate the Series A Preferred Stock.
Series B Preferred. Each share of the Company’s Series B Preferred Convertible Stock (“Series B Preferred”) has a stated value of $4.00 per share (“Stated Value”) and accrued annual dividends equal to 5% of the Stated Value, payable by the Company in quarterly installments, in either cash or shares of Common Stock. Each share of Series B Preferred was convertible, at the option of the holder, into that number of shares of Common Stock equal to the Stated Value, divided by $0.25 per share (the “Series B Conversion Shares”). The Company also has the option to require the conversion of the Series B Preferred into Series B Conversion Shares in the event: (i) there were sufficient authorized shares of Common Stock reserved as Series B Conversion Shares; (ii) the Series B Conversion Shares were registered under the Securities Act, or the Series B Conversion Shares were freely tradable, without restriction, under Rule 144 of the Securities Act; (iii) the daily trading volume of the Company's Common Stock, multiplied with the closing price, equaled at least $250,000 for 20 consecutive trading days; and (iv) the average closing price of the Company's Common Stock was at least $0.62 per share for 10 consecutive trading days.
During the year ended December 31, 2015, the Company declared $271,838 in dividends on outstanding shares of its Series B Preferred. The Company issued a total of 1,512,645 shares of Common Stock to pay $288,971 of cumulative unpaid dividends. As of December 31, 2015, there remained $271,838 in cumulative unpaid dividends on the Series B Preferred.
Series C Preferred. Each share of Series C Preferred has a stated value of $100 per share, (the “Stated Value”), and is convertible, at the option of each respective holder, into that number of shares of Common Stock equal to the Stated Value,$100, divided by $0.15 per share (the “Series CConversion Shares”).The Company also has the option to require conversion of the Series C Preferred into Series C Conversion Shares in the event: (i) there are sufficient authorized shares of Common Stock reserved as Series C Conversion Shares; (ii) the Series C Conversion Shares are registered under the Securities Act of 1933, as amended (the “Securities Act”), or the Series C Conversion Shares are freely tradable, without restriction, under Rule 144 of the Securities Act; and (iii) the average closing price of the Company's Common Stock is at least $0.62 per share for 10 consecutive trading days.
Issuances
Between January and February 2014, the Company issued 505,000 shares of its Series B Preferred to certain accredited investors pursuant to subscription agreements in exchange for total net proceeds of $1,857,413. The investors also received five-year warrants to purchase 2,356,667 shares of the Company’s Common Stock for $0.30 per share. The Company also issued 667,467 warrants to its capital advisors in connection with the investment. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all warrants issued totaling $416,844, was recorded to derivative liabilities during the year ended December 31, 2014.
During 2014, holders of 1,001,352 shares of the Series B Preferred Stock converted those shares into 16,021,632 shares of Common Stock.
Series C OfferingIn May and July 2014, the Company issued 69,138 and 9,289 shares of Common Stock, respectively, pursuant to a cashless exercise of a total of 179,633 outstanding warrants.
On February 20,During 2014, holders of $818,926 in outstanding principal, lender’s fees and interest on certain convertible notes payable exchanged this total for 204,732 shares of Series B Preferred and warrants to purchase 921,596 shares of Common Stock for $0.30 per share. Each warrant issued contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of all warrants issued totaling $199,567, was recorded to derivative liabilities. The total value of all such warrants, $199,567, was recorded against Additional Paid In Capital.
During 2014, the Company issued 1,751,270 shares of Common Stock and 5,692 shares of Series B Preferred in connection with various consulting agreements. The Company expensed the fair value of the Common Stock issued of $544,531 to consulting expense.
During 2014, the Company issued 2,004,002 shares of Common Stock in consideration for the settlement of lawsuits and related legal payments.
During 2015, (the “Initial Investment Date”), the Company and certain accredited investors (the “Investors”) entered into a Securities Purchase Agreement (the “PurchaseAgreement”) wherein the Investors agreedsecurities purchase agreements to purchase up to 43,000117,648 shares of Series C Preferred for $100 per share in three separate closings (the “Series C Offering”).Stock. The Company issued an aggregate total of 18,000116,471 shares of Series C Preferred on the Initial Investment Date, 15,000 shares on April 1,during 2015 and anticipates issuing the remaining 10,000 shares on or before June 30, 2015. The Purchase Agreement also provides for the appointmentprices ranging from $100 per share to $113.33 per share for a total gross proceeds of one member, designated by the Investors, to the Company’s Board of Directors.approximately $12 million. As additional consideration for participating in this offering, the Series C Offering, each Investor will receivepurchasers were issued five-year warrants (the “Warrants”),to purchase an aggregate total of 26,449,913 shares of Common Stock, exercisable forat $0.15 per share,share. Each warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to purchase that numberbe a derivative liability and, as such, the value of shares ofall such warrants issued, totaling $3,249,364, was recorded to derivative liabilities during the Company's Common Stock equal to 35% of the Conversion Shares issuable upon conversion of each Investor’s Shares (the “Warrant Shares”).
In addition to the Purchase Agreement, the Company and the Investors entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Company agreed to file a Registration Statement on Form S-1 with the Securities and Exchange Commission on or before July 1, 2015 in order to register the Warrant Shares issuable upon exercise of the Warrants, and the Conversion Shares issuable upon conversion of the Shares, under the Securities Act.
Amendment to Series C Certificate of Designation. As described under Note 1 above, on March 26, 2015, the Company filed the Series C Amendment with the Nevada Secretary of State in order to increase the number of shares of the Company’s preferred stock designated as Series C Preferred from 50,000 to 90,000 and to permit the transactions contemplated by the Note Payments and the Note Exchange, as described below.year ended December 31, 2015.
Note Payments and Note Exchange. Following the filing of the Series C Amendment, onOn March 27, 2015, the Companyholders of outstanding notes totaling $1,147,000 and the Series C Offering Investors entered into an amendment to the Amendment Purchase Agreement wherein the Company sold 27,000 Additional Shares to one of the Investors for gross proceeds of $2.7 million, which the Company subsequently used to satisfy approximately $2.7 million of the Company’s $3.8 million outstanding Notes. As additional consideration for the purchase of the Additional Shares, the Investor received additional Warrants to purchase Warrant Shares equal to 35% the Conversion Shares issuable upon conversion of the Additional Shares.
Following the Note Payments, the Company and each of the Holders of the Notes remaining after the Note Payments entered into Exchange Agreements wherein the Holdersaccrued interest totaling $67,207 agreed to exchange all remaining principal and accrued interest of any such Notes into shares of Series C Preferred on substantially similar terms to those offered in the February 2015 offering of Series C Offering.Preferred. As a result of the execution of thecertain Exchange Agreements and the consummation of theMarch Note Exchange, the Company issued to the Holders an aggregate total of 12,148 shares of Series C Preferred and Warrantsfive-year warrants to purchase approximately 2.8 million Warrant Shares.
an aggregate total of 2,834,536 shares of Common Stock for $0.15 per share. Each warrant issued in connection with the March Note Exchange contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature results in the warrants being classified as a derivative liability and, as such, the value of all warrants issued in connection with the March Note Exchange, totaling $378,681, was recorded to derivative liabilities during the year ended December 31, 2015.
On October 9, 2015 the Company issued to Vincent C. Smith a five-year warrant to purchase 17,500,000 shares of Common Stock for $0.188 per share as consideration for the execution of a personal guaranty of True Drinks’ obligations under the Niagara Agreement. The warrant contains a price-protection feature that adjusts the exercise price in the event of certain dilutive issuances of securities. Such price-protection feature is determined to be a derivative liability and, as such, the value of the warrant issued totaling $2,263,783, was recorded to derivative liabilities and is included in other expense in the accompanying consolidated statements of operations as of December 31, 2015.
During the year ended December 31, 2015, the Company issued 2,413,811 shares of Common Stock in connection with certain consulting agreements. The Company expensed the fair value of the Common Stock issued of $487,826.
TRUE DRINKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETSOn April 22, 2015, the Company cancelled 2,593,912 options to certain former Directors of the Company. The Company replaced these stock options with 2,594,914 warrants, 1,120,478 of these warrants had an exercise price of $0.25 per share, and 1,474,436 of the warrants had an exercise price of $0.38 per share. The expiration date of 1,120,478 of the warrants is November 12, 2016, and the expiration date on 1,474,436 of the warrants is March 9, 2018.
| | September 30, 2015 | | December 31, 2014 | |
ASSETS | | (Unaudited) | | | |
Current Assets: | | | | | |
Cash | | $ | 92,032 | | | $ | 668,326 | |
Accounts receivable, net | | | 500,448 | | | | 343,709 | |
Inventory | | | 2,267,340 | | | | 1,363,443 | |
Prepaid expenses and other current assets | | | 241,907 | | | | 628,675 | |
Total Current Assets | | | 3,101,727 | | | | 3,004,153 | |
| | | | | | | | |
Restricted Cash | | | 209,308 | | | | 133,198 | |
Property and Equipment, net | | | 2,118 | | | | 4,587 | |
Patents, net | | | 1,105,882 | | | | 1,211,765 | |
Trademarks, net | | | - | | | | 6,849 | |
Goodwill | | | 3,474,502 | | | | 3,474,502 | |
Total Assets | | $ | 7,893,537 | | | $ | 7,835,054 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| | | | | | | | |
Current Liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 1,695,963 | | | $ | 1,922,285 | |
Debt | | | 967,008 | | | | 4,263,002 | |
Derivative liabilities | | | 3,678,321 | | | | 1,569,522 | |
Total Current Liabilities | | | 6,341,292 | | | | 7,754,809 | |
| | | | | | | | |
Commitments and Contingencies (Note 5) | | | | | | | | |
| | | | | | | | |
Stockholders’ Equity: | | | | | | | | |
Common Stock, $0.001 par value, 200,000,000 and 120,000,000 shares authorized, 106,352,235 and 48,622,675 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | | | 106,352 | | | | 48,623 | |
Preferred Stock – Series B (liquidation preference of $4 per share), $0.001 par value, 2,750,000 shares authorized, 1,342,870 and 1,490,995 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | | | 1,343 | | | | 1,491 | |
Preferred Stock – Series C (liquidation preference $100 per share), $0.001 par value, 115,000 and 50,000 shares authorized, 25,250 and 0 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively | | | 25 | | | | - | |
Additional paid in capital | | | 26,626,610 | | | | 18,388,212 | |
Accumulated deficit | | | (25,182,085 | ) | | | (18,358,081 | ) |
Total Stockholders’ Equity | | | 1,552,245 | | | | 80,245 | |
| | | | | | | | |
Total Liabilities and Stockholders’ Equity | | $ | 7,893,537 | | | $ | 7,835,054 | |
On October 9, 2015, the Company issued five-year warrants for 884,209 shares at an exercise price of $0.19 per share in exchange for services. The warrants vest over a 12-month period. As of December 31, 2015, 221,053 warrant shares had vested and $19,895 was expensed accordingly.
The accompanying notes are an integral partNOTE 3 – STOCK OPTIONS AND WARRANTS
Warrants
A summary of these financial statements.the Company’s warrant activity for the years ended December 31, 2015 and 2014 is presented below:
| | Warrants Outstanding | | | Weighted Average Exercise Price |
Outstanding, December 31, 2013 | | | 12,590,467 | | | $ | 0.55 | |
Granted | | | 4,022,936 | | | | 0.30 | |
Exercised | | | (179,633 | ) | | | 0.25 | |
Expired | | | (58,500 | ) | | | 25.09 | |
Outstanding, December 31, 2014 | | | 16,375,270 | | | $ | 0.40 | |
Granted | | | 50,543,837 | | | | 0.16 | |
Exercised | | | - | | | | - | |
Expired | | | - | | | | - | |
Outstanding, December 31, 2015 | | | 66,919,107 | | | $ | 0.18 | |
As of December 31, 2015, 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.) | |
| 61,453 | | | $ | 30.00 | | | | 0.06 | |
| 63,098,264 | | | $ | 0.15 | | | | 4.13 | |
| 1,120,479 | | | $ | 0.25 | | | | 1.74 | |
| 1,474,435 | | | $ | 0.38 | | | | 1.53 | |
| 1,164,476 | | | $ | 0.19 | | | | 4.76 | |
| 66,919,107 | | | $ | 0.18 | | | | 4.04 | |
TRUE DRINKS, INC.Non-Qualified Stock Options
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)No options were granted during the year ended December 31, 2015 and the Company and holders of all options to purchase shares of the Company’s Common Stock agreed to cancel or forfeit their options.
Stock option activity during the year ended December 31, 2015 is summarized as follows:
| | Options Outstanding | | | Weighted Average Exercise Price | |
Options outstanding at December 31, 2014 | | | 12,379,593 | | | $ | 0.37 | |
Exercised | | | - | | | | - | |
Granted | | | - | | | | - | |
Forfeited | | | (12,379,593 | ) | | | 0.37 | |
Expired | | | - | | | | - | |
Options outstanding at December 31, 2015 | | | - | | | $ | - | |
Cancellation of Stock Options and Issuance of Restricted Stock. Between June and July 2015, the Company and each of the holders of all outstanding options to purchase shares of the Company’s Common Stock agreed to cancel or forfeit their options, such that, as of July 10, 2015, no options to purchase shares of the Company’s Common Stock were outstanding.
On August 6, 2015, the Company’s board of directors authorized an issuance of an aggregate total of 19,491,375 shares of restricted Common Stock pursuant to the terms and conditions of the Company’s 2013 Stock Incentive Plan to certain employees, including those that agreed to cancel previously issued stock options. In December 2015, the Company issued 750,000 shares of restricted stock under the plan.
| | | Three Months Ended September 30, | | | | Nine Months Ended September 30, | |
| | | 2015 | | | | 2014 | | | | 2015 | | | | 2014 | |
| | | | | | | | | | | | | | | | |
Net Sales | | $ | 1,323,730 | | | $ | 1,064,065 | | | $ | 4,172,626 | | | $ | 2,875,739 | |
| | | | | | | | | | | | | | | | |
Cost of Sales | | | 1,188,222 | | | | 977,324 | | | | 3,950,961 | | | | 2,473,018 | |
| | | | | | | | | | | | | | | | |
Gross Profit | | | 135,508 | | | | 86,741 | | | | 221,665 | | | | 402,721 | |
| | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | |
Selling and marketing | | | 2,325,567 | | | | 1,085,405 | | | | 4,269,670 | | | | 2,661,279 | |
General and administrative | | | 1,006,486 | | | | 1,029,118 | | | | 3,302,782 | | | | 3,153,687 | |
Total operating expenses | | | 3,332,053 | | | | 2,114,523 | | | | 7,572,452 | | | | 5,814,966 | |
| | | | | | | | | | | | | | | | |
Operating Loss | | | (3,196,545 | ) | | | (2,027,782 | ) | | | (7,350,787 | ) | | | (5,412,245 | ) |
| | | | | | | | | | | | | | | | |
Other Income (Expense) | | | | | | | | | | | | | | | | |
Change in fair value of derivative liabilities | | | 1,079,335 | | | | 398,603 | | | | 749,943 | | | | (1,343,495 | ) |
Interest income (expense) | | | (15,456 | ) | | | (37,037 | ) | | | (223,160 | ) | | | (88,286 | ) |
| | | 1,063,879 | | | | 369,319 | | | | 526,783 | | | | (1,431,781 | ) |
| | | | | | | | | | | | | | | | |
NET LOSS | | $ | (2,132,666 | ) | | $ | (1,666,216 | ) | | $ | (6,824,004 | ) | | $ | (6,844,026 | ) |
| | | | | | | | | | | | | | | | |
Declared dividends on Preferred Stock | | $ | 68,636 | | | $ | 148,181 | | | $ | 203,397 | | | $ | 148,181 | |
| | | | | | | | | | | | | | | | |
Net loss attributable to common stockholders | | $ | (2,201,302 | ) | | $ | (1,814,397 | ) | | $ | (7,027,401 | ) | | $ | (6,992,207 | ) |
| | | | | | | | | | | | | | | | |
Loss per common share, basic and diluted | | $ | (0.02 | ) | | $ | (0.05 | ) | | $ | (0.11 | ) | | $ | (0.21 | ) |
| | | | | | | | | | | | | | | | |
Weighted average common shares outstanding, basic and diluted | | | 88,086,922 | | | | 38,920,319 | | | | 64,289,691 | | | | 33,939,850 | |
The cancellation of the stock options and issuance of restricted stock was accounted for as a modification in accordance with the provisions of ASC Topic 718 Compensation – Stock Compensation. The Company recorded approximately $1,055,000 of stock based compensation in connection with the transaction.
NOTE 4 – INTANGIBLE ASSETS
The Company has incurred costs to trademark eight of its current products and marketing nomenclatures. During 2015, the Company purchased a patent in relation to the purchase of GT Beverage, and also assumed the trademarks of Bazi Intl. Patents and trademarks are being amortized over the lesser of their remaining life or 15 years.
The accompanying notes are an integral part ofIntangible assets are:
| December 31, 2015 | | | December 31, 2014 | |
Patents and trademarks | $ | 1,706,849 | | | $ | 1,706,849 | |
Accumulated amortization | | (636,261 | ) | | | (488,235 | ) |
| $ | 1,070,588 | | | $ | 1,218,614 | |
Amortization expense for the year ended December 31, 2015 and 2014 was $148,768 and $182,843, respectively. For these financial statements. assets, amortization expense over the next five years and thereafter is expected to be as follows:
| | Patent and Trademark Amortization | |
2016 | | $ | 141,177 | |
2017 | | | 141,177 | |
2018 | | | 141,177 | |
2019 | | | 141,177 | |
2020 | | | 141,177 | |
2021 and thereafter | | | 364,703 | |
| | $ | 1,070,588 | |
TRUE DRINKS HOLDINGS, INC.NOTE 5 – INCOME TAXES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| | Nine Months Ended September 30, | |
| | 2015 | | | 2014 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net loss | | $ | (6,824,004 | ) | | $ | (6,844,026 | ) |
Adjustments to reconcile net loss to net cash used in operating activities | | | | | | | | |
Depreciation | | | 2,469 | | | | 5,283 | |
Amortization | | | 112,732 | | | | 143,383 | |
Provision for bad debt expense | | | (51,769) | | | | | |
Change in estimated fair value of derivative | | | (749,943 | ) | | | 1,343,495 | |
Fair value of common stock issued for services | | | 470,062 | | | | 171,464 | |
Stock based compensation | | | 453,491 | | | | 368,172 | |
Change in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (104,970 | ) | | | (202,693 | ) |
Restricted cash | | | (76,110 | ) | | | (66 | ) |
Inventory | | | (903,897 | ) | | | (766,866 | ) |
Prepaid expenses and other current assets | | | 386,768 | | | | 6,996 | |
Accounts payable and accrued expenses | | | (142,177 | ) | | | 1,317,696 | |
Net cash used in operating activities | | | (7,427,348 | ) | | | (4,457,162 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Purchase of property and equipment | | | - | | | | (2,349 | ) |
Net cash used in investing activities | | | - | | | | (2,349 | ) |
| | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Dividends paid | | | - | | | | (2,194 | ) |
Proceeds from issuance of Series B Preferred Stock, net | | | - | | | | 1,887,413 | |
Proceeds from issuance of Series C Preferred Stock | | | 9,000,048 | | | | - | |
Borrowings on debt | | | 1,035,792 | | | | 1,432,136 | |
Repayments on debt | | | (3,184,786 | ) | | | (1,936,667 | ) |
Net cash provided by financing activities | | | 6,851,054 | | | | 1,380,688 | |
| | | | | | | | |
NET DECREASE IN CASH | | | (576,294 | ) | | | (3,078,823 | ) |
| | | | | | | | |
CASH- beginning of period | | $ | 668,326 | | | $ | 3,136,766 | |
| | | | | | | | |
CASH- end of period | | $ | 92,032 | | | $ | 57,943 | |
| | | | | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | | | | |
Interest paid in cash | | $ | 137,556 | | | $ | 7,944 | |
Non-cash financing and investing activities: | | | | | | | | |
Conversion of preferred stock to common stock | | $ | 54,034 | | | $ | 8,621 | |
Cashless exercise of warrants | | $ | - | | | $ | 44,751 | |
Dividends paid in common stock | | $ | 203,397 | | | $ | 247,255 | |
Dividends declared but unpaid | | $ | 68,636 | | | $ | 148,181 | |
Conversion of notes payable and accrued interest to Common Stock | | $ | - | | | $ | 764,938 | |
Conversion of notes payable and accrued interest to Series C preferred stock | | $ | 1,214,206 | | | $ | - | |
Common stock issued for accrued expenses | | $ | - | | | $ | 487,650 | |
Warrants issued in connection with Series B Preferred Offering | | $ | - | | | $ | 616,411 | |
Warrants issued in connection with Series C Preferred Offering | | $ | 2,858,742 | | | $ | - | |
The accompanying notesCompany does not have significant income tax expense or benefit for the year ended December 31, 2015 or 2014. Tax net operating loss carryforwards have resulted in a net deferred tax asset with a 100% valuation allowance applied against such asset at December 31, 2015 and 2014. Such tax net operating loss carryforwards (“NOL”) approximated $27.6 million at December 31, 2015. Some or all of such NOL may be limited by Section 382 of the Internal Revenue Code and will begin to expire in the year 2032.
The income tax effect of temporary differences between financial and tax reporting and net operating loss carryforwards gives rise to a deferred tax asset at December 31, 2015 and 2014 as follows:
| | 2015 | | | 2014 | |
Deferred tax asset –NOL’s | | $ | 11,040,000 | | | $ | 6,800,000 | |
Less valuation allowance | | | (11,040,000 | ) | | | (6,800,000 | ) |
Net deferred tax asset | | $ | - | | | $ | - | |
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the history of the Company and projections for future taxable income over the periods in which the deferred tax assets are an integral partrealizable, management believes it is not more likely than not that the Company will realize the benefits of these condensed consolidated financial statements.deductible differences and therefore a full valuation allowance against the deferred tax assets has been established.
As a result of the merger with Bazi Intl. on October 15, 2012, the Company may have access to utilize a portion of the net operating loss carryforwards of Bazi Intl., which, in total, were approximately $25 million at the time of the merger. The Company is uncertain as to the portion of the Bazi net operating loss carryforwards that may be limited by Section 382 of the Internal Revenue Code.
The Tax Reform Act of 1986 contains provisions that limit the utilization of net operating loss and tax credit carryforwards if there has been a change of ownership as described in Section 382 of the Internal Revenue Code. Such an analysis has not been performed by the Company to determine the impact of these provisions on the Company’s net operating losses, though management believes the impact would be minimal, if any. A limitation under these provisions would reduce the amount of losses available to offset future taxable income of the Company.
ASC 740 prescribes a recognition threshold and measurement attribute for the recognition and measurement of tax positions taken or expected to be taken on income tax returns. ASC Topic 740 also provides guidance on de-recognition of income tax assets and liabilities, classification of current and deferred income tax assets and liabilities, and accounting for interest and penalties associated with tax positions.
Based on management’s assessment of ASC Topic 740, management concluded that the Company does not have any uncertain tax positions as of December 31, 2015. There have been no income tax related interest or penalties assessed or recorded and if interest and penalties were to be assessed, the Company would charge interest and penalties to income tax expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date. The Company and its subsidiaries have several years of past due income tax returns. Until returns are filed and the related statute of limitations are met (generally 3 years for federal and 4 years for state), such past due returns remain open to examination by applicable authorities.
TRUE DRINKS HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 2015NOTE 6 – DEBT
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESA summary of convertible notes payable as of December 31, 2015 and 2014 is as follows:
| | Amount | |
Outstanding, December 31, 2013 | | $ | 2,596,667 | |
Borrowings | | | 4,263,002 | |
Repayments | | | (1,936,667 | ) |
Conversions to Common Stock | | | (660,000 | ) |
Outstanding, December 31, 2014 | | $ | 4,263,002 | |
Borrowings | | | 1,103,817 | |
Repayments | | | (2,883,000 | ) |
Conversions to Series C Preferred Stock | | | (1,147,000 | ) |
Outstanding, December 31, 2015 | | $ | 1,336,819 | |
In March 2015, the Company paid off approximately $2.7 million of the Company’s $3.8 million in outstanding promissory notes. Following these payments, the Company and Businesseach of the holders of the remaining notes entered into Exchange Agreements, wherein the holders agreed to exchange the remaining principal of $1,147,000 and accrued interest of any such notes into shares of Series C Preferred on substantially similar terms to those offered in connection with the issuance of shares of Series C Preferred and warrants consummated in February 2015.
As described under Note 2, “Shareholder’s Equity” above, in September 2015, the Company began a private offering to certain accredited investors of: (i) Secured Notes in the aggregate principal amount of up to $2.5 million; and (ii) and Note Warrants to purchase that number of shares equal to 15% of the principal amount of the Secured Note purchased by each investor, divided by the ten-day average closing price of the Company’s Common Stock. Each Secured Note accrues interest at a rate of 12% per annum, and will mature one year from the date of issuance. As of December 31, 2015, the Company had issued Secured Notes in the aggregate principal amount of $855,000 and Note Warrants to purchase an aggregate total of 280,265 shares of Common Stock. Subsequent to December 31, 2015, Secured Notes in the aggregate principal amount of $500,000 were exchanged for shares of Series C Preferred and warrants. See Note 10 “Subsequent Events” below.
In September 2015, the Company issued promissory notes to certain related parties in the aggregate principal amount of $100,000. The notes expired on October 31, 2015 and were paid. Upon repayment, the Company paid a lender's fee to the related parties equal to 10% of the principal amount.
The Company entered into a line-of-credit agreement with a financial institution on June 30, 2014. The terms of the agreement allow the Company to borrow up to the lesser of $1.5 million or 85% of the sum of eligible accounts receivables. At December 31, 2015, the total outstanding on the line-of-credit approximated $482,000 and the Company did not have any availability to borrow. The line-of-credit bears interest at Prime rate (3.5% as of December 31, 2015) plus 4.5% per annum, as well as a monthly fee of 0.50% on the average amount outstanding on the line, and is secured by the accounts receivables that are funded against. The line-of-credit matures on July 31, 2016.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
The Company has entered in a number of agreements with various consultants. Termination of any of these agreements could result in termination fees.
The Company leases its corporate office in Irvine, California on a one-year term. The Company recently moved into a new office and extended its lease from an expiration date of July 31, 2016 to December 31, 2016. Total rent expense related to the Company's operating lease for the year ended December 31, 2015 was $55,640. Total remaining payments on the lease through December 31, 2016 are $42,687.
Overview